BofI Holding (AX -1.75%) released its second-quarter financial results early on January 28, turning in the huge growth results that have become commonplace from the oldest Internet-based bank in the U.S. Management conducted a call with analysts after market close the same day,
However, overhang from a lawsuit, accusations made by a former employee, and a series of accusations made by short-sellers have weighed heavily on the company's stock during the past several months. Let's take a closer look at BofI's financial results, as well as the company's response to the allegations that key executives, auditors, and related parties have committed a laundry list of bad behaviors.
Response to short attack, lawsuit, and accusations by former employee
Since October, BofI's stock has fallen sharply following an article in the New York Times, detailing a lawsuit by a former employee, Matt Erhart, alleging the company -- particularly top management -- had a long list of bad dealings, including firing him after he brought the issues to management, and then to regulators.
While firing a whistleblower is a federal offense, Erhart has not been recognized as such by the courts. So far, no regulatory body has launched an investigation into the company based on his claims, or on those made by short-sellers.
On the earnings call, CEO Greg Garrabrants said that the company will not only vigorously defend itself against the claims made by Erhart, but will not settle with him, either. While it could make sense to simply reach a settlement and move on, management apparently isn't willing to risk its reputation -- or maybe just see Erhart get any money -- and just move on with a settlement.
When it comes to the numerous allegations made by short-sellers and published on investing website Seeking Alpha, Garrabrants simply said that they are baseless, that it would take time for them to be proven wrong, and that "we will keep on performing; the market is going to do what the market is going to do."
- Net income was up 45%:
- Non-interest income was up 142%, getting a boost following the recent deal with H&R Block, which closed early in the quarter.
- Net interest income increased up 31.3% on loan growth of 31.2% in the quarter.
- Loan originations increased 50.4%, a nice bounce back from the 10% growth reported in the sequential quarter.
- Deposits grew 30% in the quarter.
- Loan quality remains very high, with a non-performing loan rate of 0.46%, far below many of its peers.
- Tangible book value per share -- a ratio of the bank's assets per share -- increased 30%, to $9.60 per share.
Putting it all together
A couple of interesting points. Management is essentially ignoring the short attack. While that doesn't guarantee no wrongdoing, the allegations are largely the sort that sound big and scary, but lack any damning evidence. Furthermore, management reiterated on the earnings call that they know of no investigations or inquiries into the company by any regulatory agencies. It's also worth noting that the lawsuit by Erhart was filed after regulators refused to act on his accusations, and BofI fired him for what management has called "poor performance."
In other words, there's been a lot of unsubstantiated accusations, and zero regulatory inquiry in more than three months since this first started. That's not to say that regulators won't inquire -- there's a big difference between "not yet" and not at all -- but it shouldn't be ignored that they haven't acted so far.
BofI's financial performance continues to be excellent. Loan and deposit growth remains very high, and the quality of those loans has also been very solid. The partnership to handle the banking for H&R Block customers is already adding to the bottom line, helping to both boost non-interest income, and adding to the deposit base, which will help support even more loan growth without having to source capital from other channels, such as selling stock and diluting current investors.
While questions about the accusations made by Erhart and short-sellers will only be answered by time or regulatory inquiry, BofI's growth has not been affected. The big fear is that its focus on jumbo loans -- loans that are too big to be sold to Fannie Mae or Freddie Mac -- could turn into a weakness if the real estate market or economy weakens, dragging on profits, and potentially leading to big losses.
There will also remain uncertainty with regards to the allegations made against the company and its executives, but there's always a trust factor with any investment. Depending on what happens with the Erhart lawsuit, the allegations could weigh on the company's stock for some time. For patient investors willing to ride it out, it could be well worth it -- at least based on the company's amazing growth record, and prospects for that growth to continue.