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| BOFI > SEC Filings for BOFI > Form 10-K on 23-Sep-2008 | All Recent SEC Filings |
23-Sep-2008
Annual Report
The following discussion and analysis contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements due to various important factors, including those set forth under "Factors the May Affect Our Performance" and elsewhere in this Form 10-K. The following discussion and analysis should be read together with the "Selected Financial Data" and our consolidated financial statements, including the related notes, included elsewhere in this Form 10-K.
Overview
Our company, BofI Holding, Inc., is the holding company for Bank of Internet USA, a consumer-focused, nationwide savings bank operating primarily over the Internet. We generate retail deposits in all 50 states and originate loans for our customers directly through our websites, including www.bankofinternet.com, www.bofi.com and www.apartmentbank.com. We are a unitary savings and loan holding company and, along with Bank of Internet USA, are subject to primary federal regulation by the OTS.
Net income for the fiscal year ended June 30, 2008 was $4.2 million, or $0.46 per diluted share, as compared to $3.3 million, or $0.36 per diluted share, in fiscal 2007 and $3.3 million, or $0.34 per diluted share, in 2006. Growth in our interest earning assets, particularly our loans and investment securities, has been the primary driver of the increase in net income. Higher interest earning assets caused net interest income (interest income from loans and investments minus interest expense from deposits and borrowings) to grow to $18.0 million for the fiscal year ended June 30, 2008 compared to $10.8 million for fiscal 2007 and $10.0 million for 2006.
During the year ended June 30, 2008, our net interest margin (net interest income divided by average interest earning assets) increased 36 basis points to 1.72% compared to 1.36% for the year ended June 30, 2007. The improvement in our net interest margin was due primarily to increases in the yields of our loans and securities. During fiscal 2008 we purchased higher yielding loans and mortgage-backed securities. We also sold lower yielding agency mortgage-backed securities and replaced them with higher yielding non-agency securities.
Total assets at June 30, 2008 were $1,194.2 million as compared to $947.2 million at June 30, 2007 and $737.8 million at June 30, 2006. Assets grew $247.0 million or 26.1% during the last fiscal year primarily due to the purchase of mortgage-backed securities and mortgage loan pools, and the origination of RV and home equity loans. These investments were funded with growth in deposits, advances from the FHLB, and borrowings from securities sold under agreements to repurchase. Total assets grew $209.4 million or 28.4% in fiscal 2007 due to the purchase of mortgage-backed securities and the origination and purchase of mortgage loans, and total assets grew $128.3 million or 21.1% in fiscal 2006 from the previous year as a result of the purchase of mortgage-backed securities
On September 7, 2008, the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that the FHFA was putting Fannie Mae and Freddie Mac under conservatorship and giving management control to their regulator, the FHFA. The U.S. Treasury also announced that dividends on Fannie Mae and Freddie Mac common and preferred stock were eliminated. Based upon the government announcement, we sold our investment in Fannie Mae Preferred stock on September 8, 2008 at a significant loss. The book value of our Fannie Mae preferred stock investment was $9.1 million at June 30, 2008 and the loss realized after the sale in the first quarter of fiscal 2009 was $7.9 million pretax or approximately $4.7 million after tax.
Our future performance will also depend on many factors, including changes in interest rates, competition for deposits and quality loans, the credit performance of our assets, regulatory actions and our ability to improve operating efficiencies. (See "-Factors that May Affect our Performance").
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.
Investment Securities-Currently, we classify investment securities as either available-for-sale or held to maturity. Securities available for sale are reported at estimated fair value, with unrealized gains and losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive income or loss. The fair value of securities traded in active markets are obtained from market quotes. If quoted prices in active markets are not available, we determine the fair value from our internal pricing models. Securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Amortization of purchase premiums and accretion of discounts on securities are recorded as yield adjustments on such securities using the effective interest method. The specific identification method is used for purposes of determining cost in computing realized gains and losses on investment securities sold.
At each reporting date, we monitor our available-for-sale and held to maturity securities for other-than-temporary impairment. Other-than-temporary impairment losses are recognized in noninterest income with a corresponding reduction in the carrying value of the investment.
Allowance for Loan Losses-The allowance for loan losses is maintained at a level estimated to provide for probable losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is charged against current period operating results and recoveries of loans previously charged-off. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible.
