BofI Holding, Inc. (Nasdaq:BOFI) – Investment Memo – 11/09/15

Recommendation: Short BofI Holding (Nasdaq:BOFI) equity

Current Stock Price: $97.92

Timing: 6-12 months

Catalyst: Resolution of litigation, initiation of a regulatory investigation

Thesis

Bank of Internet (BOFI) is a branchless commercial bank based in San Diego which takes

deposits and originates mortgages and business loans primarily to nontraditional

borrowers. BofI takes on customers who are unable to receive loans from more

conservative banks and in turn charges higher interest rates

Despite taking on riskier customers, BofI does not appear to have a strong risk

management or compliance department and as a result there have been several reports of

indicted criminals financing homes and businesses with BofI money

In addition to having a sketchy business model, several members of the management

team have questionable track records having worked for failed banks or financial

institutions known for poor ethical behavior

BofI is known for having an intense culture with high employee turnover, particularly in

the accounting department. In addition, BofI has had three different external auditors

since going public 10 years ago

In October 2015, a former employee in the internal audit department filed a whistle

blower lawsuit alleging numerous violations of federal and banking law. BofI has

responded to the litigation by declaring war on short sellers and has engaged in

questionable behavior such as initiating a stock split and releasing altered call transcripts

Despite all of the red flags and ongoing litigation, BofI has won over the sell side and still

trades at an elevated valuation

Questionable business model

Bank of Internet is a branchless bank which takes deposits online and makes mortgage

and business loans to customers who are unable to get loans from more conservative

banks

How do we know its customers cannot get loans from other banks?

o BofI charges higher rates. CEO Greg Garrabrants stated the average interest rate

on its mortgages is just below 5 percent (vs. ~3% at main street banks)1

o The bank explicitly advertises its willingness to lend to nontraditional borrowers.

In the below ad on the left, BofI advertises “Niche Jumbo Loans” which may

feature asset depletion underwriting, foreign national borrowers, non QM loans

and hobby farm financing among other options

1 “An Internet Mortgage Provider Reaps the Rewards of Lending Boldly”, New York Times, August 22, 2015.

Capitalization Financials Valuation

Market Cap $1,542 LTM Revenue $237 LTM P/E 17.0x

Cash $368 NTM Growth 40% NTM P/E 13.2x

Total Debt $862 LTM Net Income $96 P / Sales 6.5x

Tang. Book Value $573 LTM Profit % 41% P / Tang. Book 2.7x

$ in millions. Data as of 11/09/2015 (Q3 2015). Financial projections based on Wall St. Consensus estimates.

2

o

BofI’s website states “The majority of our loans are approved with either a credit or

collateral exception” (subsequently taken down)2. In other words, BofI’s assets have

significant exposure to non-QM mortgages and risky business loans that could easily go

south

BofI’s draw for investors is that it is extremely efficient and can grow rapidly without

branches. However, with just 467 employees as of June 30, 2015, I question whether BofI

has developed the proper risk management and compliance infrastructure. Notes on the

company’s culture (discussed later) indicate that BofI doesn’t even have a human

resources department

o Compared to peer online-only banks, BofI has a significantly lower headcount

o

The other big draw for investors is that it has been able to rapidly grow its asset base

organically without incurring loan losses. In fact, BofI is apparently so good at

originating non-QM loans, that its loan loss reserve hasn’t budged

2 “So what exactly do you get with Bank of the Internet stock?”, Bronte Capital blog, April 8, 2015.

Bank Name Market Cap Deposit Base Headcount

Ally Financial $9,539 $61,700 6,900

EverBank Financial $2,204 $16,503 3,100

Blackhawk Network $2,441 N/A 1,860

Green Dot $904 $669 857

The Bancorp $300 $4,316 684

BofI Holding $1,542 $4,452 467

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BofI attributes its strong asset and loan growth to its strong sales channel and willingness

to lend. BofI attributes its low loan loss provision as the result of a low average LTV

between 50-60% and high fico score borrowers

o I have not (yet) had a chance to verify this research, but a lengthy article on

Seeking Alpha claims that BofI is utilizing shady mortgage brokers to source

jumbo loans for high risk and potentially illegal clients. The same article claims

that BofI is using inflated appraisal values and other tricks to claim lower LTVs3

