Thursday, April 9, 2015

Another Bank of the Internet advertisement

These advertisements are pitched at mortgage brokers and they have lots of jargon. But this advert is priceless...

It says "Professional fighter wants to buy an estate with a mixed martial arts studio and needs an asset depletion income qualification loan. BOFI Federal Bank can do that."

So what is an "asset depletion loan"?

Here is a fairly standard explanation from a the Chicago Tribune:

Asset depletion. Some high-net-worth borrowers don't show enough adjusted gross income on their tax returns to qualify. With an asset depletion loan, the lender factors the borrower's liquid assets into the income calculation. The asset amount, less the down payment, is amortized over 30 years or until the borrower reaches age 85, whichever comes first, just as if the money were spent during that time.
So the fighter here does not have enough verified income to qualify - and in this context BOFI are happy to impute an income to the forthcoming mixed martial arts studio.

Good luck with that. I am not sure how good the secondary market is in failed mixed martial arts studios.



Anonymous said...

Isn't it really a question of how good/effective they are at offloading the risk of default on to third parties?


John Hempton said...

These loans are on their balance sheet as far as I can tell.

Anonymous said...

There is no secondary market for these loans. Look at their ROA. Off the charts. They own all this risk.

Anonymous said...

Might be the case that this kind of nonsense only comes crashing down in a broader market crash / regualtory environment. e.g., ninja loans / CDOs and that whole "once in a lifetime" (every few years) event.

If the winds blowing, raise a sail, just take it down before it stops!

Kris Tuttle said...

I was wondering what their story was as to how they were handling the risk. Investors must be concerned about it now? The valuation seems very stretched to me. I took a small short position, in part as a hedge against other things. I wonder if you could have a larger short on BOFI and balance it with a long of small safer regional banks as an ETF.

I have a friend who is sort of in this business that may have some more insights.

Anonymous said...

I read this ad as them underwriting based on his assets earned as a professional fighter, not on future income from the mma studio

brendan said...

San Diego based BOFI does 46% of their lending in Southern California, which happens to be the capital of the MMA universe. About 1 in 5 top ranked UFC guys fights out of Socal:

Fighters have sporadic earnings: they'll fight 4 times one year, 1 time the next. They may have plenty of cash in the bank but unstable earnings.

If BOFI requires a fighter to put 30-40% down on a property and that fighter's assets meet the asset depletion criteria, then what's the big deal? Especially so close to home where they may have an advantage in diligence.

Again, you guys need to look at these things in the context of a bank with a 15 year record of exceptional risk control, asset allocation, and adaptability.

Yes, the bank has grown so rapidly, and into many new businesses, that past might not be a great guide to the future.

But this is a small shop, with something like 300 employees, and stability at the top.

The less dispersed a firm is the easier it is to maintain a sound culture and risk control.

In fact, the CEO regularly talks about individual NPL's on the conference call: yeah, that one is a vacation home in malibu, we were just talking to that guy the other day, he'll go current soon, but we'll be fine either way since it's a 50% LTV.

You gotta consider the possibility that BOFI is genuinely locating pockets of mispriced risk. In very strange places.

And that's the sort of thing, that when combined with their cost structure, justifies a premium valuation.

Anonymous said...

Brendan, I've always found the CEO to be more slippery than a pocket full of pudding.

Kris Tuttle said...

That's good feedback on the UFC industry and the localized profile BOFI has in SoCa.

Banks are certainly not flexible post-2008/9 and certainly leave many opportunities to go begging. High LTV ratios certainly help contain the risk however this feels like one of those things that works very well as long as everything is "up and to the right."

If and when things turn down then it would seem that BOFI would suffer more than the more conservative financial institutions that have been passing on these types of loans.

Anonymous said...

They aren't imputing an income to the MMA studio, they're imputing an income to his existing assets.

Probably doesn't change the outcome, but it is pretty easy to see why a HNW individual who may not work during a given calendar year would need a loan based on something other than wage income.

brendan said...

Kris, I think they'll be fine in less good times. Aside from the quantitative stuff, like their LTVs, they just don't talk like a growth at all costs type of bank. For example, on just the less conference call the CEO said they might be pulling back a bit from multifamily markets because valuations are frothy and underwriting terms too lenient in many markets. This has happened repeatedly: BOFI tells you where it's gonna expand, where it's gonna retrench, why, and then does it.

Let me put it like this. A proof by contradiction. Assume I'm right and that these guys are stud asset allocators with a uniquely cheap and flexible platform.

What about reality is inconsistent w/ that vision?

Because there is quite a bit inconsistent w/ the picture John is implicitly painting.

Dan Davies said...

Simple question: if they are doing their own due diligence in their own back yard and exploiting their own information advantage ... What is the purpose of these glossy above-the-line as campaigns aimed at mortgage brokers? This bank is growing through an intermediary channel, not by its own origination.

brendan said...

