As filed with the Securities and Exchange
Commission on February 24, 2005
Registration No. 333-121329
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BofI Holding, Inc.
(Exact name of registrant as specified in its
charter)
|
|
|
|
|
Delaware
|
|
6035
|
|
33-0867444
|
(State or other jurisdiction of
incorporation or organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification No.)
|
BofI Holding, Inc.
12220 El Camino Real, Suite 220
San Diego, CA 92130
(858) 350-6200
(Address, including zip code, and telephone
number, including area code, of registrants principal
executive offices)
Gary Lewis Evans
President and Chief Executive
Officer
BofI Holding, Inc.
12220 El Camino Real, Suite 220
San Diego, CA 92130
(858) 350-6200
(Name, address, including zip code, and
telephone number,
including area code, of agent for
service)
Copies to:
|
|
|
Allen Z. Sussman, Esq.
|
|
Ellen R. Marshall, Esq.
|
Charles C. Kim, Esq.
|
|
Ivan A. Gaviria, Esq.
|
Morrison & Foerster LLP
|
|
Manatt, Phelps & Phillips,
LLP
|
555 West Fifth Street
|
|
695 Town Center Drive,
14th Floor
|
Los Angeles, CA 90013-1024
|
|
Costa Mesa, CA 92626
|
(213) 892-5200
|
|
(714) 371-2500
|
Approximate date of
commencement of proposed sale to the public:
As soon as
practicable after the effective date of this Registration
Statement.
If any of the securities
being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following
box.
o
If this Form is filed to
register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If delivery of the
prospectus is expected to be made pursuant to Rule 434,
please check the following
box.
o
CALCULATION OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
Proposed Maximum
|
|
|
Title of Each Class of
|
|
Amount to be
|
|
Offering
|
|
Aggregate
|
|
Amount of
|
Securities to be Registered
|
|
Registered(1)
|
|
Price Per Share
|
|
Offering Price(2)
|
|
Registration Fee(3)
|
|
|
Common stock, par value $0.01 per share
|
|
2,587,500
|
|
$13.00
|
|
$33,637,500
|
|
$3,959.13
|
|
|
|
|
(1)
|
Includes shares of common stock that the
underwriters have the option to purchase to cover
over-allotments, if any.
|
|
(2)
|
Estimated solely for the purpose of determining
the registration fee in accordance with Rule 457(o) under
the Securities Act of 1933.
|
|
|
(3)
|
Previously paid.
|
|
The Registrant hereby
amends this Registration Statement on such date or dates as may
be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on
such date as the SEC, acting pursuant to Section 8(a), may
determine.
The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or
sale is not permitted.
|
SUBJECT TO COMPLETION, DATED
FEBRUARY 24, 2005
|
|
|
|
|
|
|
|
|
B of I Holding, Inc.,
the holding company for:
|
|
|
|
2,250,000 Shares
of Common Stock
|
|
|
We are BofI Holding, Inc., the holding company
for Bank of Internet USA.
|
|
This is BofI Holdings initial public
offering and no public market currently exists for its shares.
We expect that the public offering price will be between $9.00
and $13.00 per share.
|
|
|
|
|
|
|
|
|
THE OFFERING
|
|
PER SHARE
|
|
TOTAL
|
|
|
Public Offering Price
|
|
$
|
|
|
|
$
|
|
|
Underwriting Discount
|
|
$
|
|
|
|
$
|
|
|
Proceeds to BofI Holding, Inc.
|
|
$
|
|
|
|
$
|
|
|
|
|
|
BofI Holding has granted the underwriters the
right to purchase up to 337,500 additional shares from it within
30 days after the date of this prospectus to cover any
over-allotments. The underwriters expect to deliver shares of
common stock to purchasers
on ,
2005.
|
|
|
|
Proposed Nasdaq National Market Symbol: BOFI
|
|
|
|
OpenIPO®
: The
method of distribution being used by the underwriters in the
offering differs somewhat from that traditionally employed in
firm commitment underwritten public offerings. In particular,
the public offering price and allocation of shares will be
determined primarily by an auction process conducted by the
underwriters and other securities dealers participating in the
offering. The minimum size for any bid in the auction is
100 shares. A more detailed description of this process,
known as an OpenIPO, is included in Plan of
Distribution beginning on page 100.
|
Investing in the common stock of BofI Holding
involves a high degree of risk.
See Risk Factors beginning on
page 7 to read about risks you should consider carefully
before buying shares of BofI Holdings common
stock.
Neither the Securities and Exchange Commission
nor any state securities commission or other regulatory body has
approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
These securities are not savings or deposit
accounts or obligations of any bank and are not insured by the
Federal Deposit Insurance Corporation, Bank Insurance Fund,
Savings Association Insurance Fund or any other governmental
agency.
The date of this prospectus
is ,
2005.
[MAP OF THE UNITED STATES SHADED TO INDICATE IN WHICH STATES OUR BANK HAS DEPOSITS ONLY AND IN
WHICH STATES OUR BANK HAS DEPOSITS AND LOANS ORIGINATED OR PURCHASED SINCE INCEPTION THAT INCLUDES
THE FOLLOWING TEXT: INTERNET BANKING CUSTOMERS IN ALL 50 STATES AND BANK OF INTERNET CURRENTLY
ORIGINATES CUSTOMER DEPOSITS AND SINGLE FAMILY MORTGAGE LOANS ON A NATIONWIDE BASIS AND MULTIFAMILY
LOANS PRIMARILY IN CALIFORNIA, ARIZONA, TEXAS AND WASHINGTON. BANK OF INTERNET OPERATES OUT OF A
SINGLE LOCATION IN SAN DIEGO, CALIFORNIA.]
[PHOTOGRAPHS OF THE MAIN AND MULTIFAMILY LOAN WEBSITES FOR OUR BANK THAT INCLUDES THE FOLLOWING
TEXT: OUR WEBSITES PROVIDE A USER-FRIENDLY INTERFACE WHERE OUR CUSTOMERS OPEN ACCOUNTS, REVIEW
INTEREST RATES AND TERMS, ENTER LOAN APPLICATIONS, LOCK IN INTEREST RATES AND MONITOR LOAN
PROCESSING. OUR DEPOSIT CUSTOMERS PAY BILLS ONLINE, VIEW CANCELLED CHECKS AND USE OUR FREE ATM AND
VISA CHECK CARDS]
TABLE OF CONTENTS
You should rely only on the information
contained in this prospectus. We have not, and the underwriters
have not, authorized any other person to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information contained in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
This prospectus contains product names,
trademarks and trade names of our company and other
organizations.
i
PROSPECTUS SUMMARY
This summary provides an overview of
information contained elsewhere in this prospectus and does not
contain all of the information you should consider. You should
read the following summary together with the more detailed
information set out in this prospectus, including the Risk
Factors section beginning on page 7 and our
consolidated financial statements and notes to those
consolidated financial statements that appear elsewhere in this
prospectus.
Unless otherwise stated, all information in
this prospectus assumes that the underwriters will not exercise
their over-allotment option to purchase any of the
337,500 shares of our common stock subject to that
option.
BofI Holding, Inc.
General
We are BofI Holding, Inc., the holding company
for Bank of Internet USA, a consumer-focused, nationwide savings
bank operating primarily through the Internet from a single
location in San Diego, California. We provide a variety of
consumer banking services, focusing primarily on gathering
retail deposits over the Internet and originating and purchasing
multifamily and single family loans for investment. Since the
inception of our bank in 2000, we have designed and implemented
an automated Internet-based banking platform and electronic
workflow process that we believe affords us low operating
expenses and allows us to pass these savings along to our
customers in the form of attractive interest rates and low fees
on our products. Our bank was designed from the ground-up to use
this platform, providing us with an advantage in leveraging
technology to handle routine banking transactions with lean
staffing.
We believe that our business model is highly
scalable, and we expect to be able to grow with the addition of
new capital. Through our Internet marketing efforts and our
ability to adjust interest rates quickly in response to market
conditions, we have been able to expand into new regions and
products and rapidly increase deposits and, to a lesser extent,
loans, without significant delays and with limited additional
fixed assets and personnel. We are able to operate in all
50 states and can be selective in entering new geographic
markets and targeting demographic groups such as seniors or
students. We currently originate deposits and single family
mortgage loans on a nationwide basis, and multifamily loans
primarily in California, Arizona, Texas and Washington.
At December 31, 2004, we had total assets of
$513.1 million, net loans held for investment of
$417.9 million and total deposits of $320.0 million.
Our deposits consist primarily of interest-bearing checking and
savings accounts and time deposits. Our loans are primarily
first mortgages secured by multifamily (five or more units) and
single family (one to four units) real property.
During the past three fiscal years, we have
achieved strong growth. From the fiscal year ended June 30,
2002 to the fiscal year ended June 30, 2004, we have:
|
|
|
|
|
increased our net income from $1.0 million
to $2.2 million and diluted earnings per share from $0.21
to $0.39;
|
|
|
|
increased our total assets at year end from
$217.6 million to $405.0 million, while only
increasing our employment base from 20 to 24 full time employees;
|
|
|
|
increased net loans held for investment at year
end from $167.3 million to $355.3 million, increased
originations of multifamily loans held for investment from
$30.0 million to $57.3 million and increased
originations of single family loans held for sale from
$7.0 million to $76.6 million;
|
|
|
|
increased total deposits at year end from
$167.6 million to $269.8 million and the number of
online deposit accounts from 6,400 to 13,700;
|
|
|
|
increased advances from the Federal Home Loan
Bank, or the FHLB, from $29.9 million to
$101.4 million;
|
|
|
|
improved our efficiency ratio, or noninterest
expense as a percentage of net interest income plus noninterest
income, which decreased from 79.3% to 49.5%;
|
|
|
|
improved our return on average common
stockholders equity from 6.3% to 8.4%; and
|
1
|
|
|
|
|
further leveraged our capital base as our
banks Tier 1 leverage (core) capital to adjusted
tangible assets ratio decreased from 8.7% to 7.8%.
|
Business Strategy
Our business strategy is to lower the cost of
delivering banking products and services by leveraging
technology, while continuing to grow our assets and deposits to
achieve increased economies of scale. Our strategy includes a
number of key elements:
|
|
|
|
|
Leverage Technology.
We have designed our automated Internet-based banking platform
and workflow process to handle traditional banking functions
with reduced paperwork and human intervention. We plan to
continue to incrementally improve our proprietary software and
systems on an ongoing basis. We currently expect the annual rate
of capital expenditures for technology-related improvements will
remain consistent with our past growth experience.
|
|
|
|
Exploit Advantages of Nationwide
Presence.
Our thrift charter allows us
to operate in all 50 states. Our nationwide, online
presence allows us increased flexibility to target a large
number of loan and deposit customers based on demographics,
geographic location and price. It also provides us with a low
cost of customer acquisition and the ability to be selective in
approving prospective loan customers. We can rapidly shift and
target our marketing based on the demographics and location of
the target audience nationwide and establish a presence in new
geographic and demographic markets with relatively low entry
costs. Our marketing costs are fairly uniform on a nationwide
basis because we advertise mainly over the Internet.
|
|
|
|
Continue to Grow Online Deposits and Expand
Services.
We offer a broad selection
of retail deposit instruments and plan to continue to develop
new products and services to serve specific demographics. We
intend to expand the volume and breadth of our deposit marketing
over the Internet. We expect that the annual rate of our
marketing costs compared to growth in new customers will remain
consistent with our past growth experience.
|
|
|
|
Increase Loan Originations and
Purchases.
We intend to continually
increase single family and multifamily loan originations through
our websites, including our ApartmentBank and
Broker Advantage websites. We also plan to continue
to purchase high-quality multifamily and, to a lesser extent,
single family loans. We expect that our loan marketing and
origination costs will rise incrementally as our originations
grow at a rate in line with our past experience.
|
Corporate Information
BofI Holding, Inc. was incorporated in the State
of Delaware on July 6, 1999 for the purpose of organizing
and opening an Internet-based bank. Bank of Internet USA, our
wholly-owned subsidiary, is a federal savings bank that opened
for business over the Internet on July 4, 2000. Our only
other subsidiary is BofI Trust I, a Delaware statutory trust
formed in connection with the issuance of our trust preferred
securities in December 2004. Our executive offices are located
at 12220 El Camino Real, Suite 220, San Diego,
California 92130, and our telephone number is
(858) 350-6200.
We maintain the following active websites:
|
|
|
|
|
www.bankofinternet.com and www.bofi.com, the main
websites for our bank where we provide, among other things,
traditional banking products and services;
|
|
|
|
homeloans.bankofinternet.com, our website for
originating single family loans;
|
|
|
|
www.apartmentbank.com, our website for
originating multifamily loans;
|
|
|
|
broker.bofi.com, our website dedicated to the
loan brokers with whom we have relationships;
|
|
|
|
www.bancodeinternet.com, a redesigned version of
our main website to focus on Spanish speaking customers; and
|
|
|
|
www.seniorbofi.com, our website to market to
seniors.
|
Information contained on our websites is not a
part of this prospectus.
2
The Offering
|
|
|
Common Stock offered
|
|
2,250,000 shares(1)
|
|
Common Stock outstanding as of December 31,
2004
|
|
4,563,399 shares
|
|
|
Common Stock outstanding as of December 31,
2004, assuming the exercise and conversion of all outstanding
exercisable and convertible securities
|
|
6,672,216 shares
|
|
|
Common Stock outstanding after the offering
|
|
7,497,649 shares(2)
|
|
Net proceeds
|
|
The net proceeds from the offering will be
approximately $21.8 million, assuming an offering price of
$11.00 per share (the midpoint of the range) and that the
underwriters over-allotment option is not exercised.
|
|
Use of proceeds
|
|
We intend to contribute approximately
$16.0 million of the net proceeds from this offering to
Bank of Internet USA to provide additional capital to support
its growth. We also intend to use a portion of the net proceeds
to prepay in full a note payable that had an outstanding
principal balance of $5.0 million at December 31,
2004. The note payable bears interest at prime plus one percent
per annum. We intend to use the remaining net proceeds for
general corporate purposes. Pending these uses, we will invest
the net proceeds initially in short term, investment grade
securities and other qualified investments. See Use of
Proceeds for more information.
|
|
Dividends on Common Stock
|
|
We have never paid cash dividends on our common
stock, electing to retain earnings for funding our growth and
business. We currently anticipate continuing our policy of
retaining earnings to fund growth. See Dividend
Policy for more information.
|
|
Proposed Nasdaq National Market symbol
|
|
We have applied to have our common stock listed
for quotation on the Nasdaq National Market under the symbol
BOFI.
|
|
|
(1)
|
The number of shares of our common stock offered
assumes that the underwriters over-allotment option is not
exercised. If the over-allotment option is exercised in full, we
will issue and sell an additional 337,500 shares.
|
|
|
(2)
|
The number of shares of our common stock
outstanding after the offering is based on the number of shares
outstanding at December 31, 2004, and assumes that the
underwriters over-allotment option is not exercised. The
number includes 684,250 shares of common stock issuable
upon exercise of warrants with an exercise price of
$4.19 per share, which warrants we expect to be exercised
on a cash basis prior to the offering because they terminate if
not exercised prior to that time.
|
|
The number excludes:
|
|
|
|
|
|
722,017 shares of common stock issuable upon
exercise of outstanding stock options with a weighted average
exercise price of $6.11 per share;
|
|
|
|
|
59,950 shares of common stock issuable upon
the exercise of warrants with an exercise price of
$14.00 per share;
|
3
|
|
|
|
|
642,600 shares of common stock currently
issuable upon conversion of our Series A 6%
Cumulative Nonparticipating Perpetual Preferred Stock, or our
Series A preferred stock. Our Series A preferred stock
is convertible at prices which increase periodically through
January 2009, after which time our Series A preferred stock
is no longer convertible into our common stock. The current
conversion price of $10.50 per share is in effect through
January 1, 2006;
|
|
|
|
|
shares of common stock reserved for future
issuance under our 2004 stock incentive plan, which provides
that aggregate equity awards under our 2004 stock incentive plan
and options outstanding under our 1999 stock option plan may not
exceed 14.8% of our outstanding common stock at any time. Based
on the number of shares of common stock outstanding at
December 31, 2004, and assuming 2,250,000 shares of
common stock are sold in the offering and warrants to purchase
684,250 shares of common stock are exercised on a cash basis
prior to the offering, the maximum number of shares of common
stock issuable upon exercise of options granted under our 2004
stock incentive plan would be 1,109,652; and
|
|
|
|
|
up to 500,000 shares of common stock
reserved for future issuance under our 2004 employee stock
purchase plan.
|
Risk Factors
See Risk Factors beginning on
page 7 for a discussion of material risks related to an
investment in our common stock.