The New York Times has reported on at least three instances where BofI has originated

loans for indicted criminals4

o “In 2012 [BofI] issued a $5 million mortgage to Purna Chandra Aramalla on a

house in Sands Point, an affluent section of Long Island, according to local

property records. In 2013, federal law enforcement authorities in New York

charged Mr. Aramalla with Medicare and Medicaid fraud. In March, he was

sentenced to three years in prison”

o “In mid-2014, Bank of Internet lent $1.05 million to Frederic Elm for a house in

Fort Lauderdale, Fla., property records show. In January, the Securities and

Exchange Commission accused Mr. Elm of running a “Ponzi-like” scheme that

had raised $17 million since November 2013. Mr. Elm partly settled with the

agency in June.”

o “And in 2012, Bank of Internet issued a $1.26 million mortgage to Deepal

Wannakuwatte, a Sacramento businessman who received a 20-year prison

sentence last year for operating, for more than 10 years, what the F.B.I. called a

Ponzi scheme.”

CEO Garrabrants defends against the reported loans made to criminals by stating that the

loans were made before the criminal activity took place and that BofI has thousands of

customers and some are bound to be bad apples

o Again, I have not yet verified this piece of research, but a separate article on

Seeking Alpha digs deeper into the BofI loan to Frederic Elm and finds that a

simple google search made before the origination of the loan would turn up that

Elm had been indicted for fraud in the past. If true, this casts serious doubt on the

quality of BofI’s risk management and compliance process5

In the same New York Times article, it was reported that BofI knowingly lent money to a

man in default to another bank

3 “The New York Times Has Only Scratched The Surface On BofI Holding...”, Seeking Alpha, August 28, 2015. 4 “An Internet Mortgage Provider Reaps the Rewards of Lending Boldly”, New York Times, August 22, 2015. 5 “Recent BOFI Court Filing Confirms Existence Of Undisclosed Subpoenas And Nonpublic Government

Investigations”, Seeking Alpha, November 5, 2015.

($ millions) 2011 2012 2013 2014 2015 CAGR

Total Assets $1,940 $2,387 $3,091 $4,403 $5,824 31.6%

Total Deposits $1,340 $1,615 $2,092 $3,042 $4,452 35.0%

Loans, Net of Allowances $1,325 $1,721 $2,257 $3,533 $4,929 38.9%

Provision for Loan Losses $6 $8 $8 $5 $11

Provisions % of Loans 0.44% 0.47% 0.33% 0.15% 0.23%

Note: No material acquisitions took place over this time period.

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o “Bank of Internet has lent to people who have failed to pay loans made by other

banks. For instance, last year it made a $4.8 million mortgage on a home in

Coral Gables, Fla., that belongs to John H. Ruiz, a prominent Miami lawyer.

SunTrust, a large regional bank, is currently suing Mr. Ruiz and his wife,

asserting that they failed to make payments on a nearly $3 million promissory

note.”

o “In certain cases, and after careful scrutiny, Mr. Garrabrants said, Bank of

Internet may decide to lend to people who have defaulted on past loans.”

The bank’s advertised willingness to make risky loans compounded with its aggressive

asset growth and extremely low loss reserves despite evidence of grossly inadequate

customer diligence paint the picture that BofI’s balance sheet is a house of cards

Potential bad actors in leadership roles

In addition to questionable business practices, looking into the history and track-records

of the management and board also raises numerous yellow and red flags

Gregory Garrabrants has been CEO since October 2007. Before BofI, Gerrabrants spent

the 2 years leading to the financial crisis as the SVP of business development for the now

bankrupt IndyMac

o IndyMac failed approximately 1 year after Garrabrants’ departure and is one of

the most spectacular bank failures in history. Indy was the 7th

largest thrift bank in

the U.S. and failed due to its aggressive growth strategy and poor lending

standards. Indy is known to have made loans without proper diligence

o Although Gerrabrants only spent 2 years at IndyMac, he was in a very senior role

during a pivotal time in Indy’s history. BofI’s lending profile is also oddly similar

to Indy’s. A quick LinkedIn search shows that many former IndyMac employees

now work in the BofI credit department

The current CFO Andrew Micheletti must be pretty unlucky because almost every

company I can find that he has worked for has had financial issues

o Micheletti joined BofI (presumably as CFO) in April 2001

o Andrew was VP of Finance at (now bankrupt) Telespectrum from 1997 to 2001

o Micheletti was VP of Finance/CFO at LPL Financial between 1990 and 1997.