Two possible forms of local diligence would be:

-Initial market qualification. Maybe BOFI's internal sales force dabbles in the market 5 years ago, has some good results, learns about it, etc.

-Setting the parameters for their mortgage brokers to abide by, i.e. determining the relative importance of the borrower's net worth, LTV, credit score, location, etc.

-Choosing which brokers to use. MMA is a highly connected world and it seems likely there are a handful of enormously productive connected brokers.

These details are speculative but the point is that the value of diligence doesn't fly out the window when one decides to use 3rd party originators.

brendan said...
This comment has been removed by the author.
brendan said...

John said: BOFI was "...funded primarily by high cost brokered deposit."

- 84% of their current $4b deposits are core
- They've generated ~$2b in net core deposit growth in 2 years. That's more than a doubling in 2 years.
- Since 3Q13 they've tripled their biz banking deposit relationships from 900 to 2800; value of those deposits went from $180m to $1.4b

John's intuition is obviously fantastic. He sees bits of info (internet bank, rapid growth, exception lending), sees the pattern, checks it and is usually right.

Not so here.

Anonymous said...

Here to add some Simple Insights.

brendan, how do you reckon they go about all this due diligence work with a sub-35% efficiency ratio?

Dan Davies said...

No, I don't think that's going to fly either.

MMA is a highly connected world and it seems likely there are a handful of enormously productive connected brokers.

I think you're probably right about that. But it just underlines the point. If you really, literally want to get a bunch of loans to mixed martial artists, then you probably need to pay for less than a dozen seafood restaurant lunches in San Diego and you've got access to the entire market for MMA star lending.

If you're taking out magazine ads, with a male model pretending to be an MMA star, then it's not because you're pitching for MMA star lending. It's because you want every broker who reads that magazine to know that you, BofI, are up for a look at anything on their books that has been turned down elsewhere because it's a little bit kooky.

That might or might not be a good business model, but defend it for what it is; the answer to Brendan's question above is that the inconsistency is that careful asset allocators don't try to grow by above-the-line media campaigns.

Anonymous said...

I know nothing about BOFI's markets, but above comments about inflexible banks causing pockets of mispriced risk is quite true. You can scoff all you want, but there are very good lending opportunities if you know your local market and its lending and foreclosure laws, and stick to that market.

Anonymous said...

Brendan on the deposits, have you ever taken the time to review their first call reports? Those reports are heavily regulated and cannot be fudged in the way that Investor Relations decks can.

If you look at the FFIEC first call reports, you will immediately see that 90% of their deposits are MMA.

So they can name their deposits whatever they would like ("high quality business banking deposits") but at the end of the day, call reports don't lie.

These are low quality moneymarket accounts that are flightier than an airline.


Brendan said...

Dan, what magazine ads are you talking about? The pic in question is from the section of their website that provides marketing materials for their originators to use. There are a dozen or so others: for example one targets professional golfers, another market segment characterized by some wealthy folks with irregular income.

brendan said...

Response to anonymous on deposits:

1) My response was to John re fraction brokered and the call report confirms me: $654m brokered, 16% of total.

2) I see MM savings accounts of $2,500, 63% of the total, not 80%. I see time deposits of $800m, 20% of the total (BOFI says CDs are 26% of the total and rising). Are you categorizing TD of <1 year as MMA? Maybe that reconcile our figures.

3) Correct me if I'm wrong here. When you call their deposits "flighty" I'm picturing the scenario faced by a brick and mortar bank before more folks used the internet. Deposit rates rise, deposits flee the vulnerable bank, forcing them to tap brokered sources more heavily, possibly constraining growth. I think "price sensitive" is a better description than "flighty" here because BOFI can easily prevent core deposit outflow by raising the rates they offer and marketing more intensely. They've described instances where they overshot their deposit generation targets during these drives.

4) BOFI's deposit mix isn't bad despite the demands of gargantuan asset growth. The mix is improving. And when asset growth slows to a more normal pace - say 15% rather than 50% - why wouldn't we expect it to solidify further? You can be a heckuva lot pickier re your deposit mix when it's size isn't doubling every 18 months.

Anonymous said...

brendan, not following your math. on p25 of their call report (12/31/14), they report 403M of transaction account deposits (the higher quality type of deposits) and $3.6b of non-transaction account deposits (the low quality "rate shopper" oriented deposit source).

Transaction accounts are demand deposits - i.e. the sticky checking accounts that can fund illiquid loans.

Non-transaction accounts consist of rate shoppers looking to maximize yield on their float.

So that math suggests 10% of their deposits are in the quality bucket, and 90% are in the low quality flighty bucket. Hardly the type of deposits that make sense as a funding source for these curious "exception loans".

What are your thoughts on that?

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