BofI Holding, Inc. BOFI
February 05, 2007 - 8:14am EST by
david101
2007 2008
Price: 7.11 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 59 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I'm a thrift banker and I'm OK
I start at nine and I leave at three.

Chorus:
He's a thrift banker and he's OK
He starts at nine and he leaves at three.

I take deposits, I lend money
I go to the lavatory.
On Wednesdays I go golfing and hit the ball from the tee.

CPA’s:
He takes deposits, he lends money
He goes to the lavatory.
On Wednesdays he goes golfing and hits the ball from the tee.

 

And now for something completely different…

 

Bank of Internet is a bank of contradictions. It is a thrift but has no branches. It does business across the US but only has one location and 27 employees. It is a bank but does most of its business over the internet. It started in 2000 but has seasoned management. However, all you really need to know is that it is currently trading at 93% of tangible book value (TBV), on a fully diluted basis.

 

Net interest margin (NIM): The spreads in an inverted yield environment "…are a bitch," to quote the CEO, who says that their goal is 1.75% to 2.25% (currently 1.29%). Since there is not much they can do on the liability side of the balance sheet, they are focusing on the asset side. They hired a new consumer lending officer. He was brought in to ramp up home equity loans (HEL) because they have higher yields, currently around 7.15% vs. 6.0% for residential mortgages. They are also doing auto lending very selectively, starting with an RV program. More than 95% of their loans adjustable rate, although a number come with 1, 3 and 5 year fixed rate starters.

 

Asset duration (loans + MBS) is about 2.5 to 3.0 years, with just loans around 2.0 to 2.5 years. They have not been originating many loans because they said other lenders have been lending money to anyone with a pulse. They believe in old-fashioned underwriting and realize that despite not having any charge-offs yet that they will experience them. They feel the recent shut down of Ownit Mortgage is just the first of many to come. They have bought conforming (i.e. Fannie/Freddie) residential mortgages in the past from third parties but have been less active due to the low rates. They have only $35 million in option ARM loans out $535 million of net loans on their books. The CEO said that he has been in banking since 1971 and has seen these conditions before.

 

They have been buying loans and loan pools, primarily equity loans on multi-family (they do not do construction or cash flow loans). They have been buying seasoned loans originated between 2000 and 2004 because they are seasoned, have a history of payments and have equity. The median loan to value (LTV) for the entire loan book is 51%, which provides a significant margin of safety.

 

Deposits: 87% of their deposits are CD’s, of which ~30% are jumbo CD’s. In a normal thrift, that might be scary but it fits the business model here. BOFI does not require tellers to handle a lot of transactions. While they do not have cheap core deposits, they do have a lean operation. Even so, they have $60 million of core deposits and $395 million in CD’s. Assign a 10% premium to core deposits and 5% for the CD’s, plus tangible book, and BOFI is easily worth $8.60/share or 20% from here. Considering what Citigroup is paying for money-losing, internet-based Egg Bank, I think BOFI could be worth $10/share.

 

Competition: Internet banking is different from brick and mortar because it is product by product, not region. They do not feel like they compete with ING, per se. They do well with checking and CD's. They said NetBank is a case study in doing the opposite. BOFI has partnered with originating loans or used their online origination. They do not feel that they need a physical branch. NetBank bought a mortgage operation three years ago, and are in the midst of unwinding it now that volumes have crashed. They feel banking is rapidly becoming commoditized and being low-cost provider is what matters. It is more effective to offer home equity loans across the country rather than just one region.

 

Scale: Their technology is very scalable. They contract with Jack Henry & Associates to handle the core banking business, but they develop and maintain the web portals where they do business, and wrote the back-end system that handles the customer relationship management (CRM) function. The inverted yield curve is limiting growth now. They have enough capital to support $1 billion in assets (currently at $788 million). They do not advertise through traditional methods, and focus on buying Google search ads. Also, 6-9% of new applications are referrals from existing customers.

 

Ownership: Insiders owns about 30% of the stock and there are three 5%+ holders with 18% of the shares. Both the CEO and CFO made open market purchases of shares in December, albeit small amounts.

 

Performance: This is the weakest area for BOFI, as seen in the following table:

 

Quarter

NIM

ROAA

ROE

Efficiency

6/30/2004

2.04%

0.67%

8.42%

49.5%

9/30/2004

2.06%

0.64%

8.77%

50.5%

12/31/2004

1.91%

0.44%

6.30%

58.3%

3/31/2005

1.88%

0.68%

9.19%

42.7%

6/30/2005

1.98%

0.59%

6.73%

48.1%

9/30/2005

1.62%

0.55%

4.78%

50.9%

12/31/2005

1.49%

0.45%

4.14%

50.5%

3/31/2006

1.54%

0.49%

4.65%

51.3%

6/30/2006

1.51%

0.49%

4.56%

51.2%

9/30/2006

1.31%

0.40%

4.08%

56.3%

12/31/2006

1.29%

0.41%

4.09%

56.0%

 

 

 

Risks:

- microcap

- Sarbanes Oxley, because they have not spent much. Their market cap exempts them from 404 certification (requiring CPA firm sign-off) until June 2008. They are watching to see if Congress will relax the rules further befre spending the money.

- CRA (Community Re-Investment Act, for low-income areas). It is a complex issue but working with the OTS, they have met the challenge for the past six years.

- competitive banking environment

- inverted yield curve continues

- 46% of loans are in California

 

Now back to our regularly scheduled program…


Chorus:
He's a thrift banker and he's OK
He starts at nine and he leaves at three.

I count monies, I skip and jump
I go to lunch for two hours.
I work a little then I take a break on the hour.

CPA’s:
He counts monies, he skips and jumps
He goes to lunch for two hours.
He works a little then takes a break on the hour?!

Chorus:
He's a thrift banker and he's OK
He starts at nine and he leaves at three.

I count monies, I wear wingtips,
Suspenders and a bro,
Like my idol George Costanza on the Seinfeld show.

 
CPA’s:
He counts monies, he wears wingtips,
Suspenders...and a bro?!

...He's a thrift banker and he's OK
He starts at nine and he leaves at three.

...I'm a thrift banker and I'm OK
I sleep all night and I work all day.
  

Catalyst

Trading at 93% of TBV
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