LPL Financial is a publically traded broker that has had a checkered past with

regulators. LPL has received numerous Finra disciplinary notices and SEC

settlements dating back over the past decade and even recently6

o Finally, Micheletti was a controller at (now bankrupt) thrift bank Imperial Savings

Association which failed after poor investments in junk bonds7

o Also worth mentioning, Micheletti has let his CPA designation lapse

Current chairman Theodore Allrich co-founded BofI in 2000

o Before founding BofI, Allrich operated a small wealth management business and

an online investment website (www.theonlineinvestor.com)

o Notably, Allrich had a 20 year career in investment banking which led to Allrich

being a senior banker at Drexel Burnham in fixed income sales. Of course, Drexel

is famously known for peddling ‘junk bonds’ and having a widespread unethical

employee culture 6 “Recent fine may hasten LPL Financial's shift to fee compensation”, Investment News, May 10, 2015. 7 “California Saving Unit Is Seized”, New York Times, February 24, 1990.

5

Paul Grinberg is a board member and chair of the Audit committee. Paul is also the CFO

of Encore Capital Group, a publically traded debt collections company which is currently

heavily shorted due to its legal issues and sketchy business model

o In September, Encore agreed to pay a $42 million fine after the CFPB said it

illegally bought debts without verifying their accuracy and collected payments by

pressuring consumers through lawsuits, among other tactics8

o Needless to say, Paul Grinberg does not seem like the best person to be the Chair

of the Audit committee

Chief Legal Officer Eshel Bar-Adon’s career has been focused on working for structured

settlements companies that provide advanced payments to lottery prize winners (among

other questionable activities)

Chief Credit Officer Thomas Constantine was an SVP at First Bank of Beverly Hills

o FBBH was shut down by the FDIC in 2009 for an “unsustainable business model”

focused on rapid asset growth through the extension of high-risk CRE and ADC

loans and accounting based on “false profits” from problematic loans9

Heavy insider selling

o Aside from CEO Garrabrants who has been holding on to his stock options and

grants, there has been widespread net selling by other executives

o YTD 2015, the board and management has sold net ~$4 million in stock

(including option grants and exercises provided as board compensation)

o Below is a schedule of insider sales in 2015. It is interesting to note that many

open market sales occurred in August after the initial New York Times article

came out and sent the stock 15% lower

o It is worth noting that the CEO bought shares in November after asked on a call

why no executives were buying shares after the 30% drop. The CEO is simply

trying to send a signal to the market rather than time a rise in BofI shares

8 “CFPB Settles With Debt-Collection Giants”, The Wall Street Journal, September 9, 2015. 9 “FDIC sues former D&Os of First Bank of Beverly Hills”, Lexology, June 25, 2012.

Holder Name Trade Date Range # Shares $ Value (USD) Transaction Type

Edward J. Ratinoff (Director) Aug-27-2015 (927) (112,538) Open Market Disposition

Edward J. Ratinoff (Director) Aug-25-2015 (1,073) (131,174) Open Market Disposition

Theodore Allrich (Chairman of the Board) Aug-11-2015 - Aug-13-2015 (4,319) (563,997) Open Market Disposition

Theodore Allrich (Chairman of the Board) Aug-11-2015 (2,160) (282,463) Open Market Disposition

Theodore Allrich (Chairman of the Board) Aug-13-2015 (2,159) (281,534) Open Market Disposition

Paul Grinberg (Director) Aug-10-2015 (11,323) (1,471,877) Open Market Disposition

John Burke (Director) Jun-11-2015 (5,214) (482,191) Derivative Exercise and Sale

John Burke (Director) Jun-11-2015 5,214 38,323 Derivative Exercise

John Burke (Director) Jun-11-2015 (3,055) (304,981) Sale

John Burke (Director) Jun-11-2015 (2,159) (215,533) Sale

Andrew Micheletti (Chief Financial Officer) Jun-11-2015 (28,369) (2,562,572) Derivative Exercise and Sale

