After a lackluster 2014 that saw the stock price trail the S&P 500, shares of BofI Holding (NYSE:AX) are on a roll this year:
The funny thing is, last year's stock price performance didn't really match up with the performance of the business, which has essentially been the same so far this year. Let's talk briefly about that, and take a closer look at the most important metrics to watch when the company reports earnings later this week.
Stock versus business performance
While you wouldn't know it from looking at the stock chart above, BofI Holding actually had a pretty fantastic year in 2014:
As you can see in the table above, revenue, earnings per share, and shareholder value as measured by growth in tangible book value per share are all up more than 45% over the past five quarters, corresponding (coincidentally, I'm sure) with the 44% increase in the share price over the past 19 months or so.
What does this mean? In short, that the company's stock price -- based on the value of the company's increased earnings power -- is actually cheaper today than it was a year ago:
At least, this is the case based, again, on the company's impressive growth in earnings. With that context, let's talk about the key metrics for BofI Holding.
The big three
This doesn't have anything to do with the major U.S. automakers, but deals with three key metrics that matter a lot for BofI:
- Loan assets/originations growth.
- Deposit growth.
- Book value per-share growth.
These three measure different things, but they are tightly linked together. The first is pretty clear, because a commercial bank like BofI Holding's Bank of Internet will generate the majority of its earnings from loan points and interest. But since it must have the money on hand to loan, growing its deposit base is also a critical element, especially since the other source of cheap capital -- selling stock in a secondary offering -- reduces shareholder returns. The more efficiently the company is able to grow its loan assets without adding shares, the more it can grow per-share book value, a handy metric for measuring the value of a financial business like a bank.
Growing like wildfire
Over the past several quarters, the company has reported exceptionally strong growth in loan and deposit assets, and while there has been more than 30% shareholder dilution over that time frame, earnings-per-share growth has been exceptional:
|Quarter||EPS Growth %||Loan Assets Growth %||Deposit Assets Growth %|
However, there are some risks that investors need to be cognizant of.
Bank of the Internet, still largely regional
San Diego-based BofI Holding may market Bank of Internet as "America's oldest and most trusted" web bank, but it's still a very regional player, especially in the mortgage business, which makes up the lion's share of its loan assets. Because much of Southern California and the Bay Area have some of the highest real estate prices in the U.S., the bank carries larger exposure than other banks to "jumbo loans," which are nonconforming loans that exceed the limit for which Fannie Mae and Freddie Mac can purchase. Southern California was also one of the hardest-hit markets in the housing crisis.
However, BofI Holding has maintained a relatively solid book of business. Over the past two years, the company's non-performing loans has yet to exceed 1%, and has regularly been below 0.7%. As a comparison, Wells Fargo & Co. -- widely considered one of the best-run lending banks in the country -- regularly sees nonperforming loan assets above 1.5%. However, its more regional concentration does create more risk to specific market weakness.
Furthermore, rising interest rates could threaten to slow the pace of home sales, weakening the incredible growth BofI Holding has reported over the past few years, but it's not likely to be a major headwind, nor it is it likely to impact business before early 2016. At any rate, those are key risks to be aware of and metrics to watch.
Overall, it's hard to argue that BofI Holding isn't performing extremely well, and patient investors have been rewarded. However, it's just as important that you keep watching those key metrics, as they show how the banks business activities impact the bottom line. It's not clear whether the rest of the year will look more like last year, or the first half of 2015 as far as the stock price is concerned, but considering that the business performance was stellar all along, keep an eye on the business. If the performance is great, eventually the stock price will follow along.
Stay tuned for more when BofI reports earnings on July 30.