Business Context and Reporting Period
Company: BofI Holding, Inc. (Parent of Bank of Internet USA)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 30, 2009
Business Overview: BofI Holding is a unitary savings and loan holding company operating Bank of Internet USA, a nationwide savings bank focused on Internet-based consumer and wholesale banking. The bank gathers retail deposits and originates/purchases multifamily, single-family, and home equity mortgage loans, as well as mortgage-backed securities (MBS). The company operates from a single location in San Diego, California.
Key Financial Metrics
| Metric | 2009 (Actual) | 2008 (Prior Year) |
|---|---|---|
| Total Assets | $1,302.2 million | $1,194.2 million |
| Total Loans (Net) | $615.5 million | $631.4 million |
| Total Deposits | $648.5 million | $570.7 million |
| Total Borrowings | $558.1 million | $534.1 million |
| Net Interest Income | $36.4 million | $18.0 million |
| Net Income | $7.1 million | $4.2 million |
| Diluted EPS | $0.78 | $0.46 |
| Net Interest Margin | 3.04% | 1.72% |
| Efficiency Ratio | 43.46% | 52.40% |
| Return on Average Assets | 0.59% | 0.40% |
| Return on Average Equity | 8.79% | 5.41% |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 70% to $7.1 million, driven primarily by a doubling of Net Interest Income (NII) to $36.4 million. This was fueled by a 132 basis point expansion in Net Interest Margin (NIM) to 3.04%, resulting from lower funding costs (deposits and borrowings) and higher yields on assets.
- Asset Growth: Total assets grew 9.0% to $1.3 billion, primarily due to the purchase of mortgage-backed securities and loan pools, funded by deposit growth and Federal Reserve Discount Window borrowings.
- Non-Interest Losses: The company reported a non-interest loss of $6.7 million (compared to $1.4 million income in 2008). This was largely due to a $7.9 million realized loss on the sale of Fannie Mae preferred stock following the government conservatorship announcement in September 2008.
- Asset Quality Deterioration: Nonperforming assets increased to $8.5 million (0.65% of total assets) from $4.6 million in 2008. Net charge-offs rose to $2.7 million, and the provision for loan losses increased to $4.7 million to cover probable losses in the RV and mortgage portfolios.
- Loan Portfolio Shift: The loan portfolio decreased slightly by $15.9 million due to principal repayments, though the company shifted strategy from retail originations to wholesale purchases of higher-quality loan pools.
Guidance, Outlook, and Risks
Management Commentary & Strategy: Management aims to increase total assets to over $3.0 billion, improve the efficiency ratio below 30%, and increase return on average common equity above 15.0%. The company is leveraging its Internet platform to lower operating expenses and is actively managing interest rate risk through "natural" balance sheet hedging rather than derivatives. They are focusing on purchasing high-quality loan pools and MBS while reducing exposure to retail originations in volatile markets.
Key Risks & Contingencies:
- Real Estate Exposure: Approximately 42.8% of the loan portfolio is secured by real estate in California, exposing the bank to regional economic downturns and declining property values.
- Securities Impairment: The company holds significant non-agency MBS. While currently rated AAA or AA, there is a risk of further other-than-temporary impairments (OTTI) if economic conditions worsen. Held-to-maturity securities had gross unrecognized losses of $25.1 million.
- Liquidity & Funding: The bank relies heavily on deposits and FHLB advances. While well-capitalized, access to funding could be constrained if the bank were to lose its "well-capitalized" status or if market conditions deteriorate further.
- Regulatory Environment: Increased FDIC insurance premiums and potential changes in capital requirements or lending regulations pose ongoing risks.
Investor Verification Checklist
- Verify Fannie Mae Loss Impact: Confirm the full extent of the $7.9 million realized loss on Fannie Mae preferred stock and ensure no further exposure remains in the portfolio.
- Assess Non-Agency MBS Quality: Review the specific credit enhancement levels and default projections for the $332 million non-agency MBS held-to-maturity portfolio to gauge potential future OTTI charges.
- Monitor California Real Estate Trends: Track local housing price indices and unemployment rates in California, given the 42.8% concentration of collateral in that state.
- Review Loan Loss Provision Adequacy: Analyze the $4.7 million provision and the 0.77% allowance-to-loans ratio against rising charge-offs in the RV and single-family segments.
- Check Liquidity Coverage: Verify the availability of the $44.7 million immediate FHLB line and the $187.1 million Federal Reserve Discount Window capacity against upcoming deposit maturities ($237.9 million due within one year).