Andrew Micheletti (Chief Financial Officer) Jun-11-2015 28,369 269,506 Derivative Exercise

Andrew Micheletti (Chief Financial Officer) Jun-11-2015 (28,369) (2,832,077) Sale

Theodore Allrich (Chairman of the Board) Jun-11-2015 (8,704) (787,987) Derivative Exercise and Sale

Theodore Allrich (Chairman of the Board) Jun-11-2015 2,856 27,132 Derivative Exercise

Theodore Allrich (Chairman of the Board) Jun-11-2015 (2,856) (285,114) Sale

Theodore Allrich (Chairman of the Board) Jun-11-2015 5,848 53,802 Derivative Exercise

Theodore Allrich (Chairman of the Board) Jun-11-2015 (2,759) (275,431) Sale

Theodore Allrich (Chairman of the Board) Jun-11-2015 (3,089) (308,375) Sale

6

Related party transactions

o BofI discloses in the 10K that it offers loans to its employees and discloses the

total balance of those loans which was $1.6 million in mortgages (a small amount)

o I have not yet had a chance to verify this research, but several articles on Seeking

Alpha claim BofI is not disclosing certain related party loans made to executives10

Finally, it is interesting to note that no one currently on the board of BofI has commercial

banking experience

Employee and auditor turnover

The litigation from the former employee (discussed later) describes an intense office

culture with very high turnover and aggressive pressuring from executives

Reading employee reviews on Glassdoor.com confirms this picture. Below are some

excerpts from the employee reviews

o “They hire about 5-10 people a week and 3-6 people a week quit or are fired. I

worked on these all the time, so I know the turnover is roughly 40%.”

o “No HR dept, weak facilities maintenance” (5 star review)

o “Things seem to be a mess. As previous people have mentioned, there is no

training. The training you receive is by a co-worker who does not have time to

train you due to their heavy work load and lack of staff. If a co-worker leaves, you

automatically have to pick up whatever they did without training or guidance and

are expected to do just a good of job they did. This happens a lot due to people

leaving left and right and the bank growing extremely rapidly.”

o “The negatives overlooks the positive aspects of working here. No HR so their

can be a lot of unprofessionalism. No structure to work, job description is useless,

and everything is a mess. Most people seem to be unhappy and treat others with

less respect if they're higher or get paid more.”

The consistent comment regarding there being no human resources department is

puzzling. How does BofI make hiring decisions? Does BofI properly screen its

employees? Does BofI not have an HR department purely to save costs? Does BofI also

lack resources in compliance and risk management?

The same litigation specifically mentions high turnover in the internal audit function and

claims his manager, Jonathan Ball, resigned after refusing to engage in illegal activity

BofI actually got an official statement from Mr. Ball explaining why he quit: “The main

reason for my resignation was due to burnout caused by continuous long hours. My

immediate resignation was due to a discussion that I had on March 5 with Mr.

Garrabrants about completing time-intensive work tasks facing my department, which I

understood would mean no relief from such long hours in the foreseeable future.”

o I am dubious of Mr. Ball’s explanation. Internal audit at a commercial bank

should be a boring job, not a burnout job

10 “Buyer Beware: BOFI Related Party Loans”, Seeking Alpha, November 4, 2015.

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o On the 10/14/2015 call, the CEO mentioned that in addition to Mr. Ball and Mr.

Erhart (plaintiff below), the head of the internal audit department turned over

Regardless of the reason, high turnover in the internal audit department of a small

commercial bank is a screaming red flag

There has also been elevated turnover in the external auditor

o Deloitte was auditor from 2004 to 2005

o Crowe Horwath LLP was auditor from 2006 to 2012

o BMO has been auditor since 2013

External auditor opinions have always been unqualified. Management described the

reason for switching to BMO from Crowe Horwarth as being able to save 20% in fees

and efficiency gains

Ongoing litigation from former internal audit employee

The ongoing litigation from former employee Matt Erhart has been the catalyst behind

