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| BOFI > SEC Filings for BOFI > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items, contractual obligations and capital resources of BofI Holding, Inc. and subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our Annual Report on Form 10-K and the accompanying interim unaudited condensed consolidated financial statements and notes thereto.
Certain matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as "estimate," "project," "anticipate," "expect," "intends," "believe," "will," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which the Company operates and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include economic conditions, changes in the interest rate environment, changes in the competitive marketplace, risks associated with credit quality and other risk factors summarized in Part II, Item 1A under the heading "Risk Factors" in this report, and discussed in greater detail under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Our Performance" in our Annual Report on Form 10-K for the year ended June 30, 2008, which has been filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.
General
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 offer loans and deposits in all 50 states to 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 Office of Thrift Supervision, or "OTS".
Using online applications on our websites, our customers apply for deposit products, including time deposits, interest-bearing demand accounts (including interest-bearing checking accounts) and savings accounts (including money market savings accounts). We originate small- to medium-size multifamily and single-family mortgage loans and secured consumer loans, primarily home equity and vehicle loans. More recently, we increased our efforts to purchase single family and multifamily loans. We also purchase mortgage-backed securities. We manage our cash and cash equivalents based upon our need for liquidity, and we seek to minimize the assets we hold as cash and cash equivalents by investing our excess liquidity in higher yielding assets such as mortgage loans or mortgage-backed securities.
Critical Accounting Policies
Our consolidated financial statements and the notes thereto, 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.
Our significant accounting policies and practices are described in greater detail in Note 1 to our June 30, 2008 audited consolidated financial statements and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Selected Financial Data
The following tables set forth certain selected financial data concerning the periods indicated:
BofI HOLDING, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
September 30, June 30, September 30,
2008 2008 2007
Selected Balance Sheet Data:
Total assets $ 1,170,915 $ 1,194,245 $ 1,024,713
Loans - net of allowance for loan losses 622,119 631,413 508,438
Allowance for loan losses 2,809 2,710 1,430
Investment securities 501,724 510,014 451,001
Total deposits 557,496 570,704 601,079
Securities sold under agreements to repurchase 130,000 130,000 110,000
Advances from the FHLB 392,973 398,966 227,412
Junior subordinated debentures 5,155 5,155 5,155
Total stockholders' equity 79,250 83,082 75,333
At or For the Three Months
Ended September 30,
2008 2007
Selected Income Statement Data:
Interest and dividend income $ 19,177 $ 13,622
Interest expense 11,365 10,660
Net interest income 7,812 2,962
Provision for loan losses 505 5
Net interest income after provision for loan losses 7,307 2,957
Non-interest income (loss) (7,924 ) 448
Non-interest expense 2,477 2,150
Income (loss) before income tax expense (3,094 ) 1,255
Income tax expense (benefit) (1,277 ) 508
Net income (loss) $ (1,817 ) $ 747
Net income (loss) attributable to common stock $ (1,988 ) $ 670
Per Share Data:
Net income (loss):
Basic $ (0.24 ) $ 0.08
Diluted $ (0.24 ) $ 0.08
Book value per common share $ 8.36 $ 8.50
Tangible book value per common share $ 8.36 $ 8.50
Weighted average number of common shares outstanding:
Basic 8,279,465 8,248,158
Diluted 8,279,465 8,374,558
Common shares outstanding at end of period 8,299,563 8,267,590
Common shares issued at end of period 8,627,840 8,587,090
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BofI HOLDING, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
At or For the Three Months
Ended September 30,
2008 2007
Performance Ratios and Other Data:
Loan originations $ 12,029 $ 35,302
Loan originations for sale 213 516
Loan purchases 15,349 929
Return (loss) on average assets (0.61 %) 0.31 %
Return (loss) on average common stockholders' equity (11.19 %) 3.92 %
Interest rate spread1 2.42 % 0.93 %
Net interest margin2 2.68 % 1.24 %
Efficiency ratio3 N/A 63.0 %
Capital ratios:
Equity to assets at end of period 6.77 % 7.35 %
Tier 1 leverage (core) capital to adjusted tangible
assets4 6.90 % 7.50 %
Tier 1 risk-based capital ratio4 14.03 % 14.78 %
Total risk-based capital ratio4 14.52 % 15.05 %
Tangible capital to tangible assets4 6.90 % 7.50 %
Asset Quality Ratios:
Net charge-offs to average loans outstanding 0.06 % -
Nonperforming loans to total loans 0.42 % 0.03 %
Allowance for loan losses to total loans held for
investment 0.45 % 0.28 %
Allowance for loan losses to nonperforming loans 107.75 % 10.7 X
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1 Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
2 Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
3 Efficiency ratio represents noninterest expense as a percentage of the aggregate of net interest income and noninterest income. Due to the loss on sale of FNMA preferred stock this ratio is not meaningful. Without the loss of $7.902 million in noninterest income, the efficiency ratio would have been 31.8%.