4
Summary Consolidated Financial
Information
You should read the summary consolidated
financial information set forth below together with our
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. Our consolidated income statement information
for the six months ended December 31, 2004 and 2003 and the
consolidated balance sheet information as of December 31,
2004 are derived from our unaudited consolidated financial
statements, which are included in this prospectus and, in the
opinion of management, include all adjustments necessary for
fair presentation of the results of such periods. The
consolidated balance sheet information as of December 31,
2003 is derived from our unaudited consolidated financial
information. The consolidated income statement information for
the fiscal years ended June 30, 2004, 2003 and 2002 and the
consolidated balance sheet information as of June 30, 2004
and 2003 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus. The
consolidated income statement information for the fiscal year
ended June 30, 2001 and the period from July 6, 1999
(inception) to June 30, 2000 and the consolidated
balance sheet information at June 30, 2002, 2001 and 2000
have been derived from our audited consolidated financial
statements that are not included in this prospectus. Historical
results are not necessarily indicative of future
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for
|
|
|
At or for
|
|
|
|
|
|
|
|
|
|
the Period
|
|
|
the Six Months
|
|
|
|
July 6, 1999
|
|
|
Ended December 31,
|
|
At or for the Fiscal Years Ended June 30,
|
|
(inception) to
|
|
|
|
|
|
|
June 30,
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
513,108
|
|
|
$
|
316,804
|
|
|
$
|
405,039
|
|
|
$
|
273,464
|
|
|
$
|
217,614
|
|
|
$
|
156,628
|
|
|
$
|
13,295
|
|
Loans held for investment, net of allowance for
loan losses
|
|
|
417,915
|
|
|
|
283,764
|
|
|
|
355,261
|
|
|
|
245,933
|
|
|
|
167,251
|
|
|
|
139,679
|
|
|
|
|
|
Loans held for sale, at cost
|
|
|
845
|
|
|
|
|
|
|
|
435
|
|
|
|
3,602
|
|
|
|
128
|
|
|
|
22
|
|
|
|
|
|
Allowance for loan losses
|
|
|
1,220
|
|
|
|
825
|
|
|
|
1,045
|
|
|
|
790
|
|
|
|
505
|
|
|
|
310
|
|
|
|
|
|
Investment securities
|
|
|
53,041
|
|
|
|
311
|
|
|
|
3,665
|
|
|
|
441
|
|
|
|
726
|
|
|
|
1,522
|
|
|
|
|
|
Total deposits
|
|
|
320,019
|
|
|
|
220,235
|
|
|
|
269,841
|
|
|
|
193,992
|
|
|
|
167,618
|
|
|
|
127,204
|
|
|
|
|
|
Advances from the FHLB
|
|
|
148,504
|
|
|
|
66,389
|
|
|
|
101,446
|
|
|
|
55,900
|
|
|
|
29,900
|
|
|
|
15,900
|
|
|
|
|
|
Note payable
|
|
|
5,000
|
|
|
|
3,060
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
870
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
32,844
|
|
|
|
26,623
|
|
|
|
31,759
|
|
|
|
22,885
|
|
|
|
19,501
|
|
|
|
11,903
|
|
|
|
12,936
|
|
Selected Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
10,192
|
|
|
$
|
7,218
|
|
|
$
|
15,772
|
|
|
$
|
13,514
|
|
|
$
|
11,641
|
|
|
$
|
4,697
|
|
|
$
|
24
|
|
Interest expense
|
|
|
5,905
|
|
|
|
4,342
|
|
|
|
9,242
|
|
|
|
8,426
|
|
|
|
8,144
|
|
|
|
3,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,287
|
|
|
|
2,876
|
|
|
|
6,530
|
|
|
|
5,088
|
|
|
|
3,497
|
|
|
|
1,162
|
|
|
|
24
|
|
Provision for loan losses
|
|
|
175
|
|
|
|
35
|
|
|
|
255
|
|
|
|
285
|
|
|
|
195
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan
losses
|
|
|
4,112
|
|
|
|
2,841
|
|
|
|
6,275
|
|
|
|
4,803
|
|
|
|
3,302
|
|
|
|
852
|
|
|
|
24
|
|
Noninterest income
|
|
|
385
|
|
|
|
474
|
|
|
|
1,190
|
|
|
|
1,349
|
|
|
|
297
|
|
|
|
52
|
|
|
|
|
|
Noninterest expense
|
|
|
2,546
|
|
|
|
1,985
|
|
|
|
3,819
|
|
|
|
3,158
|
|
|
|
3,008
|
|
|
|
1,985
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
1,951
|
|
|
|
1,330
|
|
|
|
3,646
|
|
|
|
2,994
|
|
|
|
591
|
|
|
|
(1,081
|
)
|
|
|
(988
|
)
|
Income tax expense (benefit)
|
|
|
776
|
|
|
|
580
|
|
|
|
1,471
|
|
|
|
1,264
|
|
|
|
(429
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,175
|
|
|
$
|
750
|
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
$
|
(1,082
|
)
|
|
$
|
(988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
972
|
|
|
$
|
731
|
|
|
$
|
2,035
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
$
|
(1,082
|
)
|
|
$
|
(988
|
)
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for
|
|
|
At or for
|
|
|
|
|
|
|
|
|
|
the Period
|
|
|
the Six Months
|
|
|
|
July 6, 1999
|
|
|
Ended December 31,
|
|
At or for the Fiscal Years Ended June 30,
|
|
(inception) to
|
|
|
|
|
|
|
June 30,
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.25
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
$
|
0.39
|
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
Book value per common share
|
|
$
|
5.74
|
|
|
$
|
5.27
|
|
|
$
|
5.57
|
|
|
$
|
5.11
|
|
|
$
|
4.50
|
|
|
$
|
3.21
|
|
|
$
|
3.50
|
|
Tangible book value per common share
|
|
$
|
5.74
|
|
|
$
|
5.27
|
|
|
$
|
5.57
|
|
|
$
|
5.11
|
|
|
$
|
4.50
|
|
|
$
|
3.21
|
|
|
$
|
3.50
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,527,519
|
|
|
|
4,498,045
|
|
|
|
4,502,284
|
|
|
|
4,468,296
|
|
|
|
4,128,051
|
|
|
|
3,706,050
|
|
|
|
2,950,999
|
|
|
Diluted
|
|
|
5,172,864
|
|
|
|
5,156,898
|
|
|
|
5,160,482
|
|
|
|
5,134,940
|
|
|
|
4,795,401
|
|
|
|
3,706,050
|
|
|
|
2,950,999
|
|
Common shares outstanding at end of period
|
|
|
4,563,399
|
|
|
|
4,506,524
|
|
|
|
4,506,524
|
|
|
|
4,474,351
|
|
|
|
4,334,401
|
|
|
|
3,707,156
|
|
|
|
3,694,031
|
|
Performance Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations for investment
|
|
$
|
27,682
|
|
|
$
|
37,198
|
|
|
$
|
64,478
|
|
|
$
|
58,609
|
|
|
$
|
34,659
|
|
|
$
|
16,003
|
|
|
|
NM
|
|
Loan originations for sale
|
|
|
9,795
|
|
|
|
43,643
|
|
|
|
76,550
|
|
|
|
124,739
|
|
|
|
6,994
|
|
|
|
3,317
|
|
|
|
NM
|
|
Loan purchases
|
|
|
70,859
|
|
|
|
52,468
|
|
|
|
129,193
|
|
|
|
81,778
|
|
|
|
132,298
|
|
|
|
139,565
|
|
|
|
NM
|
|
Return (loss) on average assets
|
|
|
0.53%
|
|
|
|
0.52%
|
|
|
|
0.67%
|
|
|
|
0.71%
|
|
|
|
0.53%
|
|
|
|
(1.56
|
)%
|
|
|
NM
|
|
Return (loss) on average common
stockholders equity
|
|
|
7.52%
|
|
|
|
6.16%
|
|
|
|
8.42%
|
|
|
|
7.87%
|
|
|
|
6.32%
|
|
|
|
(8.68
|
)%
|
|
|
NM
|
|
Interest rate spread(1)
|
|
|
1.78%
|
|
|
|
1.76%
|
|
|
|
1.81%
|
|
|
|
1.76%
|
|
|
|
1.45%
|
|
|
|
0.67
|
%
|
|
|
NM
|
|
Net interest margin(2)
|
|
|
1.98%
|
|
|
|
2.02%
|
|
|
|
2.04%
|
|
|
|
2.11%
|
|
|
|
1.83%
|
|
|
|
1.73
|
%
|
|
|
NM
|
|
Efficiency ratio(3)
|
|
|
54.49%
|
|
|
|
59.25%
|
|
|
|
49.47%
|
|
|
|
49.06%
|
|
|
|
79.28%
|
|
|
|
163.51
|
%
|
|
|
NM
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets at end of period
|
|
|
6.40%
|
|
|
|
8.40%
|
|
|
|
7.84%
|
|
|
|
8.37%
|
|
|
|
8.96%
|
|
|
|
7.60
|
%
|
|
|
NM
|
|
Tier 1 leverage (core) capital to
adjusted tangible assets(4)
|
|
|
7.45%
|
|
|
|
8.94%
|
|
|
|
7.84%
|
|
|
|
8.09%
|
|
|
|
8.65%
|
|
|
|
8.16
|
%
|
|
|
NM
|
|
Tier 1 risk-based capital ratio(4)
|
|
|
11.44%
|
|
|
|
12.09%
|
|
|
|
11.11%
|
|
|
|
11.40%
|
|
|
|
13.76%
|
|
|
|
15.00
|
%
|
|
|
NM
|
|
Total risk-based capital ratio(4)
|
|
|
11.80%
|
|
|
|
12.44%
|
|
|
|
11.48%
|
|
|
|
11.81%
|
|
|
|
14.13%
|
|
|
|
15.37
|
%
|
|
|
NM
|
|
Tangible capital to tangible assets(4)
|
|
|
7.45%
|
|
|
|
8.94%
|
|
|
|
7.84%
|
|
|
|
8.09%
|
|
|
|
8.65%
|
|
|
|
8.16
|
%
|
|
|
NM
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans held for
investment at end of period
|
|
|
0.29%
|
|
|
|
0.29%
|
|
|
|
0.29%
|
|
|
|
0.32%
|
|
|
|
0.30%
|
|
|
|
0.22
|
%
|
|
|
NM
|
|
Allowance for loan losses to nonperforming
loans(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Interest rate spread represents the difference
between the weighted average yield on interest-earning assets
and the weighted average rate paid on interest-bearing
liabilities.
|
|
(2)
|
Net interest margin represents net interest
income as a percentage of average interest-earning assets.
|
|
(3)
|
Efficiency ratio represents noninterest expense
as a percentage of the aggregate of net interest income and
noninterest income.
|
|
(4)
|
Reflects regulatory capital ratios of Bank of
Internet USA only.
|
|
|
(5)
|
For every quarter from inception to June 30,
2004, we had no loan defaults, no foreclosures, no nonperforming
loans and no specific loan loss allowances. Since that time, one
loan with a principal balance of approximately $152,000 at
June 30, 2004 defaulted, but the loan was repaid in full in
September 2004. At September 30, 2004 and December 31,
2004, we had no loan defaults, no foreclosures, no nonperforming
loans and no specific loan loss allowances.
|
|
NM means not meaningful.
6
RISK FACTORS
An investment in our common stock involves
risk, and you should not invest in our common stock unless you
can afford to lose some or all of your investment. You should
carefully read the risks described below, together with all of
the other information included in this prospectus, before you
decide to buy any of our common stock. Our business, prospects,
financial condition and results of operations could be harmed by
any of the following risks or other risks which have not been
identified which we believe are immaterial or
unlikely.
Risks Relating to Our Business
|
|
|
Our limited operating history makes our
future prospects and financial performance unpredictable, which
may impair our ability to manage our business and your ability
to assess our prospects.
|
We commenced banking operations in July 2000. We
remain subject to the risks inherently associated with new
business enterprises in general and, more specifically, the
risks of a new financial institution and, in particular, a new
Internet-based financial institution. Our prospects are subject
to the risks and uncertainties frequently encountered by
companies in their early stages of development, including the
risk that we will not be able to implement our business
strategy. In addition, we have a limited history upon which we
can rely in planning and making the critical decisions that will
affect our future operating results. Similarly, because of the
relatively immature state of our business, it will be difficult
to evaluate our prospects. Accordingly, our financial
performance to date may not be indicative of whether our
business strategy will be successful.
|
|
|
We may not be able to implement our plans
for growth successfully, which could adversely affect our future
operations.
|
We have grown substantially, from
$217.6 million in total assets and $167.6 million in
total deposits at June 30, 2002 to $513.1 million in
total assets and $320.0 million in total deposits at
December 31, 2004. We expect to continue to grow our
assets, our deposits, the number of our customers and the scale
of our operations generally and will seek to grow at an
accelerated rate following completion of the offering. Our
future success will depend in part on our continued ability to
manage our growth. We may not be able to achieve our growth
plans, or sustain our historical growth rates or grow at all.
Various factors, such as economic conditions, regulatory and
legislative considerations and competition, may also impede our
ability to expand our market presence. If we are unable to grow
as planned, our business and prospects could be adversely
affected.
Our business strategy involves, among other
things, continuing to grow our assets and loan portfolio and our
customer base. We intend to use the net proceeds from the
offering to help us achieve this objective. Our ability to
achieve profitable growth depends in part upon our ability to
identify favorable loan and investment opportunities and
successfully attract deposits. Our management may not be able to
use the net proceeds from the offering to implement our business
strategy effectively, and we may encounter unanticipated
obstacles in implementing our strategy. If we are unable to
expand our business as we anticipate, we may be unable to
benefit from the investments we have made to support our future
growth. If this occurs, we may not be able to maintain
profitability.
|
|
|
Our inability to manage our growth could
harm our business.
|
We anticipate that our asset size and deposit
base will continue to grow over time, perhaps significantly. To
manage the expected growth of our operations and personnel, we
will be required to, among other things:
|
|
|
|
|
improve existing and implement new transaction
processing, operational and financial systems, procedures and
controls;
|
|
|
|
maintain effective credit scoring and
underwriting guidelines; and
|
|
|
|
expand our employee base and train and manage
this growing employee base.
|
If we are unable to manage growth effectively,
our business, prospects, financial condition and results of
operations could be adversely affected.
7
|
|
|
In a rising interest rate environment, an
institution with a negative interest rate sensitivity gap
generally would be expected, absent the effects of other
factors, to experience a greater increase in its cost of
liabilities relative to its yield on assets, and thus a decrease
in its net interest income.
|
Our profitability depends substantially on our
net interest income, which could be negatively affected by
changes in interest rates. Net interest income is the difference
between the income we earn on interest-earning assets, such as
mortgage loans and investment securities, and the interest we
pay on interest-bearing liabilities, such as deposits and other
borrowings. Because of the differences in both maturities and
repricing characteristics of our interest-earning assets and
interest-bearing liabilities, changes in interest rates do not
produce equivalent changes in interest income earned on
interest-earning assets and interest paid on interest-bearing
liabilities. Accordingly, fluctuations in interest rates could
adversely affect our net interest income and therefore
profitability. We may not be able to manage our interest rate
risk.
