I am positive many will be scared off by a bank headquartered in California. Now is the time to stop reading. I am more positive on Bank of the Internet (NASDAQ:BOFI) since the recent Fed announcement than at any time before (well, maybe 2009 saw a pretty good valuation). Its entire business is dependent on high deposits and low interest rates until it gains the loyalty following of a Wells Fargo (NYSE:WFC). I discussed in a previous article the inherent business model advantages of BOFI, so today I will remind readers that the Fed's holding interest rates low for two additional years clears one of the biggest problems BOFI was facing: Uncertainty of how long it will hold a moat over the rest of the banking industry.
Many have challenged my assertion that there is indeed a moat due to the amount of banks that have an online bank. BOFI is the largest pure online bank with just one physical branch. That does not begin to describe the advantages as ut recently released a new checking account policy with many features. You can now scan your checks at home to deposit -- no minimum balance, 1.25% yield, no maintenance, unlimited ATM transactions, free personal checks, debit card, finance works, cash-back rewards, and postage-paid envelopes. This is a bank that makes its money with banking, not on fees. For the past four years it's been profitable just banking; interest income has only padded its net income.
It reports yearend results Thursday and more than likely we can expect approximately $24.5M in total loans (with fees) and investments. 1.3% interest annually (average payment) on $1.8B in deposits (average) will come to $5.85-6M. Fed home loans and other borrowings should remain consistent at $3M which brings us to $15.5M. With the RV loans business nearly done and loans improving, I would envision loan losses totaling about $1.1M for net income after provisions of $14.4M. Banking fees should total about $0.6M (not including gains on sales of investments as well as losses; they should be about even). This gives us $15M and including total non-interest expenses of $7.7M (an increase of 5% over last quarter to be conservative) gives us income before taxes $7.3M. A t,ax rate has been approximately 39.5% for the year which would bring us to $4.416M in net income. This comes to just $0.43 eps for the quarter which is below the whisper number of the CEO Gregory Garrabrants at a recent investor presentation.
I believe comprehensive income (gain in equity with buybacks and dividends removed and income on shares offered above book added; basically added value to a company) should come in above the last quarter of $3.44M. In the end that is the most important thing. Book value is currently $13.75 per share so you are already buying a growing bank with a competitive advantage below book value. This purchase is right out of Buffett's playbook a la Wells Fargo (though in a dramatically different fashion). It's hard for me to give a fair value, though I see 10x earnings as highly reasonably considering all things which should bring us to a full year eps to $1.80 (which should be a floor for moving forward) and a minimum share value of $18 or a potential increase of 38.5%.
Disclosure: I am long BOFI.