10-K 1 a05-15792_110k.htm 10-K

 

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

x

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

 

 

 

For the year ended June 30, 2005

 

 

 

OR

 

 

o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

 

Commission file number: 000-51201

 

BofI HOLDING, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0867444

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

12777 High Bluff Drive, Suite 100
San Diego, CA

 

92130

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s 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:

 

Title of each class

 

Name of each exchange on which registered

Common stock, $.01 par value

 

NASDAQ National Market

 

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 Registrant’s 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 Act).
o Yes ý No

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes ý No

 

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 Registrant’s common stock outstanding as of June 30, 2005 was 8,299,823.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive Proxy Statement for the period ended June 30, 2005 are incorporated by reference into Part III.

 

 



 

TABLE OF CONTENTS

 

 

 

PAGE

 

PART I

 

 

 

 

Item

 

 

 

 

 

1.

Business

1

 

 

 

2.

Properties

21

 

 

 

3.

Legal Proceedings

21

 

 

 

4.

Submission of Matters to a Vote of Security Holders

21

 

 

 

 

PART II

 

 

 

 

5.

Market for Registrant’s Common Equity and Related Stockholder Matters

22

 

 

 

6.

Selected Financial Data

24

 

 

 

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

7A.

Quantitative and Qualitative Disclosures about Market Risk

47

 

 

 

8.

Financial Statements and Supplemental Data

47

 

 

 

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

47

 

 

 

9A.

Controls and Procedures

47

 

 

 

9B.

Other Information

48

 

 

 

 

PART III

 

 

 

 

10.

Directors and Executive Officers of the Registrant

49

 

 

 

11.

Executive Compensation

49

 

 

 

12.

Security Ownership of Certain Beneficial Owners and Management

49

 

 

 

13.

Certain Relationships and Related Transactions

49

 

 

 

14.

Principal Accountant Fees and Services Disclosure Required

49

 

 

 

 

PART IV

 

 

 

 

15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

50

 

 

 

 

Signatures

52

 

i



 

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 BofI’s 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 BofI’s 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7.

 

ii



 

PART I

Item 1.  Business

 

Overview

 

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 stockholder’s 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 stockholder’s 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.

 

1



 

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 Commission’s 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.

 

2



 

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:

 

 

 

At June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family (one to four units)

 

$

62,403

 

12.9

%

$

21,753

 

6.1

%

$

42,124

 

17.2

%

$

32,763

 

19.7

%

$

118,377

 

84.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily (five units or more)

 

406,660

 

84.2

%

320,971

 

90.6

%

191,426

 

78.0

%

125,303

 

75.2

%

12,878

 

9.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate and land

 

14,181

 

2.9

%

11,659

 

3.3

%

11,839

 

4.8

%

8,396

 

5.0

%

8,122

 

5.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans and others

 

40

 

0.0

%

63

 

0.0

%

62

 

0.0

%

109

 

0.1

%

78

 

0.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans held for investment

 

$

483,284

 

100

%

$

354,446

 

100

%

$

245,451

 

100

%

$

166,571

 

100

%

$

139,455

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(1,415

)

 

 

(1,045

)

 

 

(790

)

 

 

(505

)

 

 

(310

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized premiums, net of deferred loan fees

 

5,003

 

 

 

1,860

 

 

 

1,272

 

 

 

1,185

 

 

 

534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans held for investment

 

$

486,872

 

 

 

$

355,261

 

 

 

$

245,933

 

 

 

$

167,251

 

 

 

$

167,251

 

 

 

 

3



 

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:

 

 

 

Term to Contractual Repayment or Maturity

 

 

 

Less
Than
Three
Months

 

Over Three
Months
through
One
Year

 

Over One
Year
through
Five Years

 

Over
Five
Years

 

Total

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2005

 

$

40

 

$

1,006

 

$

1,502

 

$

480,736

 

$

483,284

 

 

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:

 

 

 

Fixed

 

Floating or
Adjustable

 

Total

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Single family (one to four units)

 

$

218

 

$

62,179

 

$

62,397

 

Multifamily (five units or more)

 

24,868

 

381,792

 

406,660

 

Commercial real estate and land

 

256

 

12,925

 

13,181

 

Consumer

 

 

 

 

 

 

 

Total

 

$

25,342

 

$

456,896

 

$

482,238

 

 

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

 

State

 

Total Real
Estate
Loans

 

Single
Family

 

Multifamily

 

Commercial and
Land

 

 

 

 

 

 

 

 

 

 

 

California-south (1)

 

43.40

%

25.75

%

45.57

%

58.82

%

California-north (2)

 

9.88

%

21.62

%

8.35

%

2.11

%

Colorado

 

7.02

%

1.49

%

7.52

%

16.92

%

Washington

 

9.35

%

3.51

%

10.57

%

5.54

%

Arizona

 

7.10

%

2.75

%

7.82

%

 

Texas

 

5.29

%

0.93

%

6.01

%

4.20

%

Oregon

 

4.49

%

2.44

%

4.96

%

 

Florida

 

3.92

%

10.90

%

2.98

%

 

All other states

 

9.55

%

30.61

%

6.22

%

12.41

%

 

 

100

%

100

%

100

%

100

%

 


(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.

