Can BofI Holding, Inc Keep Up Its Impressive Growth?

Despite losing some altitude in the last few months, the stock of Bank of Internet (NASDAQ: BOFI  )  has still more than quadrupled over the last three years. If you bought B of I stock back in 2011, I'd love to come visit your summer home.

BOFI Chart

BOFI data by YCharts.

But if you're looking at the bank as an investment opportunity today, caution is required. A dive into the numbers reveals two potential issues that might constrain future growth.

Bank of Internet's story
Unlike the behemoth big banks, Band of Internet has a relatively simple business. B of I offers personal and business checking and savings accounts and uses the deposits to make mostly real estate loans for single-family homes and multi-family properties. Real estate lending accounts for around 80% of B of I's loan portfolio, with about half of its real estate loans in southern California.

Bank of Internet's high growth hurdle
Rapid deposit growth of 33% per year since 2010 has fueled the company's ability to make loans. But the company is showing signs of a slowdown in deposit growth.

Backing out the approximately $500 million in customer deposits it purchased of H&R Block's bank assets, through three quarters, B of I is only on pace to grow deposits around 15% this fiscal year. 33% growth would have been impossible to sustain long term, so a slowdown isn't entirely unexpected, but it suggests Bank of Internet will have to slow its loan growth unless deposit growth picks back up.

B of I's stretched loan portfolio
The only thing that has grown faster than B of I's deposit base is its loan portfolio.

The company's total loans have a compound annual growth rate of 45% since 2010, outpacing even its extraordinary deposit growth. This has stretched B of I's loan to deposit ratio all the way to 110%, which is way out of whack compared to the rest of the industry.


Bank of Internet has been extremely aggressive in lending at a time when many of the other big mortgage lenders are holding more dry powder.

With interest rates at historic lows and the Fed intimating that rate hikes could be here as early as next year, Bank of Internet looks the least prepared of its competitors to take advantage of the higher rates.

Although B of I's CEO said on the most recent conference call that the company stands to benefit when interest rates rise, unless deposit growth picks up, the company that is already lending 110% of its deposits will likely have to look to alternative and higher-cost funding if it wants to continue lending at such a prodigious pace. 

As an investor with a long time horizon, I love coming across a small but rapidly growing business that is shaking up its industry. But in banking, there is something to be said for a long-term track record. When I see first-rate institutions like US Bancorp and Wells Fargo staying conservative while interest rates are low, I worry that B of I is being a little too aggressive for what the interest rate climate dictates.

Foolish final thoughts
Bank of Internet has been a rocketship over the past few years. Its branchless model gives the company a cost advantage that is the envy of the banking industry.

But declining deposit growth and aggressive lending makes me skeptical that the bank can keep up its impressive post-crisis run. Despite being 30% off its March highs, the bank trades at a relatively expensive 3.1 times book value.

As much as I like what this business could be, I'm going to watch how it handles higher interest rates and wait for a lower price.

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 16, 2014, at 12:51 PM, jpsc1 wrote:

    This is an interesting article, but you've missed an incredibly important point in your research which invalidates most of the article. BofI announced the intent to purchase those deposits from H&R Block. Backing them out of current figures is simply incorrect.

  • Report this Comment On July 16, 2014, at 12:56 PM, jpsc1 wrote:

    Per their press release: "Additional information regarding the agreements with H&R Block subsidiaries, the transaction process, related contingencies, and the timing of the transaction is included in a Form 8-K filed today with the Securities and Exchange Commission. There can be no assurances regarding when or if the contemplated transactions will close, the ability to obtain all required regulatory and other approvals, or final terms and conditions of the various agreements."

  • Report this Comment On July 17, 2014, at 1:14 PM, ChrisWalczakSD wrote:

    I acknowledge in the article that they are purchasing the H&R block's assets. I backed them out because I'm trying to measure organic deposit growth which is slowing. That combined with the company being very levered up is a bad combination.

  • Report this Comment On July 18, 2014, at 1:09 PM, BlazerMania wrote:

    Chris-

    I think you're missing jpsc1's point. None of the H&R Block deposits are currently showing up in BOFI's numbers, so what could you possibly be backing them out from?

    At 3/31/13 BOFI had $2.1 billion in deposits. At 12/31/13 BOFI had $2.4 billion in deposits. 3/31/14 BOFI had $2.8 billion in deposits. That's a 35% annual organic increase, and a 15% organic quarter over quarter sequential increase. Both of those numbers demonstrate fantastic organic deposit growth as none of the H&R Block deposits are included in those numbers since the deal hadn't closed as of 3/31/14.

    I think you should take another look at your numbers and your conclusion.

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