Bofi Holdings (NASDAQ:BOFI)

We are removing BOFI from the GeoSpecial List. Estimates going forward appear subpar with 2011 EPS expected to fall from 2010 levels. The company's fiscal year ends in June. We will revisit after BOFI reports 2010 year end results or if analyst estimates are revised upward.

Added to the GeoSpecial list on  November 3, 2009 @ $8.40. (reached a high of $19.27 on 5/10/2010, a 129% increase since inception of tracking)

Current price: $16.91.

Shares of online banking operator BOFI have bucked the recent market drop and actually attained a 52 week high of $12.89 in today's trading session. Since our first mention of BOFI, it is considering raising capital to expand growth initiatives, attracted wall street analyst coverage and reported superb top and bottom line growth for is fiscal 2010 second quarter.  We are hopeful that investors will eventually price BOFI shares more along the lines of an exciting growth company rather than a mundane financial dinosaur.

Source: Marketwire (February 4, 2010)

Excerpt From GeoBargain & GeoSpecial Review article, November 17, 2009.

Bofi Holding Inc (NASDAQ:BOFI) Closing Price Nov. 16, 2009: $9.90

• Added to the GeoSpecial List on November 3, 2009 at $8.40.
• Reached a high of $11.49 on Nov. 12, 2009, an increase of 37% since placement on the list.

Bofi, an online banking company, bypassed the global economic crisis by posting solid EPS gains through 2009 and into its fiscal 2010 year. The Company’s stock is selling under its book value per share of $10.48, a fact that is a bit disconcerting given the bank’s conservative nature and stellar long-term track record of EPS growth. See our full article.

In an effort to diversify our China heavy portfolio, the GeoTeam® is taking great efforts to identify U.S-based firms with promising growth stories. This task will obviously pose challenges when compared to the plethora of opportunities available in the U.S listed China space. In the past year or so, we have highlighted some select U.S. based stocks that have performed nicely.

Good examples of our top performers:

Orchids Paper Products Co. (NYSE AMEX:TIS)
Medifast Inc (NYSE:MED)
Virgin Mobile Usa Inc (NYSE:VM)
Alpha Pro Tech Ltd (NYSE AMEX:APT)
Cpi Aerostructures Inc (NYSE AMEX:CVU)
Air Trans Services (NASDAQ:ATSG)
Coffee Holding Co Inc (NYSE AMEX:JVA)

Others stocks that have yet to perform:

Ricks Cabaret Intl Inc (NASDAQ:RICK)
Yocream Intl Inc (PINK:YOCM)
Merrimac Industries Inc (NYSE AMEX:MRM)
Halifax Corp (NYSE AMEX:HX)
Smith Midland Corp (OTC BB:SMID)

Yesterday we added Bofi Holding Inc (NASDAQ:BOFI) to the GeoSpecial list.

BOFI is a consumer focused, FDIC insured, nationwide savings bank operating primarily over the Internet.

• Closing Price (November 3, 2009): $8.68
• Trailing EPS: $1.43
• P/E: 6.07
• Book Value per Share: $10.58
• Price to Book: $0.81
• Loan to Value: 50% to 60% (Industry average is ~75%. A lower figure implies a more conservative structure)
• Non-Performing Assets percentage: 0.73%

We have been tracking BOFI for sometime, but never established a position in the company. The banking sector is not one that we particularly emphasize. However,  certain aspects of the BOFI story have piqued our interest.

Deposit Business: (Liability side of the balance sheet)

BOFI's online model has enabled it to offer banking products to its customers with more attractive interest rates and lower fees than traditional brick and mortar banks and its less efficient internet banking competitors. It credits this to a technology driven model that emphasizes automation and user-friendly features. For example, its convenient online check imaging technology reduces mailing costs. Services such as ATM fee reimbursement help to attract and build a loyal customer base.

Loan Origination/Purchase Business: (Asset side of the balance sheet)

On the asset side, the Company has virtually side-stepped the credit crunch by focusing less on loan origination and more on purchasing wholesale products (closed loans originated by other parties) with high credit quality. Loan origination entails greater risk as there are more unknowns in contrast to being able to gauge the history of a closed loan. Furthermore, because of the Company’s conservative nature and financial strength, it has been able to purchase favorably priced loan assets from troubled institutions.

The company is also seeing opportunities in the loan origination business:

“In particular, we continue to see significant competitive exits from the multifamily lending business, providing us a strong tailwind as we place resources towards growing our multifamily originations. I am very optimistic that the current market continues to provide us outstanding growth opportunities."

Strategy in a nut shell

“Our business strategy is to lower the cost of delivering banking products and services by leveraging technology while continuing to grow our assets and deposits to achieve increased economies of scale. We have designed our automated Internet-based banking platform and workflow process to handle traditional banking functions with reduced paperwork and human intervention.”

The Company's efforts have produced significant sales and EPS growth since 2007. The momentum has carried into the first quarter.

Fiscal 2009 10K
Fiscal 2010 First Quarter Earnings Press Release

We are not well versed with respect to analyzing the banking sector, but BOFI’s track record of consistent growth, combined with its efficient business model, may give investors a reason to price shares more aggressively than your average financial institution.  We think the stock attaining its book value of $10.58 is not an unrealistic goal.

Risk of dilution

Generally speaking, a bank's ability to grow is a function of deposit growth and asset growth. Currently, BOFI has $1.3 billion in total assets. It has aggressive goals to grow assets to more than $3 billion.  However, there are certain regulatory requirements tying a bank’s assets size to its equity.( i.e $1.00 of equity per $12.00 in assets). Using this relationship BOFI is at the top of its asset limit given its current equity. The company can increase its equity by growing its earnings or raising additional capital. If it does choose to raise capital we cannot predict if such an event would be accretive or dilutive to EPS. However, it is our assumption that it would not be difficult to rapidly deploy funds.  Ironically, the market may view a capital raise as a positive. The Company’s strong financial track record also gives us confidence that management efforts will focus on earnings accretion.

Regulatory Risk

As the financial industry reorganizes it is possible that rules put in place may be perceived as growth limiting.