the record drop in BofI’s stock from $140 to $98 today

Matt Erhart states that while working at BofI he began to relay his concerns about the

bank to the OCC, the Bank’s regulator; however, over 180 days have passed since Matt’s

initial complaints were made and he is therefore filing this lawsuit under whistle blower

protections after exhausting administrative remedies

o The lawsuit was filed on 10/13/15 and the legal documents can be downloaded

from the PACER system for a small fee

The lawsuit has many specific examples of situations or circumstances where Mr. Earhart

believes the law was broken. At a high level, the key points include:

o Claims he was instructed to exclude details from audit reports for fear of legal

liabilities

o Believes management is manipulating the financial statements based on a

conversation with the Chief Credit Officer where the Chief mentioned that “he

could not and would not vouch for the accuracy of the numbers once the CFO had

them”

o Claims he was aggressively pressured by certain members of the executive team

o Believes BofI is concealing information regarding high risk clients from

regulators and is not properly disclosing subpoenas to the SEC

o Claims the bank is under-reporting its client concentration and that the largest

accounts represent more than 20% of assets

o Claims the bank is miscalculating its reserves

o Claims the bank is improperly recording customer calls

o Claims the bank has issued global cash cards to high risk clients to help launder

money

o Claims the CEO is laundering money by improperly allocating assets into his and

his brother’s accounts

o Claims his manager Jonathan Ball resigned after refusing to engage in illegal

activity

Matt Erhart worked at BofI for almost 2 years before filing the lawsuit. Before BofI, Matt

worked at Finra as a compliance manager for over 3 years

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o Given Matt’s experience at Finra, I have some degree of confidence that Matt

understands the kinds of issues that a regulator would pay attention to

The same day the lawsuit was filed, the New York Times published a follow-up piece on

BofI which drew attention to the lawsuit and sent the stock tumbleing11

BofI’s response to the litigation

More interesting than the lawsuit was BofI’s response to the situation. On October 14, the

company held a conference call to address the allegations

o On the call, CEO Garrabrants wrote off Mr. Erhart as a disgruntled former

employee

o Garrabrants stated that the bank was not aware of any ongoing investigation by its

regulators and claimed that the bank’s auditor had reviewed the allegations and

did not find any merit to the claims. Further, Garrabrants pointed to the fact that

on 9/1/2015 the OCC approved its H&R Block bank acquisition which would not

have occurred if the OCC suspected foul play at BofI

o Garrabrants then took it a step further and made several rants slamming the media

and short sellers who he claimed were orchestrating an attack on the company and

likely funding the litigation. Garrabrants threatened that BofI would investigate

the issue and go after the short sellers if they were found to possess material non-

public information or engaged in other illegal activity

On 10/15/15, BofI released a call transcript via an SEC 8-k which excluded a key

discloses he made regarding the bank’s communication with regulators

o Said on the call according to a Capital IQ transcript: “Well, I have to be very

careful about stating exactly what the OCC is doing, but the fact is, is that all

these were investigated. There's nothing ongoing. And the OCC comes in and

regularly reviews these things. If any of these things were true, we wouldn't have

gotten our deals done. You can take as absolute confirmation by the fact that we

got those deals done in the -- one deal done in the month that these allegations

were there, and then the next deal. In fact, there is no continuity to this. We have

great regulatory relations. We're under no regulatory orders, no regulatory

restrictions on our business. And we continue to have great dialogue with our

regulators and there's no issues with any of the idea that we're not providing

information or something like that.”

o Edited statement from BofI’s 8-K: “The OCC comes in and regularly reviews the

Bank. If any of these things were true, we wouldn't have gotten our two

acquisition deals done. You can take that as confirmation given that we got those

deals done. One deal was done in the month that these allegations were made. We

have great regulatory relations. We are under no regulatory orders, no

regulatory restrictions on our business, and we continue to have great dialogue

with our regulators. And there is no truth to any of these allegations that we did

not provide information.”

On 10/27/15 ahead of Q3 earnings, BofI announced a 4-For-1 stock split that can only be

interpreted as a direct shot to the short-sellers to create confusion and potentially create

issues at the brokerage houses with stock lent out for short selling

11 “Ex-Auditor Sues Bank of Internet”, New York Times, October 13, 2015.