 

4



 

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.

 

 

 

Total Real
Estate
Loans

 

Single
Family

 

Multifamily

 

Commercial
and Land

 

 

 

 

 

 

 

 

 

 

 

Weighted Average LTV

 

53.11

%

65.85

%

51.38

%

47.07

%

Median LTV

 

53.04

%

68.57

%

49.29

%

37.24

%

 

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:

 

 

 

For the Fiscal Years Ended June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

(Dollars in thousands)

 

Loans Held for Sale:

 

 

 

 

 

 

 

 

 

 

 

Single family (one to four units):

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

435

 

$

3,602

 

$

128

 

$

22

 

$

 

Loan originations

 

19,312

 

76,550

 

124,739

 

6,994

 

3,317

 

Loans purchases

 

 

 

 

 

 

Proceeds from sale of loans held for sale

 

(19,652

)

(80,081

)

(122,042

)

(6,932

)

(3,317

)

Gains on sales of loans held for sale

 

94

 

364

 

778

 

67

 

22

 

Other

 

 

 

(1

)

(23

)

 

Ending balance

 

$

189

 

$

435

 

$

3,602

 

$

128

 

$

22

 

Loans Held for Investment:

 

 

 

 

 

 

 

 

 

 

 

Single family (one to four units):

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

21,753

 

$

42,124

 

$

32,763

 

$

118,377

 

$

 

Loan originations

 

3,380

 

1,641

 

1,838

 

3,595

 

6,797

 

Loans purchases

 

50,623

 

7,855

 

32,919

 

7,792

 

127,340

 

Loans sold

 

 

 

 

 

 

Principal repayments

 

(13,353

)

(29,867

)

(25,396

)

(97,024

)

(14,807

)

Other

 

 

 

 

23

 

(953

)

Ending balance

 

$

62,403

 

$

21,753

 

$

42,124

 

$

32,763

 

$

118,377

 

Multifamily (five units or more):

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

320,971

 

$

191,426

 

$

125,303

 

$

12,878

 

$

 

Loan originations

 

36,241

 

57,337

 

49,949

 

29,970

 

4,945

 

Loans purchases

 

108,826

 

120,264

 

48,267

 

123,349

 

7,965

 

Loans sold

 

 

 

 

 

 

Principal repayments

 

(59,378

)

(48,056

)

(32,093

)

(40,894

)

(32

)

Other

 

 

 

 

 

 

Ending balance

 

$

406,660

 

$

320,971

 

$

191,426

 

$

125,303

 

$

12,878

 

Commercial real estate and land:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

11,659

 

$

11,839

 

$

8,397

 

$

8,122

 

$

 

Loan originations

 

5,715

 

5,467

 

6,784

 

1,073

 

4,261

 

Loans purchases

 

 

 

 

 

4,273

 

Loans sold

 

 

 

 

 

 

Principal repayments

 

(3,193

)

(5,647

)

(3,342

)

(798

)

(412

)

Other

 

 

 

 

 

 

Ending balance

 

$

14,181

 

$

11,659

 

$

11,839

 

$

8,397

 

$

8,122

 

Consumer loans and other:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

63

 

$

62

 

$

108

 

$

78

 

$

 

Loan originations

 

26

 

33

 

38

 

21

 

 

Loans purchases

 

 

 

 

 

 

Loans sold

 

 

 

 

 

 

Principal repayments

 

(49

)

(33

)

(108

)

8

 

(272

)

Other

 

 

 

1

 

24

 

1

 

350

 

Ending balance

 

$

40

 

$

63

 

$

62

 

$

108

 

$

78

 

TOTAL LOANS HELD FOR INVESTMENT

 

$

483,284

 

$

354,446

 

$

245,451

 

$

166,571

 

$

139,455

 

Allowance for loan losses

 

(1,415

)

(1,045

)

(790

)

(505

)

(310

)

Unamortized premiums, net of deferred loan fees

 

5,003

 

1,860

 

1,272

 

1,185

 

534

 

NET LOANS HELD FOR INVESTMENT

 

$

486,872

 

$

355,261

 

$

245,933

 

$

167,251

 

$

139,679

 

 

5



 

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:

 

 

 

For the Fiscal Years Ended June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

(Dollars in thousands)

 

Type of Loan

 

 

 

 

 

 

 

 

 

 

 

Single family (one to four units):

 

 

 

 

 

 

 

 

 

 

 

Loans originated

 

 

 

 

 

 

 

 

 

 

 

Amount funded

 

$

22,692

 

$

78,191

 

$

126,577

 

$

10,589

 

$

10,114

 

Number of loans

 

83

 

317

 

560

 

46

 

38

 

Average loan size

 

$

273

 

$

247

 

$

226

 

$

230

 

$

266

 

Loans purchased

 

 

 

 

 

 

 

 

 

 

 

Amount funded

 

$

50,623

 

$

7,855

 

$

32,919

 

$

7,792

 

$

127,340

 

Number of loans

 

208

 

11

 

68

 

