My take - fiscal 2015 Q4

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Well, what to say, what to say. Frankly, after something like 10 or 11 quarters now that I’ve been following BOFI, I’m at a loss for how to make these updates interesting. BOFI pretty much keeps doing the same great things every quarter, and I just don’t have much in the way of original comments to make anymore.

I generally wait until the SEC reports are available to do my deep analysis, but the 10-K probably won’t be filed for another month, so I thought I’d at least share my quick thoughts on the quarter in terms of numbers. I’ll follow up with an analysis of anything interesting that comes out of the conference call, and I’m planning to do a really deep dive once the 10-K is available.

Deposits
Deposit growth is up 42% YoY. As nice as that is to see, I’m even happier with the trend in the TYPES of deposits that are fueling the growth, namely transaction accounts. Checking and savings accounts now make up a whopping 82% of total deposits. This is simply outstanding, for several reasons.

CD and money market deposits are much less sticky than transaction accounts. If you have a checking account with a bank, you probably have some automatic bill pay items set up, perhaps you get a direct deposit into the account, etc. There are legitimate switching costs that you incur in terms of time and effort to move your account to a different bank. There are little to no such switching costs with CDs and money markets. The fact that 82% of BOFI’s deposits consist of these sticky accounts means that the likelihood of these deposits leaving to a rival institution is much less than if they were CDs. I am leaning towards describing this as a moat for the business, because as the switching costs increase, the need to compete purely on an interest rate level decreases. A CD is a commodity, a checking account is much less so.

Another very important point is that CDs and money markets aren’t profitable in and of themselves. What do I mean by that? They provide the financial institution capital to use for growing its loan book, but not much else. Transaction accounts, on the other hand, not only provide a financing source for loans, but are also profitable themselves via the debit card fees and other associated fees the bank can earn through the account transactions.

With every additional dollar of checking account deposits, not only does BOFI have another dollar to use to grow loans (well, not exactly a dollar, but work with me here), but that dollar is also another source of revenue via transaction fees, which helps fuel non-interest income growth.

The real story here though is the growth in the business deposits. In my opinion this is an incredibly important initiative that is largely going under the radar. I expect we’ll get some comments on that during the conference call.

Loans
The loan portfolio grew by 40% YoY, nearly identical to deposit growth. And according to management’s numbers, the portfolio continues to remain high quality with only .62% of non-performing loans to total loans. We’ll know a lot more about the loan portfolio and its performance when the 10-K is released. I am interested in see average FICO scores, weighted average LTVs, and any debt service coverage trends on the multifamily loan book.

Spreads
Not including the FHLB dividend (which isn’t worth getting into) spreads largely were flat. Increasing spreads are what we want to see, but flat isn’t exactly bad. As a refresher, the Net Interest Margin, or NIM, is basically the difference between what BOFI must pay its depositors and the interest rates BOFI earns on the loans it makes. You can kind of thing about it like an operating margin for the loan portfolio.

Efficiency Ratio
Excluding the FHLB dividend, BOFI clocked in with an absurdly low efficiency ratio of 32.47%. Every quarter I can’t imagine how the efficiency ratio can get any lower, yet each quarter management seems to squeeze out a little bit more. The efficiency ratio is where management’s investment in customer data analytics really pays off.

H&R Block
If the transaction happens, it will happen soon now that tax season has passed. We’ll get more (hopefully) detail on the conference call.

Tangible Book Value per Share
TBV grew from $25.27 at June 30, 2014 to $33.92 at June 30, 2015. That’s a growth rate of 34%, which I believe is the 5th straight quarter in which TBV has grown YoY in excess of 30%.

Cross-post from the BOFI Rule Breakers message board.

This why BOFI is trading at a price-to-book multiple of 3+. I am not aware of any other financial services company (not that I’m looking either, mind you) that is growing TBV at this kind of clip.

EPS
Earnings attributable to common increased 52.6%, while EPS increased by 41% (the difference is due to the ongoing capital raising/dilution we’ve discussed before). I don’t have the numbers as I haven’t tracked them, but I would guess that also a number of consecutive quarters in which YoY EPS has grown by greater than 30%. Not bad for a company trading at a P/E of 23 for those who monitor that metric.

Conclusion
In conclusion, this appears to be another great quarter. The numbers tell you the company’s results, but the details in the conference call and the 10-K tell you HOW the company is generating those results. I’m very interested to hear the conference call and to dig into the 10-K next month.

Fletch
Long BOFI

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With every additional dollar of checking account deposits, not only does BOFI have another dollar to use to grow loans (well, not exactly a dollar, but work with me here)

Out of curiosity, Fletch, what percentage of a checking account dollar does a bank loan out, since it’s potentially much more transitory than a dollar locked up in a CD? What about savings accounts, which presumably are somewhere in between?

Thanks for another great writeup!

Neil

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Out of curiosity, Fletch, what percentage of a checking account dollar does a bank loan out, since it’s potentially much more transitory than a dollar locked up in a CD? What about savings accounts, which presumably are somewhere in between?

Thanks for another great writeup!

My pleasure, Neil. I’m glad you found it useful.

My comment above was in reference to the capital requirements banks have. If they received a dollar of new deposit, they can’t loan $1 out, as the bank is required to “hold back” some percentage of that dollar as kind of a capital reserve. I don’t know the exact math, but I would guess in round numbers that for every $1 of new deposits, BOFI has something like $.95 of that dollar available to use for new loans.

This is probably the area in which I am weakest in my understanding of the banking system, so take away the concept, but not the actual numbers in the example. Hope that (kind of) helps.

Fletch

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This link has the information…

https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta…

In the United States, a reserve requirement[4] (or liquidity ratio) is a minimum value, set by the Board of Governors of the Federal Reserve System, of the ratio of required reserves to some category of deposits held at depository institutions (e.g., commercial bank including US branch of a foreign bank, savings and loan association, savings bank, credit union). The only deposit categories currently subject to reserve requirements are net transactions accounts, mainly checking accounts. The total amount of all net transaction accounts held in USA depository institutions, plus US currency held by the nonbank public, is called M1.

A depository institution can satisfy its reserve requirements by holding either vault cash[5] or reserve deposits. An institution that is a member of the Federal Reserve System must hold its reserve deposits at a Federal Reserve Bank. Nonmember institutions can elect to hold their reserve deposits at a member institution on a pass-through basis.[6]

A depository institution’s reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective January 23, 2014, institutions with net transactions accounts:

Of less than $13.3 million have no minimum reserve requirement;
Between $13.3 million and $103.6 million must have a liquidity ratio of 3%;
Exceeding $103.6 million must have a liquidity ratio of 10%.[6]
The threshold monetary amounts are recalculated annually according to a statutory formula.

Effective December 27, 1990, a liquidity ratio of zero has applied to CDs, savings deposits, and time deposits, owned by entities other than households, and the Eurocurrency liabilities of depository institutions. Deposits owned by foreign corporations or governments are currently not subject to reserve requirements.[6]

When an institution fails to satisfy its reserve requirements, it can make up its deficiency with reserves borrowed either from a Federal Reserve Bank, or from an institution holding reserves in excess of reserve requirements. Such loans are typically due in 24 hours or less.

An institution’s overnight reserves, averaged over some maintenance period, must equal or exceed its average required reserves, calculated over the same maintenance period. If this calculation is satisfied, there is no requirement that reserves be held at any point in time. Hence reserve requirements play only a limited role in money creation in the USA - and since quantitative easing began in 2008, they have been even less important, as an enormous glut of excess reserves now exists (over the whole system; theoretically, though, individual banks may still run into temporary shortfalls).

The International Banking Act of 1978 requires branches of foreign banks operating in the US to follow the same required reserve ratio standards.[7][8]

Countries without reserve requirements[edit]
Canada, the UK, New Zealand, Australia and Sweden have no reserve requirements.

This does not mean that banks can - even in theory - create money without limit. On the contrary: banks are constrained by capital requirements, which are arguably more important than reserve requirements even in countries that have reserve requirements.

It also does not mean that a commercial bank’s overnight reserves can become negative, in these countries. On the contrary: the central bank will always step in to lend the necessary reserves if necessary so that this does not happen: this is sometimes described as “defending the payment system”. Historically, a central bank might once have run out of reserves to lend and so have had to suspend redemptions, but this cannot happen anymore to modern central banks because of the end of the gold standard worldwide, which means that all nations use a fiat currency.

A zero reserve requirement cannot be explained by a theory that holds that monetary policy works by varying the quantity of money using the reserve requirement.

Even in the United States, which retains formal (though now mostly irrelevant) reserve requirements, the notion of controlling the money supply by targeting the quantity of base money fell out of favour many years ago, and now the pragmatic explanation of monetary policy refers to targeting the interest rate to control the broad money supply.

Before the financial crisis reserve requirements were extremely liberal for the investment banks and it was not unusual for them to be leveraged several times their capital base. Lehman’s high degree of leverage - the ratio of total assets to shareholders equity - was 31 in 2007

http://www.investopedia.com/articles/economics/09/lehman-bro…

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