Under the allowance for loan loss policy, impairment calculations are determined based on general portfolio data for general reserves and loan level data for specific reserves. Specific loans are evaluated for impairment and are generally classified as nonperforming or in foreclosure when they are 90 days or more delinquent. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if repayment of the loan is expected primarily from the sale of collateral.
General loan loss reserves are calculated by grouping each loan by collateral type and by grouping the loan-to-value ratios of each loan within the collateral type. An estimated allowance rate for each loan-to-value group within each type of loan is multiplied by the total principal amount in the group to calculate the required general reserve attributable to that group. Management uses an allowance rate that provides a larger loss allowance for loans with greater loan-to-value ratios. Specific reserves are calculated when an internal asset review of a loan identifies a significant adverse change in the financial position of the borrower or the value of the collateral. The specific reserve is based on discounted cash flows, observable market prices or the estimated value of underlying collateral.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables set forth, for the periods indicated, information regarding
(i) average balances; (ii) the total amount of interest income from
interest-earning assets and the weighted average yields on such assets;
(iii) the total amount of interest expense on interest-bearing liabilities and
the weighted average rates paid on such liabilities; (iv) net interest income;
(v) interest rate spread; and (vi) net interest margin.
For the Fiscal Years Ended June 30,
2008 2007 2006
Average Average Average
Yields Yields Yields
Interest Earned/ Interest Earned/ Interest Earned/
Average Income/ Rates Average Income/ Rates Average Income/ Rates
Balance1 Expense Paid Balance1 Expense Paid Balance1 Expense Paid
(Dollars in thousands)
Assets:
Loans 2 3 $ 550,307 $ 33,499 6.09 % $ 512,599 $ 29,370 5.73 % $ 533,522 $ 27,629 5.18 %
Federal funds sold 23,147 1,013 4.38 % 11,755 614 5.22 % 7,129 310 4.35 %
Interest-earning deposits in
other financial institutions 7,821 457 5.84 % 14,333 791 5.52 % 14,947 666 4.46 %
Mortgage-backed and other
investment securities 4 451,846 27,524 6.09 % 249,128 13,164 5.28 % 94,297 3,642 3.86 %
Stock of the FHLB, at cost 14,205 808 5.69 % 12,084 647 5.35 % 9,675 466 4.82 %
Total interest-earning assets 1,047,326 63,301 6.04 % 799,899 44,586 5.57 % 659,570 32,713 4.96 %
Noninterest-earning assets 14,681 11,738 9,493
Total assets $ 1,062,007 $ 811,637 $ 669,063
Liabilities and Stockholders'
Equity:
Interest-bearing demand and
savings $ 76,028 $ 2,726 3.59 % $ 60,007 $ 2,025 3.37 % $ 72,288 $ 2,040 2.82 %
Time deposits 506,761 25,632 5.06 % 399,855 19,542 4.89 % 321,817 12,890 4.01 %
Securities sold under agreements
to repurchase 118,497 5,137 4.34 % 30,648 1,352 4.41 % - - -
Advances from the FHLB 270,022 11,417 4.23 % 239,742 10,406 4.34 % 193,632 7,466 3.86 %
Other borrowings 5,155 369 7.16 % 5,155 413 8.01 % 5,155 362 7.02 %
Total interest-bearing
liabilities 976,463 45,281 4.64 % 735,407 33,738 4.59 % 592,892 22,758 3.84 %
Noninterest-bearing demand
deposits 3,144 1,052 4,021
Other noninterest-bearing
liabilities 5,553 3,219 2,500
Stockholders' equity 76,847 71,959 69,650
Total liabilities and
stockholders' equity $ 1,062,007 $ 811,637 $ 669,063
Net interest income $ 18,020 $ 10,848 $ 9,955
Interest rate spread 5 1.40 % 0.98 % 1.12 %
Net interest margin 6 1.72 % 1.36 % 1.51 %
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1 Average balances are obtained from daily data.
2 Loans include loans held for sale, loan premiums and unearned fees.
3 Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant.