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o Why else would BofI split its stock after shares dropped 30%?

Finally on 10/30/15, BofI filed a counter-suit against Matt Erhart which essentially

offered no new information other than the statement made by Mr. Ball (above)

Sell-side response to the litigation

Unsurprisingly, Wall Street has been uniformly supportive of BofI

o KBW 10/16/15: “The drop in the stock arose from the filing of a lawsuit by a

disgruntled employee, against which the company has vigorously defended itself,

citing the allegations as baseless. The OCC had all the information and

documentation behind the allegations, reviewed it, and subsequently approved the

First Marblehead and the H&R Block deposit transactions, the latter which was a

substantial deal. Therefore, we believe the company.”

o Sandler O’Neil upgraded BofI to BUY on 10/15/15: “For our part, we suspected

the claim of misstated financials and miscalculating the allowance to be dubious

based on how they were presented in the lawsuit as well as the number of

regulatory exams and external audits the company has been through over the

years… Beyond that, many of the claims the plaintiff makes in the lawsuit were

discussed with the OCC early this year, yet BofI received approval to complete

two acquisitions (H&R Block Bank and Union Federal Savings Bank) and we

doubt the regulators would have signed off on these two deals without extensive

due diligence into the bank and its practices. Moreover, there have been no

regulatory issues that have risen from the former internal auditor’s contact with

the OCC.”

o KBW 11/1/2015: “While we view the allegations as spurious and see BOFI’s

recent deal approvals as a validation of the company, and thus maintain our 12-

month Outperform rating, we recognize the near-term volatility risk to the

shares.”

Based on the above excerpts, Wall Street gives management, regulators and external

auditors ample credit while not giving much thought to Erhart’s claims or the other red

flags around the business. All sell-side analysts currently rate BofI at BUY

What conclusions can we draw from the litigation

I am not solely concerned whether or not every allegation made by Mr. Erhart is true or

false. I am sure many of Erhart’s allegations have valid explanations. However, given

Erhart’s background working at Finra, I have some level of confidence that there is at

least some validity to his claims

Even if most of Erhart’s claims are off the mark, BofI is now under intensified scrutiny

from regulators, the media, investors, customers and business partners. If there is

something to unearth, it is exponentially more likely to come out now that BofI is in the

limelite

o In light of the red flags from the sketchy business model, questionable executive

track-records, evidence of a turn and burn employee culture and numerous other

allegations made by bloggers, I would be surprised if there isn’t some level of

improper behavior going on at the company

BofI management’s response to the litigation is more telling than the litigation itself. If

the allegations are without merit, BofI should announce a 3rd

party committee to

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investigate the claims and move on. Instead, BofI has declared war on its accusers and

short-sellers. These actions corroborate the questions raised earlier about the ethics of the

management and board

On the point that the external auditors and regulators have reviewed the allegations, it is

unclear who has actually reviewed what at this point in time

o As the financial crisis has proven, banks are incredibly complex organizations

where assets and accounts can be hidden or manipulated. Management ultimately

has discretion as to what they turn over to auditors and regulators

o BofI announced the H&R block deal in April 2014. According to Mr. Erhart’s

lawsuit, Erhart did not approach regulators until February 2015 and had limited

meetings before his abrupt departure from BofI in March 2015. Erhart’s

communication was with the OCC’s Denver office – it is unclear if Erhart’s

complaints made it to the attention of the regulators in charge of the H&R Block

deal or how seriously they were considered

o One thing that has been proven time and time again is that government moves

slowly. Regulators are generally under-staffed and need time and a sense of

urgency. Now that Erhart’s allegations have garnered attention, regulators are

significantly more likely to scrutinize BofI and take action

SEC correspondence and FOIA requests

Recent correspondence from the SEC and FOIA requests raise the possibility that BofI

has not made full disclosures

In a letter dated 5/27/2015, the SEC noted that BofI had not disclosed a few lawsuits and

related part transactions in its filings. BofI responded that the lawsuits and related party

transactions were not material12

o The SEC has sent other inquiry letters regarding BofI’s financial statement

disclosures in 2014 and 2012

Freedom of Information Act requests can be used as a tool to gain color regarding the

status of ongoing regulatory reviews. A blogger on Seeking Alpha reported that after

periodically sending in FOIA requests over the past several months which came back

empty, a recent FOIA request indicated the existence of an ongoing investigation13

o Direct Excerpt from SEC FOIA Request: “We are withholding records that may

be responsive to your request under 5 U.S.C. § 552(7), 17 CFR § 200.80(7)(i).

