SPEs Managed By BOFI Executives Directly Contradict Financial Reporting

Jan. 21, 2016 2:43 PM ETAxos Financial, Inc. (AX)16 Comments
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  • Earning outsized loan yields while setting aside tiny loss reserves, BOFI's reported credit quality has become an essential piece underpinning the promotional "myth" of BOFI's high return/low risk lending operation.
  • Directly contradicting BOFI's reported credit quality statistics, the article traces an example of a soured multi-family mortgage which BOFI "sold" to an undisclosed SPE managed by BOFI executives.
  • Believed to be held off-balance sheet, transactions with the executive-managed property SPE appear designed to hide soured mortgages and improve BOFI's reported credit quality.
  • Three additional undisclosed executive-created Lottery SPEs are also believed to be held off-balance sheet. Frequent SPE transactions with a firm linked to a BOFI executive are also examined.
  • The undisclosed dealings significantly increase the risks of a major accounting fiasco. Despite repeated emails and calls over the last week, BOFI did not answer simple questions regarding the SPEs.


Amongst the fastest growing banks in the country, Bank of the Internet (NASDAQ:BOFI) has also been amongst the most profitable. The bank has consistently reported incredible returns on equity and assets which, at over 1.6% ROA & 18% ROE, dwarf the vast majority of the banking universe. The narrative, which has been widely promoted, is that the bank's profits result from BOFI's "transformational" branchless internet banking model and advanced data analytic systems.

The actual driver of BOFI's reported profits, however, is the success executives have had in bringing much of California's dismantled subprime-era lending infrastructure roaring back to life. Having essentially "put the band back together", BOFI's industry-leading performance has been a direct function of the bank's sky-high loan yields and disproportionately small loss reserves. BOFI's loans, the majority of which are obtained through a network of brokers, earn yields which are far higher than the vast majority of lenders. Despite its outsized yields, BOFI asserts that its loans actually come with extremely low credit risks.

Source: Public Records, Data as of 9/30/2015. Reference banks were selected based on BOFI's own periodic self-comparison.

On its $5.2 Billion in total loans, BOFI has set aside a paltry $31 million in loan loss allowances which is amongst the lowest rates in the entire banking industry. Earning industry leading loan yields while setting aside minimal loss reserves, investor relations narratives have convinced many that the laws of financial gravity simply do not apply to an internet bank.

BOFI's stated credit quality and loss history is the absolutely essential piece of the high return/low risk "myth" underpinning its lending activities. Having frequently touted its credit quality publicly, BOFI's CEO, Greg Garrabrants, reiterated on the most recent earnings call that:

Our lifetime loss in our originated single family loan portfolio represents less than 2

This article was written by

Aurelius profile picture
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: I am/we are short BOFI. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. 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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