Interest rates are highly sensitive to many
factors which are beyond our control, including general economic
conditions and policies of various governmental and regulatory
agencies and, in particular, the Federal Reserve Board, or the
FRB. Changes in monetary policy, including changes in interest
rates, will influence not only the interest we receive on our
loans and investment securities and the amount of interest we
pay on deposits, it will also affect our ability to originate
loans and obtain deposits and our costs in doing so. When
interest rates rise, the cost of borrowing also increases. Our
business model is predicated on our operating on levels of net
interest income that other banks might find unacceptable or
unsustainable, as we typically pay interest rates on deposits in
the higher end of the spectrum and often charge lower interest
rates and fees than those charged by competitors. Accordingly,
changes in levels of market interest rates could materially and
adversely affect our net interest income, asset quality, loan
origination volume, business and prospects.
We expect more of our interest-bearing
liabilities will mature or reprice within one year than will our
interest-earning assets, resulting in a one year negative
interest rate sensitivity gap (the difference between our
interest rate sensitive assets maturing or repricing within one
year and our interest rate sensitive liabilities maturing or
repricing within one year, expressed as a percentage of
interest-earning assets). During the six months ended
December 31, 2004, interest income earned on loans and
interest expense paid on deposits were influenced by a general
decline in the historical spread between short term and long
term rates earned on U.S. Treasury securities. If short term
rates continue to rise faster than long term rates, our net
interest income may be negatively impacted. For a further
discussion of our interest rate risks and the assumptions
underlying our interest rate risk calculations, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Quantitative and
Qualitative Disclosures About Market Risk.
|
|
|
We may need to raise additional capital
that may not be available, which could harm our
business.
|
Due to applicable capital adequacy regulations
and sound banking practices, our growth will require that we
generate additional capital either through retained earnings or
the issuance of additional shares of common stock or other
capital instruments. We believe that the net proceeds from the
offering, cash generated from operations and borrowings
available under existing lines of credit and credit agreements
and from the FHLB will be sufficient to finance our operations
and capital expenditures for at least the next 12 months.
However, we may wish to raise additional capital, which may not
be available on terms acceptable to us, if at all. Any equity
financings could result in dilution to our stockholders or
reduction in the earnings available to our common stockholders.
If adequate capital is not available or the terms of such
capital are not attractive, we may have to curtail our growth
and our business, and our business, prospects, financial
condition and results of operations could be adversely affected.
|
|
|
We may not be able to offer Internet-based
banking services that have sufficient advantages over the
Internet-based banking services and other characteristics of
conventional brick and mortar banks to enable us to
compete successfully.
|
We are an independent Internet-based bank, as
distinguished from the Internet banking services of an
established brick and mortar bank. Independent
Internet-based banks often have found it difficult to
8
achieve profitability and revenue growth. Several
factors contribute to the unique challenges that Internet-based
banks face. These include concerns for the security of personal
information, the absence of personal relationships between
bankers and customers, the absence of loyalty to a conventional
hometown bank, customers difficulty in understanding and
assessing the substance and financial strength of an
Internet-based bank, a lack of confidence in the likelihood of
success and permanence of Internet-based banks and many
individuals unwillingness to trust their personal assets
to a relatively new technological medium such as the Internet.
As a result, some potential customers may be unwilling to
establish a relationship with us.
Conventional brick and mortar banks,
in growing numbers, are offering the option of Internet-based
banking services to their existing and prospective customers.
The public may perceive conventional banks as being safer, more
responsive, more comfortable to deal with and more accountable
as providers of their banking services, including their
Internet-based banking services.
Moreover, both the Internet and the financial
services industry are undergoing rapid technological changes,
with frequent introductions of new technology-driven products
and services. In addition to improving the ability to serve
customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future
success will depend in part upon our ability to address the
needs of our customers by using technology to provide products
and services that will satisfy customer demands, as well as to
create additional efficiencies in our operations. We may not be
able to effectively implement new technology-driven products and
services or be successful in marketing theses products and
services to our customers. If we are unable, for technical,
legal, financial or other reasons, to adapt in a timely manner
to changing market conditions, customer requirements or emerging
industry standards, our business, prospects, financial condition
and results of operations could be adversely affected.
Many of our competitors have substantially
greater resources to invest in technological improvements. To
remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our Internet-based
services. Most of our software and computer systems are
comprised of off-the-shelf applications, and we have
limited proprietary computer software, information databases and
applications. Others may develop and offer superior banking
products and services that may gain greater acceptance among
potential customers. Our success will depend in part on our
ability both to license and develop leading technologies to
enhance our existing services, develop new services and
technologies that address the increasingly sophisticated and
varied needs of our customers and respond to technological
advances and emerging industry standards and practices on a cost
effective and timely basis.
|
|
|
We face strong competition for customers
and may not succeed in implementing our business
strategy.
|
Our business strategy depends on our ability to
remain competitive. There is strong competition for customers
from existing banks and other types of financial institutions,
including those that use the Internet as a medium for banking
transactions or as an advertising platform. Our competitors
include:
|
|
|
|
|
large, publicly-traded, Internet-based banks, as
well as smaller Internet-based banks;
|
|
|
|
brick and mortar banks, including
those that have implemented websites to facilitate online
banking; and
|
|
|
|
traditional banking institutions such as thrifts,
finance companies, credit unions and mortgage banks.
|
Some of these competitors have been in business
for a long time and have name recognition and an established
customer base. Most of our competitors are larger and have
greater financial and personnel resources. In order to compete
profitably, we may need to reduce the rates we offer on loans
and investments and increase the rates we offer on deposits,
which actions may adversely affect our business, prospects,
financial condition and results of operations.
9
To remain competitive, we believe we must
successfully implement our business strategy. Our success
depends on, among other things:
|
|
|
|
|
having a large and increasing number of customers
who use our bank for their banking needs;
|
|
|
|
our ability to attract, hire and retain key
personnel as our business grows;
|
|
|
|
our ability to secure additional capital as
needed;
|
|
|
|
|
the relevance of our products and services to
customer needs and demands and the rate at which we and our
competitors introduce or modify new products and services;
|
|
|
|
|
our ability to offer products and services with
fewer employees than competitors;
|
|
|
|
the satisfaction of our customers with our
customer service;
|
|
|
|
ease of use of our websites; and
|
|
|
|
our ability to provide a secure and stable
technology platform for financial services that provides us with
reliable and effective operational, financial and information
systems.
|
If we are unable to implement our business
strategy, our business, prospects, financial condition and
results of operations could be adversely affected.
|
|
|
A natural disaster or recurring energy
shortage, especially in California, could harm our
business.
|
We are based in San Diego, California, and
approximately 58.2% of our total loan portfolio was secured by
real estate located in California at December 31, 2004. In
addition, the computer systems that operate our Internet
websites and some of their back-up systems are located in
San Diego, California. Historically, California has been
vulnerable to natural disasters. Therefore, we are susceptible
to the risks of natural disasters, such as earthquakes,
wildfires, floods and mudslides. Natural disasters could harm
our operations directly through interference with
communications, including the interruption or loss of our
websites which would prevent us from gathering deposits,
originating loans and processing and controlling our flow of
business, as well as through the destruction of facilities and
our operational, financial and management information systems. A
natural disaster or recurring power outages may also impair the
value of our largest class of assets, our loan portfolio, which
is comprised substantially of real estate loans. Uninsured or
underinsured disasters may reduce borrowers ability to
repay mortgage loans. Disasters may also reduce the value of the
real estate securing our loans, impairing our ability to recover
on defaulted loans through foreclosure and making it more likely
that we would suffer losses on defaulted loans. California has
also experienced energy shortages which, if they recur, could
impair the value of the real estate in those areas affected.
Although we have implemented several back-up systems and
protections (and maintain business interruption insurance),
these measures may not protect us fully from the effects of a
natural disaster. The occurrence of natural disasters or energy
shortages in California could have a material adverse effect on
our business, prospects, financial condition and results of
operations.
|
|
|
Our multifamily residential and commercial
real estate loans held for investment are generally unseasoned,
and defaults on such loans would harm our
business.
|
At December 31, 2004, our multifamily
residential loans held for investment were $366.7 million,
or 88.2% of our total loans held for investment, and the average
loan size of our multifamily residential loans was $705,000. At
December 31, 2004, our commercial real estate loans held
for investment were $13.0 million, or 3.1% of our total
loans held for investment, and the average loan size of our
commercial real estate loans was $721,000. The payment on such
loans is typically dependent on the cash flows generated by the
projects, which are affected by the supply and demand for
multifamily residential units and commercial property within the
relative market. If the market for multifamily residential units
and commercial property experiences a decline in demand,
multifamily and commercial borrowers may suffer losses on their
projects and be unable to repay their loans.
10
|
|
|
Our emphasis on multifamily loans increases
the possibility of loan losses.
|
We may incur significant losses because
approximately 88.2% of our loans at December 31, 2004 were
secured by multifamily properties. Loans secured by multifamily
properties may have a greater risk of loss than loans secured by
single family properties because they typically involve larger
loan balances to single borrowers or groups of related
borrowers. Significant losses on loans secured by multifamily
properties are possible because the cash flows from multifamily
properties securing the loans may become inadequate to service
the loan payments. The payment experience on these loans
typically depends upon the successful operation of the related
real estate project and is subject to risks such as excessive
vacancy rates or inadequate rental income levels. Many of our
borrowers have more than one commercial real estate or
multifamily loan outstanding with us.
Multifamily underwriting typically requires
inspection of each property and familiarity with the location of
the property and the local real estate market. While we have a
policy to conduct a site visit of the property underlying every
multifamily loan and focus our multifamily originations in only
four states with which we believe we have greater familiarity,
we intend to expand our multifamily loan originations beyond
those four states. We may not be able to develop the requisite
experience with other markets to be able to underwrite
successfully multifamily loans in additional communities and
states. We also may not be able to assess correctly relevant
criteria such as the level of vacancies with respect to a
particular property or the community in which it is located or
that we will be able to continue to physically inspect each
multifamily property. Our inability to successfully underwrite
multifamily loans could lead to delinquencies and charge-offs
and could adversely affect our business, prospects, financial
condition and results of operations.
|
|
|
If our allowance for loan losses is not
sufficient to cover actual loan losses, our earnings, capital
adequacy and overall financial condition may suffer
materially.
|
Our loans are generally secured by multifamily
and, to a lesser extent, commercial and single family real
estate properties, each initially having a fair market value
generally greater than the amount of the loan secured. However,
even though our loans are typically secured, the risk of
default, generally due to a borrowers inability to make
scheduled payments on his or her loan, is an inherent risk of
the banking business. In determining the amount of the allowance
for loan losses, we make various assumptions and judgments about
the collectibility of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real
estate serving as collateral for the repayment of our loans.
Defaults by borrowers could result in losses that exceed our
loan loss reserves. We have originated or purchased many of our
loans recently, so we do not have sufficient repayment
experience to be certain whether the allowance for loan losses
we have established is adequate. We may have to establish a
larger allowance for loan losses in the future if, in our
judgment, it is necessary. Any increase in our allowance for
loan losses will increase our expenses and consequently may
adversely affect our profitability, capital adequacy and overall
financial condition.
|
|
|
Declining real estate values, particularly
in California, could reduce the value of our loan portfolio and
impair our profitability and financial condition.
|
Substantially all of the loans in our portfolio
are secured by real estate. At December 31, 2004,
approximately 58.2% of our total loan portfolio was secured by
real estate located in California. If there is a significant
decline in real estate values, especially in California, the
collateral for our loans will become less valuable. If such an
event were to occur, we may experience charge-offs at a greater
level than we would otherwise experience, as the proceeds
resulting from foreclosure may be significantly lower than the
amounts outstanding on such loans. Declining real estate values
frequently accompany periods of economic downturn or recession
and increasing unemployment, all of which can lead to lower
demand for mortgage loans of the types we originate. These
changes would likely have a material adverse effect on our
business, prospects, financial condition and results of
operations.
11
|
|
|
We frequently purchase loans in bulk or
pools. We may experience lower yields or losses on
loan pools because the assumptions we use when
purchasing loans in bulk may not always prove
correct.
|
From time to time, we purchase loans in bulk or
pools. For the six months ended December 31,
2004 and for the fiscal years ended June 30, 2004 and 2003,
we purchased $70.9 million, $129.2 million and
$81.8 million, respectively, in single family and
multifamily mortgage loans. When we determine the purchase price
we are willing to pay to purchase loans in bulk, management
makes certain assumptions about, among other things, how fast
borrowers will prepay their loans, the real estate market and
our ability to collect loans successfully and, if necessary, to
dispose of any real estate that may be acquired through
foreclosure. When we purchase loans in bulk, we perform certain
due diligence procedures and we purchase the loans subject to
customary limited indemnities. To the extent that our underlying
assumptions prove to be inaccurate or the basis for those
assumptions change (such as an unanticipated decline in the real
estate market), the purchase price paid for pools of
loans may prove to have been excessive, resulting in a lower
yield or a loss of some or all of the loan principal. For
example, in the past, we have purchased pools of
loans at a premium and some of the loans were prepaid before we
expected. Accordingly, we earned less interest income on the
purchase than expected. To date, none of the loan
pools that we purchased at a premium have resulted
in a net investment loss. Our success in growing through
purchases of loan pools depends on our ability to
price loan pools properly and on general economic
conditions in the geographic areas where the underlying
properties of our loans are located.
Acquiring loans through bulk purchases may
involve acquiring loans of a type or in geographic areas where
management may not have substantial prior experience. We may be
exposed to a greater risk of loss to the extent that bulk
purchases contain such loans.
|
|
|
We face limits on our ability to
lend.
|
The amount that we can lend to a single borrower
is limited to 15.0% of the unimpaired capital and surplus of our
subsidiary bank. Based upon the 15.0% of unimpaired capital and
surplus measurement, at December 31, 2004, our
loans-to-one-borrower limit was $5.7 million. At
December 31, 2004, no single loan was larger than
$3.0 million and our banks largest single lending
relationship had an outstanding balance of $4.7 million. We
expect that our lending limit will increase to approximately
$8.1 million immediately following the offering, assuming
$21.8 million in net proceeds is raised in the offering and
that $16.0 million of the net proceeds are contributed to
our bank, based on the assumptions set forth below the table in
Capitalization. Because our lending limits may be
significantly lower than those of our competitors, we may be at
a competitive disadvantage in pursuing relationships with larger
borrowers in our market areas. Notwithstanding our loan limits,
we may elect not to make loans up to our maximum loan limit for
any reason. If we do elect to make larger loans, we may seek to
reduce our exposure by making the loan with one or more other
financial institutions which become solely liable for their
portion of the loan. We may not be successful in securing other
institutions to make loans with us or in successfully
administering those loans, if we elect to make larger loans.
|
|
|
Our success depends in large part on the
continuing efforts of a few individuals. If we are unable to
retain these personnel or attract, hire and retain others to
oversee and manage our company, our business could
suffer.
|
Our success depends substantially on the skill
and abilities of our senior management team, including our
President and Chief Executive Officer Gary Lewis Evans, our
Chief Financial Officer Andrew J. Micheletti and our banks
Chief Credit Officer Patrick A. Dunn, each of whom performs
multiple functions that might otherwise be performed by separate
individuals at larger banks, as well as our Chairman Jerry F.
Englert and our Vice Chairman Theodore C. Allrich. These
individuals may not be able to fulfill their responsibilities
adequately, and they may not remain with us. The loss of the
services of any of these individuals or other key employees,
whether through termination of employment, disability or
otherwise, could have a material adverse effect on our business.
In addition, our ability to grow and manage our growth depends
on our ability to continue to identify, attract, hire, train,
retain and motivate highly skilled executive, technical,
managerial, sales and marketing, customer service and
professional personnel. The implementation of our business plan
12
and our future success will depend on such
qualified personnel. Competition for such employees is intense,
and there is a risk that we will not be able to successfully
attract, assimilate or retain sufficiently qualified personnel.
