BOFI Holdings BOFI
May 19, 2008 - 12:33pm EST by
mitc567
2008 2009
Price: 6.67 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 55 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

BOFI Holding Inc. (BOFI) is a well capitalized internet-only thrift with a pristine balance sheet and sound assets that is trading at 80% of book value and less than 7x my projected EPS for fiscal 2009 (June).  Using my projected returns on equity and assets for BOFI, I would expect the stock to trade at about 2.3 time book value with the next 15 months, which equates to a share price of more than $20.00.  I expect the bank to benefit from the positively sloped yield curve and its ability to greatly increase net interest margin through the downward repricing of its deposit liabilities (CD’S) and swap out of low yielding (but safe) GNMA’s and FNMA’s for seasoned whole loans and AAA rated CMO’s from troubled financial institutions.  With the banking industry experiencing the “perfect storm”, many banks that looked sound in the good credit environment are beginning to struggle and fail.  There were very few banks that sidestepped the current credit crisis.  BOFI is one of them with a ratio of 0.09% non-performing loans to total loans. 

 

BOFI came public through Hambrecht in March of 2005 at $11.50 per share.  Once public, Hambrecht never picked up coverage and the bank still to this day has no sell-side analysts.  Management of the bank decided to use the proceeds of the IPO to purchase mainly GNMA’s and FNMA’s until the yield curve and risk adjusted credit returns improved.  As you may be aware, the yield curve remained relatively flat to downward sloped from the banks IPO until the 4th quarter of 2007.  This led the bank to report very low EPS (earnings per share), ROA (return on assets) and ROE (return of equity) over its public life. 

 

The world has changed to BOFI’s favor in the last two quarters.  First, the spread between 3 month and 10 year Treasuries has gone from about 85 basis points (bps) on October 1, 2007 to over 200 bps today.  This is helping all lenders begin to repair their balance sheets by increasing net interest margin (cost of liabilities less yield on assets).  Second, the credit crisis has caused a re-pricing of risk for new and seasoned loans.  For new loans, banks are now more careful in their underwriting standards and pricing.  For seasoned loans and CMO’s (collateralized mortgage obligations), it is a buyers market.  There are so many banks that made bad loans needing to sell assets to stay well capitalized under Federal Reserve rules for banks, that quality loans are selling for historically high spreads over treasuries.  For example in the Indymac Bancorp (IMB) call, their management stressed that seasoned non-agency AAA CMO’s with low default rates were selling at an average of 93 cents on the dollar.  I have heard this pricing from a number of other sources as well.  This means that banks like BOFI can now increase yield on their assets by an additional 100 to 200 bps over where they were six months ago.  It is important to note that this increase in yield was accomplished without increasing the Bank’s interest rate risk.

 

Another positive effect of the decrease in short and mid-term interest rates is the decrease yields that BOFI needs to pay for time deposits (CD’s).  On the Company’s recent earnings call (May 6, 2008) it noted that 19% of its CD’s re-priced in the March quarter and 63% will re-price by the end of its next fiscal year in June 2009.  This will also result in an increase in net interest margin (NIM) over the next 15 months of approximately 100 bps.  In the chart below I show the Bank’s historical and projected NIM, ROA and ROE. 

 

 

Quarter

NIM

ROA

ROE

6/30/2004

2.04%

0.67%

8.42%

9/30/2004

2.06%

0.64%

8.77%

12/31/2004

1.91%

0.44%

6.30%

3/31/2005

1.88%

0.68%

9.19%

6/30/2005

1.98%

0.59%

6.73%

9/30/2005

1.62%

0.55%

4.78%

12/31/2005

1.49%

0.45%

4.14%

3/31/2006

1.54%

0.49%

4.65%

6/30/2006

1.51%

0.49%

4.56%

9/30/2006

1.31%

0.40%

4.08%

12/31/2006

1.29%

0.41%

4.09%

3/31/2007

1.42%

0.42%

4.77%

6/30/2007

1.36%

0.40%

4.96%

9/30/2007

1.24%

0.30%

4.04%

12/31/2007

1.34%

0.25%

3.42%

3/31/2008

1.76%

0.38%

5.29%

6/30/2008

2.00%

0.72%

10.30%

9/30/2008

2.10%

0.79%

10.97%

12/31/2008

2.20%

0.86%

11.58%

3/31/2009

2.30%

0.92%

12.02%

6/30/2009

2.40%

0.98%

12.43%

(Projections in bold)

 

 

 

Please note that the future interest rate spreads I used are conservative based on the facts made public in the earnings call last week. 

 

Another positive factor in looking at BOFI is the change in top management.  In October of 2007, the Company hired Greg Garrabrants to be CEO from Indymac Bancorp (IMB) where he led the business development group responsible for merger & acquisitions, joint ventures, and strategic alliances.  Prior to IMB, Garrabrants worked for Goldman Sachs as an investment banker and at McKinsey & Company focusing on financial institutions clients.  Garrabrants has spent the last 6 months analyzing the Bank’s strengths and weaknesses and has announced a number of improvements that will reduce expenses and improve NIM.  Please read the last two earnings transcripts for the details.