This exemption protects from disclosure records compiled for law enforcement

purposes, the release of which could reasonably be expected to interfere with

enforcement activities. Since Exemption 7 protects the records from disclosure,

we have not determined if other exemptions apply. Therefore, we reserve the right

to assert other exemptions when Exemption 7 no longer applies.”

o I have recently submitted my own FOIA requests to the OCC and SEC regarding

the existence of ongoing investigations at BofI. I am still waiting for a response

BofI’s relative valuation

Despite the issues presented in this analysis, BofI trades at a comparable multiple to peers

12 http://www.sec.gov/Archives/edgar/data/1299709/000129970915000046/0001299709-15-000046-

index.htm 13 “The New York Times Has Only Scratched The Surface On BofI Holding...”, Seeking Alpha, August 28, 2015.

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o BofI’s P/TBV 2.7x vs. ~2.5x – 3.0x for peers

o BofI’s LTM P/E 17x vs. ~18x - 22x for peers

o BofI’s NTM P/E 13x vs. ~15x – 20x for peers

BofI should trade at a significant discount to peers due to the uncertainty from the

ongoing litigation and significant downside if the allegations are proven true

o Bulls would argue that BofI has superior growth and profitability and therefore

deserves a premium

o Interestingly, “online-only” banks trade at a significant discount to traditional

banks (see appendix)

The chart below shows that BofI’s P/TBV peaked at 4.0x (making it one of the most

expensive banks in America) vs. 2.7x today

Concluding thoughts

Most observers view the current situation at BofI as binary: either the litigation is right or

wrong. However, I believe it is important to analyze BofI holistically in that the litigation

when put into the context of the surrounding red flags is a catalyst for scrutiny rather than

a determinate account of all the potential wrong doing at the firm

Even if a majority of Mr. Erhart’s allegations are found to be without merit, I believe

there are enough causes for suspicion sprinkled throughout the DNA of the business and

its leadership which make BofI an attractive short

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

BOFI Share Price P/Tangible BV

Comparable Companies AnalysisShare Market Total LTM NTM LTM NTM Sales NTM EPS LTM Profit Net Interest Dividend Return on Branch Deposit Employee

Company Name Ticker Price Cap Debt P/E P/E P/TBV Growth Growth Margin Margin Yield Tang. Equity Count Base Headcount

BofI Holding BOFI $97.92 $1,542 $862 17.0x 13.2x 2.7x 39.5% 28.8% 40.6% 3.9% N/A 18.2% N/A $4,452 467

High Growth BanksShare Market Total LTM NTM LTM NTM Sales NTM EPS LTM Profit Net Interest Dividend Return on Branch Deposit Employee

Company Name Ticker Price Cap Debt P/E P/E P/TBV Growth Growth Margin Margin Yield Tang. Equity Count Base Headcount

First Republic Bank FRC $67.98 $9,693 $4,912 22.2x 19.5x 2.3x 26.0% 13.7% 24.4% 3.3% 0.9% 9.9% 73 $44,343 2,506Bank of the Ozarks OZRK $52.77 $4,658 $359 27.1x 23.2x 4.0x 25.9% 16.4% 37.3% 5.5% 1.0% 15.0% 159 $7,087 1,479BankUnited BKU $39.29 $4,068 $4,191 17.2x 18.4x 1.9x 24.4% (6.1%) 22.7% 4.6% 2.1% 8.3% 106 $15,292 1,608Texas Capital BancShares TCBI $60.82 $2,788 $1,800 20.3x 18.9x 2.0x 20.5% 7.0% 26.5% 3.8% N/A 10.4% 13 $14,188 1,142Pinnacle Financial Partners PNFP $56.33 $2,105 $756 23.6x 19.6x 3.1x 35.9% 20.1% 29.3% 3.8% 0.8% 14.0% 35 $4,994 764