130

 

296

 

Average loan size

 

$

243

 

$

714

 

$

484

 

$

60

 

$

430

 

Multifamily (five or more units):

 

 

 

 

 

 

 

 

 

 

 

Loans originated

 

 

 

 

 

 

 

 

 

 

 

Amount funded

 

$

36,241

 

$

57,337

 

$

49,949

 

$

29,970

 

$

4,945

 

Number of loans

 

53

 

84

 

80

 

50

 

9

 

Average loan size

 

$

684

 

$

683

 

$

624

 

$

599

 

$

549

 

Loans purchased

 

 

 

 

 

 

 

 

 

 

 

Amount funded

 

$

108,826

 

$

120,264

 

$

48,267

 

$

123,349

 

$

7,965

 

Number of loans

 

152

 

116

 

79

 

315

 

16

 

Average loan size

 

$

716

 

$

1,037

 

$

611

 

$

392

 

$

498

 

Commercial real estate and land:

 

 

 

 

 

 

 

 

 

 

 

Loans originated

 

 

 

 

 

 

 

 

 

 

 

Amount funded

 

$

5,715

 

$

5,467

 

$

6,784

 

$

1,073

 

$

4,261

 

Number of loans

 

7

 

5

 

6

 

3

 

5

 

Average loan size

 

$

816

 

$

1,093

 

$

1,131

 

$

358

 

$

852

 

Loans purchased

 

 

 

 

 

 

 

 

 

 

 

Amount funded

 

 

 

 

 

$

4,273

 

Number of loans

 

 

 

 

 

16

 

Average loan size

 

 

 

 

 

$

267

 

 

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.

 

6



 

                            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.

 

7



 

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 borrower’s qualifications, we consider primarily the borrower’s 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 Internet’s 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.

 

8



 

The following table sets forth changes in our investment portfolio for each fiscal year since 2002:

 

 

 

2005

 

2004

 

2003

 

2002

 

 

 

(Dollars in thousands)

 

Securities at beginning of period

 

$

3,665

 

$

441

 

$

726

 

$

1,522

 

Purchases

 

97,695

 

3,409

 

 

 

Sales

 

(18,667

)

 

 

 

Repayments and prepayments

 

(12,226

)

(185

)

(285

)

(796

)

(Decrease) increase in unrealized gains/losses on available-for-sale securities (1)

 

10

 

 

 

 

Securities at end of period

 

$

70,477

 

$

3,665

 

$

441

 

$

726

 

 


(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:

 

 

 

Total Amount

 

Due within
One Year

 

After One but
within Five Years

 

After Five but
within Ten Years

 

After Ten Years

 

 

 

Amount

 

Yield (1)

 

Amount

 

Yield (1)

 

Amount

 

Yield (1)

 

Amount

 

Yield (1)

 

Amount

 

Yield (1)

 

 

 

(Dollars in thousands)

 

Mortgage-backed Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GNMA MBS (2)

 

$

3,740

 

3.47

%

$

80

 

3.47

%

$

355

 

3.47

%

$

531

 

3.47

%

$

2,774

 

3.47

%

FHLMC MBS (2)

 

4,334

 

3.01

%

154

 

3.01

%

410

 

3.01

%

593

 

3.01

%

3,177

 

3.01

%

FNMA MBS (2)

 

54,682

 

3.32

%

996

 

3.27

%

4,408

 

3.28

%

6,611

 

3.29

%

42,667

 

3.33

%

Total debt securities

 

$

62,756

 

3.31

%

$

1,230

 

3.25

%

$

5,173

 

3.27

%

$

7,735

 

3.28

%

$

48,618

 

3.32

%

Total fair value of debt securities

 

$

62,766

 

3.31

%

$

1,230

 

3.25

%

$

5,173

 

3.27

%

$

7,735

 

3.28

%

$

48,628

 

3.32

%

Investment Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Agency

 

$

3,442

 

3.65

%

$

 

 

$

3,442

 

3.65

%

$

 

 

$

 

 

FHLMC MBS (2)

 

4,092

 

4.21

%

80

 

4.21

%

327

 

4.21

%

494

 

4.21

%

3,191

 

4.21

%

FNMA MBS (2)

 

177

 

3.75

%

4

 

3.75

%

19

 

3.75

%

28

 

3.75

%

126

 

3.75

%

Total debt securities

 

$

7,711

 

3.95

%

$

84

 

4.18

%

$

3,788

 

3.70

%

$

522

 

4.18

%

$

3,317

 

4.19

%

Total fair value of debt securities

 

$

7,678

 

3.95

%

$

84

 

4.18

%

$

3,788

 

3.70

%

$

522

 

4.18

%

$

3,284

 

4.19

%

 


(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

 

9



 

present value of expected future cash flows discounted at the loan’s 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 bank’s 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:

 

 

 

Single Family

 

Multifamily

 

Commercial
Real Estate
and Land

 

Consumer

 

Total

 

Total
Allowance
as a
Percentage
of Total
Loans

 

 

 

(Dollars in thousands)

 

Balance at June 30, 2000

 

$

 

$

 

$

 

$

 

$

 