If we fail to attract and retain the necessary technical,
managerial, sales and marketing and customer service personnel,
as well as experienced professionals, our business, prospects,
financial condition and results of operations could be adversely
affected. We maintain a key man life insurance
policy on Gary Lewis Evans and bank-owned life insurance on
other executive officers.
|
|
|
We depend on third-party service providers
for our core banking technology, and interruptions in or
terminations of their services could materially impair the
quality of our services.
|
We rely substantially upon third-party service
providers for our core banking technology and to protect us from
bank system failures or disruptions. For example, Jack Henry
& Associates, Inc. is responsible for all our basic core
processing applications, including general ledger, loans,
deposits, ATM networks, electronic fund transfers, item
processing and imaging, and our bill pay system is outsourced to
Metavante Corporation. For the six months ended
December 31, 2004 and for the fiscal years ended
June 30, 2004 and 2003, we paid approximately $181,000,
$328,000 and $278,000, respectively, to third-party service
providers for our core banking technology, which expenses are
reflected in our consolidated financial statements as data
processing and internet expenses. This reliance may mean that we
will not be able to resolve operational problems internally or
on a timely basis, which could lead to customer dissatisfaction
or long-term disruption of our operations. Our operations also
depend upon our ability to replace a third-party service
provider if it experiences difficulties that interrupt
operations or if an essential third-party service terminates. If
these service arrangements are terminated for any reason without
an immediately available substitute arrangement, our operations
may be severely interrupted or delayed. If such interruption or
delay were to continue for a substantial period of time, our
business, prospects, financial condition and results of
operations could be adversely affected.
|
|
|
A national or regional economic downturn
could reduce our customer base, our level of deposits and demand
for our financial products such as loans.
|
A deterioration in economic conditions, whether
caused by national events or local events, in particular an
economic slowdown in California, where approximately 58.2% of
our total loan portfolio was located at December 31, 2004,
could result in the following consequences, any of which could
hurt our business materially:
|
|
|
|
|
loan delinquencies may increase;
|
|
|
|
problem assets and foreclosures may increase;
|
|
|
|
demand for our products and services may
decline; and
|
|
|
|
the value of collateral supporting our loans,
especially real estate, may decline, in turn reducing
customers borrowing power and reducing potential proceeds
from foreclosures and from sales of loans.
|
The State of California continues to face its own
fiscal challenges, the long term effect of which on the
States economy cannot be predicted.
|
|
|
We rely substantially on third parties to
service our loans and to provide us with appraisals, credit
reports, title searches, environmental inspections and reports
and other underwriting services without errors or fraud and in a
timely manner.
|
We rely on other companies to administer and
service some of our loans by collecting payments, disbursing
proceeds of collection and, if necessary, conducting
foreclosures. We also rely on other companies to support our
loan underwriting process by providing us with, among other
things, appraisals, credit reports, environmental inspections
and reports and title searches. We typically pay a fee of 25
basis points (0.25%) for servicing of fixed interest rate loans
and 37.5 basis points (0.375%) for servicing of adjustable
interest rate loans. The fee is calculated based on the
principal amount of a loan. We record interest income on loans
serviced by others net of applicable service fees. At
December 31, 2004 and at June 30, 2004 and 2003, we had
13
$218.1 million, $168.0 million and
$119.9 million, respectively, in loan principal serviced by
others. The value to our customers of the services we offer and
the success of our business ultimately depend in large part on
third parties providing these ancillary services without errors,
interruptions, delays and fraud. If third parties commit fraud
or perform their services negligently, such as by intentionally
or negligently reporting false or misleading information, we
could suffer losses by relying on that information in conducting
our business. Errors, interruptions or delays by third parties
providing these ancillary services could also cause losses, as
well as delays, in the processing and closing of loans for our
customers. If we cannot manage these third parties so that they
deliver these ancillary services as we expect, we likely will
experience customer dissatisfaction, and our business,
prospects, financial condition and results of operations could
be adversely affected.
|
|
|
Our operations are subject to numerous laws
and government regulation, which may change.
|
We are subject to a large body of laws governing
our business, such as laws governing our charter, state laws
determining our remedies as lenders, laws governing labor
relations, taxation, contracts, consumer issues and many other
aspects of our business. We are regulated primarily by the
Office of Thrift Supervision, Department of the Treasury, or the
OTS, the Federal Deposit Insurance Corporation, or the FDIC,
and, to a lesser extent, the FRB. Because we are an
Internet-based bank, we are subject to various electronic funds
transfer rules adopted by the FRB. We are also subject to
various general commercial and consumer laws and regulations,
such as the Truth-in-Lending Act, the Truth-in-Savings Act, the
Real Estate Settlement Procedures Act of 1974 and the Uniform
Commercial Code, among many others. Any significant change in
applicable laws, rules and regulations, as well as new laws,
rules and regulations could significantly increase our cost of
compliance and adversely affect our business, prospects,
financial condition and results of operations.
Laws and regulations directly applicable to the
Internet and electronic commerce may become more prevalent in
the future. In the event Congress or state legislatures or
regulators such as the OTS, the FDIC, the FRB, the Federal Trade
Commission or other governmental authorities enact or modify
laws or adopt regulations relating to the Internet, our
business, prospects, financial condition and results of
operations could be adversely affected. Such legislation and
regulation could reduce the rate of growth in Internet usage
generally and decrease the acceptance of the Internet as a
commercial medium. The laws and regulations governing the
Internet remain largely unsettled, even in areas where there has
been some legislative or regulatory action. It may take years to
determine whether, and how, existing laws and regulations such
as those governing intellectual property, privacy and taxation
apply to the Internet. The growth and development of the market
for electronic commerce may prompt calls for more stringent
consumer protection laws and regulations, both in the United
States and abroad, that may impose additional burdens on
companies conducting business over the Internet.
|
|
|
We will incur increased costs as a result
of being a public company.
|
As a public company, we will incur significant
legal, accounting and other expenses that we did not incur as a
private company, including costs associated with our public
company reporting requirements. We also anticipate that we will
incur costs associated with recently adopted corporate
governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, as well as new accounting
pronouncements and new rules implemented by the Securities and
Exchange Commission, or the SEC, and the Nasdaq National Market.
Any expenses required to comply with evolving standards may
result in increased general and administrative expenses and a
diversion of management time and attention from our business. In
addition, these new laws and regulations could make it more
difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and
coverage or incur substantially greater costs to obtain the same
or similar coverage. The effect of these events could also make
it more difficult for us to attract and retain qualified persons
to serve on our board of directors, on our board committees or
as executive officers. We are presently evaluating and
monitoring developments with respect to these laws and
regulations and cannot predict or estimate the amount or timing
of additional costs we may incur to respond to their
requirements.
14
|
|
|
Ownership of our common stock is highly
concentrated, which may prevent you or other stockholders from
influencing significant corporate decisions and may result in
conflicts of interest that could cause our stock price to
decline.
|
Our executive officers, directors and their
affiliates beneficially owned or controlled approximately 33.0%
of our outstanding common stock at December 31, 2004, and
will beneficially own or control approximately 23.4%, or
approximately 22.4% assuming full exercise of the
underwriters over-allotment option, of our outstanding
common stock following the offering, in each case assuming the
exercise of all outstanding warrants held by them and the
conversion of all shares of Series A preferred stock held
by them into common stock (based on current conversion terms).
Accordingly, these executive officers, directors and their
affiliates, acting as a group, will have substantial influence
over the outcome of corporate actions requiring stockholder
approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets
or any other significant corporate transactions. This
concentration of ownership may also delay or prevent a change of
control of our company, even if such a change of control would
benefit our other stockholders, and might affect our stock price.
|
|
|
Anti-takeover provisions of our certificate
of incorporation and bylaws and federal and Delaware law may
prevent or frustrate a change in control, even if an acquisition
would be beneficial to our stockholders, which could affect our
stock price adversely and prevent attempts by our stockholders
to replace or remove our current management.
|
Provisions of our certificate of incorporation
and bylaws may delay or prevent a change in control, discourage
bids at a premium over the market price of our common stock and
adversely affect the market price of our common stock and the
voting or other rights of the holders of our common stock. These
provisions, among other things:
|
|
|
|
|
authorize our board of directors to issue
preferred stock with voting and other rights to be determined by
them;
|
|
|
|
limit the persons who can call special meetings
of stockholders;
|
|
|
|
prohibit stockholder action by written consent;
|
|
|
|
create a classified board of directors pursuant
to which our directors are elected for staggered three-year
terms; and
|
|
|
|
provide that a supermajority vote of our
stockholders is required to amend certain provisions of our
certificate of incorporation and bylaws.
|
We are subject to the provisions of the Delaware
corporation law that, in general, prohibit any business
combination with a beneficial owner of 15% or more of our common
stock for five years unless the holders acquisition of our
stock was approved in advance by our board of directors or other
conditions are met.
Acquisition of control of a federal savings bank
such as Bank of Internet USA requires advance approval by the
OTS. Under federal law, acquisition of more than 10% of our
common stock would result in a rebuttable presumption of control
of Bank of Internet USA and the ownership of more than 25% of
the voting stock would result in conclusive control of Bank of
Internet USA. Depending on the circumstances, the foregoing
requirements may prevent or frustrate a change in control of us,
discourage bids at a premium over the market price of our common
stock and adversely affect the market price of our common stock
and the voting or other rights of the holders of our common
stock.
|
|
|
We are exposed to risk of environmental
liability with respect to properties to which we take
title.
|
In the course of our business, we may foreclose
and take title to real estate and could be subject to
environmental liabilities with respect to those properties. We
may be held liable to a governmental entity or to third parties
for property damage, personal injury, investigation and clean-up
costs incurred by these parties in connection with environmental
contamination or may be required to investigate or clean up
hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or remediation
activities
15
could be substantial. In addition, if we are the
owner or former owner of a contaminated site, we may be subject
to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from the
property. If we become subject to significant environmental
liabilities, our business, prospects, financial condition and
results of operations could be adversely affected.
|
|
|
The U.S. governments monetary
policies or changes in those policies could have a major effect
on our operating results, and we cannot predict what those
policies will be or any changes in such policies or the effect
of such policies on us.
|
Our earnings will be affected by domestic
economic conditions and the monetary and fiscal policies of the
U.S. government and its agencies. The monetary policies of
the FRB have had, and will continue to have, an important effect
on the operating results of commercial banks and other financial
institutions through its power to implement national monetary
policy in order, among other things, to curb inflation or combat
a recession.
The monetary policies of the FRB, effected
principally through open market operations and regulation of the
discount rate and reserve requirements, have had major effects
upon the levels of bank loans, investments and deposits. For
example, in 2001, several drops in the discount rate by the
Federal Open Market Committee placed tremendous pressure on the
profitability of all financial institutions because of the
resulting contraction of net interest margins. Any increase in
prevailing interest rates due to changes in monetary policies
may adversely affect banks such as us, whose liabilities tend to
reprice quicker than their assets. It is not possible to predict
the nature or effect of future changes in monetary and fiscal
policies.
|
|
|
We have risks of systems failure and
security risks, including hacking and identity
theft.
|
The computer systems and network infrastructure
utilized by us and others could be vulnerable to unforeseen
problems. This is true of both our internally developed systems
and the systems of our third-party service providers. Our
operations are dependent upon our ability to protect computer
equipment against damage from fire, power loss,
telecommunication failure or similar catastrophic events. Any
damage or failure that causes an interruption in our operations
could adversely affect our business, prospects, financial
condition and results of operations.
Our operations depend upon encryption and
authentication technology to provide secure transmission of
confidential information and upon our ability to generally
protect the computer systems and network infrastructure utilized
by us against damage from security breaches and other disruptive
problems associated with Internet-related technological problems
or malicious behavior of other users. Advances in computer
capabilities, new discoveries in the field of cryptography or
other developments could result in a compromise or breach of the
processes and systems used to protect customer data.
Notwithstanding such possible advances and developments,
hackers and other disruptions could jeopardize the
security of information stored in, and transmitted through, such
computer systems and network infrastructure, which may result in
significant liability to us and deter potential customers. With
the rise in business conducted over the Internet, incidents of
identity theft have become more frequent. Although
management has implemented security technology and established
operational procedures to prevent these and other threats to
security, these security measures may not continue to be
successful. A failure of such security measures, or the failure
of our third-party service providers to design, implement and
monitor their own security systems, could adversely affect our
business, prospects, financial condition and results of
operations.
Any disruption in our operations due to systems
failure or security breach could deter potential customers or
cause existing customers to leave, could cause losses for which
we would be liable and could adversely affect our reputation.
Any such system failure or security breach could adversely
affect our business, prospects, financial condition and results
of operations.
16
Risks Relating to the Offering
|
|
|
You will experience substantial dilution in
the value of your shares immediately following the
offering.
|
Investors purchasing shares of our common stock
in the offering will pay more for their shares than the amount
paid by existing stockholders who acquired shares prior to the
offering. Accordingly, if you purchase common stock in the
offering, you will incur immediate dilution in pro forma net
tangible book value of approximately $3.95 per share. In
the past, we issued options and warrants to acquire common stock
at exercise prices significantly below the initial public
offering price and Series A preferred stock that is
currently convertible at a conversion price of $10.50 per
share. If the holders of outstanding options and warrants
exercise those securities or, depending on the per share initial
public offering price, holders of Series A preferred stock
convert their securities into common stock, you will incur
further dilution. See Dilution.
|
|
|
A public trading market for our common
stock may not develop or be maintained.
|
We have applied to have our common stock listed
for quotation on the Nasdaq National Market under the symbol
BOFI. However, we cannot assure you that an
established and liquid trading market for our common stock will
develop, that it will continue if it does develop or that after
the completion of the offering the common stock will trade at or
above the initial public offering price. The representatives of
the underwriters have advised us that they intend to make a
market in our common stock. However, neither the representatives
of the underwriters nor any other market maker is obligated to
make a market in our shares, and any market making in our common
stock may be discontinued at any time in the sole discretion of
the party making such market.
|
|
|
We have never paid cash dividends on our
common stock, and we do not expect to pay cash dividends on our
common stock following the offering.
|
We have never paid cash dividends on our common
stock and do not expect to pay cash dividends on our common
stock following the offering. Rather, we intend to retain
earnings and increase capital in furtherance of our overall
business objectives. We will periodically review our dividend
policy in view of our operating performance and may declare
dividends in the future if such payments are deemed appropriate
and in compliance with applicable law and regulations. Cash and
stock dividends are subject to determination and declaration by
our board of directors, which will take into account our
consolidated earnings, financial condition, liquidity and
capital requirements, applicable governmental regulations and
policies and other factors deemed relevant by our board of
directors. Our ability to pay dividends, should we elect to do
so, depends largely upon the ability of our bank to declare and
pay dividends to us, which are subject to, among other things,
the regulations of the OTS and the FDIC. The principal source of
our revenues is dividends paid to us by our bank.
|
|
|
After an initial period of restriction,
there will be a significant number of shares of our common stock
available for future sale, which may depress our stock
price.
|
The market price of our common stock could
decline as a result of sales of substantial amounts of our
common stock in the public market after the offering, or even
the perception that such sales could occur. We have agreed, and
our directors, executive officers and certain holders of our
outstanding common stock have also agreed, not to sell, offer,
agree to sell, contract to sell, hypothecate, pledge, grant any
option to purchase, make any short sale or otherwise dispose of
or hedge, directly or indirectly, any of our common stock or
securities that are substantially similar to our common stock,
including but not limited to any securities that are
convertible into or exchangeable for, or that represent the
right to receive, our common stock or any substantially similar
securities, or publicly announce an intention to do any of the
foregoing for a period of 180 days in the case of our
company and our directors, executive officers and certain
holders of our common stock, and 90 days in the case of
certain other holders of our common stock, after the date of
this prospectus without the prior written consent of
WR Hambrecht + Co, LLC.
Based on the number of shares of common stock
outstanding at December 31, 2004 and on the assumptions set
forth below the table in Capitalization, there will
be 7,497,649 shares of common stock
17
outstanding immediately following the offering,
or 7,835,149 shares if the underwriters exercise their
over-allotment option in full. Of these shares, assuming no
exercise of the underwriters over-allotment option, the
following will be available for sale in the public market as
follows, subject in some cases to volume and other limitations:
|
|
|
|
|
|
2,628,100 shares will be eligible for sale
upon completion of the offering, including all of the shares
sold in the offering;
|
|
|
|
|
|
2,505,457 shares will be eligible for sale
90 days from the date of this prospectus upon the
expiration of the lock-up agreements described above; and
|
|
|
|
|
|
1,622,967 shares will be eligible for sale
180 days from the date of this prospectus upon expiration
of the lock-up agreements described above.
|
|
Risks Relating to the Auction
Process
|
|
|
Potential investors should not expect to
sell our shares for a profit shortly after our common stock
begins trading.
|
Prior to the offering, there has been no public
market for our common stock. We will determine the initial
public offering price for the shares sold in the offering
through an auction conducted by us and our underwriters. We
believe the auction process will reveal a clearing price for the
shares of our common stock offered in the offering. The clearing
price is the highest price at which all of the shares offered
(including the shares subject to the underwriters
over-allotment option) may be sold to potential investors.
Although we and our underwriters may elect to set the initial
public offering price below the auction clearing price, the
public offering price may be at or near the clearing price. If
there is little to no demand for our shares at or above the
initial public offering price once trading begins, the price of
our shares would decline following the offering. You may not be
able to resell your shares at or above the initial public
offering price. If your objective is to make a short term profit
by selling the shares you purchase in the offering shortly after
trading begins, you should not submit a bid in the auction.
|
|
|
Some bids made at or above the initial
public offering price may not receive an allocation of
shares.
|
Our underwriters may require that bidders confirm
their bids before the auction for the offering closes. If a
bidder is requested to confirm a bid and fails to do so within a
required time frame, that bid will be rejected and will not
receive an allocation of shares even if the bid is at or above
the initial public offering price. In addition, we, in
consultation with our underwriters, may determine, in our sole
discretion, that some bids that are at or above the initial
public offering price are manipulative and disruptive to the
bidding process or are not creditworthy, in which case such bids
may be reduced or rejected. For example, in previous
transactions for other issuers in which the auction process was
used, the underwriters have rejected or reduced bids when the
underwriters, in their sole discretion, deemed the bids not
creditworthy or had reason to question the bidders intent
or means to fund its bid. In the absence of other information,
an underwriter or participating dealer may assess a
bidders creditworthiness based solely on the bidders
account balance or history with the underwriter or participating
dealer. The underwriters have also reduced or rejected bids that
they deemed, in their sole discretion, to be potentially
manipulative or disruptive or because the bidder had a history
of alleged securities law violations. Other conditions for valid
bids, including eligibility and account funding requirements of
The Seidler Companies Incorporated and participating dealers
other than WR Hambrecht + Co, LLC may vary. As a
result of these varying requirements, a bidder may have its bid
rejected by an underwriter or participating dealer while another
bidders identical bid is accepted.
|
|
|
Potential investors may receive a full
allocation of the shares they bid for if their bids are
successful and should not bid for more shares than they are
prepared to purchase.
|
If the initial public offering price is at or
near the clearing price for the shares offered in the offering,
the number of shares represented by successful bids will equal
or nearly equal the number of shares offered by this prospectus.
Successful bidders may therefore be allocated all or nearly all
of the shares that they bid for in the auction. Therefore, we
caution investors against submitting a bid that does not
accurately represent the number of shares of our common stock
that they are willing and prepared to purchase.
18
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
A number of the presentations and disclosures in
this prospectus, including any statements preceded by, followed
by or which include the words may,
could, should, will,
would, hope, might,
believe, expect, anticipate,
estimate, intend, plan,
assume or similar expressions, constitute
forward-looking statements. These forward-looking statements,
implicitly and explicitly, include the assumptions underlying
the statements and other information with respect to our
beliefs, plans, objectives, goals, expectations, anticipations,
estimates, intentions, financial condition, results of
operations, future performance and business, including our
expectations and estimates with respect to our revenues,
expenses, earnings, return on equity, return on assets,
efficiency ratio, asset quality and other financial data and
capital and performance ratios.
Although we believe that the expectations
reflected in our forward-looking statements are reasonable,
these statements involve risks and uncertainties that are
subject to change based on various important factors (some of
which are beyond our control). The following factors, among
others, could cause our financial performance to differ
materially from our beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions and other
forward-looking statements:
|
|
|
|
|
inflation and interest rate, market and monetary
fluctuations;
|
|
|
|
higher defaults on our loan portfolio than we
expect;
|
|
|
|
|
the strength of the United States economy in
general and the strength of the regional and local economies
within California and other regions in which we have loan
collateral and high concentrations of loans;
|
|
|
|
|
the continued acceptance of Internet-based
banking by consumers and businesses;
|
|
|
|
the willingness of users to substitute
competitors products and services for our products and
services;
|
|
|
|
our timely development of new products and
services in a changing environment, including the features,
pricing and quality of our products and services compared to the
products and services of our competitors;
|
|
|
|
technological changes;
|
|
|
|
changes in consumer spending and savings habits;
|
|
|
|
the effects of, and changes in, trade, monetary
and fiscal policies and laws, including interest rate policies
of the Board of Governors of the Federal Reserve System;
|
|
|
|
the effect of changes in financial services
policies, laws and regulations, including laws, regulations and
policies concerning taxes, banking, securities and insurance,
and their application by regulatory bodies; and
|
|
|
|
the other risks discussed under Risk
Factors.
|
If one or more of the factors affecting our
forward-looking information and statements proves incorrect,
then our actual results, performance or achievements could
differ materially from those expressed in, or implied by, our
forward-looking information and statements. We caution you not
to place undue reliance on our forward-looking information and
statements.
We do not intend to update our forward-looking
information and statements, whether written or oral, to reflect
events or circumstances after the date of this prospectus. All
forward-looking statements attributable to us are expressly
qualified by our cautionary statements.
19
USE OF PROCEEDS
As shown in the table below, our net proceeds
from the sale of our shares of common stock in the offering are
expected to be approximately $21.8 million (or
approximately $25.3 million if the underwriters
over-allotment option is exercised in full), assuming an initial
public offering price of $11.00 per share and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses.
|
|
|
|
|
|
|
|
|
|
|
No Exercise of
|
|
Full Exercise of
|
|
|
Over-Allotment Option
|
|
Over-Allotment Option
|
|
|
|
|
|
Gross proceeds
|
|
$
|
24.75 million
|
|
|
$
|
28.46 million
|
|
Underwriting discounts and commissions
|
|
|
1.49 million
|
|
|
|
1.71 million
|
|
Estimated offering expenses
|
|
|
1.42 million
|
|
|
|
1.42 million
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
$
|
21.84 million
|
|
|
$
|
25.33 million
|
|
|
|
|
|
|
|
|
|
|
We intend to contribute approximately
$16.0 million of the net proceeds of the offering to Bank
of Internet USA to provide additional capital to support its
growth, including the addition of loans secured by single family
(one to four units) and multifamily (five or more units)
residential properties and commercial real estate and
U.S. government agency mortgage-backed and other
securities, as well as to increase deposits and advances from
the FHLB.
We also intend to use a portion of the net
proceeds of the offering to prepay in full a note payable. At
December 31, 2004, the note payable had an outstanding
principal balance of $5.0 million. The note payable bears
interest at prime plus one percent per annum, which at
December 31, 2004 was 6.25% per annum, and interest is
payable quarterly. Principal on the note payable is due
quarterly in 36 equal installments beginning on January 24,
2005 and ending on October 24, 2013. We contributed all
$5.0 million of the proceeds received in connection with
the note payable to Bank of Internet USA to provide additional
capital to support its growth. As a result of repaying the note
payable, our banks common stock that is collateral for the
note payable will be released. We intend to use the remaining
net proceeds for general corporate purposes. Pending these uses,
we will invest the net proceeds initially in short term,
investment grade securities and other qualified investments,
such as federal funds sold.
DIVIDEND POLICY
We have never paid cash dividends on our common
stock, electing to retain earnings for funding our growth and
business. We currently anticipate continuing our policy of
retaining earnings to fund growth. Our ability to pay dividends,
should we ever elect to do so, depends largely upon the ability
of our bank to declare and pay dividends to us as the principal
source of our revenues is dividends paid to us by our bank.
Future dividends will depend primarily upon our earnings,
financial condition and need for funds, as well as government
policies and regulations applicable to us and our bank, which
limit the amount that may be paid as dividends without prior
approval. See Regulation Regulation of Bank of
Internet USA Capital Distribution Limitations.
20
CAPITALIZATION
The following table sets forth our capitalization
at December 31, 2004. Our capitalization is presented:
|
|
|
|
|
on an actual basis; and
|
|
|
|
|
on an as adjusted basis to reflect our receipt of
the net proceeds from the sale of 2,250,000 shares of
common stock in the offering at an assumed initial public
offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us in the offering (and assuming no exercise
of the underwriters over-allotment option), as if the sale
of our common stock had been consummated on December 31,
2004.
|
|
The following information should be read together
with our consolidated financial statements and the related notes
thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004
|
|
|
|
|
|
Actual
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
Advances from the FHLB
|
|
$
|
148,504
|
|
|
$
|
148,504
|
|
|
Note payable(1)
|
|
|
5,000
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
5,155
|
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings(2)
|
|
$
|
158,659
|
|
|
$
|
153,659
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $10,000 stated
value; 1,000,000 shares authorized; 1,200 shares
designated Series A preferred stock, 675 shares issued
and outstanding
|
|
$
|
6,637
|
|
|
$
|
6,637
|
|
|
Common stock, $.01 par value;
10,000,000 shares authorized; 4,563,399 shares issued
and outstanding actual and 7,497,649 shares issued and
outstanding as adjusted(3)
|
|
|
46
|
|
|
|
75
|
|
|
Additional paid-in capital
|
|
|
22,601
|
|
|
|
47,281
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(126
|
)
|
|
|
(126
|
)
|
|
Retained earnings
|
|
|
3,686
|
|
|
|
3,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
32,844
|
|
|
$
|
57,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
191,503
|
|
|
$
|
211,212
|
|
|
|
|
|
|
|
|
|
|
Capital ratios:
|
|
|
|
|
|
|
|
|
|
Equity to assets at end of period
|
|
|
6.40
|
%
|
|
|
10.70
|
%
|
|
Tier 1 leverage (core) to adjusted
tangible assets(4)
|
|
|
7.45
|
%
|
|
|
10.25
|
%
|
|
Tier 1 risk-based capital ratio(4)
|
|
|
11.44
|
%
|
|
|
16.08
|
%
|
|
Total risk-based capital ratio(4)
|
|
|
11.80
|
%
|
|
|
16.45
|
%
|
|
Tangible capital to tangible assets(4)
|
|
|
7.45
|
%
|
|
|
10.25
|
%
|
|
|
|
(1)
|
We intend to prepay in full without penalty the
note payable with a portion of the net proceeds from the
offering.
|
|
|
|
(2)
|
In addition to the indebtedness reflected above,
we had total deposits of $320.0 million at
December 31, 2004.
|
|
|
|
(3)
|
Common stock actual, but not common stock as
adjusted, excludes 684,250 shares of common stock issuable
upon exercise of warrants with an exercise price of
$4.19 per share, which warrants we expect to be exercised
on a cash basis prior to the offering because they terminate if
not exercised prior to that time. Common stock actual and common
stock as adjusted exclude:
|
|
|
|
|
|
|
722,017 shares of common stock issuable upon
exercise of outstanding stock options, with a weighted average
exercise price of $6.11 per share;
|
21
|
|
|
|
|
59,950 shares of common stock issuable upon
the exercise of warrants with an exercise price of
$14.00 per share;
|
|
|
|
642,600 shares of common stock currently
issuable upon conversion of our Series A preferred stock.
Our Series A preferred stock is convertible at prices which
increase periodically through January 2009, after which time our
Series A preferred stock is no longer convertible into our
common stock. The current conversion price of $10.50 per
share is in effect through January 1, 2006;
|
|
|
|
|
shares of common stock reserved for future
issuance under our 2004 stock incentive plan, which provides
that aggregate equity awards under our 2004 stock incentive plan
and options outstanding under our 1999 stock option plan may not
exceed 14.8% of our outstanding common stock at any time. Based
on the number of shares of common stock outstanding at
December 31, 2004, and assuming 2,250,000 shares of
common stock are sold in the offering and warrants to purchase
684,250 shares of common stock are exercised on a cash basis
prior to the offering, the maximum number of shares of common
stock issuable upon exercise of options granted under our 2004
stock incentive plan would be 1,109,652; and
|
|
|
|
|
up to 500,000 shares of common stock
reserved for future issuance under our 2004 employee stock
purchase plan.
|
|
|
(4)
|
Reflects regulatory capital ratios of Bank of
Internet USA only. The as adjusted ratio assumes the deployment
of the net proceeds of the offering in assets with a 20% risk
weighting under applicable regulations.
|
22
DILUTION
If you invest in our common stock, your interest
will be diluted to the extent of the difference between the
public offering price per share of our common stock and the pro
forma net tangible book value per share of our common stock
after the offering. Net tangible book value per share is equal
to the amount of our common stockholders equity less
intangible assets, divided by the number of shares outstanding.
The net tangible book value of our common stock at
December 31, 2004 was $26.2 million, or $5.74 per
share, based on 4,563,399 shares of common stock
outstanding at December 31, 2004.
After (1) giving effect to the sale of the
2,250,000 shares of common stock in the offering, at an
assumed initial public offering price of $11.00 per share
(the midpoint of the $9.00 to $13.00 range), assuming that the
underwriters over-allotment option is not exercised, and
(2) deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our
pro forma net tangible book value at December 31, 2004
would be approximately $48.0 million, or $7.05 per
share. The offering will result in an immediate increase in net
tangible book value of $1.31 per share to existing
stockholders and an immediate dilution of $3.95 per share
to new investors, or approximately 35.9% of the assumed initial
public offering price of $11.00 per share. Dilution is
determined by subtracting pro forma net tangible book value per
share after the offering from the assumed initial public
offering price of $11.00 per share. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
11.00
|
|
|
Net tangible book value per share at
December 31, 2004
|
|
$
|
5.74
|
|
|
|
|
|
|
Increase in net tangible book value per share
attributable to new investors
|
|
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share at
December 31, 2004
|
|
|
|
|
|
|
7.05
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
|
We expect warrants for 684,250 shares of
common stock with an exercise price of $4.19 per share to
be exercised on a cash basis prior to the offering because they
terminate if not exercised prior to that time. If these warrants
are exercised, then the dilution per share to new investors
would be $4.21.
The following table summarizes the tangible book
value of the outstanding shares and the total consideration paid
to us and the average price paid per share by existing
stockholders and new investors purchasing common stock in the
offering. This information is presented on a pro forma basis at
December 31, 2004, after giving effect to the sale of the
2,250,000 shares of common stock in the offering at an
assumed initial public offering price of $11.00 per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
Total Consideration
|
|
Average
|
|
|
|
|
|
|
Price
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Existing stockholders
|
|
|
5,247,649
|
(1)
|
|
|
70
|
%
|
|
$
|
25,407
|
|
|
|
51
|
%
|
|
$
|
4.84
|
|
New investors
|
|
|
2,250,000
|
|
|
|
30
|
%
|
|
|
24,750
|
(2)
|
|
|
49
|
%
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,497,649
|
|
|
|
100
|
%
|
|
$
|
50,157
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Assumes the exercise on a cash basis of warrants
to purchase 684,250 shares of common stock with an exercise
price of $4.19 per share, which warrants we expect to be
exercised prior to the offering because they terminate if not
exercised prior to that time. We have assumed no exercise of
outstanding stock options and other warrants or conversion of
our Series A preferred stock. In addition to the warrants
for 684,250 shares of common stock, at December 31,
2004, there were outstanding:
|
|
|
|
|
|
|
722,017 shares of common stock issuable upon
exercise of outstanding stock options with a weighted average
exercise price of $6.11 per share;
|
|
|
|
|
59,950 shares of common stock issuable upon
the exercise of warrants with an exercise price of
$14.00 per share; and
|
23
|
|
|
|
|
642,600 shares of common stock currently
issuable upon conversion of our Series A preferred stock
(based on the current conversion price of $10.50 per share).
|
|
|
(2)
|
Before deducting estimated underwriting discounts
and commissions of approximately $1.5 million and estimated
offering expenses of approximately $1.4 million payable by
us.
|
To the extent that any outstanding options or
warrants are exercised or, depending on the per share initial
public offering price, Series A preferred stock is
converted into common stock, there will be further dilution to
new investors. In addition, we may choose to raise additional
capital even if we believe we have sufficient funds for our
current or future operating plans. To the extent that additional
capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in
further dilution to our stockholders.
24
SELECTED CONSOLIDATED FINANCIAL
INFORMATION
You should read the selected consolidated
financial information set forth below together with our
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. Our consolidated income statement information
for the six months ended December 31, 2004 and 2003 and the
consolidated balance sheet information as of December 31,
2004 are derived from our unaudited consolidated financial
statements, which are included in this prospectus and, in the
opinion of management, include all adjustments necessary for
fair presentation of the results of such periods. The
consolidated balance sheet information as of December 31,
2003 is derived from our unaudited consolidated financial
information. The consolidated income statement information for
the fiscal years ended June 30, 2004, 2003 and 2002 and the
consolidated balance sheet information at June 30, 2004 and
2003 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The
consolidated income statement information for the fiscal year
ended June 30, 2001 and the period from July 6, 1999
(inception) to June 30, 2000 and the consolidated
balance sheet information at June 30, 2002, 2001 and 2000
have been derived from our audited consolidated financial
statements that are not included in this prospectus. Historical
results are not necessarily indicative of future
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for
|
|
|
At or for
|
|
|
|
|
|
|
|
|
|
the Period
|
|
|
the Six Months
|
|
|
|
July 6, 1999
|
|
|
Ended December 31,
|
|
At or for the Fiscal Years Ended June 30,
|
|
(inception) to
|
|
|
|
|
|
|
June 30,
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
513,108
|
|
|
$
|
316,804
|
|
|
$
|
405,039
|
|
|
$
|
273,464
|
|
|
$
|
217,614
|
|
|
$
|
156,628
|
|
|
$
|
13,295
|
|
Loans held for investment, net of allowance for
loan losses
|
|
|
417,915
|
|
|
|
283,764
|
|
|
|
355,261
|
|
|
|
245,933
|
|
|
|
167,251
|
|
|
|
139,679
|
|
|
|
|
|
Loans held for sale, at cost
|
|
|
845
|
|
|
|
|
|
|
|
435
|
|
|
|
3,602
|
|
|
|
128
|
|
|
|
22
|
|
|
|
|
|
Allowance for loan losses
|
|
|
1,220
|
|
|
|
825
|
|
|
|
1,045
|
|
|
|
790
|
|
|
|
505
|
|
|
|
310
|
|
|
|
|
|
Investment securities
|
|
|
53,041
|
|
|
|
311
|
|
|
|
3,665
|
|
|
|
441
|
|
|
|
726
|
|
|
|
1,522
|
|
|
|
|
|
Total deposits
|
|
|
320,019
|
|
|
|
220,235
|
|
|
|
269,841
|
|
|
|
193,992
|
|
|
|
167,618
|
|
|
|
127,204
|
|
|
|
|
|
Advances from the FHLB
|
|
|
148,504
|
|
|
|
66,389
|
|
|
|
101,446
|
|
|
|
55,900
|
|
|
|
29,900
|
|
|
|
15,900
|
|
|
|
|
|
Note payable
|
|
|
5,000
|
|
|
|
3,060
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
870
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
32,844
|
|
|
|
26,623
|
|
|
|
31,759
|
|
|
|
22,885
|
|
|
|
19,501
|
|
|
|
11,903
|
|
|
|
12,936
|
|
Selected Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
10,192
|
|
|
$
|
7,218
|
|
|
$
|
15,772
|
|
|
$
|
13,514
|
|
|
$
|
11,641
|
|
|
$
|
4,697
|
|
|
$
|
24
|
|
Interest expense
|
|
|
5,905
|
|
|
|
4,342
|
|
|
|
9,242
|
|
|
|
8,426
|
|
|
|
8,144
|
|
|
|
3,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,287
|
|
|
|
2,876
|
|
|
|
6,530
|
|
|
|
5,088
|
|
|
|
3,497
|
|
|
|
1,162
|
|
|
|
24
|
|
Provision for loan losses
|
|
|
175
|
|
|
|
35
|
|
|
|
255
|
|
|
|
285
|
|
|
|
195
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan
losses
|
|
|
4,112
|
|
|
|
2,841
|
|
|
|
6,275
|
|
|
|
4,803
|
|
|
|
3,302
|
|
|
|
852
|
|
|
|
24
|
|
Noninterest income
|
|
|
385
|
|
|
|
474
|
|
|
|
1,190
|
|
|
|
1,349
|
|
|
|
297
|
|
|
|
52
|
|
|
|
|
|
Noninterest expense
|
|
|
2,546
|
|
|
|
1,985
|
|
|
|
3,819
|
|
|
|
3,158
|
|
|
|
3,008
|
|
|
|
1,985
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
1,951
|
|
|
|
1,330
|
|
|
|
3,646
|
|
|
|
2,994
|
|
|
|
591
|
|
|
|
(1,081
|
)
|
|
|
(988
|
)
|
Income tax expense (benefit)
|
|
|
776
|
|
|
|
580
|
|
|
|
1,471
|
|
|
|
1,264
|
|
|
|
(429
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,175
|
|
|
$
|
750
|
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
$
|
(1,082
|
)
|
|
$
|
(988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
972
|
|
|
$
|
731
|
|
|
$
|
2,035
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
$
|
(1,082
|
)
|
|
$
|
(988
|
)
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for
|
|
|
At or for
|
|
|
|
|
|
|
|
|
|
the Period
|
|
|
the Six Months
|
|
|
|
July 6, 1999
|
|
|
Ended December 31,
|
|
At or for the Fiscal Years Ended June 30,
|
|
(inception) to
|
|
|
|
|
|
|
June 30,
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.25
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
$
|
0.39
|
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
Book value per common share
|
|
$
|
5.74
|
|
|
$
|
5.27
|
|
|
$
|
5.57
|
|
|
$
|
5.11
|
|
|
$
|
4.50
|
|
|
$
|
3.21
|
|
|
$
|
3.50
|
|
Tangible book value per common share
|
|
$
|
5.74
|
|
|
$
|
5.27
|
|
|
$
|
5.57
|
|
|
$
|
5.11
|
|
|
$
|
4.50
|
|
|
$
|
3.21
|
|
|
$
|
3.50
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,527,519
|
|
|
|
4,498,045
|
|
|
|
4,502,284
|
|
|
|
4,468,296
|
|
|
|
4,128,051
|
|
|
|
3,706,050
|
|
|
|
2,950,999
|
|
|
Diluted
|
|
|
5,172,864
|
|
|
|
5,156,898
|
|
|
|
5,160,482
|
|
|
|
5,134,940
|
|
|
|
4,795,401
|
|
|
|
3,706,050
|
|
|
|
2,950,999
|
|
Common shares outstanding at end of period
|
|
|
4,563,399
|
|
|
|
4,506,524
|
|
|
|
4,506,524
|
|
|
|
4,474,351
|
|
|
|
4,334,401
|
|
|
|
3,707,156
|
|
|
|
3,694,031
|
|
Performance Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations for investment
|
|
$
|
27,682
|
|
|
$
|
37,198
|
|
|
$
|
64,478
|
|
|
$
|
58,609
|
|
|
$
|
34,659
|
|
|
$
|
16,003
|
|
|
|
NM
|
|
Loan originations for sale
|
|
|
9,795
|
|
|
|
43,643
|
|
|
|
76,550
|
|
|
|
124,739
|
|
|
|
6,994
|
|
|
|
3,317
|
|
|
|
NM
|
|
Loan purchases
|
|
|
70,859
|
|
|
|
52,468
|
|
|
|
129,193
|
|
|
|
81,778
|
|
|
|
132,298
|
|
|
|
139,565
|
|
|
|
NM
|
|
Return (loss) on average assets
|
|
|
0.53%
|
|
|
|
0.52%
|
|
|
|
0.67%
|
|
|
|
0.71%
|
|
|
|
0.53%
|
|
|
|
(1.56)%
|
|
|
|
NM
|
|
Return (loss) on average common
stockholders equity
|
|
|
7.52%
|
|
|
|
6.16%
|
|
|
|
8.42%
|
|
|
|
7.87%
|
|
|
|
6.32%
|
|
|
|
(8.68)%
|
|
|
|
NM
|
|
Interest rate spread(1)
|
|
|
1.78%
|
|
|
|
1.76%
|
|
|
|
1.81%
|
|
|
|
1.76%
|
|
|
|
1.45%
|
|
|
|
0.67%
|
|
|
|
NM
|
|
Net interest margin(2)
|
|
|
1.98%
|
|
|
|
2.02%
|
|
|
|
2.04%
|
|
|
|
2.11%
|
|
|
|
1.83%
|
|
|
|
1.73%
|
|
|
|
NM
|
|
Efficiency ratio(3)
|
|
|
54.49%
|
|
|
|
59.25%
|
|
|
|
49.47%
|
|
|
|
49.06%
|
|
|
|
79.28%
|
|
|
|
163.51%
|
|
|
|
NM
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets at end of period
|
|
|
6.40%
|
|
|
|
8.40%
|
|
|
|
7.84%
|
|
|
|
8.37%
|
|
|
|
8.96%
|
|
|
|
7.60%
|
|
|
|
NM
|
|
Tier 1 leverage (core) capital to
adjusted tangible assets(4)
|
|
|
7.45%
|
|
|
|
8.94%
|
|
|
|
7.84%
|
|
|
|
8.09%
|
|
|
|
8.65%
|
|
|
|
8.16%
|
|
|
|
NM
|
|
Tier 1 risk-based capital ratio(4)
|
|
|
11.44%
|
|
|
|
12.09%
|
|
|
|
11.11%
|
|
|
|
11.40%
|
|
|
|
13.76%
|
|
|
|
15.00%
|
|
|
|
NM
|
|
Total risk-based capital ratio(4)
|
|
|
11.80%
|
|
|
|
12.44%
|
|
|
|
11.48%
|
|
|
|
11.81%
|
|
|
|
14.13%
|
|
|
|
15.37%
|
|
|
|
NM
|
|
Tangible capital to tangible assets(4)
|
|
|
7.45%
|
|
|
|
8.94%
|
|
|
|
7.84%
|
|
|
|
8.09%
|
|
|
|
8.65%
|
|
|
|
8.16%
|
|
|
|
NM
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans held for
investment at end of period
|
|
|
0.29%
|
|
|
|
0.29%
|
|
|
|
0.29%
|
|
|
|
0.32%
|
|
|
|
0.30%
|
|
|
|
0.22%
|
|
|
|
NM
|
|
Allowance for loan losses to nonperforming
loans(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Interest rate spread represents the difference
between the weighted average yield on interest-earning assets
and the weighted average rate paid on interest-bearing
liabilities.
|
|
(2)
|
Net interest margin represents net interest
income as a percentage of average interest-earning assets.
|
|
(3)
|
Efficiency ratio represents noninterest expense
as a percentage of the aggregate of net interest income and
noninterest income.
|
|
(4)
|
Reflects regulatory capital ratios of Bank of
Internet USA only.
|
|
|
(5)
|
For every quarter from inception to June 30,
2004, we had no loan defaults, no foreclosures, no nonperforming
loans and no specific loan loss allowances. Since that time, one
loan with a principal balance of approximately $152,000 at
June 30, 2004 defaulted, but the loan was repaid in full in
September 2004. At September 30, 2004 and December 31,
2004, we had no loan defaults, no foreclosures, no nonperforming
loans and no specific loan loss allowances.
|
|
NM means not meaningful.
26
MANAGEMENTS DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis contains
forward-looking statements that are based upon current
expectations. Forward-looking statements involve risks and
uncertainties. Our actual results and the timing of events could
differ materially from those anticipated in our forward-looking
statements due to various important factors, including those set
forth under Risk Factors and elsewhere in this
prospectus. The following discussion and analysis should be read
together with the Selected Consolidated Financial
Information and our consolidated financial statements,
including the related notes, included elsewhere in this
prospectus.
General
Our company, BofI Holding, Inc., is the holding
company for Bank of Internet USA, a consumer-focused, nationwide
savings bank operating primarily over the Internet. We generate
retail deposits in all 50 states and originate loans for
our customers directly through our websites, including
www.bankofinternet.com, www.bofi.com and www.apartmentbank.com.
We are a unitary savings and loan holding company and, along
with Bank of Internet USA, are subject to primary federal
regulation by the OTS.
Our deposit customers are acquired and serviced
exclusively over the Internet. Using online applications on our
websites, our customers apply for deposit products, including
time deposits, interest-bearing demand accounts (including
interest-bearing checking accounts) and savings accounts
(including money market savings accounts). We specialize in
originating and purchasing small- to medium-size multifamily
mortgage loans. We manage our cash and cash equivalents based
upon our need for liquidity, and we seek to minimize the assets
we hold as cash and cash equivalents by investing our excess
liquidity in higher yielding assets such as loans or securities.
Our ability to increase our assets is limited
primarily by the capital we are required to maintain by
regulation. Our bank must maintain certain minimum ratios of
capital to assets. Thus, to enable us to increase the rate at
which our bank grows its assets, we have raised additional
capital in three separate private placements totaling
$14.5 million between September 2001 and June 2004.
Following each of these private placements, we increased our
total assets. Other than the constraints of these capital
requirements, we believe that our business model is highly
scalable, allowing us to expand into new regions and products
and rapidly increase deposits and, to a lesser extent, loans,
without significant delays and with a significantly slower
growth rate of noninterest expenses and fixed assets.
At June 30, 2001, the end of our first
fiscal year of operations, our total deposits were
$127.2 million and total assets were $156.6 million.
We have since grown our deposits and assets to
$320.0 million and $513.1 million, respectively, at
December 31, 2004. During the last three fiscal years, we
have operated with net interest margins (the difference between
the rate on average interest-earning assets and the rate on
average interest-bearing liabilities) ranging from 1.83% to
2.11%. During the same three-year period, our efficiency ratio
(noninterest expense divided by the sum of net interest income
and noninterest income) improved from 79.3% to 49.5%.
During our first two years of operation, we
focused primarily on building our online franchise and deposit
growth. We became profitable during the fiscal year ended
June 30, 2002, as we grew sufficiently to generate enough
net interest income to exceed our operating expenses. In our
deposit gathering business, we initially sought time deposits
because of their large average size and their relatively simple
application and processing. This initial focus gave us time to
develop our customer relationship management, or CRM software
and manage workflow, as well as develop our online advertising
strategy. The proceeds from our deposits were invested primarily
in single family mortgage loans, which we purchased in pools
with servicing retained by the sellers. The initial pool
purchases and third-party servicing provided us the time to hire
and train loan origination and servicing staff. In the last half
of the fiscal year ended June 30, 2002, we began to shift
our focus from purchasing single family mortgage loans to
originating and purchasing multifamily mortgage loans. At
June 30, 2002, we had 20 full time employees and
$217.6 million in assets. For the fiscal year ended
27
June 30, 2002, our net interest income, the
primary component of our net income, was $3.5 million,
which resulted in a net interest margin of 1.83% on average
interest earning assets.
