BofI Holding 10-K 2005
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission file number: 000-51201
(Exact name of registrant as specified in its charter)
Registrants Telephone Number, Including Area Code: (858) 350-6200
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicated by a check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based upon the closing sales price of the common stock on the NASDAQ National Market of $9.04 on June 30, 2005 was $55,121,000.
The number of shares of the Registrants common stock outstanding as of June 30, 2005 was 8,299,823.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement for the period ended June 30, 2005 are incorporated by reference into Part III.
TABLE OF CONTENTS
Forward Looking Statements
This report may contain various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include projections, statements of the plans and objectives of management for future operations, statements of future economic performance, assumptions underlying these statements, and other statements that are not statements of historical facts. Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond BofIs control. Should one or more of these risks, uncertainties or contingencies materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. Among the key risk factors that may have a direct bearing on BofIs results of operations and financial condition are:
competitive practices in the financial services industries
operational and systems risks;
general economic and capital market conditions, including fluctuations in interest rates;
economic conditions in certain geographic areas; and
the impact of current and future laws, governmental regulations and accounting and other rulings and guidelines affecting the financial services industry in general and BofI operations particularly.
In addition, actual results may differ materially from the results discussed in any forward-looking statements for the reasons, among others, discussed under the heading Factors that May Affect Our Performance in the Managements Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7.
BofI Holding, Inc. is the holding company for Bank of Internet USA, a consumer-focused, nationwide savings bank operating primarily through the Internet. We provide a variety of consumer banking services, focusing primarily on gathering retail deposits over the Internet and originating and purchasing multifamily and single family loans for investment. Our bank is distinguished by its design and implementation of an automated Internet-based banking platform and electronic workflow process that affords us low operating expenses and allows us to pass these savings along to our customers in the form of attractive interest rates and low fees on our products.
We operate our Internet-based bank from a single location in San Diego, California, currently serving approximately 20,000 retail deposit and loan customers across all 50 states. At June 30, 2005, we had total assets of $609.5 million, loans and mortgage-backed securities of $549.6 million and total deposits of $361.1 million. Our deposits consist primarily of interest-bearing checking and savings accounts and time deposits. Our loans held for investment are primarily first mortgages secured by multifamily (five or more units) and single family real property. Our mortgage-backed securities consist of investment grade mortgage pass-through securities issued by government-sponsored entities.
Our goal is to become a premier provider of consumer banking products and increase shareholder value through growth in our assets and earnings. From the fiscal year ended June 30, 2002 to the fiscal year ended June 30, 2005, we have:
Increased total assets from $217.6 million to $609.5 million;
Increased assets per employee from $10.4 million to $24.4 million;
Improved our efficiency ratio from 79.3% to 48.0%;
Increased net income from $1.0 million to $2.9 million; and
Increased return on average common stockholders equity from 6.3% to 6.7%.
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. Our thrift charter allows us to operate in all 50 states and our online presence allows us increased flexibility to target a large number of loan and deposit customers based on demographics, geographic location and price. We plan to continue to increase our deposits by attracting new customers with competitive pricing, targeted marketing and new products and services to serve specific demographics. We intend to increase mortgage loans and mortgage-backed securities by increasing originations through our websites, including our ApartmentBank and Broker Advantage websites. Additionally, we plan to purchase high-quality multifamily and single family loans and mortgage-backed securities. The proceeds raised in our initial public offering in March 2005 have allowed our bank to increase its lending limit and to underwrite or purchase larger mortgage loans.
Within the next two fiscal years, our goals are to:
Increase our total assets to $1.0 billion;
Improve our annualized efficiency ratio to a level below 40%; and
Increase our annualized return on average common stockholders equity to 10%.
Assuming the execution of our current plan, we expect to increase our staffing from 25 full time employees to approximately 40 full time employees over the next two years using our existing office space.
Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available, free of charge, through the Securities and Exchange Commissions website at www.sec.gov and our website at www.bofiholding.com as soon as reasonably practicable after their filing with the Securities and Exchange Commission. The information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Lending and Investment Activities
General. We originate single family mortgage loans on a nationwide basis, and currently originate multifamily loans primarily in California, Arizona, Texas, Washington and Colorado. We currently sell substantially all of the single family loans that we originate and retain most of our multifamily loan originations. In addition, we purchase single family and multifamily mortgage loans from other lenders to hold in our portfolio. Our originations, purchases and sales of mortgage loans include both fixed and adjustable interest rate loans. Originations are sourced, underwritten, processed, controlled and tracked primarily through our customized websites and software. We believe that, due to our automated systems, our lending business is highly scalable, allowing us to handle increasing volumes of loans and enter into new geographic lending markets with only a small increase in personnel, in accordance with our strategy of leveraging technology to lower our operating expenses.
Loan Products. Our loans consist of first mortgage loans secured by single family and multifamily properties and, to a lesser extent, commercial properties. We also provide a limited amount of home equity financing and unsecured consumer loans. Further details regarding our loan programs are discussed below:
Single Family Loans. We offer fixed and adjustable rate, single family mortgage loans in all 50 states, and provide both conforming and jumbo loans. Our largest single family mortgage loan was $3.2 million as of June 30, 2005. We currently sell substantially all of the single family loans that we originate on a nonrecourse basis to wholesale lending institutions, typically with servicing rights released to the purchaser. Before we fund each loan, we obtain prior approval by a purchaser, who delivers a specific delivery and pricing commitment, which reduces our risk in funding the loan. In addition, while each loan is underwritten to our standard guidelines, we may also follow specific underwriting guidelines put in place by the purchaser of the loan.
Multifamily Loans. We currently originate adjustable rate multifamily mortgage loans primarily in California, Arizona, Texas and Washington, and we plan to expand in the future the states and geographic markets in which we originate new multifamily loans. In addition, we held multifamily loans secured by property in 36 states at June 30, 2005. We typically hold all of the multifamily loans that we originate and perform the loan servicing directly on these loans. Our multifamily loans as of June 30, 2005 ranged in amount from approximately $42,000 to $2.9 million and were secured by first liens on properties typically ranging from five to 70 units. We offer multifamily loans with interest rates that adjust based on a variety of industry standard indices, including U.S. Treasury security yields, LIBOR and Eleventh District Cost of Funds. Our loans typically have prepayment protection clauses, interest rate floors, ceilings and rate change caps.
Commercial Loans. We originate a small volume of adjustable rate commercial real estate loans, primarily in California. We currently hold all of the commercial loans that we originate and perform the loan servicing on these loans. Our commercial loans as of June 30, 2005 ranged in amount from approximately $112,000 to $2.2 million, and were secured by first liens on mixed-use, shopping and retail centers, office buildings and multi-tenant industrial properties. We offer commercial loans on similar terms and interest rates as our multifamily loans.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio in amounts and percentages by type of loan at the end of each fiscal year-end since inception of our operations:
The following table sets forth the amount of loans maturing in our total loans held for investment at June 30, 2005 based on the contractual terms to maturity:
The following table sets forth the amount of our loans at June 30, 2005 that are due after June 30, 2006 and indicates whether they have fixed or floating or adjustable interest rate loans:
Our loans are secured by properties primarily located in the western United States. The following table shows the largest states and regions ranked by location of these properties at June 30, 2005:
Percent of Loan Principal Secured by Real Estate Located in State
(1) Consists of loans secured by real property in California with zip code ranges from 90000 to 92999.
(2) Consists of loans secured by real property in California with zip code ranges from 93000 to 96999.
Another measure of credit risk is the ratio of the loan amount to the value of the property securing the loan (called loan-to-value ratio or LTV). The following table shows the LTVs of our loan portfolio on weighted average and median bases at June 30, 2005. The LTVs were calculated by dividing (a) the loan principal balance less principal repayments by (b) the appraisal value of the property securing the loan at the time of the funding or, for certain purchased seasoned loans, an adjusted appraised value based upon an independent review at the time of the purchase.
Lending Activities. The following table summarizes the volumes of real estate loans originated, purchased and sold for each fiscal year since inception of our operations:
The following table summarizes the amount funded, the number and the size of real estate loans originated and purchased for each fiscal year since inception of our operations:
Loan Marketing. We market our lending products through a variety of channels depending on the product. We market single family mortgage loans in all 50 states to Internet comparison shoppers through our purchase of advertising on search engines, such as Google and Yahoo, and popular product comparison sites, such as Bankrate.com. We market multifamily loans primarily in five states through Internet search engines and through traditional origination techniques, such as direct mail marketing, personal sales efforts and limited media advertising.