 

Provision for loan losses

 

198

 

76

 

33

 

3

 

310

 

 

 

Balance at June 30, 2001

 

198

 

76

 

33

 

3

 

310

 

0.22

%

Provision for loan losses

 

(107

)

300

 

2

 

 

195

 

 

 

Balance at June 30, 2002

 

91

 

376

 

35

 

3

 

505

 

0.30

%

Provision for loan losses

 

(14

)

302

 

 

(3

)

285

 

 

 

Balance at June 30, 2003

 

77

 

678

 

35

 

 

790

 

0.32

%

Provision for loan losses

 

(35

)

284

 

6

 

 

255

 

 

 

Balance at June 30, 2004

 

42

 

962

 

41

 

 

1,045

 

0.29

%

Provision for loan losses

 

101

 

253

 

16

 

 

370

 

 

 

Balance at June 30, 2005

 

$

143

 

$

1,215

 

$

57

 

$

 

$

1,415

 

0.29

%

 

The following table sets forth how our allowance for loan losses is allocated by type of loan at each of the dates indicated:

 

 

 

June 30, 2005

 

June 30, 2004

 

June 30, 2003

 

June 30, 2002

 

June 30, 2001

 

 

 

Amount
of
Allowance

 

Loan
Category
as a %
of Total
Loans

 

Amount
of
Allowance

 

Loan
Category
as a %
of Total
Loans

 

Amount
of
Allowance

 

Loan
Category
as a %
of Total
Loans

 

Amount
of
Allowance

 

Loan
Category
as a %
of Total
Loans

 

Amount
of
Allowance

 

Loan
Category
as a %
of Total
Loans

 

 

 

(Dollars in thousands)

 

Single family

 

$

143

 

10.11

%

$

42

 

4.02

%

$

77

 

9.75

%

$

91

 

18.02

%

$

198

 

63.87

%

Multifamily

 

1,215

 

85.86

%

962

 

92.06

%

678

 

85.82

%

376

 

74.46

%

76

 

24.52

%

Commercial real estate and land

 

57

 

4.03

%

41

 

3.92

%

35

 

4.43

%

35

 

6.93

%

33

 

10.64

%

Consumer

 

 

 

 

 

 

 

3

 

0.59

%

3

 

0.97

%

Total

 

$

1,415

 

100

%

$

1,045

 

100

%

$

790

 

100

%

$

505

 

100

%

$

310

 

100

%

 

10



 

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.

 

 

 

At June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Checking and savings accounts

 

8,829

 

9,588

 

5,626

 

3,287

 

Time deposits

 

10,998

 

4,065

 

3,943

 

3,080

 

Total number of deposit accounts

 

19,827

 

13,653

 

9,569

 

6,367

 

 

11



 

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:

 

 

 

At June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

 

 

Amount

 

Rate (1)

 

Amount

 

Rate (1)

 

Amount

 

Rate (1)

 

Amount

 

Rate (1)

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

8,225

 

 

$

2,279

 

 

$

3,299

 

 

$

1,405

 

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

33,187

 

1.93

%

26,725

 

1.35

%

29,902

 

1.38

%

34,283

 

3.07

%

Savings

 

50,408

 

2.13

%

94,120

 

1.96

%

18,823

 

1.91

%

7,977

 

1.87

%

Time deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under $100,000

 

178,566

 

3.60

%

88,082

 

3.44

%

95,489

 

3.93

%

82,889

 

4.23

%

$100,000 or more

 

90,665

 

3.54

%

58,635

 

3.20

%

46,479

 

3.96

%

41,064

 

4.18

%

Total time deposits

 

269,231

 

3.58

%

146,717

 

3.35

%

141,968

 

3.94

%

123,953

 

4.21

%

Total interest-bearing

 

352,826

 

3.22

%

267,562

 

2.66

%

190,693

 

3.34

%

166,213

 

3.86

%

Total deposits

 

$

361,051

 

3.14

%

$

269,841

 

2.64

%

$

193,992

 

3.28

%

$

167,618

 

3.83

%

 


(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:

 

 

 

2005

 

2004

 

2003

 

2002

 

 

 

Average
Balance

 

Interest
Expense

 

Average Rate
Paid

 

Average
Balance

 

Interest
Expense

 

Average
Rate
Paid

 

Average
Balance

 

Interest
Expense

 

Average
Rate
Paid

 

Average
Balance

 

Interest
Expense

 

Average
Rate Paid

 

 

 

(Dollars in thousands)

 

Demand

 

$

28,330

 

$

483

 

1.70

%

$

29,600

 

$

416

 

1.41

%

$

33,213

 

$

735

 

2.21

%

$

17,518

 

$

487

 

2.78

%

Savings

 

76,842

 

1,599

 

2.08

%

64,197

 

1,252

 

1.95

%

8,160

 

119

 

1.46

%

10,873

 

272

 

2.50

%

Time deposits

 

205,530

 

6,856

 

3.34

%

132,166

 

4,866

 

3.68

%

142,903

 

5,854

 

4.10

%

123,812

 

6,196

 

5.00

%

Total interest-bearing deposits

 

