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| BOFI > SEC Filings for BOFI > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
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 interim unaudited condensed consolidated financial statements and notes thereto contained in this report.
Some 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, 2009, 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, 2009 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. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
September 30, June 30, September 30,
2009 2009 2008
Selected Balance Sheet Data:
Total assets $ 1,324,069 $ 1,302,208 $ 1,170,915
Loans-net of allowance for loan losses 595,140 615,463 622,119
Loans held for sale 3,365 3,190 -
Allowance for loan losses 5,270 4,754 2,809
Securities-trading 5,299 5,445 7,361
Securities-available for sale 275,720 265,807 188,922
Securities-held to maturity 382,481 350,898 305,441
Total deposits 763,513 648,524 557,496
Securities sold under agreements to repurchase 130,000 130,000 130,000
Advances from the FHLB 225,988 262,984 392,973
Federal Reserve Discount Window and other borrowings 105,155 165,155 5,155
Total Stockholders' equity 93,016 88,939 79,250
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BofI HOLDING, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
At or for the Three Months
Ended September 30,
2009 2008
Selected Income Statement Data:
Interest and dividend income $ 21,777 $ 19,177
Interest expense 9,212 11,365
Net interest income 12,565 7,812
Provision for loan losses 2,000 505
Net interest income after provision for loan losses 10,565 7,307
Non-interest income (loss) (1,009 ) (7,924 )
Non-interest expense 3,277 2,477
Income (loss) before income tax expense 6,279 (3,094 )
Income tax expense (benefit) 2,571 (1,277 )
Net income (loss) $ 3,708 $ (1,817 )
Net income (loss) attributable to common stock $ 3,535 $ (1,988 )
Per Share Data:
Net income (loss):
Basic $ 0.43 $ (0.24 )
Diluted $ 0.41 $ (0.24 )
Book value per common share $ 10.19 $ 8.36
Tangible book value per common share $ 10.19 $ 8.36
Weighted average number of shares outstanding:
Basic 8,262,471 8,421,274
Diluted 8,873,191 8,421,274
Common shares outstanding at end of period 8,164,914 8,299,563
Common shares issued at end of period 8,791,068 8,627,840
Performance Ratios and Other Data:
Loan originations for investment $ 8,436 $ 12,029
Loan originations for sale 25,005 213
Loan purchases 1,633 15,349
Return on average assets 1.12 % -0.61 %
Return on average stockholders' equity 17.20 % -11.19 %
Interest rate spread1 3.71 % 2.42 %
Net interest margin2 3.88 % 2.68 %
Efficiency ratio3 28.36 % N/A
Capital Ratios:
Equity to assets at end of period 7.03 % 6.77 %
Tier 1 leverage (core) capital to adjusted tangible assets4 7.20 % 6.90 %
Tier 1 risk-based capital ratio4 15.51 % 14.03 %
Total risk-based capital ratio4 16.37 % 14.52 %
Tangible capital to tangible assets4 7.20 % 6.90 %
Asset Quality Ratios:
Net annualized charge-offs to average loans outstanding 0.98 % 0.26 %
Nonperforming loans to total loans 0.76 % 0.42 %
Nonperforming assets to total assets 0.73 % 0.38 %
Allowance for loan losses to total loans at end of period 0.87 % 0.45 %
Allowance for loan losses to nonperforming loans 114.57 % 107.75 %
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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.
For the three months ended September 30, 2008, without the loss of $7.902 million in noninterest income due to the loss on sale of FNMA preferred stock, the efficiency ratio would have been 31.8%.
4 Reflects regulatory capital ratios of Bank of Internet USA only.
RESULTS OF OPERATIONS - Comparison of the Three Months Ended September 30, 2009 and 2008
For the three months ended September 30, 2009, we had net income of $3,708,000 compared to a net loss of $1,817,000 for the three months ended September 30, 2008. Net income attributable to common stock holders was $3,535,000 or $0.41 per diluted share compared to a net loss of $1,988,000 or $0.24 per diluted share for the three months ended September 30, 2009 and 2008, respectively.
