BofI Holding, Inc. Answers the Important Questions…Mostly

BofI's earnings show that a lot more people are likely visiting their webpage. Photo: BofI Holdings

The moment of truth finally arrived.

After BofI Holdings (BOFI 1.71%) -- better known as the Bank of the Internet -- reported earnings on Thursday morning, investors were probably expecting to see a very nice bump in the stock's price. After all, the company exceeded earnings expectations, and showed little sign of slowing down.

But instead, the stock slumped as much as 9.5%. The likely culprit: continued unease with management following a lawsuit filed by a former auditor for the company. In a somewhat less common move, BofI released earnings in the morning, but waited until after the market close to hold its conference call.

That allowed a full day's worth of unease to boil to the surface. So when the conference call started, investors listened closely to see if CEO Greg Garrabrants would answer the most pressing questions left unanswered from the complaint.

Two huge pieces of information
Garrabrants didn't disappoint. At the end of the prepared remarks, he took the allegations head on.

One of the previously unaddressed accusations was that the former auditor, Matt Erhart, found evidence of third-party checks being improperly deposited into the CEO's account. On that note, Garrabrants offered a full and unqualified denial:

"Any allegations of wrong doing with regard to my accounts or allegations of reported restrictions placed on me regarding activities in my accounts or personal investments are completely false, misleading and wholly without merit."

But while that was important, it was the added color provided surrounding the departure of John Ball -- Erhart's boss in the audit department -- that was the truly important piece of information. Erhart claimed that Ball left because he was uncomfortable with how the company was handling regulators, a claim backed by an anonymous source through The New York Times.

But in a written statement allegedly given by Ball to BofI's legal team -- after Erhart's allegations surfaced -- Ball dismisses these claims:

"On March 5, 2015, I sent an email for the audit committee and senior management to advise them that I was resigning from BofI effective that same day. The main reason for my resignation was due to a burnout caused by continuous long hours. My immediate resignation was due to a discussion that I had on March 5 with Mr. Garrabrants about completing time intensive work tasks facing my department which I understood would mean no relief from such long hours in the foreseeable future."

These were two of the largest issues facing BofI, and the responses offered by management should be of enormous relief to investors in the company.

But ... (there's always a "but")
BofI was almost entirely out of the woods with the evidence they offered up. But then Garrabrants said he would be taking absolutely no questions about the Erhart matter during the call's Q&A session.

It took three questions for that dictum to fall by the wayside.

Analyst Bob Ramsey of FBR asked when Ball's written statement was supplied -- before or after the Erhart allegations? Garrabrants was willing to bend the rules and tell him that it was provided after the allegations.

Ramsey ended his questions by pressing Garrabrants once again on the Erhart issue, asking, "could you just confirm again that as of today you're not aware of any ongoing investigations by federal regulators in the BofI?" 

Garrabrants replied that, "I'm not commenting on that but I will say that you can review the very clear statements that I made on my prior two conference calls and those statements remain as true today as when I made them."

Unsure as to the exact wording of what Garrabrants had said in the last two calls, I went back to check. The first place I checked was the company's transcript submitted to the SEC from their earlier October conference call.

In it, Garrabrants stated, "We are under no regulatory orders, no regulatory restrictions on our business, and we continue to have great dialogue with our regulators."

A BofI bull will read that statement and say: "That's clear evidence that the Feds aren't investigating." A BofI bear -- or someone shorting the stock -- would claim: "That's a clever way of sidestepping the fact that authorities are investigating, but they haven't placed sanctions on you ... yet!"

Of course, it gets even more complicated
The transcript that BofI submitted to the SEC did not accurately reflect what Garrabrants said. By going back to the actual call, here's what was said:

Analyst: "So [the regulators] have let you know that there's nothing ongoing related to any of the concerns that [Erhart] raised that they are still investigating at this point?"

Here's how Garrabrants responded, with the transcript provided by the company to the left, and the actual response to the right.

Source: SEC filings, author's transcription of the company conference call.

The problem, of course, is that the real statement Garrabrants offered was that there was "nothing ongoing." The document that his CFO signed off on to be sent to the SEC omitted that statement entirely.

There's only one conclusion that's for sure about this: Garrabrants' statements from previous calls are anything but, "very clear."

I think that BofI did a lot to dispel doubt that there's anything nefarious going on at the company. My own doubts were greatly reduced given the rebuttal Garrabrans offered regarding his personal accounts, and the statement provided as to why John Ball left the company.

Unfortunately, the opaqueness behind Garrabrants' responses to questions about "ongoing investigations" will likely continue to dog the company and its stock -- down 6% as of this writing -- for some time.

One thing is for sure: this will be a very interesting stock to watch in the coming months.