BOFI Freak Out & Facts

Investment Analysis Clubs Saul’s Investing Discussions
1

Fools,

We should have seen this one coming. Basically, there has been nothing new whatsoever that changes anything with the investment thesis.

The shorts seem to find a point when the stock goes up a bit on lower volume, then do their best beat it back down.

Here are the facts:

  1. EPS & QoQ Growth:

EPS	Mar	Jun	Sep	Dec
2012	0.15	0.16	0.17	0.18
2013	0.19	0.20	0.21	0.23
2014	0.25	0.27	0.30	0.32
2015	0.34	0.39	0.40	0.44

EPS QoQ	Mar	Jun	Sep	Dec
2013	28%	22%	27%	30%
2014	35%	40%	41%	38%
2015	35%	41%	33%	40%
  1. Book Value per Share & Price per Book Value:

TBV/Shr	Mar	Jun	Sep	Dec
2012	3.9	4.0	4.1	4.3
2013	4.5	4.8	5.0	5.5
2014	5.9	6.3	6.9	7.4
2015	8.0	8.5	9.1	9.6

PBV	Mar	Jun	Sep	Dec
2012	1.1	1.2	1.6	1.6
2013	2.0	2.4	3.2	3.6
2014	3.6	2.9	2.6	2.6
2015	2.9	3.1	3.5	2.2
@$19.00/share, it's at 1.98
  1. Net Performing Assets & Loans:

NPAss	Mar	Jun	Sep	Dec
2012				0.79%
2013	0.71%	0.66%	0.55%	0.49%
2014	0.50%	0.46%	0.52%	0.69%
2015	0.65%	0.55%	0.50%	0.40%

NPLoans	Mar	Jun	Sep	Dec
2012				0.95%
2013	0.86%	0.80%	0.63%	0.58%
2014	0.60%	0.57%	0.62%	0.80%
2015	0.72%	0.62%	0.57%	0.46%
  1. P/E & Efficiency Ratio:

P/E	Mar	Jun	Sep	Dec
2012				10.7
2013	13.0	15.9	21.1	23.9
2014	24.2	19.1	17.3	17.1
2015	19.0	19.8	22.4	13.5	
@$19.00/share, it's at 12.2		
				
EffRat	Mar	Jun	Sep	Dec
2012				41.0%
2013	42.1%	42.8%	41.4%	39.9%
2014	35.1%	34.9%	34.8%	34.6%
2015	34.5%	31.6%	33.3%	34.6%
  1. And finally, another short article, on Seeking Alpha.

This reminds me of what happened to Ebix a few years back. With the business performance of BOFI, we should see even better price appreciation once this runs its course and greed replaces fear.

DJ

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Basically, there has been nothing new whatsoever that changes anything with the investment thesis.

I agree. But what the short attack did was remind everyone about the BOFI senior officers who were allegedly previously involved in bank failures, felonies, and scandals, and all the bizarre things like hiring their senior auditor right as he came from the bank with the biggest California banking scandal in recent history. All those memories, which people like me were trying to forget about and ignore. The numbers all look good though…

Saul

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Forget your F/A voodoo numbers telling you the way this stock is spozed to be…

Having just seen my chart for BOFI, I went searching for news and read about a new lawsuit. This is not a short attack as you are incorrectly inferring.

This is a class action lawsuit, launched by the Houston Municipal Employees Pension System. It is centered on new allegations by new whistleblowers who used to work for BOFI.

http://www.fool.com/investing/general/2016/04/14/why-bofi-ho…

The plaintiff alleges that BofI Holding engaged in unlawful lending practices, violated federal laws in identifying its customers, and failed to maintain adequate controls over its operations, among various other, more specific, allegations.

The filing references several interviews with former BofI Holding employees, who it identifies only as numbered confidential witnesses. One is quoted as saying “internal controls were whatever Greg [Garrabrants] wanted them to be…We have internal controls on paper, but were they ever followed? No.” Greg Garrabrants is the bank’s Chief Executive Officer.

Another confidential witness, who became uncomfortable with the company’s lending practices while working for the company, said that “it started to become very rare that we would deny a loan.” Yet another witness suggested that BofI Holding’s management made decisions based on how it would appear in the company’s quarterly and annual reports for shareholders.

One potentially very damaging revelation is that one former employee observed that BofI Holding was using one appraiser for its multifamily loans. In one instance, the appraiser called the former BofI underwriter and stated that the property needed to be appraised for $18 million to satisfy BofI Holding’s requirement for a loan-to-value ratio to fund the loan.