Other key comparisons between our operating results for the quarters ended September 30, 2009 and 2008 are:
• Net interest income increased $4,753,000 in the 2009 quarter due to an 11.1% increase in average earning assets primarily from loan pool purchases and mortgage-backed securities. In addition, our net interest margin increased 120 basis points in the quarter ended September 30, 2009 compared to September 30, 2008, as the earning rates on loans and securities increased while the rates paid on deposits and borrowings decreased.
• The loan loss provision was $2,000,000 for the September 30, 2009 quarter compared to $505,000 for the quarter ended September 30, 2008. The increased loan loss provision was due primarily to the general declines in housing values and increased charge-offs on RV loans.
• The loss in non-interest income decreased $6,915,000 for the September 30, 2009 quarter compared to the quarter ended September 30, 2008. During the September 30, 2009 quarter, we recorded other-than-temporary impairment (OTTI) expense of $1,369,000, a fair value loss to our trading securities of $142,000 and had $332,000 in gain on sale of single family first mortgages. A loss of $7,902,000 was recorded on the sale of Fannie Mae preferred stock in the September 30, 2008 quarter.
Excluding the impact of a one-time loss in the quarter ended September 30, 2008 on our investment in Fannie Mae preferred stock, our earnings this quarter increased $815,000 or 28.2% compared to the three months ended September 30, 2008. 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 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. As a result of 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. Excluding the Fannie Mae loss, earnings for the quarter ended September 30, 2008 would have been $2,893,000.
Net Interest Income
Net interest income for the quarter ended September 30, 2009 totaled $12.6 million, a 60.8% increase compared to net interest income of $7.8 million for the quarter ended September 30, 2008.
Total interest and dividend income during the quarter ended September 30, 2009 increased 13.6% to $21.8 million, compared to $19.2 million during the quarter ended September 30, 2008. The increase in interest and dividend income for the quarter was attributable primarily to growth in average earning assets from purchases of investment securities and loans. The average balance of investment securities (primarily mortgage-backed securities) increased 20.8% when compared for the three-month periods ended September 30, 2009 and 2008. The increase in interest income was also the result of our higher rates earned on new loans originated and purchased, amortization of discounts on purchases of loan pools as well as higher rates on new non-agency mortgage-backed securities purchased. The loan portfolio yield for the quarter ended September 30, 2009 increased 50 basis points and the investment security portfolio yield increased 24 basis points. The net growth in average earning assets for the three-month period was funded largely by increased demand and savings accounts and increased short-term borrowings. Total interest expense decreased 18.9% to $9.2 million for the quarter ended September 30, 2009 compared with $11.4 million for the quarter ended September 30, 2008. The average funding rate decreased by 114 basis points while the average interest-bearing liabilities incurred an 11.7% growth in average balances. Contributing to the decrease in the average funding rate were decreases in the average rates for time deposits of 78 basis points, decreases in the average funding rates of demand and savings accounts of 154 basis points offset by an increase in the average rates of FHLB advances of 50 basis points when compared for the quarter ended September 30, 2009 and 2008. Net interest margin, defined as net interest income divided by average earning assets, increased by 120 basis points to 3.88% for the quarter ended September 30, 2009, compared with 2.68% for the quarter ended September 30, 2008.
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 March of 2008, the Federal Reserve has reduced the short-term Fed funds rate by 200 basis points, to a range of 0.00 to 0.25% as of September 30, 2009. The rate cuts have reduced and will likely continue to reduce our cost of funding through lower term deposit rates and will reduce our interest income on certain loans and securities, transitioning from a fixed rate to and adjustable rate.