4 Reflects regulatory capital ratios of Bank of Internet USA only.
RESULTS OF OPERATIONS - Comparison of Three Months Ended September 30, 2008 and 2007
For the three months ended September 30, 2008, we had a net loss of $1,817,000 or $0.24 per diluted share compared to net income of $747,000, or $0.08 per diluted share for the three months ended September 30, 2007.
Excluding the impact of a one-time loss on our investment in Fannie Mae preferred stock, we earned $2,893,000 or $0.33 per diluted share for the quarter ended September 30, 2008 up $2,146,000 or 287% compared to the quarter ended September 2007. As a result of the U.S. Government's decision to place Fannie Mae in conservatorship and to suspend dividends to shareholders, our earnings were reduced by an after tax loss of $4,710,000 or $0.57 per diluted share due to the sale of our investment in Fannie Mae preferred stock. 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's decision, we sold our investment in Fannie Mae Preferred stock on September 8, 2008 at a pre-tax loss of $7,902,000.
Other key comparisons between our operating results for the quarters ended September 30, 2008 and 2007 are:
• Net interest income increased $4,850,000 in the 2008 quarter due to a 22.2% increase in average earning assets primarily from mortgage-backed securities. In addition, our net interest margin increased 144 basis points in the quarter ended in September 2008 compared to September 2007, as the earning rates on most loans and investment securities increased while the rates paid on time deposits and borrowings decreased.
• The loan loss provision was $505,000 for the September 2008 quarter compared to $5,000 for the quarter ended September 2007. The increased loan loss provision was due primarily to general declines in housing values and increased charge-offs on RV loans.
• Excluding the pre-tax loss of $7,902,000 related to Fannie Mae preferred stock, non-interest income decreased $470,000 for the September 2008 quarter compared to the quarter ended September 2007. During the September 2008 quarter, we recorded a fair value loss to our trading securities of $177,000. A gain of $220,000 was recorded on the sale of government agency mortgage backed-securities in the September 2007 quarter.
• Salaries, employee benefits and stock-based compensation increased $242,000 for the September 2008 quarter compared to the quarter ended September 2007.
Net Interest Income
Net interest income for the quarter ended September 30, 2008 totaled $7.8 million, a 160.0% increase compared to net interest income of $3.0 million for the quarter ended September 30, 2007.
Total interest and dividend income during the quarter ended September 30, 2008 increased 41.2% to $19.2 million, compared to $13.6 million during the quarter ended September 30, 2007. The increase in interest and dividend income for the quarter was attributable primarily to growth in average earning assets, primarily investment securities and loans. During the quarter ended September 30, 2008, the average balance of investment securities (primarily mortgage-backed securities) increased 32.7% when compared to the average for the quarter ended September 30, 2007. The increase in interest income was also the result of our higher rates earned on new loans originated and purchased as well as new non-agency mortgage backed securities purchased. The loan portfolio yield for the quarter ended September 30, 2008 increased 38 basis points and the investment security portfolio yield increased 148 basis points when compared to the quarter ended September 30, 2007. The net growth in average earning assets for the three-month period ended September 30, 2008 was funded largely by increased short-term borrowings, which account for the majority of the increase in interest expense. Total interest expense increased 6.5% to $11.4 million for the quarter ended September 30, 2008 compared with $10.7 million for the quarter ended September 30, 2007. The cost of funds increased due to 22.7% growth in average balances, partially offset by a 62 basis point decrease in the average funding rate. Contributing to the decrease in the average funding rate were decreases in average rates for time deposits and reverse repurchase agreements of 27 and 10 basis points, respectively. Similarly, lower rates paid on FHLB advances used to replace maturing advances and new advances used to purchase whole loan pools and mortgage backed securities led to a decrease in FHLB advance funding cost of 90 basis points during the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007.
Net interest margin, defined as net interest income divided by average earning assets, increased by 144 basis points to 2.68% for the quarter ended September 30, 2008, compared with 1.24% for the quarter ended September 30, 2007.