310,702

 

8,938

 

2.88

%

225,963

 

6,534

 

2.89

%

184,276

 

6,708

 

3.64

%

152,203

 

6,955

 

4.57

%

Total deposits

 

$

315,448

 

$

8,938

 

2.83

%

$

227,966

 

$

6,534

 

2.87

%

$

186,032

 

$

6,708

 

3.61

%

$

153,028

 

$

6,955

 

4.54

%

 

The following table shows the maturity dates of our certificates of deposit at June 30, 2005 and 2004:

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Within 12 months

 

$

159,670

 

$

80,365

 

13 to 24 months

 

46,492

 

23,018

 

25 to 36 months

 

39,784

 

14,760

 

37 to 48 months

 

15,772

 

14,309

 

49 months and thereafter

 

7,513

 

14,265

 

Total

 

$

269,231

 

$

146,717

 

 

12



 

The following table shows maturities of our time deposits having principal amounts of $100,000 or more at June 30, 2005 and 2004:

 

 

 

Term to Maturity

 

 

 

 

 

Within
Three
Months

 

Over Three
Months
through Six
Months

 

Over Six
Months
through One
Year

 

Over One
Year

 

Total

 

 

 

(Dollars in thousands)

 

June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

Time deposits with balances of $100,000 or more

 

$

15,636

 

$

15,461

 

$

25,355

 

$

34,213

 

$

90,665

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

Time deposits with balances of $100,000 or more

 

$

13,355

 

$

11,784

 

$

10,599

 

$

22,897

 

$

58,635

 

 

Borrowings

 

In addition to deposits, we have historically funded our asset growth through advances from the FHLB. Our bank can borrow up to 35.0% of its total assets from the FHLB, and borrowings are collateralized by mortgage loans and mortgage-backed securities pledged to the FHLB. Based on loans and securities pledged at June 30, 2005, we had a total borrowing capacity of approximately $186.4 million, of which $172.9 million was outstanding and $13.5 million was available. At June 30, 2005, we also had a $4.5 million unsecured fed funds purchase line with a major bank under which no borrowings were outstanding.

 

On October 24, 2003, we entered into a $5.0 million loan facility with a commercial bank consisting of a one-year revolving line of credit plus a fully amortizing term loan of up to nine years. We entered into this loan facility to provide additional regulatory capital to our bank to support its growth. A total of $5.0 was drawn under the line of credit, which terminated and became a nine- year term loan on October 24, 2004. The term loan note payable of $5.0 was prepaid in full in March 2005 with the proceeds from our initial public offering.

 

On December 16, 2004, we completed a transaction in which we formed a trust and issued $5.0 million of trust-preferred securities. The net proceeds from the offering were used to purchase approximately $5.2 million of junior subordinated debentures of our company with a stated maturity date of February 23, 2035. The debentures are the sole assets of the trust. The trust preferred securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indenture. We have the right to redeem the debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indenture plus any accrued but unpaid interest through the redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%, which was 5.68% at June 30, 2005, with interest to be paid quarterly starting in February 2005.

 

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The table below sets forth the amount of our borrowings, the maximum amount of borrowings in each category during any month-end during each reported period, the approximate average amounts outstanding during each reported period and the approximate weighted average interest rate thereon at or for the fiscal years ended June 30, 2005, 2004, 2003 and 2002:

 

 

 

At of For The Fiscal Years Ended
June 30, 2005

 

 

 

2005

 

2004

 

2003

 

2002

 

Advances from the FHLB (1):

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

122,166

 

$

69,932

 

$

35,343

 

$

22,764

 

Maximum amount outstanding at any month-end during the period

 

172,562

 

101,446

 

55,900

 

29,900

 

Balance outstanding at end of period

 

172,562

 

101,446

 

55,900

 

29,900

 

Average interest rate at end of period

 

3.49

%

3.19

%

4.40

%

5.05

%

Average interest rate during period

 

3.45

%

3.79

%

4.86

%

5.02

%

Notes payable:

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

2,541

 

$

1,119

 

 

 

Maximum amount outstanding at any month-end during the period

 

5,000

 

3,060

 

 

 

Balance outstanding at end of period

 

 

1,300

 

 

 

Average interest rate at end of period

 

 

5.25

%

 

 

Average interest rate during period (2)

 

6.19

%

5.36

%

 

 

Notes payable — related party:

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

 

 

 

$

487

 

Maximum amount outstanding at any month-end during the period

 

 

 

 

1,570

 

Balance outstanding at end of period

 

 

 

 

 

Average interest rate at end of period

 

 

 

 

 

Average interest rate during period

 

 

 

 

9.45

%

Junior subordinated debentures:

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

2,782

 

 

 

 

Maximum amount outstanding at any month-end during the period

 

5,155

 

 

 

 

Balance outstanding at end of period

 

5,155

 

 

 

 

Average interest rate at end of period

 

5.68

%

 

 

 

Average interest rate during period

 

5.47

%

 

 

 

 


(1)          Advances from the FHLB have been reduced by debt issue costs of $338, and $454 for the fiscal years ended June 30, 2005 and 2004, respectively.

