Business Context and Reporting Period
This summary covers the Form 10-Q filed by BofI Holding, Inc. (the parent company of Bank of Internet USA) for the quarterly period ended September 30, 2007. The Company operates as a consumer-focused, nationwide savings bank primarily through the Internet, offering loans (multifamily, single-family, home equity, and recreational vehicle) and deposit products. The filing notes a significant management change subsequent to the period end: Gregory Garrabrants was appointed CEO effective October 22, 2007.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 |
|---|---|---|
| Net Income | $747,000 | $746,000 |
| Net Income Attributable to Common Stock | $670,000 | $668,000 |
| Earnings Per Share (Diluted) | $0.08 | $0.08 |
| Total Assets | $1,024.7 million | $766.2 million |
| Total Deposits | $601.1 million | $443.4 million |
| Net Interest Income | $2.96 million | $2.44 million |
| Net Interest Margin | 1.24% | 1.31% |
| Efficiency Ratio | 63.0% | 56.3% |
| Return on Average Assets | 0.31% | 0.40% |
| Allowance for Loan Losses | $1.43 million | $1.45 million |
| Nonperforming Loans | $134,000 (0.03% of total loans) | Not disclosed |
Material Changes vs. Prior Period
- Asset Growth: Total assets increased 8.2% ($77.5 million) from the prior quarter (June 30, 2007), driven primarily by an $82.3 million increase in mortgage-backed securities available for sale.
- Revenue: Net interest income rose 25.0% year-over-year to $2.96 million, fueled by a 28.6% increase in average earning assets. However, the Net Interest Margin compressed by 7 basis points to 1.24% due to high prepayments on seasoned multifamily loans purchased at a premium, which accelerated premium amortization.
- Expenses: Non-interest expense increased 36.3% year-over-year to $2.15 million. This was largely due to a $166,000 increase in employment-related fees (search for a new CEO) and a $150,000 increase in advertising/promotional costs for the home equity loan program.
- Loan Portfolio Mix: The Company shifted focus from single-family and multifamily loans to consumer loans. Home equity and RV loan portfolios grew by $16.1 million and $15.5 million, respectively, while multifamily loans declined due to payoffs.
- Asset Quality: The Company recorded its first-ever net charge-offs of $25,000 in the quarter, associated with the new RV lending portfolio. The provision for loan losses was $5,000, compared to a benefit of $25,000 in the prior year.
Outlook, Risks, and Management Commentary
- Liquidity: The Company maintains strong liquidity with $18.0 million in cash and cash equivalents and $104.1 million in available borrowing capacity at the Federal Home Loan Bank (FHLB). Borrowing capacity was increased to 40% of total assets in October 2007.
- Capital: The Bank is "well capitalized" under regulatory guidelines, with a Tier 1 leverage ratio of 7.50% and a total risk-based capital ratio of 15.05%.
- Interest Rate Risk: The Company has a negative interest rate sensitivity gap of $46.1 million for the one-year horizon. Management notes that in a rising rate environment, this could lead to a decrease in net interest income. Market value of equity modeling indicates a 37% decline in equity value if rates rise 300 basis points.
- Risks: Key risks include the unseasoned nature of the home equity and RV loan portfolios, potential for higher defaults in these segments, and reliance on third-party service providers for core banking technology. The Company also faces competition and the risk of declining real estate values.
- Subsequent Event: On October 22, 2007, Gregory Garrabrants was appointed CEO, replacing Gary Evans, who remains President and COO.
Investor Verification Checklist
- Verify the impact of the new CEO appointment on strategic direction and executive compensation costs.
- Monitor the credit quality of the rapidly growing RV and home equity loan portfolios, specifically the trend in charge-offs and delinquencies.
- Assess the sustainability of the Net Interest Margin given the negative interest rate sensitivity gap and the acceleration of premium amortization on multifamily loans.
- Review the efficiency ratio trend, which has deteriorated to 63.0% due to increased marketing and recruitment expenses.
- Confirm the stability of deposit funding sources, particularly the retention of time deposits maturing within one year ($257.7 million).