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, 2010. The Company operates as a consumer-focused, nationwide savings bank primarily through the Internet, offering loans and deposits in all 50 states. It is regulated by the Office of Thrift Supervision (OTS) and the FDIC.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 |
|---|---|---|
| Net Income | $4.83 million | $3.71 million |
| Net Income Attributable to Common Stock | $4.76 million | $3.54 million |
| Diluted Earnings Per Share | $0.45 | $0.41 |
| Total Assets | $1,518.0 million | $1,324.1 million |
| Net Loans Held for Investment | $876.9 million | $595.1 million |
| Total Deposits | $991.7 million | $763.5 million |
| Net Interest Income | $12.67 million | $12.57 million |
| Net Interest Margin | 3.55% | 3.88% |
| Provision for Loan Losses | $1.60 million | $2.00 million |
| Non-Interest Income | $2.12 million | ($1.01 million) loss |
| Non-Interest Expense | $5.20 million | $3.28 million |
| Stockholders' Equity | $132.8 million | $93.0 million |
Material Changes vs. Prior Period
- Profitability: Net income increased 30% year-over-year, driven by a significant improvement in non-interest income and a reduction in the loan loss provision.
- Non-Interest Income: Turned from a loss of $1.01 million in Q3 2009 to income of $2.12 million in Q3 2010. This $3.13 million swing was primarily due to a $1.0 million increase in prepayment penalty fees, a $1.06 million increase in mortgage banking gains, and a $939,000 reduction in impairment charges on investment securities.
- Expense Growth: Non-interest expenses rose 59% to $5.20 million, largely due to a $1.41 million increase in compensation costs (salaries and stock-based compensation) as the company expanded its staff from 61 to 117 full-time equivalents.
- Asset Growth: Total assets grew 6.8% quarter-over-quarter to $1.518 billion, fueled by a $102 million increase in loans held for investment.
- Asset Quality: Nonperforming loans increased to $14.46 million (1.62% of total loans) from $11.70 million (1.48%) in the prior quarter, driven by a specific delinquent multifamily loan. However, the provision for loan losses decreased due to lower recreational vehicle (RV) charge-offs.
Guidance, Outlook, and Risks
- Outlook: Management anticipates an overall decline in RV write-offs in fiscal 2011 based on economic stabilization. The company expects to continue purchasing single-family and multifamily loans and mortgage-backed securities.
- Liquidity: The company maintains stable liquidity with $124.4 million immediately available from the Federal Home Loan Bank (FHLB) and an additional $319.9 million available with additional collateral. Brokered deposits totaled $109.2 million.
- Capital: The Bank is classified as "well capitalized," exceeding all regulatory minimums for leverage, Tier 1 risk-based, and total risk-based capital ratios.
- Risks:
- Economic Conditions: Continued volatility in credit markets and the housing sector poses risks to loan performance and asset values.
- Regulatory Changes: The Dodd-Frank Act and potential changes in FDIC insurance premiums and regulatory oversight may increase operating costs and limit borrowing capabilities.
- Interest Rate Risk: The company has a negative interest rate sensitivity gap in the short term (over one year or less), meaning rising rates could compress net interest income in the near term.
Investor Verification Checklist
- Non-Interest Income Sustainability: Verify the recurring nature of the $1.0 million prepayment penalty fee, which was attributed to a single specialty loan repayment.
- Asset Quality Trends: Monitor the specific $2.9 million delinquent multifamily loan in Yuba City, California, which drove the increase in nonperforming loans.
- Expense Management: Assess whether the 59% increase in non-interest expenses (driven by staffing) is sustainable relative to revenue growth.
- Securities Portfolio: Review the valuation of non-agency mortgage-backed securities (RMBS), which rely on Level 3 inputs and management assumptions regarding default rates and loss severities.
- Deposit Composition: Note that $292.3 million in time deposits mature within one year, creating potential refinancing risk if rates rise significantly.