 

I have projected the ROA and ROE in the chart above based on the Bank’s current operating model.  The projected income statements are shown in the chart below and assume no growth in assets and only an increase in NIM with announced cost savings.

 

$in 1,000's

 Actual

 Actual

 Actual

 Proj.

 Proj.

 Proj.

 Proj.

 Proj.

Fiscal Year Ended

30-Sep

31-Dec

31-Mar

30-Jun

30-Sep

31-Dec

31-Mar

30-Jun

 

2007

2007

2008

2008

2009

2009

2009

2009

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Loans, including Fees

 $7,494

 $7,727

 $8,559

 

 

 

 

 

Investments

   6,128

   7,244

   7,615

 

 

 

 

 

  Total interest and Dividend Income

 13,622

 14,971

 16,174

 16,971

 16,971

 16,971

 16,971

 16,971

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

   6,950

   7,546

   7,187

 

 

 

 

 

Advances from FHLB

   2,524

   2,594

   2,870

 

 

 

 

 

Other Borrowings

   1,186

   1,401

   1,456

 

 

 

 

 

  Total Interest Expense

 10,660

 11,541

 11,513

 10,790

 10,533

 10,276

 10,020

   9,763

 

 

 

 

        -  

        -  

        -  

        -  

        -  

Net Interest Income

   2,962

   3,430

   4,661

   6,181

   6,438

   6,694

   6,951

   7,208

Provision for Loan Losses

         5

      264

      835

      500

      500

      500

      500

      500

Net Interest Income after Provision for Loan Losses

   2,957

   3,166

   3,826

   5,681

   5,938

   6,194

   6,451

   6,708

 

 

 

 

        -  

        -  

        -  

        -  

        -  

NON-INTEREST INCOME

 

 

 

        -  

        -  

        -  

        -  

        -  

Prepayment Penalty Fee Income

      140

       45

       45

       55

       67

       81

       98

      120

Gain on Sale of Loans and Securities

      220

      206

      881

      250

      250

      250

      250

      250

Banking Service Fees and Other inc.

       88

       82

       97

       80

       81

       82

       83

       84

  Total Non-Interest Income

      448

      333

   1,023

      385

      398

      413

      431

      454

 

 

 

 

        -  

        -  

        -  

        -   

        -  

NON-INTEREST EXPENSE

 

 

 

        -  

        -  

        -  

        -  

        -  

Salaries and Employee Benefits

   1,021

   1,358

   1,659

   1,443

   1,400

   1,358

   1,358

   1,358

Professional Services

       95

      154

      216

      187

      187

      187

      187

      187

Occupancy and Equipment

       94

       91

       93

       96

       94

       92

       91

       89

Data Processing and Internet

      153

      154

      170

      178

      178

      178

      178

      178

Advertising and Promotional

      301

      174

      230

      241

      241

      241

      241

      241

Depreciation and Amortization

       25

       30

       37

       39

       39

       39

       39

       39

Service Contract Termination

        -  

        -  

        -  

        -  

        -  

        -  

        -  

        -  

Other G&A

      461

      449

      733

      552

      552

      552

      552

      552

  Total Non-Interest Expense

   2,150

   2,410

   3,138

   2,735

   2,691

   2,647

   2,645

   2,644

 

 

 

 

        -  

        -  

        -  

        -  

        -  

INCOME BEFORE TAXES

   1,255

   1,089

   1,711

   3,330

   3,644

   3,960

   4,238

   4,518

 

 

 

 

        -  

        -  

        -  

        -  

        -  

INCOME TAXES

      508

      438

      693

   1,339

   1,466

   1,593

   1,704

   1,817

 

 

 

 

        -  

        -  

        -  

        -  

        -  

NET INCOME

 $  747

 $  651

 $1,018

 $1,991

 $2,178

 $2,368

 $2,533

 $2,701

 

 

 

 

        -  

        -  

        -  

        -  

        -  

NET INCOME ATTRIB TO C STOCK

 $  670

 $  574

 $  941

 $1,914

 $2,101

 $2,291

 $2,456

 $2,624

 

 

 

 

        -  

        -  

        -  

        -  

        -  

Basic Shares Outstanding (in 1,000's)

   8,248

   8,254

   8,274

   8,274

   8,274

   8,274

   8,274

   8,274

Fully Diluted Shares Outstanding (in 1,000's)

   8,375

   8,374

   8,376

   8,376

   8,376

   8,376

   8,376

   8,376

 

 

 

 

        -  

        -  

        -  

        -  

        -  

Basic EPS

 $ 0.08

 $ 0.07

 $ 0.11

 $ 0.23

 $ 0.25

 $ 0.28

 $ 0.30

 $ 0.32

Diluted EPS

 $ 0.08

 $ 0.07

 $ 0.11

 $ 0.23

 $ 0.25

 $ 0.27

 $ 0.29

 $ 0.31

Full Year EPS

 

 

 

 $ 0.49

 

 

 

 $ 1.13

 

The upside to these numbers could come from the Bank’s announced intention to originate and sell qualified home loans to FNMA.  This would add gain on sale revenues to the model that I can’t quantify at this time.  The risks are straight forward, poor underwriting of future loans and a significant flattening of the yield curve.  I feel comfortable with both of these risks due to BOFI’s high underwriting standards and the state of the US credit markets.