Loan Originations. We originate loans through three different origination channels: online retail, online wholesale and direct.
Online Retail Loan Origination. We originate single family and multifamily mortgage loans directly online through our websites, where our customers can review interest rates and loan terms, enter their loan applications and lock in interest rates directly over the Internet.
Single Family Loan Website. Our primary website for single family loans is located at homeloans.bankofinternet.com. We maintain and update the rate and other information on this website. Once a single family loan application is received, we outsource processing of the loan application to a third-party processor, which handles all of the tasks of underwriting and processing the loan. Customers seeking direct contact with a loan officer during the application process are directed to a loan officer at the third-party loan processor.
Multifamily Loan Website. Our primary website for multifamily loans is located at www.ApartmentBank.com, where customers can obtain loan rates and terms, prequalify loan requests, submit loan applications, communicate with loan officers and monitor loan processing in a secure, online environment. Multifamily loan applications are underwritten and processed internally by our personnel. We designed our multifamily website and underlying software to expedite the origination, processing and management of multifamily loans. For example, customers can directly input or import loan application data electronically, or submit data by facsimile. Once a customer begins an online application, he or she can save the application and resume the process at a later date through a secure password. Our software determines which forms are needed, populates the forms and allows multiple parties, such as guarantors, to access the application.
Online Wholesale Loan Origination. We have developed relationships with independent multifamily loan brokers in our five primary multifamily markets, and we manage these relationships and our wholesale loan pipeline through our Broker Advantage website located at broker.bofi.com. Through this password-protected website, our approved independent loan brokers can compare programs, terms and pricing on a real time basis and communicate with our staff. Additionally, through a secure loan pipeline management feature, brokers can submit prequalification requests, submit, edit and manage full loan applications, manage loans in process, track outstanding documents and obtain any necessary forms required for documentation. We do not allow brokers to perform any loan processing beyond acting as the originating broker of record. We handle all further loan processing, including verification of loan requests, underwriting, preparation of loan documents and obtaining third party reports and appraisals. We believe that the tools and services offered by Broker Advantage free loan brokers from much of the administrative tasks of loan processing and allow brokers to focus more of their time on local marketing and business development efforts.
Direct Loan Origination. We employ a staff of three loan originators who directly originate multifamily and commercial loans and develop wholesale lending relationships with loan brokers on a regional basis. Our internal software, known as Origination Manager, allows each loan originator to have direct online access to our multifamily loan origination system and originate and manage their loan portfolios in a secure online environment from anywhere in the nation. Routine tasks are automated, such as researching loan program and pricing updates, prequalifying loans, submitting loan applications, viewing customer applications, credit histories and other application documents and monitoring the status of loans in process. We have four direct loan originators, located in Denver, Dallas/Fort Worth, Phoenix and San Diego.
Loan Purchases. We purchase selected single family and multifamily loans from other lenders to supplement and diversify our loan portfolio geographically. We currently purchase loans from major banks or mortgage companies. At June 30, 2005, approximately $283.1 million, or 58.6%, of our loan portfolio was acquired from other lenders who are servicing the loans on our behalf, of which 80.0% were multifamily loans and 20.0% were single family loans.
Loan Servicing. We typically retain servicing rights for all multifamily loans that we originate. We typically do not acquire servicing rights on purchased single family and multifamily loans, and we typically release-servicing rights to the purchaser when we sell single family loans that we originate.
Loan Underwriting Process and Criteria. We individually underwrite all multifamily and commercial loans that we originate, and all loans that we purchase. We outsource to a third-party processor the underwriting of all single family loans that we originate, based on underwriting criteria that we establish and provide to the processor. Our loan underwriting policies and procedures are written and adopted by our board of directors and our loan committee. Each loan, regardless of how it is originated, must meet underwriting criteria set forth in our lending policies and the requirements of applicable lending regulations of the OTS.
We have designed our loan application and review process so that much of the information that is required to underwrite and evaluate a loan is created electronically during the loan application process. Therefore we can automate many of the mechanical procedures involved in preparing underwriting reports and reduce the need for human interaction, other than in the actual credit decision process. We believe that our systems will allow us to handle increasing volumes of loans with only a small increase in personnel, in accordance with our strategy of leveraging technology to lower our operating expenses.
