Business Context and Reporting Period
Company: BofI Holding, Inc. (Parent of Bank of Internet USA)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2008
Business Overview: BofI is a consumer-focused, nationwide savings bank operating primarily through the Internet. It gathers retail deposits and originates/purchases multifamily, single-family, and home equity mortgage loans, as well as vehicle loans and mortgage-backed securities (MBS). The company operates from a single location in San Diego, California, serving approximately 29,000 customers across all 50 states.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Total Assets | $1,194.2 million | $947.2 million |
| Total Loans (Net) | $631.4 million | $507.9 million |
| Total Deposits | $570.7 million | $547.9 million |
| Total Borrowings | $534.2 million | $322.4 million |
| Net Interest Income | $18.0 million | $10.8 million |
| Net Income | $4.2 million | $3.3 million |
| Diluted EPS | $0.46 | $0.36 |
| Net Interest Margin | 1.72% | 1.36% |
| Efficiency Ratio | 52.4% | 53.6% |
| Return on Average Assets | 0.40% | 0.41% |
| Return on Average Equity | 5.41% | 4.50% |
Material Changes vs. Prior Period
- Asset Growth: Total assets increased 26.1% ($247.0 million) driven by the purchase of mortgage-backed securities and loan pools, as well as originations of RV and home equity loans.
- Profitability: Net income rose 26.4% to $4.2 million, primarily due to growth in interest-earning assets and an improved net interest margin (up 36 basis points).
- Asset Quality Deterioration: The company experienced its first mortgage foreclosures and loan charge-offs in fiscal 2008. Nonperforming loans increased to $4.15 million (0.66% of total loans) from $0.23 million (0.05%) in 2007. The provision for loan losses increased to $2.2 million from a benefit of $25,000 in the prior year.
- Investment Portfolio: The company shifted strategy to purchase higher-yielding non-agency MBS and whole loan pools while selling lower-yielding agency MBS. This included a $1.0 million other-than-temporary impairment charge on Fannie Mae preferred stock recorded in Q4 2008.
- Expense Growth: Noninterest expenses increased 57.5% to $10.2 million, largely due to increased staffing for new loan products (RV, home equity) and one-time CEO compensation expenses.
Guidance, Outlook, Risks, and Unusual Items
- Strategic Goals: Management aims to increase total assets to over $3.0 billion, improve the efficiency ratio to below 30%, and increase return on average common equity above 15.0%.
- Unusual Items:
- Fannie Mae Exposure: Subsequent to June 30, 2008, the company sold its entire position in Fannie Mae preferred stock at a realized loss of $7.9 million (pretax) following the government conservatorship of Fannie Mae and Freddie Mac.
- CEO Transition: Included $675,000 in one-time expenses related to the new CEO and a contract amendment for the former CEO.
- Risks and Contingencies:
- California Concentration: Approximately 44.9% of the loan portfolio is secured by real estate in California, exposing the company to regional economic downturns and natural disasters.
- Interest Rate Risk: The company has a negative interest rate sensitivity gap in the one-year horizon, meaning rising rates could increase funding costs faster than asset yields.
- Credit Risk: Increased exposure to unseasoned RV and home equity loans, which have higher default risks compared to the company's historical multifamily portfolio.
Investor Verification Checklist
- Post-Period Losses: Verify the impact of the $7.9 million Fannie Mae preferred stock loss realized in September 2008 on the company's capital position and future earnings.
- Loan Loss Adequacy: Assess whether the allowance for loan losses ($2.7 million, or 0.43% of loans) is sufficient given the first-time charge-offs and the concentration of unseasoned consumer loans (RV/Home Equity).
- California Exposure: Monitor the performance of the 44.9% of the loan portfolio secured by California real estate in the context of the state's housing market decline.
- Liquidity Sources: Confirm the stability of funding sources, noting that $399.0 million of the $443.9 million FHLB borrowing capacity was utilized as of June 30, 2008.
- Efficiency Ratio Trend: Track the efficiency ratio, which rose to 52.4% in 2008, against the management goal of reducing it below 30%.