(2)          Rate excludes impact of write-off of $46,000 in deferred loan costs as a result of prepaying the note payable in March 2005.

 

14



 

Technology

 

We have implemented customized software and hardware systems to provide products and services to our customers. Most of our key customer interfaces were designed by us specifically to address the needs of an Internet-only bank and its customers. Our website and CRM technology drive our customer self-service model, reducing the need for human interaction while increasing our overall operating efficiencies. Our CRM software enables us to collect customer data over our websites, which is automatically uploaded into our customer databases. The databases drive our workflow processes by automatically linking to third-party processors and storing all customer contract and correspondence data, including emails, hard copy images and telephone notes. With customer information readily accessible through our CRM software, our service personnel can respond to customers rapidly. We intend to continue to improve our systems and implement new systems, with the goal of providing for increased transaction capacity without materially increasing personnel costs.

 

The following summarizes our current technology resources:

 

Core Banking Systems.  We outsource substantially all of our core banking systems. The outsourcer is responsible for all of our basic core processing applications, including general ledger, loans, deposits, ATM networks, electronic fund transfers, item processing and imaging. These outsourced services for our core banking systems are located in California, Wisconsin and North Carolina, with a backup location in New York. Our bill pay system is also outsourced. We use a variety of vendors to provide automated information for our customers, including credit, identity authentication, tax status and property appraisal.

 

Internet and CRM Systems.  We use our own customized software for our website interface with loan and deposit customers, including collection and initial processing of new customer information. We have also created customized software to manage workflow and fraud control and provide automated interfaces to our outsourced service providers. We directly host our primary web servers, which are located in San Diego, California, and fully control and manage the content of our websites with a staff of technology personnel. Web servers used by our customers to access real time account data are located in California and Kansas, with a backup location in Texas.

 

Systems Architecture.  Our Internet and CRM platforms have been developed using Microsoft software and Intel-based hardware. Our outsourced core processing system uses IBM hardware and software. We use a variety of specialized companies to provide hardware and software for firewalls, network routers, intrusion detection, load balancing, data storage and data backup. To aid in disaster recovery, customer access to our websites is supported by a fully redundant network and our servers are “mirrored” so that most hardware failures or software bugs should cause no more than a few minutes of service outage. “Mirroring” means that our server is backed up continuously so that all data is stored in two physical locations.

 

Security

 

Because we operate almost exclusively through electronic means, we believe that we must be vigilant in detecting and preventing fraudulent transactions. We have implemented stringent computer security and internal control procedures to reduce our susceptibility to “identity theft,” “hackers,” theft and other types of fraud. We have implemented an automated approach to detecting identity theft that we believe is highly effective, and we have integrated our fraud detection processes into our CRM technology. For example, when opening new deposit accounts, our CRM programs automatically collect a customer’s personal and computer identification from our websites, send the data to internal and third-party programs which analyze the data for potential fraud, and quickly provide operating personnel with a summary report for final assessment and decision making during the account-opening process.

 

We continually evaluate the systems, services and software used in our operations to ensure that they meet high standards of security. The following are among the security measures that are currently in place:

 

             Encrypted Transactions.  All banking transactions and other appropriate Internet communications are encrypted so that sensitive information is not transmitted over the Internet in a form that can be read or easily deciphered.

 

15



 

             Secure Log-on.  To protect against the possibility of unauthorized downloading of a customer’s password protected files, user identification and passwords are not stored on the Internet or our web server.

 

             Authenticated Session Integrity.  An authenticated user is any user who signs onto our website with a valid user ID and password. To protect against fraudulent bank customers, our server is programmed to alert our core processing vendor of any attempted illegitimate entry so that its staff can quickly investigate and respond to such attempts.

 

             Physical Security.  Our servers and network computers reside in secure facilities. Currently, computer operations supporting our outsourced core banking systems are based in Lenexa, Kansas with backup facilities in Houston, Texas. Only employees with proper photographic identification may enter the primary building. The computer operations are located in a secure area that can be accessed only by using a key card and further password identification. In addition, our marketing and account opening servers reside in a secure third-party location in San Diego with a mirror site at our corporate offices. These servers are physically separate from our outsourced core back-office processing system and maintain the same level of security services as our outsourced core processing servers in Lenexa, Kansas.

 

             Service Continuity.  Our core system outsourcer and our bank provide a fully redundant network. Our server is also “mirrored.” This network and server redundancy is designed to provide reliable access to our bank. However, if existing customers are not able to access their accounts over the Internet, customers retain access to their funds through paper checks, ATM cards, customer service by telephone and an automated telephone response system.

 

             Monitoring.  All customer transactions on our server produce one or more entries into transaction logs, which we monitor for unusual or fraudulent activity. We are notified and log any attempt by an authenticated user to modify a command or request from our websites. Additionally, all financial transactions are logged, and these logs are constantly reviewed for abnormal or unusual activity.

 

Intellectual Property and Proprietary Rights

 

We register our various Internet URL addresses with service companies, and work actively with bank regulators to identify potential naming conflicts with competing financial institutions. We also work with various regulators to shut down websites with names that may be misleading to our customers. Policing unauthorized use of proprietary information is difficult and litigation may be necessary to enforce our intellectual property rights.