We perform underwriting directly on all multifamily and commercial loans that we originate and purchase. We rely primarily on the cash flow from the underlying property as the expected source of repayment, but we also endeavor to obtain personal guarantees from all borrowers or substantial principals of the borrower. In evaluating multifamily and commercial loans, we review the value and condition of the underlying property, as well as the financial condition, credit history and qualifications of the borrower. In evaluating the borrowers qualifications, we consider primarily the borrowers other financial resources, experience in owning or managing similar properties and payment history with us or other financial institutions. In evaluating the underlying property, we consider primarily the net operating income of the property before debt service and depreciation, the ratio of net operating income to debt service and the ratio of the loan amount to the appraised value.
Lending Limits. As a savings association, we generally are subject to the same lending limit rules applicable to national banks. With limited exceptions, the maximum amount that we may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of our unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. We are additionally authorized to make loans to one borrower, by order of the Director of the OTS, in an amount not to exceed the lesser of $30.0 million or 30% of our unimpaired capital and surplus for the purpose of developing residential housing, if certain specified conditions are met. See Regulation Regulation of Bank of Internet USA.
At June 30, 2005, Bank of Internets loans-to-one-borrower limit was $8.2 million, based upon the 15% of unimpaired capital and surplus measurement. At June 30, 2005, no single loan was larger than $3.2 million and our largest single lending relationship had an outstanding balance of $5.0 million.
Asset Quality and Credit Risk. For every quarter from inception to June 30, 2005, we had no nonperforming assets or troubled debt restructurings, no foreclosures and no specific loan loss allowances. During that time, two loans had notice of defaults filed during the quarter, but were cured before the end of the quarter. Since our history is limited, we expect in the future to have additional loans that default or become nonperforming. Nonperforming assets are defined as nonperforming loans and real estate acquired by foreclosure or deed-in-lieu thereof. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more overdue but still accruing interest to the extent applicable. Troubled debt restructurings are defined as loans that we have agreed to modify by accepting below market terms either by granting interest rate concessions or by deferring principal or interest payments. Our policy in the event of nonperforming assets is to place such assets on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest will be deducted from interest income. Our policy is to not accrue interest on loans past due 90 days or more.
Mortgage-backed Securities Portfolio. In addition to loans, we invest in mortgage-backed securities consisting of investment grade single family mortgage pass-through securities issued by government-sponsored entities. We invest in mortgage-backed securities to supplement our loan portfolio originations and purchases and to manage excess liquidity. During the fiscal year ended June 30, 2005, we increased our purchases of mortgage-backed securities because we believed the mortgage-backed securities provided better risk adjusted yields than certain single family whole loan originations or whole loan pools. We also buy and sell mortgage-backed securities to facilitate liquidity and to help manage our interest rate risk.
Investment Portfolio. In addition to loans and mortgage-backed securities, we invest available funds in investment grade fixed income securities, consisting mostly of federal agency securities. We also invest available funds in term deposits of other FDIC-insured financial institutions. Our investment policy, as established by our board of directors, is designed primarily to maintain liquidity and generate a favorable return on investment without incurring undue interest rate risk, credit risk or portfolio asset concentration. Under our investment policy, we are currently authorized to invest in obligations issued or fully guaranteed by the United States government, specific federal agency obligations, specific time deposits, negotiable certificates of deposit issued by commercial banks and other insured financial institutions, investment grade corporate debt securities and other specified investments.
The following table sets forth changes in our investment portfolio for each fiscal year since 2002:
(1) Through June 30, 2004, we did not have any securities designated as available-for-sale.
The following table sets forth, at June 30, 2005, the dollar amount of our investment portfolio by type, based on the contractual terms to maturity and the weighted average yield for each range of maturities:
(1) Weighted average yield is based on amortized cost of the securities.
(2) Mortgage-backed securities are allocated based on contractual principal maturities, assuming no prepayments.
Allowance for Loan Losses. We maintain an allowance for loan losses in an amount that we believe is sufficient to provide adequate protection against probable losses in our loan portfolio. We evaluate quarterly the adequacy of the allowance based upon reviews of individual loans, recent loss experience, current economic conditions, risk characteristics of the various categories of loans and other pertinent factors. The evaluation is inherently subjective, as it 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. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible and increased by recoveries of loans previously charged off.