During the fiscal years ended June 30, 2003
and 2004, we developed and strengthened our online loan
origination capabilities. We launched our single family loan
origination website in March 2002. We originated single family
mortgage loans for sale of $7.0 million for the fiscal year
ended June 30, 2002, $124.7 million for the fiscal
year ended June 30, 2003 and $76.6 million for the
fiscal year ended June 30, 2004. We launched our
multifamily loan origination website in December 2002. We
originated multifamily mortgage loans of $30.0 million for
the fiscal year ended June 30, 2002, $49.9 million for
the fiscal year ended June 30, 2003 and $57.3 million
for the fiscal year ended June 30, 2004.
At June 30, 2004, we had $405.0 million
in assets, or $16.9 million in assets per full time
equivalent employee. For the fiscal year ended June 30,
2004, our net interest income was $6.5 million which
resulted in a net interest margin of 2.0% on average
interest-earning assets. Our asset growth, the shift in our loan
portfolio toward multifamily loans and the relative increase in
demand and savings accounts, combined with the relatively slower
growth in our operating expense as result of our Internet
platform, are principally responsible for our increase in
earnings from $1.0 million for the fiscal year ended
June 30, 2002 to $1.7 million for the fiscal year
ended June 30, 2003 and $2.2 million for the fiscal
year ended June 30, 2004.
At December 31, 2004, we had
$513.1 million in assets, or $20.5 million in assets
per full time equivalent employee. For the six months ended
December 31, 2004, our net income was $1.2 million and
increased 56.7% compared to the same period ended
December 31, 2003. The earnings increase was a result of
asset growth after incurring a contract termination expense for
the six months ended December 31, 2003.
Our future performance will depend on many
factors, including changes in interest rates, competition for
deposits and quality loans, regulatory burden and our ability to
improve operating efficiencies. We believe we are well
positioned for asset growth and processing efficiencies that
will increase profitability.
Critical Accounting Policies
The following discussion and analysis of our
financial condition and results of operations is based upon our
consolidated financial statements and the notes thereto, which
have been prepared in accordance with accounting principles
generally accepted in the United States of America. The
preparation of these consolidated financial statements requires
us to make a number of estimates and assumptions that affect the
reported amounts and disclosures in the consolidated financial
statements. On an ongoing basis, we evaluate our estimates and
assumptions based upon historical experience and various factors
and circumstances. We believe that our estimates and assumptions
are reasonable under the circumstances. However, actual results
may differ significantly from these estimates and assumptions
that could have a material effect on the carrying value of
assets and liabilities at the balance sheet dates and our
results of operations for the reporting periods.
Our significant accounting policies and practices
are described in Note 1 to our June 30, 2004 audited
consolidated financial statements, which are included in this
prospectus. Following is a summary of the accounting policies
and practices that require managements judgment and
estimates:
Investment
Securities.
Investment securities
generally must be classified as held-to-maturity,
available-for-sale or trading. The appropriate classification is
based partially on our ability to hold the securities to
maturity and largely on managements intentions with
respect to either holding or selling the securities. The
classification of investment securities is significant since it
directly impacts the accounting for unrealized gains and losses
on securities. Unrealized gains and losses on trading securities
flow directly through earnings during the periods in which they
arise, whereas for available-for-sale securities, they are
recorded as a separate component of stockholders equity
(accumulated comprehensive other income or loss) and do not
affect earnings until realized. The fair values of our
investment securities are generally determined by reference to
quoted market prices and reliable independent sources. We are
obligated to assess, at each reporting date, whether there is an
other-than-temporary impairment to our investment
securities. Any impairment must be recognized in current
earnings rather than in other comprehensive income. We have not
had any impaired investment securities.
28
Allowance for Loan
Losses.
We maintain an allowance for
loan losses at an amount that we believe is sufficient to
provide adequate protection against probable losses in our loan
portfolio. Quarterly, we evaluate the adequacy of the allowance
based upon reviews of individual loans, recent loss experience,
current economic conditions, risk characteristics of the various
categories of loans and other pertinent factors. The evaluation
is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes
available. The allowance is increased by the provision for loan
losses, which is charged against current period operating
results. The allowance is decreased by the amount of charge-offs
of loans deemed uncollectible and increased by recoveries of
loans previously charged-off.
Under our allowance for loan loss policy,
impairment calculations are determined based on general
portfolio data for general reserves and loan level data for
specific reserves. Specific loans are evaluated for impairment
and are classified as nonperforming or in foreclosure when they
are 90 days or more delinquent. A loan is considered
impaired when, based on current information and events, it is
probable that the bank will be unable to collect the scheduled
payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors that we
consider in determining impairment include payment status,
collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally
are not classified as impaired. Impairment is measured on a loan
by loan basis by either the present value of expected future
cash flows discounted at the loans effective interest rate
or the fair value of the collateral if repayment of the loan is
expected primarily from the sale of collateral.
General loan loss reserves are calculated by
grouping each loan by collateral type and by grouping the
loan-to-value ratios of each loan within the collateral type. An
estimated allowance rate for each loan-to-value group within
each type of loan is multiplied by the total principal amount in
the group to calculate the required general reserve attributable
to that group. We use an allowance rate that provides a larger
loss allowance for loans with greater loan-to-value ratios.
Specific reserves are calculated when an internal asset review
of a loan identifies a significant adverse change in the
financial position of the borrower or the value of the
collateral. The specific reserve is based on discounted cash
flows, observable market prices or the estimated value of
underlying collateral.
For every quarter from inception to June 30,
2004, we had no loan defaults, no foreclosures, no nonperforming
loans and no specific loan loss allowances. Since that time, one
loan with a principal balance of approximately $152,000 at
June 30, 2004 defaulted, but the loan was repaid in full in
September 2004. At September 30, 2004 and
December 31, 2004, we had no loan defaults, no
foreclosures, no nonperforming loans and no specific loan loss
allowances. Our history is limited, and we expect to have over
time additional loans default or become nonperforming. We have
provided general loan loss allowances as an estimate of the
impairment inherent in our portfolio. See Risk
Factors for more information regarding the risks
associated with our loan portfolio.
Comparison of Financial Condition at
December 31, 2004 and June 30, 2004
Total assets increased by $108.1 million to
$513.1 million at December 31, 2004 from
$405.0 million at June 30, 2004. The increase in total
assets resulted primarily from purchases of mortgage-backed
securities and mortgage loans held for investment during the six
months ended December 31, 2004, resulting in increases in
investment securities available for sale and loans held for
investment of $44.8 million and $62.7 million,
respectively. Total liabilities increased by $107.0 million
to $480.3 million at December 31, 2004 from
$373.3 million at June 30, 2004. The increase in total
liabilities resulted from growth in deposits of
$50.2 million, advances from the FHLB of
$47.1 million, increase in notes payable of
$3.7 million and our issuance of $5.2 million in
junior subordinated debentures.
Stockholders equity increased by
$1.1 million during the six months ended December 31,
2004. The increase was the result of $1.2 million in net
income, $239,000 from the exercise of common stock warrants less
$203,000 in cash dividends paid to holders of our Series A
preferred stock.
Our deposit growth of $50.2 million between
June 30, 2004 and December 31, 2004 was primarily the
result of a $60.7 million net increase in time deposits due
to increased offering rates and increased advertising.
29
Our originations and purchases of loans held for
investment, primarily multifamily loans, were $27.7 million
and $70.9 million, respectively, for the six months ended
December 31, 2004. Deposit funding in excess of our loan
originations, advances from the FHLB and proceeds from our
issuance of junior subordinated debentures were invested in
hybrid mortgage-backed securities to build our investment
portfolio, increase its yield and add liquidity. In addition to
our loan originations, we intend to continue purchasing
multifamily and single family loans and mortgage-backed
securities from time to time.
Comparison of Financial Condition at
June 30, 2004 and 2003
Total assets increased by $131.5 million, or
48.1%, to $405.0 million at June 30, 2004 from
$273.5 million at June 30, 2003. The increase in total
assets resulted primarily from a $109.3 million increase in
net loans due to loan purchases and originations totaling
$193.7 million, which were offset by loan principal
repayments of $83.6 million. The $109.3 million
increase in net loans was primarily the result of the expansion
of our multifamily loan origination and purchase capabilities,
including the development and launch of our multifamily loan
origination websites. Investment securities increased by
$3.2 million to $3.7 million due to the purchase of a
government agency debt security. Total liabilities increased by
$122.7 million, or 49.0%, to $373.3 million at
June 30, 2004 from $250.6 million at June 30,
2003. The increase in total liabilities resulted primarily from
growth in deposits of $75.8 million and increases in
advances from the FHLB of $45.5 million. We designed and
marketed new savings account programs, which increased our
savings accounts by $75.3 million between June 30,
2003 and 2004. We used advances from the FHLB to extend the
average maturities of our liabilities to match better the
expected timing of changes in the interest rates on our loans.
Stockholders equity increased by
$8.9 million, or 38.9%, during the fiscal year ended
June 30, 2004. The increase is primarily due to
$6.6 million in net cash received from our issuance of
Series A preferred stock and an increase of
$2.2 million in retained earnings from net income, less a
total of $140,000 in cash dividends paid to holders of our
Series A preferred stock.
During the fiscal year ended June 30, 2004,
we originated and purchased $57.3 million and
$120.3 million, respectively, in multifamily loans,
increasing our multifamily loan portfolio by 67.7% from
$191.4 million to $321.0 million. We expect to
continue to emphasize multifamily lending through the addition
of direct loan originators and through increased online contact
from our customers and potential customers searching for loans.
Our originations of single family loans held for sale declined
from $124.7 million for the fiscal year ended June 30,
2003 to $76.6 million for the fiscal year ended
June 30, 2004. This decline was primarily due to rising
interest rates and the resulting decline in refinance activity.
Comparison of Financial Condition at
June 30, 2003 and 2002
Total assets increased by $55.9 million, or
25.7%, to $273.5 million at June 30, 2003 from
$217.6 million at June 30, 2002. The increase in total
assets resulted primarily from loan purchases and originations
of $140.4 million, 70% of which were multifamily mortgage
loans. The increase was offset by principal repayments during
the fiscal year ended June 30, 2003, which totaled
$60.9 million, consisting primarily of single family
mortgage prepayments by borrowers who refinanced during a period
of low interest rates. Loans held for sale increased
$3.5 million to $3.6 million at June 30, 2003
from $128,000 at June 30, 2002, due to increased
originations of single family mortgage loans which were held for
sale.
Total liabilities increased by
$52.5 million, or 26.5%, to $250.6 million at
June 30, 2003 from $198.1 million at June 30,
2002. The increase in total liabilities resulted from growth in
deposits of $26.4 million and $26.0 million in
advances from the FHLB.
Stockholders equity increased by
$3.4 million, or 17.4%, during the fiscal year ended
June 30, 2003. The increase is primarily due to
$1.7 million in new common stock issued in a private
placement, which closed on July 31, 2002, and
$1.7 million in net income which increased retained
earnings.
During the fiscal year ended June 30, 2003,
we originated $124.7 million in single family loans held
for sale. The development and launch of our single family loan
origination website and low mortgage interest rates favoring
refinancing caused our originations to rise from the
$7.0 million originated in the fiscal year ended
June 30, 2002.
30
Average Balances, Net Interest Income, Yields
Earned and Rates Paid
The following tables set forth, for the periods
indicated, information regarding (i) average balances;
(ii) the total amount of interest income from
interest-earning assets and the weighted average yields on such
assets; (iii) the total amount of interest expense on
interest-bearing liabilities and the weighted average rates paid
on such liabilities; (iv) net interest income;
(v) interest rate spread; and (vi) net interest margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Rates
|
|
|
|
Interest
|
|
Rates
|
|
|
Average
|
|
Income/
|
|
Earned/
|
|
Average
|
|
Income/
|
|
Earned/
|
|
|
Balance(1)
|
|
Expense
|
|
Paid(2)
|
|
Balance(1)
|
|
Expense
|
|
Paid(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Assets:
|
Loans(3)(4)
|
|
$
|
366,070
|
|
|
$
|
9,169
|
|
|
|
5.01
|
%
|
|
$
|
250,237
|
|
|
$
|
6,929
|
|
|
|
5.54
|
%
|
Federal funds sold
|
|
|
14,082
|
|
|
|
113
|
|
|
|
1.60
|
%
|
|
|
19,713
|
|
|
|
91
|
|
|
|
0.92
|
%
|
Interest-earning deposits in other financial
institutions
|
|
|
9,745
|
|
|
|
126
|
|
|
|
2.59
|
%
|
|
|
11,073
|
|
|
|
133
|
|
|
|
2.40
|
%
|
Investment securities(4)(5)
|
|
|
38,081
|
|
|
|
676
|
|
|
|
3.55
|
%
|
|
|
385
|
|
|
|
5
|
|
|
|
2.60
|
%
|
Stock of the FHLB, at cost
|
|
|
5,412
|
|
|
|
108
|
|
|
|
3.99
|
%
|
|
|
2,996
|
|
|
|
60
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
433,390
|
|
|
|
10,192
|
|
|
|
4.70
|
%
|
|
|
284,404
|
|
|
|
7,218
|
|
|
|
5.08
|
%
|
Noninterest-earning assets
|
|
|
8,309
|
|
|
|
|
|
|
|
|
|
|
|
4,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
441,699
|
|
|
|
|
|
|
|
|
|
|
$
|
288,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity:
|
Interest-bearing demand and savings
|
|
$
|
118,872
|
|
|
$
|
1,077
|
|
|
|
1.81
|
%
|
|
$
|
72,261
|
|
|
$
|
620
|
|
|
|
1.72
|
%
|
Time deposits
|
|
|
174,763
|
|
|
|
2,867
|
|
|
|
3.28
|
%
|
|
|
129,726
|
|
|
|
2,512
|
|
|
|
3.87
|
%
|
Advances from the FHLB
|
|
|
107,551
|
|
|
|
1,857
|
|
|
|
3.45
|
%
|
|
|
59,072
|
|
|
|
1,198
|
|
|
|
4.06
|
%
|
Other borrowings
|
|
|
3,490
|
|
|
|
104
|
|
|
|
5.96
|
%
|
|
|
447
|
|
|
|
12
|
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
404,676
|
|
|
|
5,905
|
|
|
|
2.92
|
%
|
|
|
261,506
|
|
|
|
4,342
|
|
|
|
3.32
|
%
|
Noninterest-bearing demand deposits
|
|
|
3,355
|
|
|
|
|
|
|
|
|
|
|
|
2,172
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
32,492
|
|
|
|
|
|
|
|
|
|
|
|
24,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
441,699
|
|
|
|
|
|
|
|
|
|
|
$
|
288,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
4,287
|
|
|
|
|
|
|
|
|
|
|
$
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread(6)
|
|
|
|
|
|
|
|
|
|
|
1.78
|
%
|
|
|
|
|
|
|
|
|
|
|
1.76
|
%
|
Net interest margin(7)
|
|
|
|
|
|
|
|
|
|
|
1.98
|
%
|
|
|
|
|
|
|
|
|
|
|
2.02
|
%
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Yields
|
|
|
|
Yields
|
|
|
|
Yields
|
|
|
|
|
Interest
|
|
Earned/
|
|
|
|
Interest
|
|
Earned/
|
|
|
|
Interest
|
|
Earned/
|
|
|
Average
|
|
Income/
|
|
Rates
|
|
Average
|
|
Income/
|
|
Rates
|
|
Average
|
|
Income/
|
|
Rates
|
|
|
Balance(1)
|
|
Expense
|
|
Paid
|
|
Balance
|
|
Expense
|
|
Paid
|
|
Balance(1)
|
|
Expense
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Assets:
|
Loans(3)(4)
|
|
$
|
284,617
|
|
|
$
|
15,177
|
|
|
|
5.33
|
%
|
|
$
|
202,955
|
|
|
$
|
12,723
|
|
|
|
6.27
|
%
|
|
$
|
158,105
|
|
|
$
|
10,765
|
|
|
|
6.81
|
%
|
Federal funds sold
|
|
|
20,944
|
|
|
|
192
|
|
|
|
0.92
|
%
|
|
|
16,446
|
|
|
|
235
|
|
|
|
1.43
|
%
|
|
|
21,953
|
|
|
|
459
|
|
|
|
2.09
|
%
|
Interest-earning deposits in other financial
institutions
|
|
|
10,919
|
|
|
|
261
|
|
|
|
2.39
|
%
|
|
|
19,327
|
|
|
|
445
|
|
|
|
2.30
|
%
|
|
|
8,793
|
|
|
|
305
|
|
|
|
3.47
|
%
|
Investment securities held to maturity, at
cost(4)(5)
|
|
|
336
|
|
|
|
7
|
|
|
|
2.08
|
%
|
|
|
586
|
|
|
|
17
|
|
|
|
2.92
|
%
|
|
|
1,082
|
|
|
|
46
|
|
|
|
4.25
|
%
|
Stock of the FHLB, at cost
|
|
|
3,467
|
|
|
|
135
|
|
|
|
3.89
|
%
|
|
|
1,866
|
|
|
|
94
|
|
|
|
5.05
|
%
|
|
|
1,182
|
|
|
|
66
|
|
|
|
5.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
320,283
|
|
|
|
15,772
|
|
|
|
4.92
|
%
|
|
|
241,180
|
|
|
|
13,514
|
|
|
|
5.60
|
%
|
|
|
191,115
|
|
|
|
11,641
|
|
|
|
6.09
|
%
|
Noninterest-earning assets
|
|
|
5,790
|
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
1,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
326,073
|
|
|
|
|
|
|
|
|
|
|
$
|
244,220
|
|
|
|
|
|
|
|
|
|
|
$
|
193,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity:
|
Interest-bearing demand and savings
|
|
$
|
93,797
|
|
|
$
|
1,668
|
|
|
|
1.78
|
%
|
|
$
|
41,373
|
|
|
$
|
854
|
|
|
|
2.07
|
%
|
|
$
|
28,391
|
|
|
$
|
759
|
|
|
|
2.67
|
%
|
Time deposits
|
|
|
132,166
|
|
|
|
4,866
|
|
|
|
3.68
|
%
|
|
|
142,903
|
|
|
|
5,854
|
|
|
|
4.10
|
%
|
|
|
123,812
|
|
|
|
6,196
|
|
|
|
5.00
|
%
|
Advances from the FHLB
|
|
|
69,932
|
|
|
|
2,648
|
|
|
|
3.79
|
%
|
|
|
35,343
|
|
|
|
1,718
|
|
|
|
4.86
|
%
|
|
|
22,764
|
|
|
|
1,143
|
|
|
|
5.02
|
%
|
Other borrowings
|
|
|
1,119
|
|
|
|
60
|
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
|
|
46
|
|
|
|
9.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
297,014
|
|
|
|
9,242
|
|
|
|
3.11
|
%
|
|
|
219,619
|
|
|
|
8,426
|
|
|
|
3.84
|
%
|
|
|
175,454
|
|
|
|
8,144
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
1,756
|
|
|
|
|
|
|
|
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
620
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
26,260
|
|
|
|
|
|
|
|
|
|
|
|
21,995
|
|
|
|
|
|
|
|
|
|
|
|
16,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
326,073
|
|
|
|
|
|
|
|
|
|
|
$
|
244,220
|
|
|
|
|
|
|
|
|
|
|
$
|
193,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
6,530
|
|
|
|
|
|
|
|
|
|
|
$
|
5,088
|
|
|
|
|
|
|
|
|
|
|
$
|
3,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread(6)
|
|
|
|
|
|
|
|
|
|
|
1.81
|
%
|
|
|
|
|
|
|
|
|
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
|
|
1.45
|
%
|
Net interest margin(7)
|
|
|
|
|
|
|
|
|
|
|
2.04
|
%
|
|
|
|
|
|
|
|
|
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
1.83
|
%
|
|
|
(1)
|
Average balances are obtained from daily data.