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The last link I left in this thread was a Motley Fool writer who mentioned the lawsuit talks about the “one” appraiser who does BOFI’s deals. Check out what this professional short is telling you on Seeking Alpha.

I have highlighted two of his bulleted sub-headlines which should make you raise your eyebrows.

Now toss in the Department of Justice and Treasury Department and SEC reviews launched since the leak of the Panama Papers. Something is going to give in the “biggest on-shore tax haven in the world” (as a Bloomberg writer recently called the USA.).

Go back and read Aurelius’s last post on Seeking Alpha about the one person office in the Nevada desert which BOFI opened. As you read that, think about the Panama Papers and how the lawfirm behind it was set up.

http://seekingalpha.com/article/3965195-walls-closing-branch…

Summary

  • A recent securities fraud lawsuit against BOFI in a Federal District Court shows that many more former BOFI employees have come forward to share stories of fraud at the company.

* Almost one dozen former employees tell a tale of Salvadoran gambling gangs, felonious executives, opaque Venezuelan trusts, corrupt appraisals, CEO check forgery, and falsified audits.

* Multiple formers claim BOFI regularly and potentially inappropriately used an appraiser named Brendan Flynn who reportedly has personal ties to the Chief Credit Officer.

  • BOFI’s CEO already alluded to this lawsuit on the last earnings call - the company was clearly aware that more formers had stepped forward to expose suspected wrongdoing.

  • The smoke from last October is turning into fire and we reiterate our belief that this company’s eventual demise will come as a result of government intervention.

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RockOYates: It is centered on new allegations by new whistleblowers who used to work for BOFI.

No.

The court appointed Houston Municipal Employees Pension System as Lead Plaintiff in the consolidated class actions on January 29, 2016 and the original complaint dates back to October 15, 2015:

ORDER Granting 9 , 12 , 17 Joint Motions to Consolidate Cases, Appoint Lead Plaintiff, and Approve Selection of Lead Counsel. The Court Appoints Houston Municipal Employees Pension System as Lead Plaintiff in the consolidated class actions. The Court Appoints Lieff, Cabraser, Heimann & Bernstein, LLP as Lead Counsel in the consolidated class actions. Signed by Judge Gonzalo P. Curiel on 1/29/2016. (srm)

source: http://law.justia.com/cases/federal/district-courts/californ…

RockOYates: One potentially very damaging revelation is that one former employee observed that BofI Holding was using one appraiser for its multifamily loans.

Here’s what The Friendly Bear actually wrote (emphasis and comments mine):

But most noteworthy is the frequent [define frequent, please] mention of an appraiser named Brendan Flynn who appears to dominate [define dominate, please] market share of BOFI loan appraisals. One former [this must be a typo… one former what?] claims that Mr. Flynn is a friend of BOFI Chief Credit Officer Thomas Constantine, and numerous formers [formers is an odd writing style] called the relationship between BOFI and this appraiser into question. One also questioned the merits and veracity of Flynn’s appraisals.

If their claims are even remotely accurate…

If my grandma had wheels, she’d be a wagon.

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NewEchota
Thank you for the information. Very useful. If this is a silly question, excuse my ignorance. I believe the SA article mentioned 12 former employees of BOFI now coming forward. This I don’t remember and sounds worrisome. Thoughts?
Scott

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I steered clear of BOFI. Consequently, I don’t have a dog in this hunt. I have been following events, however, because I find the story interesting.

While it’s true the original class action suit was filed earlier, the subject at hand is the amendment to the complaint filed just three days ago on April 11. This amendment introduces a dozen “formers” (former employees) who allege a number of actions not discussed before. Here’s how Reuters summarized matters:

http://www.reuters.com/article/bofi-holding-lawsuit-idUSL2N1…

Houston sued Internet banking company BofI Holding Inc. for securities fraud on Thursday, prompting its shares to sink on allegations it relied on unlawful lending practices and off- balance-sheet entities to boost profits.

The suit…alleges that in one instance, the bank refinanced a loan to a borrower that participated in a gambling ring operated by a Salvadoran gang.

The suit also says the company failed to disclose its use of off-balance-sheet entities to purchase lottery receivables, lacked a robust compliance system and issued loans to foreign nationals with criminal or suspicious backgrounds.

This amendment wasn’t merely a rehash of previously alleged misdeeds.

