Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Bank of Internet a Value Investment?

Our friends over at the Motley Fool must be happy today because one of their favorite companies, BOFI Holdings (NASDAQ: BOFI)—the company popularly known as Bank of Internet—is doing real well. Unfortunately, there’s something that the cheerleaders at the Fool have been ignoring about BOFI: a portfolio of high risk loans that could implode in investors’ faces and pull the rug out from underneath investors.

The Third Quarter Financial Summary shows that BOFI’s high risk lending activities have been paying off. Among other things, the summary shows that Bank of Internet made a lot of money from those loans. Here are some numbers to think about:

  • BOFI’s net income increased by 44.2% between March 31, 2014, and March 31, 2015. Net income during the quarter was $21.1 million.


  • Bank of Internet’s interest income increased by 42.1% over third quarter 2014.


  • The non-interest income increased by 44.2% over third quarter 2014.


  • The amount of money in checking and savings accounts at Bank of Internet increased by 80% over the year, according to president & CEO Greg Garrabrants.


The Dark Side of BOFI

Okay, that’s the hype, but now for something Bank of Internet fans have ignored: questionable lending practices that indicate a sort of mini lending bubble at this institution. The Seeking Alpha Contributor Forensic Research Analyst has done a great job exposing some of the shenanigans going on behind the scenes at BOFI that investors should be aware of.

The Analyst uncovered evidence that points to aggressive lending practices and a lack of due diligence that sound like something out of the great mortgage bubble of 2005. A few of the highlights from the Analyst’s investigation include:

  • A willingness to make loans and extend credit to borrowers with no paper trail of historic credit. That included persons with no tax returns or credit records and foreign nationals buying real estate in the United States.


  • Mortgage lending to people with foreclosures, bankruptcies, and other black marks on their credit.


  • Attempts to inflate borrowers’ incomes by listing retirement savings and past income as current income. This includes jumbo loans made to retirees.
  • Underwriting gigantic home loans sometimes in excess of $1 million.


  • Making large loans on second and third homes.


  • Bank of Internet is willing to take on loans that other banks are not willing to underwrite.


  • Bank of Internet may have made large numbers of loans to Chinese nationals, indicating that it could be heavily exposed to economic problems in that country.


  • The number of delinquent loan balances at BOFI doubled between June 30, 2014, and September 30, 2014, which indicates that the bank’s loan book could quickly melt down.

From the article, it is clear that the analyst thinks Bank of Internet could face regulatory action, perhaps from the FDIC, over its lending practices at some point. It could also face serious losses.

It also looks as if BOFI could be very vulnerable to changing economic conditions because of the number of risky loans it has written. The bank could also be quickly dragged down by falling real estate values or foreclosures.

The analyst’s writings make one thing painfully clear: BOFI is not a value investment. Instead, it is a very speculative play; the Bank’s management has taken some serious risks and made a bold bet on American recovery. If recovery does not come, it could among the first companies to go down.

My suggestion would be to stay away from Bank of Internet. There are better and cheaper banks out there like Uncle Warren’s favorite, Bank of America (NYSE: BAC), and EverBank Financial (NYSE: EVER). These banks are not sexy and they rarely pop up on the Fool’s radar, but they are far less risky than BOFI.


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Disclosure: The blogger owns shares of Bank of America.