4 All investments are taxable.
5 Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
6 Net interest margin represents net interest income as a percentage of average interest-earning assets.
Results of Operations
Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Our net interest income has grown primarily as a result of the growth in our assets. We also earn non-interest income primarily from prepayment fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of investment securities. The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased from 25 full time employees at June 30, 2006 to 44 full time equivalent employees at June 30, 2008. We are subject to federal and state income taxes, and our effective tax rates were 40.15%, 40.8%, and 40.0% for the fiscal years ended June 30, 2008, 2007, and 2006, respectively. Other factors that affect our results of operations include expenses relating to occupancy, data processing and other miscellaneous expenses.
Comparison of the Year Ended June 30, 2008 and 2007
Net Interest Income. Net interest income totaled $18.0 million for the fiscal
year ended June 30, 2008 compared to $10.8 million for the fiscal year ended
June 30, 2007. The following table sets forth the effects of changing rates and
volumes on our net interest income. Information is provided with respect to
(i) effects on interest income and interest expense attributable to changes in
volume (changes in volume multiplied by prior rate); (ii) effects on interest
income and interest expense attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) changes in rate/volume (change in rate
multiplied by change in volume) for the fiscal year ended June 30, 2008 compared
to the fiscal year ended June 30, 2007.
Fiscal Year Ended June 30, 2008 vs. 2007
Increase (Decrease) Due to
Total
Increase
Volume Rate Rate/Volume (Decrease)
(Dollars in thousands)
Increase/(decrease) in interest
income:
Loans $ 2,161 $ 1,845 $ 123 $ 4,129
Federal funds sold 595 (99 ) (97 ) 399
Interest-earning deposits in other
financial institutions (359 ) 46 (21 ) (334 )
Mortgage-backed and other investment
securities 10,704 2,018 1,638 14,360
Stock of the FHLB, at cost 113 41 7 161
$ 13,214 $ 3,851 $ 1,650 $ 18,715
Increase/(decrease) in interest
expense:
Interest-bearing demand and savings $ 540 $ 132 $ 29 $ 701
Time deposits 5,228 680 182 6,090
Securities sold under agreements to
repurchase 3,874 (21 ) (68 ) 3,785
Advances from the FHLB 1,314 (264 ) (39 ) 1,011
Other borrowings - (44 ) - (44 )
$ 10,956 $ 483 $ 104 $ 11,543
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Interest Income. Interest income for the year ended June 30, 2008 totaled $63.3 million, an increase of $18.7 million, or 41.9%, compared to $44.6 million in interest income for the year ended June 30, 2007 primarily due to interest-earning asset growth. Average interest-earning assets for the year ended June 30, 2008 increased by $247.4 million compared to the year ended June 30, 2007 due to the purchase of mortgage-backed and investment securities which increased $202.7 million during the year ended June 30, 2008 compared to 2007. Also increasing by $37.7 million was the average balance of the loan portfolio, primarily the result of our purchase of pools of multifamily and single family loans and the originations of RV and home equity loans. Average interest earning balances associated with our stock of the FHLB increased by $2.1 million in the year ended June 30, 2008 compared to the year ended June 30, 2007 because our required minimum investment increased, in line with our increased advances from the FHLB. For the year ended June 30, 2008, the growth in average balances contributed additional interest income of $13.2 million, and the average rate increase resulted in a net $3.9 million increase in interest income. The average yield earned on our interest-earning assets increased to 6.04%
for the year ended June 30, 2008, up from 5.57% for the same period in 2007 due primarily to the higher yields on our loan portfolio and our mortgage-backed securities portfolio.
Interest Expense. Interest expense totaled $45.3 million for the year ended June 30, 2008; an increase of $11.6 million, compared to $33.7 million in interest expense during the year ended June 30, 2007. Average interest-bearing balances for the year ended June 30, 2008 increased $241.1 million compared to the same period in 2007, due to higher deposit totals from increased customer accounts and additional borrowings from the FHLB. The average interest-bearing balances of advances from the FHLB increased $30.3 million as primarily short term advances were added to replace time deposits. Our addition of short-term fixed rate borrowings is a part of our strategy to manage our interest rate risk. For the year ended June 30, 2008, the growth in the average balance of interest bearing liabilities resulted in additional interest expense of $11.0 million, and increases in interest rates resulted in a net increase of $0.5 million in interest expense. The average rate paid on all of our interest-bearing liabilities increased to 4.64% for the year ended June 30, 2008 from 4.59% for the year ended June 30, 2007. The maturity of lower-rate term deposits and the addition of new term deposits in the first half of the year at higher rates caused the average term deposit rates to increase to 5.06% in fiscal 2008 from 4.89% in fiscal 2007. New lower rate FHLB advances added during the last half of fiscal 2008 caused the average FHLB advance rate to decrease to 4.23% in fiscal 2008 from 4.34% in fiscal 2007. These rate changes in fiscal 2008 were accompanied by an increase in the weighted average rate paid on interest-bearing demand and savings accounts, which increased to 3.59% from 3.37%, and the average rate paid on other borrowings that decreased to 7.16% in fiscal 2008 from 8.01% in fiscal 2007. The increase in the rate paid on checking and savings was due to competitive increases in our rates for money market savings accounts and interest-bearing checking accounts. Our average rate on term deposits increased 17 basis points between fiscal 2008 and 2007.