 

We own the Internet domain names “bankofinternet.com,” “bofi.com,” “apartmentbank.com,” “insurancesales.com,” “investmentsales.com,” “bancodeinternet.com” and many other similar names. Domain names in the United States and in foreign countries are regulated, and the laws and regulations governing the Internet are continually evolving. Additionally, the relationship between regulations governing domain names and laws protecting intellectual property rights is not entirely clear. As a result, we may in the future be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademark and other intellectual property rights.

 

Employees

 

At June 30, 2005, we had two part-time and 24 full time employees (or 25 full time equivalent employees). None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have not experienced any work stoppage and consider our relations with our employees to be good.

 

16



 

Competition

 

The market for banking and financial services is intensely competitive, and we expect competition to continue to intensify in the future. We believe that competition in our market is based predominantly on price, customer service and brand recognition. Our competitors include:

 

             large, publicly-traded, Internet-based banks, as well as smaller Internet-based banks;

 

             “brick and mortar” banks, including those that have implemented websites to facilitate online banking; and

 

             traditional banking institutions such as thrifts, finance companies, credit unions and mortgage banks.

 

In real estate lending, we compete against traditional real estate lenders, including large and small savings banks, commercial banks, mortgage bankers and mortgage brokers. Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources and are capable of providing strong price and customer service competition. In order to compete profitably, we may need to reduce the rates we offer on loans and investments and increase the rates we offer on deposits, which actions may adversely affect our overall financial condition and earnings. We may not be able to compete successfully against current and future competitors

 

REGULATION

 

General

 

Savings and loan holding companies and savings associations are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the Savings Association Insurance Fund, or SAIF, and not for the benefit of our stockholders. The following information describes aspects of the material laws and regulations applicable to us and our subsidiary, and does not purport to be complete. The discussion is qualified in its entirety by reference to all particular applicable laws and regulations.

 

Legislation is introduced from time to time in the U.S. Congress that may affect the operations of our company and Bank of Internet USA. In addition, the regulations governing us and Bank of Internet USA may be amended from time to time by the OTS. Any such legislation or regulatory changes in our future could adversely affect Bank of Internet USA. No assurance can be given as to whether or in what form any such changes may occur.

 

Regulation of BofI Holding, Inc.

 

General. We are a savings and loan holding company subject to regulatory oversight by the OTS. As such, we are required to register and file reports with the OTS and are subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over us and our subsidiary, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to Bank of Internet USA.

 

Activities Restrictions. Our activities, other than through Bank of Internet USA or any other SAIF-insured savings association we may hold in the future, are subject to restrictions applicable to bank holding companies. Bank holding companies are prohibited, subject to certain exceptions, from engaging in any business or activity other than a business or activity that the Federal Reserve Board has determined to be closely related to banking. The Federal Reserve Board has by regulation determined that specified activities satisfy this closely-related-to-banking standard.  We currently do not engage in any activities that fall under this standard.

 

17



 

Regulation of Bank of Internet USA

 

General. As a federally chartered, SAIF-insured savings association, Bank of Internet USA is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments of Bank of Internet USA must comply with various statutory and regulatory requirements. Bank of Internet USA is also subject to reserve requirements promulgated by the Federal Reserve Board. The OTS, together with the FDIC, regularly examines Bank of Internet USA and prepares reports for Bank of Internet USA’s board of directors on any deficiencies found in the operations of Bank of Internet USA. The relationship between Bank of Internet USA and depositors and borrowers is also regulated by federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of mortgage documents utilized by Bank of Internet USA.

 

Bank of Internet USA must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into specified transactions such as mergers with or acquisitions of other financial institutions or raising capital or issuing trust preferred securities. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress, could have a material adverse effect on us, Bank of Internet USA and our operations.

 

Insurance of Deposit Accounts. The SAIF, as administered by the FDIC, insures Bank of Internet USA’s deposit accounts up to the maximum amount permitted by law. The FDIC may terminate insurance of deposits upon a finding that Bank of Internet USA has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS.

 

The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system, as of December 31, 2001, SAIF members pay zero to $0.27 per $100 of domestic deposits, depending upon the institution’s risk classification. This risk classification is based on an institution’s capital group and supervisory subgroup assignment. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate for the third quarter of 2002 of approximately $0.0172 per $100 of assessable deposits to fund interest payments on bonds issued by the Financing Corporation, or FICO, an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017.

 

Regulatory Capital Requirements and Prompt Corrective Action. The prompt corrective action regulation of the OTS requires mandatory actions and authorizes other discretionary actions to be taken by the OTS against a savings association that falls within undercapitalized capital categories specified in the regulation.

 

Under the regulation, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written agreement, order, capital directive, prompt corrective action directive or other individual requirement by the OTS to maintain a specific capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1” and is not experiencing or anticipating significant growth). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At June 30, 2005, Bank of Internet USA met the capital requirements of a “well capitalized” institution under applicable OTS regulations.

 

In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll-over brokered deposits.