The improvement in the net interest margin has resulted from specific actions we have taken to manage our assets and liabilities, as well as general changes in the U.S. Treasury yield curve and loan risk premiums. Our specific actions include selling our agency mortgage-backed securities and replacing them with higher yielding loans and non-agency mortgage backed securities. In addition, we have lowered our deposit offering rates in an effort to take advantage of lower borrowing rates tied to U.S. Treasury rates. Since September of 2007, the Federal Reserve has reduced the short-term Fed funds rate by 275 basis points, to 2.00% as of September 30, 2008. The rate cuts have reduced and will likely continue to reduce our cost of funding through lower short-term borrowing rates.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents 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 three months ended September 30, 2008 and 2007:
For the Three Months Ended September 30,
2008 2007
Interest Rates Interest Rates
Average Income / Earned / Average Income / Earned /
Balance Expense Paid 1 Balance Expense Paid 1
(Dollars in thousands)
Assets
Loans 2 3 $ 625,814 $ 9,780 6.25 % $ 511,078 $ 7,494 5.87 %
Federal funds sold 2,426 12 1.98 % 28,585 366 5.12 %
Interest-bearing deposits in other
financial institutions 1,111 12 4.32 % 11,957 176 5.89 %
Investment securities 3 4 515,767 9,102 7.06 % 388,630 5,418 5.58 %
Stock of FHLB, at cost 19,535 271 5.55 % 12,591 168 5.34 %
Total interest-earning assets 1,164,653 19,177 6.59 % 952,841 13,622 5.72 %
Non-interest earning assets 17,794 15,179
Total assets $ 1,182,447 $ 968,020
Liabilities and Stockholders'
Equity
Interest-bearing demand and savings $ 133,418 $ 1,087 3.26 % $ 73,980 $ 643 3.48 %
Time deposits 429,203 5,240 4.88 % 489,808 6,308 5.15 %
Securities sold under agreements to
repurchase 130,000 1,416 4.36 % 96,848 1,081 4.46 %
Advances from FHLB 392,928 3,554 3.62 % 223,472 2,524 4.52 %
Other borrowings 5,156 68 5.28 % 5,155 104 8.07 %
Total interest-bearing liabilities 1,090,705 11,365 4.17 % 889,263 10,660 4.79 %
Noninterest-bearing demand deposits 4,004 1,027
Other interest-free liabilities 6,949 4,260
Stockholders' equity 80,789 73,470
Total liabilities and stockholders'
equity $ 1,182,447 $ 968,020
Net interest income $ 7,812 $ 2,962
Net interest spread 5 2.42 % 0.93 %
Net interest margin 6 2.68 % 1.24 %
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1 Annualized
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. The rate earned on loans does not include loan prepayment penalty income, which is classified as non-interest income.
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 annualized as a percentage of average interest-earning assets.
Analysis of Changes in Net Interest Income
Changes in net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table presents information regarding changes in interest income and interest expense for the periods indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to changes in volume (changes in volume multiplied by prior rate), the change attributable to variations in interest rates (changes in rates multiplied by old volume) and the change attributable to changes in rate/volume (change in rate multiplied by the change in volume):
Increase (decrease) due to
Total net
Rate / Increase
Volume Rate Volume (Decrease)
(In Thousands)
Increase / (decrease) in interest income:
Loans $ 1,682 $ 493 $ 111 $ 2,286
Federal funds sold (335 ) (225 ) 206 (354 )
Interest-bearing deposits in other -
financial institutions (160 ) (47 ) 43 (164 )
Mortgage-backed security 1,772 1,440 472 3,684
Stock of Federal Home Loan Bank 93 7 3 103
$ 3,052 $ 1,668 $ 835 $ 5,555
Increase / (decrease) in interest expense:
Interest-bearing demand and savings $ 517 $ (40 ) $ (33 ) $ 444
Time deposits (781 ) (328 ) 41 (1,068 )
Securities sold under agreements to repurchase 370 (26 ) (9 ) 335
Federal Home Loan Bank advances 1,914 (503 ) (381 ) 1,030
Other borrowings - (36 ) - (36 )
$ 2,020 $ (933 ) $ (382 ) $ 705
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Provision for Loan Losses
The loan loss provision was $505,000 for the quarter ended September 30, 2008, compared to $5,000 for the quarter ended September 30, 2007. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on the factors discussed under the "Allowance for Loan Losses" section of this report.
Non-interest Income
The following table sets forth information regarding our non-interest income for
the periods shown:
For the Three Months
Ended September 30,
2008 2007
(in thousands)
Prepayment penalty fee income $ 42 $ 140
Mortgage banking fee income 1 2
Gain / (loss) on sale of securities (8,073 ) 220
Banking service fees and other income 106 86
Total non-interest income $ (7,924 ) $ 448
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Non-interest income for the quarter ended September 30, 2008 decreased $8,372,000 to a loss of $7,924,000 compared to a gain of $448,000 for the quarter ended September 30, 2007. The decrease in non-interest income for the three month period was primarily the result selling $9.1 million in FNMA preferred stock resulting in a loss of $7.9 million and recording a fair value adjustment to our trading securities for a loss of $177,000.
Non-interest Expense
The following table sets forth information regarding our non-interest expense
for the periods shown:
For the Three Months
Ended September 30,
2008 2007
(in thousands)
Salaries, benefits and stock-based compensation $ 1,263 $ 1,021
Professional services 194 95
Occupancy and equipment 99 94
Data processing and internet 188 153
. . .
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