BofI: Boiler Rooms, Bad Loans, And Off-Balance Sheet Maneuvers Underpin Poorly Understood Risks

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  • As mortgage growth has slowed, BOFI has aggressively expanded it's Commercial and Structured Settlement businesses. Despite being increasingly important, BOFI has offered only sparse disclosure and explanatory detail.
  • Believing that these businesses offer sky-high yields with little commensurate risk, most investors and analysts appear to fundamentally misunderstand BOFI's lending activities and, importantly, the large associated risks.
  • A network of boiler rooms and undisclosed lending relationships appears to have facilitated hundreds of millions worth of highly suspect, BOFI-originated loans, that have flooded the courts with defaults.
  • BOFI's apparent financing of an undisclosed, off-balance sheet, Special Purpose Entity whose sole purpose appears to be to purchase BOFI's own loan originations is examined.
  • BOFI's questionable structured settlement activities are examined through a brief example highlighted in court records.


"If it grows like a weed, it probably is a weed"--Old Banking Maxim

Bank Of The Internet (NASDAQ:BOFI) has been one of the best performing stocks in the world in recent years. It has also been, by most measures, one of the fastest growing and most profitable banks in the country. Taking advantage of a "branchless" internet banking model, BOFI has crafted a narrative, which has been widely promoted, that it is revolutionizing the banking industry. While much of the focus tends to be on BOFI's supposed dis-intermediation of traditional banks, the key, in my view, has always been it's loan growth.

BOFI Total Assets (Quarterly) Chart

BOFI Total Assets (Quarterly) data by YCharts

When the subprime crisis hit, it took many California banks, mortgage brokers, and related infrastructure with it. In my opinion, BOFI's CEO, Greg Garrabrants, himself a former Indymac executive, has brought much of this infrastructure roaring back to life. Appearing to have the best of both worlds, BOFI's loan portfolio has had sky-high yields while experiencing negligible credit losses. BOFI has generated industry leading net interest margins while setting aside industry low levels of loan loss provisions. This has resulted in enormous (short term) profitability which appears to have emboldened BOFI to become even more aggressive in growing loans and fee income streams. Awarded one of the most expensive stock valuations in the entire banking industry, BOFI appears to have convinced many that the laws of financial gravity do not apply to it.

While exotic mortgages remain the dominant portion of both it's balance sheet and loan originations, BOFI's mortgage growth has slowed. Needing to maintain supersonic growth to keep up with expectations and maintain it's lofty stock valuation, BOFI has pivoted to other categories. This effort, at least on the surface, has been successful. BOFI has reported strong income growth in recent quarters largely as a

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In-Depth ResearchNo affiliation with Aurelius Capital Management.

Disclosure: I am/we are short BOFI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article represents the opinion of the author as of the date of this article. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.

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