Mean $55.44 $4,662 $2,404 22.1x 19.9x 2.7x 26.5% 10.2% 28.1% 4.2% 1.2% 11.5% 77 $17,181 1,500Median $56.33 $4,068 $1,800 22.2x 19.5x 2.3x 25.9% 13.7% 26.5% 3.8% 0.9% 10.4% 73 $14,188 1,479

High Profitability BanksShare Market Total LTM NTM LTM NTM Sales NTM EPS LTM Profit Net Interest Dividend Return on Branch Deposit Employee

Company Name Ticker Price Cap Debt P/E P/E P/TBV Growth Growth Margin Margin Yield Tang. Equity Count Base Headcount

Signature Bank SBNY $156.98 $7,898 $2,250 22.9x 19.5x 2.8x 22.5% 17.2% 40.3% 3.3% N/A 13.2% 28 $26,612 1,010Western Alliance WAL $38.49 $3,880 $630 20.3x 17.0x 3.2x 34.4% 18.9% 31.6% 4.4% N/A 13.2% 40 $11,407 1,131Bank of Hawaii BOH $68.85 $2,981 $928 18.9x 18.1x 2.8x 1.7% 4.1% 26.2% 2.9% 2.6% 14.4% 74 $13,091 2,161First Financial Bankshares FFIN $35.67 $2,353 $501 23.6x 21.2x 3.6x 25.0% 11.3% 30.0% 4.2% 1.7% 12.7% 67 $5,097 1,140Eagle Bancorp EGBN $51.29 $1,717 $135 22.0x 19.9x 2.8x 6.4% 10.7% 33.9% 4.4% N/A 13.7% 22 $4,825 427

Mean $70.26 $3,766 $889 21.5x 19.2x 3.1x 18.0% 12.5% 32.4% 3.8% 2.1% 13.4% 46 $12,207 1,174Median $51.29 $2,981 $630 22.0x 19.5x 2.8x 22.5% 11.3% 31.6% 4.2% 2.1% 13.2% 40 $11,407 1,131

Online BanksShare Market Total LTM NTM LTM NTM Sales NTM EPS LTM Profit Net Interest Dividend Return on Branch Deposit Employee

Company Name Ticker Price Cap Debt P/E P/E P/TBV Growth Growth Margin Margin Yield Tang. Equity Count Base Headcount

Ally Financial ALLY $19.80 $9,539 $73,015 N/A 8.6x 0.7x (18.8%) N/A 15.5% 2.4% N/A 7.7% N/A $61,700 6,900Blackhawk Network HAWK $44.68 $2,441 $476 53.8x 18.6x N/A 16.3% 189.2% 2.7% N/A N/A N/A N/A N/A 1,860EverBank Financial EVER $17.64 $2,204 $5,578 19.8x 12.6x 1.4x 1.6% 57.3% 14.6% 3.1% 1.0% 8.4% N/A $16,503 3,100Green Dot GDOT $17.36 $904 $134 20.7x 13.7x 4.7x 0.7% 51.2% 6.3% N/A N/A 20.5% N/A $669 857Meta Financial Group CASH $44.05 $361 $561 16.6x 11.0x 1.3x 31.8% 50.4% 10.6% 3.0% 1.2% 6.5% 11 $1,518 N/A The Bancorp TBBK $7.94 $300 $14 N/A 9.3x 1.0x N/A N/A 0.8% 2.6% N/A 0.3% N/A $4,316 684First Internet Bancorp INBK $31.43 $141 $154 17.6x 14.4x 1.4x (6.5%) 22.3% 20.9% 2.7% 0.8% 8.5% 4 $908 143

Mean $26.13 $2,270 $11,419 25.7x 12.6x 1.7x 4.2% 74.1% 10.2% 2.8% 1.0% 8.7% 8 $14,269 2,257Median $19.80 $904 $476 19.8x 12.6x 1.3x 1.1% 51.2% 10.6% 2.7% 1.0% 8.1% 8 $2,917 1,359

Source: Capital IQ. Projections based on Wall Street consensus estimates. Data as of 11/09/2015.