 

 

Valuation

 

Historically banks that earn ROA’s of 1% and ROE’s of 10% trade in the public markets at significant premiums to book value.  Using a regression analysis based on historical bank acquisitions from the mid 1990’s till 2005, yields a value of 2.3x book value.  That would equate to a $20.00 per share based on Fiscal Year end 2009’s anticipated ROA and ROE and today’s book value of $8.67 per share.  I would expect BOFI’s stock price to migrate slowly from it current level to this price as investors recognize the soundness of the Bank and its earnings power.

 

 

Catalyst

1. Significantly increased EPS
2. Continued positively sloped yield curve.
3. Possible acquisition
4. Sell-side analysts picking up coverage (There are a lot of investment banks that cover stocks in this space)
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    Description

    BOFI Holding Inc. (BOFI) is a well capitalized internet-only thrift with a pristine balance sheet and sound assets that is trading at 80% of book value and less than 7x my projected EPS for fiscal 2009 (June).  Using my projected returns on equity and assets for BOFI, I would expect the stock to trade at about 2.3 time book value with the next 15 months, which equates to a share price of more than $20.00.  I expect the bank to benefit from the positively sloped yield curve and its ability to greatly increase net interest margin through the downward repricing of its deposit liabilities (CD’S) and swap out of low yielding (but safe) GNMA’s and FNMA’s for seasoned whole loans and AAA rated CMO’s from troubled financial institutions.  With the banking industry experiencing the “perfect storm”, many banks that looked sound in the good credit environment are beginning to struggle and fail.  There were very few banks that sidestepped the current credit crisis.  BOFI is one of them with a ratio of 0.09% non-performing loans to total loans. 

     

    BOFI came public through Hambrecht in March of 2005 at $11.50 per share.  Once public, Hambrecht never picked up coverage and the bank still to this day has no sell-side analysts.  Management of the bank decided to use the proceeds of the IPO to purchase mainly GNMA’s and FNMA’s until the yield curve and risk adjusted credit returns improved.  As you may be aware, the yield curve remained relatively flat to downward sloped from the banks IPO until the 4th quarter of 2007.  This led the bank to report very low EPS (earnings per share), ROA (return on assets) and ROE (return of equity) over its public life. 

     

    The world has changed to BOFI’s favor in the last two quarters.  First, the spread between 3 month and 10 year Treasuries has gone from about 85 basis points (bps) on October 1, 2007 to over 200 bps today.  This is helping all lenders begin to repair their balance sheets by increasing net interest margin (cost of liabilities less yield on assets).  Second, the credit crisis has caused a re-pricing of risk for new and seasoned loans.  For new loans, banks are now more careful in their underwriting standards and pricing.  For seasoned loans and CMO’s (collateralized mortgage obligations), it is a buyers market.  There are so many banks that made bad loans needing to sell assets to stay well capitalized under Federal Reserve rules for banks, that quality loans are selling for historically high spreads over treasuries.  For example in the Indymac Bancorp (IMB) call, their management stressed that seasoned non-agency AAA CMO’s with low default rates were selling at an average of 93 cents on the dollar.  I have heard this pricing from a number of other sources as well.  This means that banks like BOFI can now increase yield on their assets by an additional 100 to 200 bps over where they were six months ago.  It is important to note that this increase in yield was accomplished without increasing the Bank’s interest rate risk.

     

    Another positive effect of the decrease in short and mid-term interest rates is the decrease yields that BOFI needs to pay for time deposits (CD’s).  On the Company’s recent earnings call (May 6, 2008) it noted that 19% of its CD’s re-priced in the March quarter and 63% will re-price by the end of its next fiscal year in June 2009.  This will also result in an increase in net interest margin (NIM) over the next 15 months of approximately 100 bps.  In the chart below I show the Bank’s historical and projected NIM, ROA and ROE. 

     

     

    Quarter

    NIM

    ROA

    ROE

    6/30/2004

    2.04%

    0.67%

    8.42%

    9/30/2004

    2.06%

    0.64%

    8.77%

    12/31/2004

    1.91%

    0.44%

    6.30%

    3/31/2005

    1.88%

    0.68%

    9.19%

    6/30/2005

    1.98%

    0.59%

    6.73%

    9/30/2005

    1.62%

    0.55%

    4.78%

    12/31/2005

    1.49%

    0.45%

    4.14%

    3/31/2006

    1.54%

    0.49%

    4.65%

    6/30/2006

    1.51%

    0.49%

    4.56%

    9/30/2006

    1.31%

    0.40%

    4.08%

    12/31/2006

    1.29%

    0.41%

    4.09%

    3/31/2007

    1.42%

    0.42%

    4.77%

    6/30/2007

    1.36%

    0.40%

    4.96%

    9/30/2007

    1.24%

    0.30%

    4.04%

    12/31/2007

    1.34%

    0.25%

    3.42%

    3/31/2008

    1.76%

    0.38%

    5.29%

    6/30/2008

    2.00%

    0.72%

    10.30%

    9/30/2008

    2.10%

    0.79%

    10.97%

    12/31/2008

    2.20%

    0.86%

    11.58%

    3/31/2009

    2.30%

    0.92%

    12.02%

    6/30/2009

    2.40%

    0.98%

    12.43%

    (Projections in bold)

     

     

     

    Please note that the future interest rate spreads I used are conservative based on the facts made public in the earnings call last week. 