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, 2009 and 2008:
For the Three Months Ended September 30,
2009 2008
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 $ 612,955 $ 10,350 6.75 % $ 625,814 $ 9,780 6.25 %
Federal funds sold 38,993 16 0.16 % 2,426 12 1.98 %
Interest-bearing deposits in other
financial institutions 283 - 0.00 % 1,111 12 4.32 %
Investment securities 3 4 623,225 11,372 7.30 % 515,767 9,102 7.06 %
Stock of FHLB, at cost 18,848 39 0.83 % 19,535 271 5.55 %
Total interest-earning assets 1,294,304 21,777 6.73 % 1,164,653 19,177 6.59 %
Non-interest earning assets 27,713 17,794
Total assets $ 1,322,017 $ 1,182,447
Liabilities and Stockholders' Equity
Interest-bearing demand and savings $ 360,850 $ 1,552 1.72 % $ 133,418 $ 1,087 3.26 %
Time deposits 378,099 3,879 4.10 % 429,203 5,240 4.88 %
Securities sold under agreements to
repurchase 130,000 1,436 4.42 % 130,000 1,416 4.36 %
Advances from FHLB 215,682 2,224 4.12 % 392,928 3,554 3.62 %
Other borrowings 133,198 121 0.36 % 5,156 68 5.28 %
Total interest-bearing liabilities 1,217,829 9,212 3.03 % 1,090,705 11,365 4.17 %
Noninterest-bearing demand deposits 4,560 4,004
Other interest-free liabilities 7,609 6,949
Stockholders' equity 92,019 80,789
Total liabilities and stockholders'
equity $ 1,322,017 $ 1,182,447
Net interest income $ 12,565 $ 7,812
Net interest spread 5 3.71 % 2.42 %
Net interest margin 6 3.88 % 2.68 %
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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):
For the Three Months Ended September 30,
2009 vs 2008
Increase (decrease) due to
Total net
Rate / Increase
Volume Rate Volume (Decrease)
(Dollars in Thousands)
Increase / (decrease) in interest income:
Loans $ (201 ) $ 789 $ (18 ) $ 570
Federal funds sold 181 (11 ) (166 ) 4
Interest-bearing deposits in other financial
institutions (9 ) (12 ) 9 (12 )
Investment securities 1,897 308 65 2,270
Stock of the FHLB (10 ) (231 ) 9 (232 )
$ 1,858 $ 843 $ (101 ) $ 2,600
Increase / (decrease) in interest expense:
Interest-bearing demand and savings $ 1,854 $ (514 ) $ (875 ) $ 465
Time deposits (623 ) (833 ) 95 (1,361 )
Securities sold under agreements to repurchase - 19 1 20
Advances from FHLB (1,604 ) 496 (222 ) (1,330 )
Other borrowings 1,690 (63 ) (1,574 ) 53
$ 1,317 $ (895 ) $ (2,575 ) $ (2,153 )
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Provision for Loan Losses
The loan loss provision was $2,000,000 for the quarter ended September 30, 2009, compared to $505,000 for the quarter ended September 30, 2008. The increased provision for the quarter ended September 30, 2009 was the result of the nationwide decline in housing values and higher unemployment which has negatively impacted consumer credit, continued changes in portfolio mix and higher estimated losses from our recreational vehicle portfolio and real estate loan portfolios. 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,
2009 2008
(Dollars in thousands)
Realized gain (loss) on securities:
Sale of FNMA preferred stock $ - $ (7,902 )
Sale of mortgage-backed securities - 6
Total realized gain (loss) on securities - (7,896 )
Unrealized gain (loss) on securities:
Total impairment losses (1,390 ) -
Loss recognized in other comprehensive earnings 21 -
Net impairment loss recognized in earnings (1,369 ) -
Fair value loss on trading securities (142 ) (177 )
Total unrealized loss on securities (1,511 ) (177 )
Prepayment penalty fee income 47 42
Mortgage banking income 332 1
Banking service fees and other income 123 106
Total non-interest income (loss) $ (1,009 ) $ (7,924 )
. . .
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