 

18



 

If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with restrictions applicable to significantly undercapitalized institutions. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized without the express permission of the institution’s primary regulator.

 

OTS capital regulations also require savings associations to meet three additional capital standards:

 

                  tangible capital equal to at least 1.5% of total adjusted assets;

                  leverage capital (core capital) equal to 4.0% of total adjusted assets; and

                  risk-based capital equal to 8.0% of total risk-weighted assets.

 

These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels greater than those provided in the regulations may be established by the OTS for individual savings associations upon a determination that the savings association’s capital is or may become inadequate in view of its circumstances. Bank of Internet USA is not subject to any such individual minimum regulatory capital requirement and our regulatory capital exceeded all minimum regulatory capital requirements as of June 30, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

Loans-to-One-Borrower Limitations. Savings associations generally are subject to the lending limits applicable to national banks. With limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings associations 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 unimpaired capital and surplus for the purpose of developing residential housing, if specified conditions are met:

 

                  the purchase price of each single family dwelling in the development does not exceed $500,000;

                  the savings association is in compliance with its fully phased-in capital requirements;

                  the loans comply with applicable loan-to-value requirements; and

                  the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus.

 

Qualified Thrift Lender Test. Savings associations must meet a qualified thrift lender, or QTL, test. This test may be met either by maintaining a specified level of portfolio assets in qualified thrift investments as specified by the HOLA, or by meeting the definition of a “domestic building and loan association” under the Internal Revenue Code of 1986, as amended, or the Code. Qualified thrift investments are primarily residential mortgage loans and related investments, including mortgage related securities. Portfolio assets generally mean total assets less specified liquid assets, goodwill and other intangible assets and the value of property used in the conduct of Bank of Internet USA’s business. The required percentage of qualified thrift investments under the HOLA is 65% of portfolio. An association must be in compliance with the QTL test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. At June 30, 2005, Bank of Internet USA was in compliance with its QTL requirement and met the definition of a domestic building and loan association.

 

Liquidity Standard. Savings associations are required to maintain sufficient liquidity to ensure safe and sound operations.

 

19



 

Affiliate Transactions. Transactions between a savings association and its affiliates are quantitatively and qualitatively restricted pursuant to OTS regulations. Affiliates of a savings association include, among other entities, the savings association’s holding company and companies that are under common control with the savings association. In general, a savings association or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates.  In addition, a savings association and its subsidiaries may engage in certain covered transactions and other specified transactions with affiliates only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies.

 

The OTS regulations generally exclude all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Federal Reserve Board decides to treat these subsidiaries as affiliates. The regulations also require savings associations to make and retain records that reflect affiliate transactions in reasonable detail and provide that specified classes of savings associations may be required to give the OTS prior notice of affiliate transactions.

 

Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings associations, like cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. Under these regulations, a savings association may, in circumstances described in those regulations:

 

                  be required to file an application and await approval from the OTS before it makes a capital distribution;

                  be required to file a notice 30 days before the capital distribution; or

                  be permitted to make the capital distribution without notice or application to the OTS.

 

Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities and the denial of applications. In addition, an institution’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in the OTS, other federal regulatory agencies or the Department of Justice taking enforcement actions against the institution.

 

Federal Home Loan Bank System. Bank of Internet USA is a member of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the board of directors of the individual FHLB. As an FHLB member, Bank of Internet USA is required to own capital stock in an FHLB in specified amounts based on either its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year or its outstanding advances from the FHLB.

 

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and nonpersonal time deposits. At June 30, 2005, Bank of Internet USA was in compliance with these requirements.

 

Activities of Subsidiaries. A savings association seeking to establish a new subsidiary, acquire control of an existing company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in compliance with regulations and orders of the OTS. The OTS has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OTS determines to pose a serious threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking practices.

 

20



 

Item 2. Properties

 

Our principal executive offices, which also serve as our bank’s main office and branch, are located at 12777 High Bluff Drive, Suite 100, San Diego, California 92130, and our telephone number is (858) 350-6200. This facility occupies a total of approximately 12,300 square feet under a lease that expires in October 31, 2012. We believe our facilities are adequate for our current needs.

 

Item 3. Legal Proceedings

 

We may from time to time become a party to legal proceedings arising in the ordinary course of our business. We are not currently a party to any material legal proceedings are not currently defending any suit or claim.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

21



 

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

 

Our common stock began trading on the NASDAQ National Market on March 15, 2005 under the symbol “BOFI.”  There were 8,299,823 shares of common stock held by 215 registered owners as of June 30, 2005. The following table sets forth, for the calendar quarters indicated, the range of high and low sales prices for the common stock of BofI Holding, Inc. for each quarter since our initial public offering.  Sales prices represent actual sales of which our management has knowledge.  The transfer agent and registrar of our common stock is U.S. Stock Transfer of Glendale, California.

 

 

 

BofI Holding, Inc.
Common Stock

 

 

 

High

 

Low

 

Quarter ended:

 

 

 

 

 

March 31, 2005

 

$

12.00

 

$

10.46

 

June 30, 2005

 

$

11.45

 

$

8.25