     

    Another positive factor in looking at BOFI is the change in top management.  In October of 2007, the Company hired Greg Garrabrants to be CEO from Indymac Bancorp (IMB) where he led the business development group responsible for merger & acquisitions, joint ventures, and strategic alliances.  Prior to IMB, Garrabrants worked for Goldman Sachs as an investment banker and at McKinsey & Company focusing on financial institutions clients.  Garrabrants has spent the last 6 months analyzing the Bank’s strengths and weaknesses and has announced a number of improvements that will reduce expenses and improve NIM.  Please read the last two earnings transcripts for the details.

     

    I have projected the ROA and ROE in the chart above based on the Bank’s current operating model.  The projected income statements are shown in the chart below and assume no growth in assets and only an increase in NIM with announced cost savings.

     

    $in 1,000's

     Actual

     Actual

     Actual

     Proj.

     Proj.

     Proj.

     Proj.

     Proj.

    Fiscal Year Ended

    30-Sep

    31-Dec

    31-Mar

    30-Jun

    30-Sep

    31-Dec

    31-Mar

    30-Jun

     

    2007

    2007

    2008

    2008

    2009

    2009

    2009

    2009

    INTEREST AND DIVIDEND INCOME

     

     

     

     

     

     

     

     

    Loans, including Fees

     $7,494

     $7,727

     $8,559

     

     

     

     

     

    Investments

       6,128

       7,244

       7,615

     

     

     

     

     

      Total interest and Dividend Income

     13,622

     14,971

     16,174

     16,971

     16,971

     16,971

     16,971

     16,971

     

     

     

     

     

     

     

     

     

    INTEREST EXPENSE

     

     

     

     

     

     

     

     

    Deposits

       6,950

       7,546

       7,187

     

     

     

     

     

    Advances from FHLB

       2,524

       2,594

       2,870

     

     

     

     

     

    Other Borrowings

       1,186

       1,401

       1,456

     

     

     

     

     

      Total Interest Expense

     10,660

     11,541

     11,513

     10,790

     10,533

     10,276

     10,020

       9,763

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    Net Interest Income

       2,962

       3,430

       4,661

       6,181

       6,438

       6,694

       6,951

       7,208

    Provision for Loan Losses

             5

          264

          835

          500

          500

          500

          500

          500

    Net Interest Income after Provision for Loan Losses

       2,957

       3,166

       3,826

       5,681

       5,938

       6,194

       6,451

       6,708

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    NON-INTEREST INCOME

     

     

     

            -  

            -  

            -  

            -  

            -  

    Prepayment Penalty Fee Income

          140

           45

           45

           55

           67

           81

           98

          120

    Gain on Sale of Loans and Securities

          220

          206

          881

          250

          250

          250

          250

          250

    Banking Service Fees and Other inc.

           88

           82

           97

           80

           81

           82

           83

           84

      Total Non-Interest Income

          448

          333

       1,023

          385

          398

          413

          431

          454

     

     

     

     

            -  

            -  

            -  

            -   

            -  

    NON-INTEREST EXPENSE

     

     

     

            -  

            -  

            -  

            -  

            -  

    Salaries and Employee Benefits

       1,021

       1,358

       1,659

       1,443

       1,400

       1,358

       1,358

       1,358

    Professional Services

           95

          154

          216

          187

          187

          187

          187

          187

    Occupancy and Equipment

           94

           91

           93

           96

           94

           92

           91

           89

    Data Processing and Internet

          153

          154

          170

          178

          178

          178

          178

          178

    Advertising and Promotional

          301

          174

          230

          241

          241

          241

          241

          241

    Depreciation and Amortization

           25

           30

           37

           39

           39

           39

           39

           39

    Service Contract Termination

            -  

            -  

            -  

            -  

            -  

            -  

            -  

            -  

    Other G&A

          461

          449

          733

          552

          552

          552

          552

          552

      Total Non-Interest Expense

       2,150

       2,410

       3,138

       2,735

       2,691

       2,647

       2,645

       2,644

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    INCOME BEFORE TAXES

       1,255

       1,089

       1,711

       3,330

       3,644

       3,960

       4,238

       4,518

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    INCOME TAXES

          508

          438

          693

       1,339

       1,466

       1,593

       1,704

       1,817

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    NET INCOME

     $  747

     $  651

     $1,018

     $1,991

     $2,178

     $2,368

     $2,533

     $2,701

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    NET INCOME ATTRIB TO C STOCK

     $  670

     $  574

     $  941

     $1,914

     $2,101

     $2,291

     $2,456

     $2,624

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    Basic Shares Outstanding (in 1,000's)

       8,248

       8,254

       8,274

       8,274

       8,274

       8,274

       8,274

       8,274

    Fully Diluted Shares Outstanding (in 1,000's)

       8,375

       8,374

       8,376

       8,376

       8,376

       8,376

       8,376

       8,376

     

     

     

     

            -  

            -  

            -  

            -  

            -  

    Basic EPS

     $ 0.08

     $ 0.07

     $ 0.11

     $ 0.23

     $ 0.25

     $ 0.28

     $ 0.30

     $ 0.32

    Diluted EPS

     $ 0.08

     $ 0.07

     $ 0.11

     $ 0.23

     $ 0.25

     $ 0.27

     $ 0.29

     $ 0.31

    Full Year EPS

     

     

     

     $ 0.49

     

     

     

     $ 1.13

     

    The upside to these numbers could come from the Bank’s announced intention to originate and sell qualified home loans to FNMA.  This would add gain on sale revenues to the model that I can’t quantify at this time.  The risks are straight forward, poor underwriting of future loans and a significant flattening of the yield curve.  I feel comfortable with both of these risks due to BOFI’s high underwriting standards and the state of the US credit markets.