Provision for Loan Losses. Provision for loan losses was $2.2 million for the year ended June 30, 2008 and a benefit of $25,000 for fiscal 2007. The provisions were made to maintain our allowance for loan losses at levels which management believed to be adequate. The assessment of the adequacy of our allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss history and changes in the volume and mix of loans and collateral values.
See "Asset Quality and Allowance for Loan Loss" for discussion of our allowance for loan loss and the related loss provisions.
Noninterest Income. The following table sets forth information regarding our noninterest income for the periods shown.
For Fiscal Year
Ended June 30,
2008 2007
(Dollars in thousands)
Prepayment penalty fee income $ 287 $ 399
Mortgage banking income 2 93
Net gain on securities 711 403
Banking service fees and other income 379 285
Total noninterest income $ 1,379 $ 1,180
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Noninterest income totaled $1.4 million for the year ended June 30, 2008 compared to $1.2 million for the same period in 2007. The increase of $199,000 in fiscal 2008 was primarily due to an increase in gain on sale of securities of $308,000, offset by the lower prepayment penalty income of $112,000 and lower mortgage banking income of $91,000. Lower prepayment penalty income in fiscal 2008 was generally the result of fewer new multifamily loans and the expiration of penalties on seasoned multifamily loans. Mortgage banking income decreased due to a reduction in the number of single family and multifamily loans originated for sale.
The increase in gains on sales of securities for fiscal 2008 was partially offset by an other-than-temporary impairment charge on an investment in Fannie Mae preferred stock. The net gain on sale of mortgage-backed securities for fiscal 2008 increased to $1.7 million compared to $0.4 million realized in fiscal 2007. The increased net gain was the result of our strategy to sell lower
yielding government agency mortgage-backed securities and reinvest the proceeds in higher yielding whole loan pool purchases and non-agency AAA mortgage-backed securities. An other-than- temporary-impairment charge of $1.0 million partially offset the realized gains and was recorded as of June 30, 2008 as a result of the decline in the market value of our $10.1 million investment in Fannie Mae (FNMA) 8 1/4% Series S "FNMA Preferred" stock. Subsequent to June 30, 2008, the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that the FHFA was putting Fannie Mae and Freddie Mac under conservatorship and giving management control to their regulator, the FHFA. The U.S. Treasury also announced that dividends on the FNMA Preferred stock were eliminated. Based upon the government announcement of the conservatorship and the elimination of dividends on FNMA Preferred, the Bank sold on September 8, 2008 its entire position in FNMA Preferred at a realized loss of an additional $7.9 million or approximately $4.7 million after income tax.
Noninterest Expense. The following table sets forth information regarding our noninterest expense for the periods shown:
For Fiscal Year
Ended June 30,
2008 2007
(Dollars in thousands)
Salaries, employee benefits and stock-based compensation $ 5,426 $ 2,993
Professional services 654 537
Occupancy and equipment 373 363
Data processing and internet 656 586
Advertising and promotional 750 584
Depreciation and amortization 132 88
FDIC and OTS regulatory fees 744 238
Other general and administrative 1,427 1,061
Total noninterest expenses $ 10,162 $ 6,450
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Noninterest expense totaled $10.2 million for the year ended June 30, 2008, an increase of $3.7 million compared to fiscal 2007. Salaries, employee benefits and stock-based compensation increased $2.4 million during fiscal 2008 due primarily to the addition of staffing for RV and home equity loan products and the addition of our new CEO. Included in the $2.4 million increases was $675,000 of one-time expense related to the new CEO and a contract amendment of the . . .
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