BOFI FY2016.Q3 Earnings Quick Take

Bank of the Internet earnings are out and they look quite good! Net income met analyst estimates while revenue exceeded them. Looking at the deeper bank related metrics they are awesome across the board. The only number that looked just okay was loan origination which only grew 17.97% YoY but we’ve seen this metric YoY growth be lumpy the last few quarters. Book value is up to $10.23 per share.

Here is a quick note from the company in their press release:

“We achieved record quarterly earnings and earnings per share as a result of robust fee income growth, balanced loan growth and solid net interest margins,” stated Greg Garrabrants, President and Chief Executive Officer. “Strong growth in fee income from our H&R Block partnership was a catalyst for our best in class return on assets and return on equity. We continue to generate healthy growth in our single family, C&I and warehouse lending businesses while maintaining a strong core net interest margin and sound credit quality. We closed the acquisition of certain assets and operations of Pacific Western Equipment Finance at the end of the third quarter. The addition of an experienced equipment leasing team with a nationwide footprint further diversifies our commercial lending capabilities. With a strong balance sheet, excellent credit quality and capital flexibility, we will continue to invest in new growth initiatives and ongoing infrastructure enhancements that will further improve our customer service and user experience,” Mr. Garrabrants concluded.

Here are my quick takes for the FY 2016.Q3:

Net Income

$0.56 EPS (FY 2016.Q3 actual)
$0.56 EPS (FY 2016.Q3 estimate)
$0.34 EPS (FY 2015.Q3 actual)
+64.7% YoY

Net Revenue (Net Interest Income)

$92.873 M (FY 2016.Q3 actual)
$90.80 M (FY 2016.Q3 estimate)
$59.03 M (FY 2015.Q3 actual)
+57.3% YoY

Key Metrics

Tangible book value: $10.23 per share (FY 2016.Q3 actual) vs. $8.01 per share (FY 2015.Q3 actual) [+27.7%]

Total assets: $7,705.6 M (FY 2016.Q3 actual) vs. $5,528.5 M (FY 2015.Q3 actual) [+39.4%]

Loan portfolio growth YoY: $1,393.4 M, +30.0%

Loan originations: $1,248.5 M (FY 2016.Q3 actual) vs. $1,058.2 M (FY 2015.Q3 actual) [+17.97%]

Deposit growth YoY: $1,679.3 M, +38.4%

Non-performing asset ratio: 0.31% (FY 2016.Q3 actual) vs. 0.65% (FY 2015.Q3 actual)

Non-performing loans ratio: 0.39% (FY 2016.Q3 actual) vs. 0.72% (FY 2015.Q3 actual)

My Take

Choo choo! Choo choo! All aboard the BOFI growth train.

At about 1.95 price to book and growing the book value consistently over 25% BOFI is a very compelling investment. The numbers are so good, some people might think they are fake or something shady is going on - and believe me there are plenty of people who do (see Seeking Alpha). Purely based on the numbers this is a no brainer stock and people saw it that way last summer which pushed BOFI to about $2B market cap at a split adjusted price around $35.

Now let’s address two concerns. First one is the lawsuits and allegations. In the earnings press release there was no mention of this. BOFI did put out a special release and filing in regards to the recently filed class action lawsuit which did deny the allegations quite well. Many months also had passed since the former employee issue came up in September of last year. My take on this is that yes these are issues that are concerning and investors should keep an eye on. They have made me realize that BOFI is a small cap bank and inherently has tons of risk despite the great numbers. Thus one must allocate accordingly not too big. However, I have yet to see a shred of concrete evidence of any wrongdoing - all the governing bodies and analysts have backed up the company thus far.

The second concern with any growth type company is can the growth continue? In BOFI’s case can the torrid growth continue? Looks like yes. Management has proven over many years to be disciplined capital allocators and makes great acquisitions. The H&R block deal which looks like a home run. And the latest deal with the leasing business also looks to be a winner although time will tell - odds are it will be good based on the track record of the company. Still we must watch the metrics to see any signs of cracks - book value may be slightly decelerating and the lumpy loan origination growth over the past few quarters seem like small yellow flags.

BOFI is currently trading at $19.96 (+2.73%) per share in regular market activity. Price to book is currently at 1.951.