3 Reasons Why I Bought This Under-the-Radar Bank

Two weeks ago, I purchased shares of a bank that had been on my radar for a few months. The bank is an outlier compared to some of the other banks sitting on my watchlist. This company has a market cap just over $400 million, doesn't pay even a modest dividend, and has a price-to-book ratio approaching 2. Despite all this, BofI Holdings (NASDAQ: BOFI  ) should be regarded as a long-term option among the hundreds of financial stocks out there.

Who are they?
BofI is different from nearly every other bank out there. Based in San Diego, it has no physical branches, instead operating its Bank of Internet USA subsidiary in all 50 states. Over 40,000 customers complete all transactions virtually, keeping overhead costs down and allowing the bank to pay some of the highest interest rates on its consumer deposit products. For example, BofI will pay up an APR of up to 1.25% on a checking account, while the national average is a paltry 0.05%. While all consumers may not be quite ready to do all of their banking online just yet, I am intrigued by the bank as an investment, and here are three of the reasons why it has a place in my portfolio.

Deposit growth
At the end of its fiscal 2008, BofI was pretty small by bank standards, with only $570.7 million in total deposits. Since then, however, its deposit base has grown substantially, checking in at nearly $2.0 billion at the end of 2012. This rapid growth is probably not sustainable long-term, especially as other traditional banks continue to increase the efficiency of their online services. With annual deposit growth of around 44.5%since 2008, the bank should be able to grow deposits by at least 12% per year, making the future bright for this Internet banking pioneer.

Conservative loan mix
Similar to deposits, BofI has dramatically increased its total loans since 2008, going from $631.4 million to $1.7 billion at the end of 2012. A vast majority of these loans have been made to consumers, with only 5.9% of loans at the end of the last quarter made to commercial customers. Though the bank would probably like to increase its commercial lending portfolio, and has over the past five years, it will most likely continue most of its loan business on the consumer side.

Beyond the mix of actual loans, BofI has done well to ensure that the loans on its books remain in a performing status. At the end of December, the bank's nonperforming loan ratio was a minuscule 0.95%, well below the industry average of 3.6%. Hopefully, this number will remain low, but even if there is a slight increase, BofI will still compare favorably to many other banks that are still dealing with troubled loans from pre-crisis lending.

Efficiency ratio
A bank's efficiency ratio measures exactly how much cost is required for a bank to earn each dollar of revenue. To find it, we simply take noninterest expenses -- primarily the cost for salaries, rent, and the like -- and divide by total revenue. For a bank like BofI, which has no physical bank branches to speak of, we should expect to see this number relatively low when compared to some other banks, and that is indeed the case:

Bank

Efficiency Ratio

BofI Holdings

40.98%

New York Community Bancorp  (NYSE: NYCB  )

43.37%

Wells Fargo   (NYSE: WFC  )

58.80%

US Bancorp   (NYSE: USB  )

52.60%

First Niagara Financial Group   (NASDAQ: FNFG  )

69.39%

Source: Latest quarterly filings.

Because BofI is truly in a class of its own, both in size and business model, I have presented the efficiency ratio of some of the "better" banks out there to illustrate how well BofI generates revenue. As it continues to grow, I would expect it to be able to at least maintain this efficiency ratio, primarily because it will continue to keep costs to a minimum because of its lack of physical branches.

A great opportunity
BofI is an interesting bank that probably few people know about. It has managed to remain under the radar primarily because of its size, but in my opinion, it will continue to grow over the next few years. If it manages to do so, I'm sure a dividend won't be far behind, enticing even more investors to take a look at the "little" Internet bank from San Diego. It might not ever reach the size of some of the banking behemoths out these, but it has definitely carved out a nice little niche where it can continue to perform.

As you can see from the chart above, the only bank close to being as efficient as BofI Holdings is New York Community Bancorp. That's not the full story, however, as a conservative portfolio, quality long-term management, and a huge dividend make it a favorite among investors. But is it really that simple? To help you figure out whether New York Bank is a buy today, I invite you to read our premium research report on the bank. Click here now for instant access!


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