     

     

    Valuation

     

    Historically banks that earn ROA’s of 1% and ROE’s of 10% trade in the public markets at significant premiums to book value.  Using a regression analysis based on historical bank acquisitions from the mid 1990’s till 2005, yields a value of 2.3x book value.  That would equate to a $20.00 per share based on Fiscal Year end 2009’s anticipated ROA and ROE and today’s book value of $8.67 per share.  I would expect BOFI’s stock price to migrate slowly from it current level to this price as investors recognize the soundness of the Bank and its earnings power.

     

     

    Catalyst

    1. Significantly increased EPS
    2. Continued positively sloped yield curve.
    3. Possible acquisition
    4. Sell-side analysts picking up coverage (There are a lot of investment banks that cover stocks in this space)

    Messages


    Subject1st Insider purchase
    Entry05/19/2008 02:04 PM
    Membermitc567
    The CFO bought a small amount of stock just as I published this write up.

    Subject1st Insider purchase
    Entry05/19/2008 02:04 PM
    Membermitc567
    The CFO bought a small amount of stock just as I published this write up.

    SubjectCEO from Indymac?
    Entry05/19/2008 03:18 PM
    Memberthoreau941
    You mention that BOFI's CEO used to work for Indymac. Shouldn't this be a source of worry? Indymac is currently dealing with major problems due to lax underwriting in their mortgage and homebuilding portfolios.

    SubjectQuestions
    Entry05/19/2008 04:37 PM
    Memberdavid101
    Mitc,

    Deja vu all over again.

    1. Valuation - 2.3X book is VERY aggressive for a nano-cap like BOFI. What was the median market cap in your regression analysis of acquisitions?

    2. What is the average duration on the assets?

    3. Spreads - What happens if the Fed starts raising rates? Won't those CD's have to reprice higher while their longer-dated dated assets don't?

    4. Why would another bank buy BOFI?

    David

    Subjectcomments
    Entry05/19/2008 06:29 PM
    Memberskyhawk887
    Mitc,

    Were you aware that David posted this idea in early 2007? I wasn’t a fan of the idea then and I don’t think anything has really changed. Sure, the yield curve has gotten quite steep, but I wonder how long that will last (inflation apparently won’t ever again be a problem for the Fed when the BLS comes up with the most comical ways to calculate it) and I wonder if BOFI will really be able to take advantage of it in a meaningful and sustainable way.

    I thought your analysis of the company, particularly the balance sheet, was lacking. Yes, their credit quality has been good, but any investment in a bank deserves some sort of analysis of their loan and securities book. Who are these 15 new full-time employees they’ve hired and what will they do as part of the “new consumer lending group”? Make ill-advised home equity loans? And what about their deposits/funding base? Only $88M of the funding is from core deposits. The remaining 900M is borrowings or CDs. I have stated repeatedly in many of my comments that CDs are worthless. Maybe others disagree, but when any bank in the country can raise billions of dollars in CDs in a short amount of time, they can’t be worth that much.

    So BOFI essentially comes down to a bet on the sustainability of the steep yield curve. I guess in some respects you could say it looks very cheap compared to something like HCBK trading at 2 times tangible book and NYB at 4 times, but I would argue that these are two relatively unique companies in their ability to get investors to love the stock and perpetually delude themselves. They are also large and liquid.

    Ultimately, BOFI isn’t a real company. It’s a collection of assets and borrowings, much like a mortgage REIT such as NLY. This doesn’t mean that the stock can’t go up, but when I invest I’d prefer to buy a real company that actually has a compelling strategy. Maybe that will change with the new CEO, but I am already skeptical of him. In the most recent quarterly press release, he is quoted as saying "I am proud to say that the changes our team has implemented in the first full quarter since my arrival at the Bank have led to rapid improvements in the Bank's operating results in one of the most challenging environments for banks in many decades." Please. The better performance has had nothing to do with his arrival and everything to do with the Fed’s aggressive rate cuts. Nothing like taking undeserved credit when you can do so.

    I also think an acquisition is very unlikely. They are very small, so a large national player probably isn't interested and with the dramatic sell-off in many small regional banks, their are lots of cheaper alternatives for a buyer. Besides, any potential buyer can easily enough put on their own carry-trade without having to go through the hassle of an acquisition.

    SubjectRE: CEO from Indymac?
    Entry05/20/2008 08:56 AM
    Membermitc567
    He wasn't on the loan side. He was in business development.