Under our allowance for loan loss policy, impairment calculations are determined based on general portfolio data for general reserves and loan level data. Specific loans are evaluated for impairment and are to be classified as nonperforming or in foreclosure if they are 90 days or more delinquent. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors that we consider 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 loans effective interest rate or the fair value of the collateral if repayment of the loan is expected 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 impairment 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. We use an allowance rate that provides a larger loss allowance for loans with greater loan-to-value ratios, measured at the time the loan was funded. The internal asset review committee of our board of directors reviews and approves the banks calculation methodology. Specific reserves are to be 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.
For every quarter from inception to June 30, 2005, we had no nonperforming assets or troubled debt restructurings, no foreclosures and no specific loan loss allowances During that time, two loans had notice of defaults filed during the quarter, but were cured before the end of the quarter.
The following table sets forth the changes in our allowance for loan losses, by loan type, from June 30, 2000 through June 30, 2005. From inception through June 30, 2005, we have not recorded any specific loan loss reserves or any loan charge-offs or recoveries:
The following table sets forth how our allowance for loan losses is allocated by type of loan at each of the dates indicated:
Deposit Products and Services
Deposit Products. We offer a full line of deposit products over the Internet to customers in all 50 states. Our deposit products consist of demand deposits (interest bearing and non-interest bearing), savings accounts and time deposits. Our customers access their funds through ATMs, debit cards, Automated Clearing House funds (electronic transfers) and checks. We also offer the following additional services in connection with our deposit accounts:
Online Bill Payment Service. Customers can pay their bills online through electronic funds transfer or a written check prepared and sent to the payee.
Online Check Imaging. Online images of cancelled checks and deposit slips are available to customers 24 hours a day. Images of cancelled checks are available real time (at the time the check clears our bank) and may be printed or stored electronically.
ATM Cards or VISA(R) Check Cards. Each customer may choose to receive a free ATM card or VISA(R) check card upon opening an account. Customers can access their accounts at ATMs and any other location worldwide that accept VISA(R) check cards. We do not charge a fee for ATM/VISA(R) usage, and we reimburse our customers up to $10 per month for fees imposed by third-party operators of ATM/VISA(R) locations.
Overdraft Protection. Overdraft protection, in the form of an overdraft line of credit, is available to all checking account customers who request the protection and qualify.
Electronic Statements. Statements are produced and imaged automatically each month and may be printed or stored electronically by the customer.
Deposit Marketing. We currently market to deposit customers through targeted, online marketing in all 50 states by purchasing key word advertising on Internet search engines, such as Google, and placement on product comparison sites, such as Bankrate.com. We target deposit customers based on demographics, such as age, income, geographic location and other criteria.
As part of our deposit marketing strategies, we actively manage deposit interest rates offered on our websites and displayed in our advertisements. Senior management is directly involved in executing overall growth and interest rate guidance established by our asset/liability committee, or ALCO. Within these parameters, management and staff survey our competitors interest rates and evaluate consumer demand for various products and our existing deposit mix. They then establish our marketing campaigns accordingly and monitor and adjust our marketing campaigns on an ongoing basis. Within minutes our management and staff can react to changes in deposit inflows and external events by altering interest rates reflected on our websites and in our advertising.
For the year ended June 30, 2005, we opened 10,856 new deposit accounts, resulting in approximately $208.5 million in new deposits, and spent approximately $89,000 in external advertising costs for deposit gathering. For the fiscal year ended June 30, 2004, we opened 6,408 new deposit accounts, resulting in approximately $136.0 million in new deposits, and spent approximately $29,000 in external advertising costs for deposit gathering. Our external advertising cost per new account was approximately $8.19 and $4.52 per new account for fiscal 2005 and 2004, respectively. The number of deposit accounts at June 30, 2005 and at each of June 30, 2004, 2003 and 2002 is set forth below.
Deposit Composition. The following table sets forth the dollar amount of deposits by type and weighted average interest rates at June 30, 2005 and at each of June 30, 2004, 2003 and 2002:
(1) Based on weighted average stated interest rates at the end of the period.
The following tables set forth the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated:
The following table shows the maturity dates of our certificates of deposit at June 30, 2005 and 2004:
The following table shows maturities of our time deposits having principal amounts of $100,000 or more at June 30, 2005 and 2004: