BofI Holding (NYSE:AX) released its first-quarter financial results on Oct. 29, with earnings up 43%, and strong growth -- as we've become accustomed to -- in several key categories. However, growth slowed a touch in a few, so there are some things that bear watching.
Let's take a closer look at the details and three key things that stood out:
1. Earnings and book value per share continue to grow quickly
BofI Holding reported strong growth again in the quarter:
- Total assets increased 29.7%.
- Loan portfolio grew by $1.27 billion or 32%.
- Deposits grew by $1,493.6 million, or 45.8%, compared to Sept. 30, 2014.
- Tangible book value increased to $36.33 per share, up 32%.
BofI has done a remarkable job of growing assets over the past several years. Leveraging both new loans and deposit growth to help fund those loans and reduce the impact of secondary stock offerings on per-share returns growth.
2. Underwriting quality remains very high
Total non-performing assets were 0.50% of total assets and non-performing loans equal to 0.57% of total loans in the quarter. BofI's non-performing assets have remained remarkably low, even compared to some of the best underwriters in the industry.
For some context, let's take a look at Wells Fargo & Co. (NYSE:WFC), just as we did in the earnings preview. Wells Fargo is renowned for its conservative lending practices. In its most recent quarterly earnings, it reported 1.47% of assets were non-performing.
And that's not necessarily an aberration for the megabank, which reported that 1.62% and 1.72% of assets were non-performing in the prior quarters. Bank of America (NYSE:BAC) reported 1.17%, 1.31%, and 1.61%, respectively, non-performing loan assets over the past three quarters.
One of the interesting things about BofI's loan performance is that the vast majority of its loans are consumer debt, and it still has a very low non-performance rate. Wells Fargo's breakdown of non-performance is 0.52% of commercial assets were non-performing at quarter 's end, and more than 2% of consumer loans were non-performing.
3. Loan origination rate fell off in the quarter
One quarter's performance doesn't make a trend, but it's worth noting that loan originations were up "only" 9.2%. This compared to 42%, 52%, and 57% loan origination growth in the three prior quarters.
Here's the bottom line: A significant amount of BofI's value -- and the premium valuation of the stock -- is tied to its incredible growth rate. Loan origination is a key measure of loan growth. The bank needs to consistently originate new loans not just to grow but to replace loans that are paid off over time.
BofI released earnings before market open, but won't hold its earnings call until after market close. Considering the uncertainty that still surrounds the bank following the allegations in a lawsuit filed by a former auditor, it's a good idea to listen to the earnings conference call or to read the transcript once it's available.
The particular concerns that management should address are the loan origination rate, as well as any impact on deposits the bank is seeing after the allegations in the lawsuit were made public. There doesn't seem to be any major economic threats for BofI right now, so its strong record of loan growth shouldn't be at risk from any outside factors, so it's important that management take steps to be sure the internal issues related to perception from the lawsuit are addressed and don't cause any harm.
That starts with addressing these concerns on the earnings call and making sure investors are aware of any potential impacts on business and what management is doing to deal with it. Now's the time to be as transparent as possible.