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putnid: The suit also says the company failed to disclose its use of off-balance-sheet entities…

Seeking Alpha, December 15, 2015: BofI Confirmed To Finance Undisclosed, Off Balance Sheet SPE To Which It Transfers Bad Loans

http://seekingalpha.com/article/3741946-bofi-confirmed-finan…

putnid: …lacked a robust compliance system…

Seeking Alpha, August 28, 2015 (also written by The Friendly Bear): The New York Times Has Only Scratched The Surface On BofI Holding…


     
        *The latter type of borrower is more of a mystery, as it suggests* 
 *there is some compliance reason that these borrowers are* 
 *unpalatable to traditional high net worth lenders such as First* 
 *Republic.*

 *We think there are at most 10-12 people working in compliance at* 
 *this company. Relationship banks that have far less "know your* 
 *customer" (KYC) risk staff compliance organizations in the 100+* 
 *person range.*

 *Recent developments in the company's internal regulatory* 
 *compliance division give us even more pause in light of our* 
 *findings.*

putnid: …issued loans to foreign nationals with criminal or suspicious backgrounds.

Seeking Alpha, December 2, 2014: In our opinion, BOFI’s underwriting standards appear to be lacking discipline as evidenced by the bank’s willingness to extend credit to borrowers including foreign nationals who lack historical tax returns and credit scores, as well as borrowers who have blemished credit histories (foreclosures, short sales, and bankruptcies)

2014! I guess no regulators have looked into these public allegations in a year-and-a-half.

As I wrote earlier… all rehashed.

putnid: This amendment introduces a dozen “formers” (former employees) who allege a number of actions not discussed before.

tobapeg: I believe the SA article mentioned 12 former employees of BOFI now coming forward. This I don’t remember and sounds worrisome. Thoughts?

From today’s Seeking Alpha article: Some of the loans formers discuss include a loan tied to a Salvadoran gambling gang and one to a Venezuelan trust where underlying borrower information was (according to the case) never verified for the purposes of OFAC (which if true is a crime).

Salvadoran gambling gang… what, did the borrower list that as his job title on the loan paperwork?

And I believe class action lawyers live to pull in any and all claims from former employees… whether true or not.

One last thing: Erhart tried to get regulators to act on his claims before he filed his lawsuit. It’s been what… coming up on a year this summer now?

And in that time, BofI has been examined for regulatory approvals for the H&R Block transaction and was granted Ginnie Mae Issuer approval but I guess regulators missed the Salvadoran gambling gang during their examinations.

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New Echota,

putnid: This amendment introduces a dozen “formers” (former employees) who allege a number of actions not discussed before.

tobapeg: I believe the SA article mentioned 12 former employees of BOFI now coming forward. This I don’t remember and sounds worrisome. Thoughts?

From today’s Seeking Alpha article: Some of the loans formers discuss include a loan tied to a Salvadoran gambling gang and one to a Venezuelan trust where underlying borrower information was (according to the case) never verified for the purposes of OFAC (which if true is a crime).

These are all new. While the other stuff was rehashed this was the parts being discussed. Let’s not muddy the waters with the other information.

Salvadoran gambling gang… what, did the borrower list that as his job title on the loan paperwork?

That is a very good point.

I think that most if not all of this is bull, but the problem is you really can not know for sure. But when you have to keep defending a company that you are invested in it gets tiresome. Also you can still lose a lot of money being completely correct because although you are right the stock still will crash. Now whether it will crash further? That depends on how many strong hands are in the stock. But I do not think I should put my money at risk because I have some loyalty to the company, rather I think the company should be loyal to me and make me money. So I am out of BOFI for now. Whether you agree or not the risk has gone up.

Andy
Who has decided to never stick up for a company with my money. Taking the money and running.

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Where does anyone get the idea that moldy bread gets better with age.

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buynholdisdead: I should put my money at risk because I have some loyalty to the company, rather I think the company should be loyal to me and make me money. So I am out of BOFI for now. Whether you agree or not the risk has gone up.

I am not attempting to persuade anyone to hold or purchase BofI; please do not think that is my intent. Please do whatever lets you sleep better at night. But at the same time, I’m not going to let wild accusations – many of which date back to 2014 – be presented as facts.

If these allegations were true, would bank regulators ignore them for 6, 8 or 10 months or longer? Erhart filed his case about 7 months ago and pitched it to regulators for a couple of months before then. Wouldn’t regulators have stepped in a taken over the bank if these kinds of gross abuses were true?

And of course class actions attorneys have found former employees who would be happy to share in a settlement (because that’s what they’re working toward).

Have you seen Erhart’s trial date? His Jury Trial is set for 9/26/2017… almost a year-and-a-half from now. Anyone think his attorneys plan to carry his case for that long?

Enough, though. And again, please make the investing choice that’s best for you and yours.

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Here is some info about the Houston Employees Municipal Pension Plan.

“HMEPS is a governmental defined benefit pension plan that provides retirement, disability and survivor benefits for eligible employees of the City of Houston (City) and HMEPS. Created in 1943, HMEPS currently has over 25,000 participants.”

This is not a Seeking Alpha short attack - this is a legitimate financial entity from the city of Houston that represents 25,000 people.

I guess the question I would ask myself is this - do you think there are other municipalities or retirement plans that may now move forward with their own filing against BOFI and what effect if any would that have on the stock’s price moving forward?

Frank - see profile for all holdings

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NewEchota,

I am not attempting to persuade anyone to hold or purchase BofI; please do not think that is my intent. Please do whatever lets you sleep better at night. But at the same time, I’m not going to let wild accusations – many of which date back to 2014 – be presented as facts.

I do not think you are trying to persuade anyone and I agree with a lot of your points.

If these allegations were true, would bank regulators ignore them for 6, 8 or 10 months or longer? Erhart filed his case about 7 months ago and pitched it to regulators for a couple of months before then. Wouldn’t regulators have stepped in a taken over the bank if these kinds of gross abuses were true?

Well you have to admit that 1 person blowing the whistle can be shrugged off but 12 people blowing on the same whistle makes a much stronger case.

This is the problem NewEchota, it doesn’t matter what is true or not, the damage will be done. In the long term I think you will be correct but in the short term I think this stock will take another dive.

When LL was being hit by the shorts for formaldehyde, I studied the company, called the company, talked to people in the industry that did all the Carb 2 testing. I knew that LL was not guilty. But the problem was the perception to investors and the public. When they came out with the 60 minutes piece I jumped out even though I knew that they were not guilty. The problem was now would the public shop there? Why should they if they could be poisoned.

Why do I bring this up? Well even though you can be 100% right you can still lose 80% of your money. I don’t doubt that you are 90% correct NewEchota but I have made a rule that I will keep my money when a company is attacked. There just isn’t any reason for me to be loyal to them. I am risking the capital and I do not need to fight for any company. They should be fighting for me.

Andy

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I don’t really understand people’s thought processes here. BOFI has allegations against it that may or may not be true, nobody can say for sure at this point. Thinking that “oh by now people would know if the allegations were true” is speculation, nothing more, and inherently risky. By investing in this company, you are betting as much if not more on the investigation verdict rather than the company itself. Why risk your money? If BOFI turns out to be clean, invest then. Sure you might get in a little late to the party, but you are investing in the fundamentals then, not speculating on the company’s legality. There are so many solid companies that don’t have this issue I don’t understand why people feel the need to put their money at risk for this scenario. SKX, SWKS, INFN, SBNY, there are so many cheap options right now to solid companies with good growth. I feel like people are prioritizing short term and risky behavior with this move. Hey, as an 18 year old, I LOVE taking short term high risk/reward, but not this time for this stock. If you truly think BOFI is a long term play, you can bear buying it at even a 20% premium to today’s price for the assurance that the company is clean.

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If risk of remaining is off-putting, couldn’t folks just move their BOFI money across to INBK in order to maintain the sector exposure meeting Saul’s investing criteria. Then if this blows over move it back?
A

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Then if this blows over move it back?

Of course it seemed it had blown over already… and then BAM…

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I don’t really understand people’s thought processes here. BOFI has allegations against it that may or may not be true, nobody can say for sure at this point. Thinking that “oh by now people would know if the allegations were true” is speculation, nothing more, and inherently risky. By investing in this company, you are betting as much if not more on the investigation verdict rather than the company itself. Why risk your money? If BOFI turns out to be clean, invest then. Sure you might get in a little late to the party, but you are investing in the fundamentals then, not speculating on the company’s legality. There are so many solid companies that don’t have this issue I don’t understand why people feel the need to put their money at risk for this scenario.

I just read a good article on why we do this.

http://www.mauldineconomics.com/the-10th-man/to-be-a-great-i…

The basic idea is that we do this because we like to root for the underdog. We think a good company is getting unjustly attacked by the shorts and we want to help that company win. We vote with our money. We do this all the time in real life. We root for the underdog sports team from a small school, not the team with a winning record from the big school. In all kinds of social situations we allocate resources not to the hard working successful individuals, they don’t need our help. We allocate resources to those that are struggling the most.

The problem is we carry that mindset over to investing where it can be a recipe for disaster. It is definitely something I need to work on.

4wheel.

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Of course it seemed it had blown over already… and then BAM…

I realize it was not intended, but BAM happens to be a great place for money without the drama of BOFI.

-Brandon

long BOFI and BAM