Monday, May 14, 2018

A current AIM Program Small Cap Equity Holding: Bofi Holding, Inc. (BOFI) by: Nathaniel D'Amato. "Bank of the Internet"

Bofi Holding, Inc. (BOFI, $40.87): “Bank of the Internet”

By: Nathaniel D’Amato, AIM student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Bofi Holding, Inc. (NYSE:BOFI) is a bank holding company with approximately $10 billion in assets, that operates through a completely online platform that also offers loan financing services for residential properties and small to medium sized businesses.

• Efficient online platform allowing with branchless low-cost distribution channels

• Total assets have increased by approximately a billion year-over-year (YoY) since the stock was added to the AIM portfolio in 2016

• Exclusive lending partnership with H&R Block

• Tax Act reducing limit on deductible mortgage debt to $750,000

Key points: Bofi Holding, Inc. stock has been a well performing security in the AIM Small Cap portfolio, increasing its price by over 100% since the purchase made in November of 2016.

Bofi primary source of income comes from their loan products including mortgages for single family and multifamily real properties as well as commercial and industrial loans for small and medium sized businesses. Net interest income has grown by an average of 25.6% year-over-year since 2016.

A segment that has been negatively impacted by Tax Reform was BOFI’s jumbo residential mortgage lending services. This is due to the new tax act reducing the limit on deductible mortgage debt to $750,000. This reduction will make this service less profitable as BOFI will incur more interest expenses.

Bofi did not participate in much merger or acquisition activity in 2017 and has continued to sustain from any activity through March of 2018. However, Bofi Holdings and H&R Block began an exclusive partnership in July of 2017 and a subsidiary of the Bank acquired Epiq. Epiq provides specialized software and consulting services to Chapter 7 and non-7 trustees and fiduciaries.

The deal with H&R Block holds Bofi exclusively responsible for their Refund Advance loans, this unique service allows the borrower to receive their tax refund in advanced. Epiq is a software and consulting service that is expected to bring in depositors and additional fee generated income along with loans originated for sale and transaction fees earned from processing payment activity.

What has the stock done lately?

Since the start of the 2018 BOFI’s stock price has increased substantially. Increasing by approximately 33% since January - jumping from $30 a share to $40 a share. BOFI can expect to reach new heights as the price bounces around the top of the recent 52 week price range of $21.60 - $43.50.

Past Year Performance: As of March 2018 total assets for BOFI are $9.8 billion, growing by over a billion YoY. Net interest income grew by 20% in 2017 and continued this momentum into 2018 growing by 18.5% in the first quarter. The increase in net interest income was driven by the 14% increase in total deposits for the 2017 year.  

Source: FactSet

My Takeaway

Bofi Holdings, Inc. is well positioned for the near future with a rate rising environment driving up their primary source of income with expanding net interest margins combined with BOFI’s ability to rapidly grow their total assets and loans will continue to drive the stock price higher. The use of internet-based technology eliminates geographical boundaries from acquiring new customers and will allow BOFI to continue to grow their depositors faster than competitors that aren’t satisfying their customer’s technological needs.