    SubjectRE: Questions
    Entry05/20/2008 09:08 AM
    Membermitc567
    The median value of the banks in the sample was $102 million. That is about what BOFI would sell for at 2.3x book value.

    They don't disclose duration. Since at least 2/3 of assets are in mortgage related securities, duration would be a moving target based on refinance rates anyways.

    Spreads, as you all know, are dependent on both market conditions and loan terms. What the bank has said is that it is less sensitive to interest rates than it was previously. I believe that any increase in short rates will probably be met by a increase in long rates as banks and insurance companies continue to repair their balance sheets.

    I believe BOFI is building a nice internet only franchise that would be a good diversification strategy for a medium sized US bank with a weak internet offering. Other than ING and Citi, most banks do not market well on the internet. I believe that an acquistion is not imminent and would only come after BOFI proves their model over the next couple of years.

    SubjectRE: comments
    Entry05/20/2008 09:49 AM
    Membermitc567
    Balance Sheet Analysis: I didn’t include the charts from the public filings, as I felt that the 0.09% non-performing ratio pretty much said it all. That said, loan to value for single and multiple family stands in the 60% range based on previous filings. That should insulate them well in the current downturn.

    The 15 new employees in the consumer lending group is a positive not a negative. The bank is ready to begin originating loans to sell to Fannie Mae. This exposes them to little credit risk and adds potential additional income that I have chosen to leave out of the model.

    Your argument on core deposits is based on your focus of traditional community banking. Whether you spend money for a branch network or chose to use CD’s and high-yield checking deposits, it is all a cost of capital discussion. I personally believe that the internet will provide a cheaper source of funding than branches. Others can respectfully disagree.

    The sustainability of a steep yield curve is a fact. The inverted and flat yield curves that we have experienced due to the recent credit and hedge fund bubbles are an anomaly. If you look at history, the current environment is the norm. BOFI is a safe way to play this fact. Also, the Bank has reduced its interest rate risk should rates move against them. Here is the CEO’s quote, “In fact, our sensitivity to interest rate risk has been significantly reduced in comparison with the prior quarter to better prepare the Bank for any upward movement in interest rates.”

    I understand your difficulty in accepting the possibility of an acquisition. However, if you look at all bank acquisitions done in the last 10 years, BOFI is in the right size range. Calling this a carry trade is the same as calling any internet company a weak version of a bricks and mortar company. I believe that view is short sighted. Once their sustainability of earnings becomes apparent, I believe that it is a no-brainer for a mid-size bank looking to diversify their strategy.

    Your argument is probably close to the short view of the stock. That is why 5% of the float with about 18 days to cover ratio exists. I believe the shorts will get squeezed on this due to the coming earnings. Please read the conference call transcript to get a better understanding of the turnaround.

    SubjectBOFI is presenting at JMP
    Entry05/20/2008 10:34 AM
    Membermitc567
    on Wednesday this week.

    SubjectRE: comments
    Entry05/20/2008 08:01 PM
    Memberdavid101
    Skyhawk,

    I'll echo Mitc's comments that CD's are not entirely worthless. It all depends on the total deposit costs when factoring in physical branches and tellers. The one exception would be jumbo/brokered CD's because those are typically interest rate "queens."

    My enthusiasm for BOFI, however, has waned. Last year, expanding into RV loans made sense. Their deposit gathering is essentially commoditized, but that was okay because RV lending presented an interesting niche on the asset side. Have to imagine that $4/gal. for gas really crimps RV sales (dohhhh). The fact that they are now pursuing a commodity business like originating Fannie mortgages leaves me asking is that all there is?

    The reason that a bank pays a premium for another bank is due to core deposits, branch footprint, real estate, and certain loan books. All of that is absent from BOFI as they have commodity assets and commodity liabilities, and the only premium value is the internet piece, and it comes down to whether a regional bank would want to build or buy an internet operation.

    An interesting argument could be made that shareholders might realize more value by liquidiating BOFI and selling the internet piece than trying to find a way to make money.

    David

    SubjectBOFI JMP presentation filed
    Entry05/21/2008 10:02 AM
    Membermitc567
    BOFI filed an 8-k today for their JMP presentation.

    They detail why their cost of operation is much lower than a traditional bank.

    Salaries & Benefits 0.50% vs 1.70% for small bank and 1.37% for large banks.

    Total non-interest expense is 0.99% vs 3.16% small and 2.95% large.

    I believe this spread has value and will translate into increased share price as ROE and ROA go up.

    Subject40% EPS growth guidance
    Entry05/22/2008 09:03 AM
    Membermitc567
    BOFI presented yesterday at JMP and guided to this q's eps up greater than 40% this quarter over previous quarter. SLide show is in 8-K and audio is on bofiholding.com site.

    Discussion of credit quality: 21% Loans single family. Highly seasoned with Loan to Value (LTV) of 62.4%. 7% loans home equity with 60.2 LTV and 762 FICO score. There have been zero losses on home equity loans due to low LTV. 56% multifamily with LTV of 50.7%.

    Confirmed net interest margin > 200 basis points.


    SubjectRE: but your est.was 100%+ gro
    Entry05/22/2008 04:55 PM
    Membermitc567
    He said greater than 40% growth. In the last quarter there was a one time charge for previous CEO comp which will not reoccur this quarter. Adding that in gets you $.14 last quarter. Using his NIM of >200 BPS and the reduced expenses he mentioned on the conf call gets me to $.23.

    Hope that helps

    SubjectAnother small insider buy
    Entry05/22/2008 04:56 PM
    Membermitc567
    One of the directors bought 200 shares today. I don't know if the small purchases are limited by trading volume or investable cash.

    SubjectAdditional insider purchase
    Entry05/23/2008 07:35 AM
    Membermitc567
    Allrich bought an additional 2,800 shares yesterday to bring his total for the day to 3,000 shares. Dollar wise it isn't a lot of money, but it is nice to see mgt and the board stepping up to the plate and buying shares.

    Subject2 more insider buys
    Entry05/23/2008 02:23 PM
    Membermitc567
    Both insiders bought approx. 2,000 shares each. That brings the total to 4 insidersb that have purchased since the window opened.

    SubjectValuation
    Entry06/02/2008 09:30 PM
    Memberlvampa1070
    Is it possible that 2.3x book is a "takeover" multiple on peak ROA for this bank? Also, is it fair to compare the P/B ratio for conventional banks and for this internet thrift? I can think of some competitive advantages that a conventional community bank has over an internet based bank.

    SubjectRE: Valuation
    Entry06/03/2008 10:36 AM
    Membermitc567
    2.3X book is just the regression multiple value of all bank M&A activity over a 10 year stretch for banks with ROA's of 1% and ROE's of 10%.

    Having been a bank investor for over 20 years, I personally believe that the community bank model is a thing of the past. Increased competition, high real estate and labor costs and the ease of using the internet for financial transactions is the death knell for this model. If you look at the success of Citi and ING in doing bank on line models, I believe that early movers like BOFI will benefit from consumers increasing acceptance of internet based financial transactions. Anecdotally, physical check based transaction are declining at about a 3% per annum rate.

    SubjectUpdate on Earnings
    Entry07/01/2008 09:30 AM
    Membermitc567
    Today BOFI issued a press release where they announced the sale of a convertible preferred stock with a conversion premium of over 20% ($9/$7.40) and an 8% coupon. The money is not being used to repair the balance sheet, but for growth capital to take adavantage of market conditions in the mortgage market. They also put out guidance for earnings of up over 70% sequential. This is due to net interest margin moving from 1.76% to 2.35%. This should allow for next 12 months earnings over $1.00 per share.

    SubjectBOFI EPS $.20/share q4
    Entry08/20/2008 10:48 AM
    Membermitc567
    BOFI earned $.20/share in their q4 (June 30). This is a 100% increase Year over Year and up 75% sequentionally. The earnings would have been $.27/share without an impairment charge for ownership of Fannie Mae Pfd stock. Wells Fargo, who owns $2.5 billion of this Pfd stock, chose not to take a charge this quarter. Tone of the conference call was positive.

    SubjectRE: Author Exit Recommendation
    Entry09/05/2013 09:47 AM
    Memberkerrcap
    Price at recommendation: $6.67
    Price today: $65

    Great job. 

    SubjectRe: Re: Re: Re: Re: Re: A good short now?
    Entry10/07/2015 04:33 PM
    Membergrizzlybear

    This is the most expensive bank in the US on P / TBV, and it will get very negatively hurt by any interest rate increase.

    What they are doing is extremely risky -- levering up with an illiquid 3 to 5 year duration asset with short term hot money deposits.  

    It appears to be driven up on pure momentum buying by unsophisticated retail holders or non-financial analysts.  

    I would expect there to be a serious correction should interest rates rise, or the growth slow even modestly.  


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: A good short now?
    Entry10/07/2015 06:57 PM
    Membergrizzlybear

    I listened to the call.  The CEO sounded unprofessional.  He talked about the details of his OCC exam publically.  

    The OCC is requiring them to hold more capital than normal which is unusual and typically a signal that they'd like to see a growth slowdown.   

    Also it is strange that two auditors quit recently.

    The company's claim that only 10% of its loans are to foreign nationals is highly suspect as well.  It is well known that these types of loans are much riskier than a typical loan, and also create significant risks around money laundering.  It is no wonder that the company likes to hide this fact from investors.  


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: A good short now?
    Entry10/07/2015 10:02 PM
    Memberbroncos727

    This is some what of an off topic question.  I dont really know that much about BOFI, other than it appears over priced.  I own INBK, which seems comparable to BOFI - but is much cheaper.  It would be hard for me to make a case that someone should pile into INBK as it is roughtly 1.5 times book value.  But part of the reason I have not sold all of my INBK is that I think one day a few people will look at INBK valuation versus BOFI valuation and either put on a pair trade or maybe just buy INBK.  Does anyone know if this is flawed logic or have any opinions as to why this might not work?  I guess it is low probability. They are both internet banks with rate sensitive deposits.  One is substantially cheaper on a price to book basis, but maybe doesnt grow as fast.  It could be that they are both over valued.


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: A good short now?
    Entry10/08/2015 06:26 AM
    Membergrizzlybear

    The company has a $4B 5/1 ARM book that is earning about 5.5%.  The extra 250bps of spread is beacuse the company is making higher risk loans from both a credit and regulatory perspective.  The core niche is lending to foreign nationals, and in particular foreign nationals from countries that other banks do not lend (Russia, Ukraine, Argentina, Venezuela, etc).  One can confirm this by speaking with any of the number of correspondant lenders and mortgage brokers that source the vast majority of the jumbo loans that the bank portfolios.    

    I tend to agree that in the immediate term large credit losses are not likely to occur, due to the increasing value of real estate.  However, the company is has been growing its very unseasoned loan book extremely rapidly, and only provisioning about $2.5M per quarter against the ~$6B of loans --> it can only get worse from these levels as the book ages and defaults start to hit.  As you can see from the recent reports, NPLs are increasing and I expect this number to continue to rise.   

    In addition, growth is a concern, given that they are hitting up against the law of large numbers as well as increased competition.  Last quarter 8.5% of the 5/1 ARM book pre-paid -- a staggeringly high number particularly given that the book is unseasoned.  This indicates that a substantial number of customers are using this as a bridge loan product, which makes sense given the very high interest rates.  It is obvious that the borrowers that do not prepay are the weaker credits who for whatever reason cannot find a cheaper form of financing.  Thus, as the book ages, the credit quality of the book will only get worse as the company is saddled with the dregs and the higher quality credits all prepay.  In addition, I expect this prepay rate to increase, and I think it will become increasingly difficult for the company to grow its originations from the current ~$400M per quarter clip.

    Lastly, as you acknowledge, the interest rate risk is real.  I calculate that a 50bps move in fed funds will hit earnings by 30 cents to 60 cents.  

     

     

     


    SubjectNot a short other than for valuation
    Entry10/09/2015 08:41 AM
    Membermitc567

    Hi,

    I don't have a horse in this race.  I have read the short argument and I personally don't believe it holds water.  The jumbo loans are well underwritten and are typically done around 50% to 60% loan to value.  The HRB deal adds a ton of profit to BOFI and will start to hit profits this quarter.  If you read the HRB press release on its hit to earnings it is fairly easy to figure out the positive impact to BIFI.  The CEO is very bright and honest and a bit quirky.  I wouldn't read anything into his calls other than he takes it personally when the shorts put out moronic info, like some of their wealthy customers committed crimes.  

     

    IMHO I wouldn't short this other than for valuation.  


    SubjectRe: Not a short other than for valuation
    Entry10/09/2015 10:14 AM
    Membergrizzlybear

    Hi Mitc,

    Thanks for the commentary, and great job with the initial write-up.

    I am curious if you have actually done much primary research on the company recently. 

    If so, what do you think about the idea that the company relies almost entirely on hot money and brokered deposits that could literally disappear overnight?  If rates go up, the margins will get destroyed.

    Also I am curious what you think about the extremely high turnover culture at the company.   


    SubjectRe: Re: Not a short other than for valuation
    Entry10/09/2015 11:33 AM
    Membermitc567

    I have not done much work other than to read the quarterly reports and look at the HRB deal.  I have my money deposited there and find it to be generally better than a bank branch other than when I need hard cash.  The brokered deposit argument is not worthwhile.  The fact is it is a pain in the rear end to move money around and people aren't moving quickly for a few bp's.  This isn't like the old days when S&L's were dying for cash and people had real incentive to watch out for the potential for bankruptcy.

    Staff turnover is mainly because Garrabrants works 24/7 and texts and emails his employees at all hours.  People are expected to perform and he doesn't suffer poor performance well.  Kind of a double edged sword, but I prefer it to the typical bank work ethic.  

     

    I hope that helps. 


    SubjectRe: Re: Re: Not a short other than for valuation
    Entry10/09/2015 11:46 AM
    Membergrizzlybear

    The fact is that the vast majority of the balance sheet is funded by money chasing yield.

    Brokered deposits are, by definition, going to chase bps.  It is the job of the broker to do that.  

    I don't understand why you wouldn't be concerned that a 50bps increase in fed funds would lead to significant margin compression.  The asset side of the balance sheet is almost all fixed rate.  

    I understand that the bull argument is that over half of the top 10 people at the bank after left in the last year, because Garrabrants works them to death.  However, the other side of the story is that they left because they weren't comfortable with the extremely aggressive practices of the bank.  Greg appears to be known to shout down any dissenters / fire them.  This is likely the reason why two former auditors left recently, and went to the OCC with complaints.   


    SubjectRe: Re: Re: Re: Not a short other than for valuation
    Entry10/14/2015 04:28 PM
    Membermitc567

    I understand your argument on the brokered deposits and you could be right.  But I haven't had that experience as an investor in banks in over a decade.  The NYT article certainly had a negative impact on the stock price.  So it would seem the issue with the auditor has spooked investors.  I have had one experience where the OCC changed their mind on a bank's asset quality, but it would be unusual for the OCC to do so.  If the internal auditor has already broached this with the OCC and they have looked at it, then I would find it hard to believe that it is an issue.  Congrats on your short.  I still won't play in this name because it isn't a value to me at this level and I won't short against the CEO who I saw execute so well.  If the whistleblower is correct you will continue to do quite well here.  Good luck.

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