The holding company behind Bank of Internet USA, BofI Holding (NYSE:AX) released its fourth-quarter and full-year financial results on July 30, and it was another great one. In the earnings preview, I pointed out three key metrics that investors should pay close attention to and the bank performed exceptionally well in all three last quarter:
- Loan assets grew 40% on a 42% increase in originations.
- Deposits increased 46% from last year.
- Book value per share increased 34%.
The growth in loan assets was the key driver for profits, which jumped to $1.54 per share in the quarter, up 41%. For the full year, EPS was up almost 40% to $5.37 per share. Let's take a closer look at the details.
Loan portfolio doing the heavy lifting
BofI Holding reported its loan portfolio grew by nearly $1.4 billion in the quarter from last year, and was up just under $300 million from the third quarter. Total loan assets -- net of allowances against losses -- reached $4.93 billion in the quarter, a 40% increase from the end of fiscal 2014. This is one of the key drivers behind the 45% increase in net interest income the company reported for the full year.
Non-performing loans, or loans that are late, or at risk of default, fell to 0.62% of loans in the quarter, versus 0.72% in the third quarter. This marks the second sequential decline, as non-performing loans had climbed to 0.82% of loans in the second quarter.
Non-interest income also increased in the quarter, and much of it was loan-related as well. The bank reported a $2.2 million increase in mortgage banking income, and a $1.9 million increase in prepayment penalty fee income. That $4.1 million increase was 77% of the increase in non-interest income the bank reported in the quarter.
Adding and diversifying deposits
Not only did deposits grow 46% to $4.45 billion at the end of June, but the mix of deposits in checking and savings also increased to 82%, from 74% one year ago. As we discussed in the earnings preview, deposit growth also helps offset the need to raise capital with stock sales.
The balance, of course, is keeping capital costs as low as possible in order to maximize the rate spread the company can command. Last quarter's interest rate spread fell ever so slightly to 3.82%, versus 3.89% a year ago. For the full year, the interest rate spread of 3.79% was only 20 basis points below last year's 3.81%, and still excellent by most any measure or comparison.
In other words, the financial impact -- measured by the impact of interest expense paid to depositors -- of adding more deposits isn't having a major effect on lowering returns from interest income, and probably hurts a lot less than the dilutive impact of cash raised from secondary stock offerings.
Building a bigger, better (cheaper) bank
While the asset and originations growth reported in the fourth quarter is a slight decline from the prior few periods, it's still an incredibly high rate of growth. And even with the slight reduction in the net interest rate spread from last year, the growth in deposits is unequivocally good, as it offsets at least some of the impact of share dilution on per-share earnings growth.
Combined with the so-far-excellent quality of loans the bank has issued, as measured by its very low non-performing assets ratio, and there's a lot going right for the Internet bank.
Will it continue? Frankly, that's more a macroeconomic question than anything. As long as the U.S. economy remains relatively strong, and housing sales continue to increase (we are still well below pre-recession levels), BofI Holding can probably continue its strong growth. If things do soften or begin to slow, then it's likely to affect the growth rate to some extent, and could increase the rate of non-performing assets to some degree.
But as things stand, the fundamentals of the economy and housing market are strong and improving, and so far, BofI Holding's management has done a great job of managing the growth. Chances are, they would prove just as capable at managing a downturn. Let's hope we don't have to find out anytime soon.