|
|
(2)
|
Annualized.
|
|
(3)
|
Loans include loans held for sale, allowance for
loan losses, loan premiums and unearned fees.
|
|
(4)
|
Interest income includes reductions for
amortization of loan and investment securities premiums and
earnings from accretion of discounts and loan fees. Loan fee
income is not significant.
|
|
(5)
|
All investments are taxable.
|
|
(6)
|
Interest rate spread represents the difference
between the weighted average yield on interest-earning assets
and the weighted average rate paid on interest-bearing
liabilities.
|
|
(7)
|
Net interest margin represents net interest
income as a percentage of average interest-earning assets.
|
32
Results of Operations
Our results of operations depend on our net
interest income, which is the difference between interest income
on interest-earning assets and interest expense on
interest-bearing liabilities. Our net interest income has grown
primarily as a result of the growth in our assets and, to a
lesser extent, from the shift in our loan portfolio and the
relative increases in demand and savings accounts, as compared
to time deposits. We also earn noninterest income from gains on
sales of single family mortgage loans and prepayment fee income
from multifamily borrowers who repay their loans before
maturity. During the fiscal year ended June 30, 2003, lower
interest rates resulted in higher mortgage refinancing activity.
Interest rates increased during the fiscal year ended
June 30, 2004 and, as a result, mortgage loan refinancing
activity declined. In the near term, we believe that prepayment
penalty fee income and gain on sale income will be reduced as a
result of rising interest rates. The largest component of
noninterest expense is salary and benefits, which is a function
of the number of personnel, which increased from 20 full time
employees at June 30, 2001 to 25 full time equivalent
employees at December 31, 2004. We are subject to federal
and state income taxes, and our effective tax rate has changed
from a benefit of 72.6% for the fiscal year ended June 30,
2002 to an expense of 42.2% and 40.4% for the fiscal years ended
June 30, 2003 and 2004, respectively. We recognized the
benefit of prior tax operating losses for the fiscal years ended
June 30, 2002 and 2003. No such benefit was recognized for
the fiscal year ended June 30, 2004. Other factors that
affect our results of operations include expenses relating to
occupancy, data processing and other miscellaneous expenses.
Net income for the six months ended
December 31, 2004 totaled $1.2 million compared to
$750,000 for the six months ended December 31, 2003. The
$425,000 increase resulted from a $1.4 million increase in
net interest income, reduced by an increase in noninterest
expense of $561,000, an increase in our loan loss provision of
$140,000 and a decrease in noninterest income of $89,000. The
principal reason for the $561,000 increase in noninterest
expense for the six months ended December 31, 2004 compared
to the six months ended December 31, 2003 was an increase
in salary and benefits of $432,000, which was primarily the
result of accruing $280,000 in special one-time bonuses for our
executives. Net income totaled $2.2 million for the fiscal
year ended June 30, 2004, compared to $1.7 million for
the fiscal year ended June 30, 2003. The $445,000 increase
resulted from a $1.4 million increase in net interest
income, reduced by a $661,000 increase in noninterest expense, a
$207,000 increase in income tax expense and a $159,000 decrease
in noninterest income. The increase in noninterest expense for
the fiscal year ended June 30, 2004 was due to increased
salaries and benefits and the termination of a services
contract. Net income increased $710,000 to $1.7 million for
the fiscal year ended June 30, 2003 compared to
$1.0 million for the fiscal year ended June 30, 2002.
The increase in net income resulted from a $1.6 million
increase in net interest income and a $1.1 million increase
in noninterest income, a $90,000 increase in loan loss
provisions, a $150,000 increase in noninterest expense and
a $1.7 million increase in income tax expense.
|
|
|
Comparison of the Six Months Ended
December 31, 2004 and 2003
|
Net Interest Income.
Net interest income is determined by our interest rate spread
(
i.e.
, the difference between the yields earned on our
interest-earning assets and the rates paid on our
interest-bearing liabilities) and the relative amounts (volume)
of our interest-earning assets and interest-bearing liabilities.
Net interest income totaled $4.3 million for the six months
ended December 31, 2004 compared to $2.9 million for
the six months ended December 31, 2003. The following table
sets forth the effects of changing rates and volumes on our net
interest income. Information is provided with respect to
(i) effects on interest income and interest expense
attributable to changes in volume (changes in volume multiplied
by prior rate); (ii) effects on interest income and
interest expense attributable to changes in rate (changes in
rate multiplied by prior volume); and
33
(iii) changes in rate/volume (change in rate
multiplied by change in volume) for the six months ended
December 31, 2004 compared to the six months ended
December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2004 vs.
|
|
|
Six Months Ended December 31, 2003
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Increase
|
|
|
Volume
|
|
Rate
|
|
Rate/Volume
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Increase/(decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,209
|
|
|
$
|
(663
|
)
|
|
$
|
(306
|
)
|
|
$
|
2,240
|
|
Federal funds sold
|
|
|
(26
|
)
|
|
|
67
|
|
|
|
(19
|
)
|
|
|
22
|
|
Interest-earning deposits in other financial
institutions
|
|
|
(16
|
)
|
|
|
11
|
|
|
|
(2
|
)
|
|
|
(7
|
)
|
Investment securities
|
|
|
490
|
|
|
|
2
|
|
|
|
179
|
|
|
|
671
|
|
Stock of the FHLB, at cost
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,705
|
|
|
$
|
(583
|
)
|
|
$
|
(148
|
)
|
|
$
|
2,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
$
|
401
|
|
|
$
|
33
|
|
|
$
|
23
|
|
|
$
|
457
|
|
Time deposits
|
|
|
871
|
|
|
|
(383
|
)
|
|
|
(133
|
)
|
|
|
355
|
|
Advances from the FHLB
|
|
|
985
|
|
|
|
(180
|
)
|
|
|
(146
|
)
|
|
|
659
|
|
Other borrowings
|
|
|
82
|
|
|
|
1
|
|
|
|
9
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,339
|
|
|
$
|
(529
|
)
|
|
$
|
(247
|
)
|
|
$
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net interest margin for the six months ended
December 31, 2004 declined to 1.98% compared to 2.02% for
the six months ended December 31, 2003. During the six
months ended December 31, 2004, interest income earned on
loans and interest expense paid on deposits were influenced by a
general decline in the historical spread between short term and
long term rates earned on U.S. Treasury securities. If short
term rates continue to rise faster than long term rates, our net
interest income may be negatively impacted. See
Quantitative and Qualitative Disclosures About
Market Risk.
Interest Income.
Interest income for the six months ended December 31, 2004
totaled $10.2 million, an increase of $3.0 million, or
41.7%, compared to $7.2 million in interest income for the
six months ended December 31, 2003. Average
interest-earning assets for the six months ended
December 31, 2004 increased by $149.0 million compared
to the six months ended December 31, 2003 due primarily to
an $115.8 million increase in the average balance of the
loan portfolio as a result of our emphasis on building our
multifamily loan portfolio. Also, our average balance of
investment securities increased to $38.0 million during the
six months ended December 31, 2004 compared to the $385,000
average balance for the same period in 2003 as a result of the
purchase of $53.0 million of mortgaged-backed securities.
Average interest earning balances associated with our stock of
the FHLB increased by $2.4 million for the six months ended
December 31, 2004 compared to the six months ended
December 31, 2003 because our required minimum investment
increased, in line with increased advances from the FHLB. The
average yield earned on our interest-earning assets declined to
4.7% for the six months ended December 31, 2004 from 5.1%
for the same period in 2003 due primarily to the lower yield on
our loan portfolio as market interest rates declined. The
widespread increase in prepayments or refinancing of mortgage
loans during 2003 and 2004 reduced the higher-yielding older
loans which were replaced with lower yielding new loans, causing
the average yield on the loan portfolio to decline to 5.0% for
the six months ended December 31, 2004 from 5.5% for the
same period in 2003. Thus, the loan portfolio volume increase in
the six months ended December 31, 2004 would have increased
interest income $3.2 million, but the average rate decline
and the higher volume of loans originated at the lower average
rates reduced the interest income by $1.0 million,
resulting in a net increase in interest income of
$2.2 million.
34
Interest Expense.
Interest expense totaled $5.9 million for the six months
ended December 31, 2004, an increase of $1.6 million,
compared to $4.3 million in interest expense during the six
months ended December 31, 2003. Average interest-bearing
balances for the six months ended December 31, 2004
increased $143.2 million compared to the same period in
2003, due to higher deposit totals from increased customer
accounts and additional borrowings from the FHLB. The average
interest-bearing balances of advances from the FHLB increased
$48.5 million as new 2-, 3-, 4-, 5- and 7-year fixed-rate
advances were added. In addition, $15.9 million of advances
scheduled to mature during the fiscal year ended June 30,
2004 were modified and extended for periods of three to six
years. Our increased borrowing of long-term fixed rate amounts
during fiscal 2003 and 2004 was part of our strategy to manage
our interest rate risk. The average rate paid on our
interest-bearing liabilities declined to 2.9% for the six months
ended December 31, 2004 from 3.3% for the same period in
2003, due principally to the maturity of higher-rate term
deposits and the adding of new advances from the FHLB at market
rates that were significantly lower in 2004 than in 2003. Our
weighted average rates paid on interest-bearing demand and
savings accounts, time deposits and advances from the FHLB and
other borrowings for the six months ended December 31, 2004
was 40 basis points lower than for the six months ended
December 31, 2003. Thus, the decline in average rates paid
on interest-bearing liabilities would have reduced interest
expense in the six months ended December 31, 2004 by
$776,000, but the growth of average balances in demand and
savings accounts and advances from the FHLB caused an increase
in interest expense of $2.3 million, resulting in a net
increase in interest expense of $1.6 million. We believe
our trend of declining average rates paid on time deposits for
the six months ended December 31, 2004 compared to the six
months ended December 31, 2003 is likely to change in the
next six months to a rising average rate because market rates
paid for deposits have risen, $106.8 million of our time
deposits are scheduled to mature during the twelve months ended
December 31, 2005 and renewing customers will likely earn
higher interest rates on time deposits.
Provision for Loan
Losses.
Provision for loan losses was
$175,000 for the six months ended December 31, 2004 and
$35,000 for the same period in 2003. The provisions were made to
maintain our allowance for loan losses at levels which
management believed to be adequate. The assessment of the
adequacy of our allowance for loan losses is based upon a number
of quantitative and qualitative factors, including levels and
trends of past due and nonaccrual loans, change in volume and
mix of loans and collateral values. We did not have any
nonperforming loans at December 31, 2004 or 2003. We
believe that our history is limited and it is unlikely that
every loan in our investment portfolio will continue to perform
without exception so we provide general allowances based upon
the overall volume of loans, the loan types and the estimated
collateral values. Between December 31, 2004 and
June 30, 2004, our gross loans held for investment grew
$61.2 million and included $49.7 million of
multifamily loans purchased on December 14, 2004. A
provision of $175,000, or approximately 29 basis points on the
net loan growth, was recorded for general loan loss allowances
during the six months ended December 31, 2004. The primary
reason for the $140,000 increase in the loan loss provision for
the six months ended December 31, 2004 compared to the six
months ended December 31, 2003 was our $49.7 million
purchase of multifamily loans, which accounted for approximately
81%, or $142,000, of the loan loss provision during the six
months ended December 31, 2004.
Noninterest Income.
The following table sets forth information regarding our
noninterest income for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
Ended
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Prepayment penalty fee income
|
|
$
|
200
|
|
|
$
|
203
|
|
|
Gain on sale of loans originated for sale
|
|
|
44
|
|
|
|
204
|
|
|
Banking service fees and other income
|
|
|
141
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
385
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
35
Noninterest income totaled $385,000 for the six
months ended December 31, 2004 compared to $474,000 for the
same period in 2003. The decrease in 2004 was primarily due to
lower gains on sale of loans offset by an increase in banking
service fees and other income. Our gain on sale income decreased
$160,000 as result of the general decline in mortgage loan
refinance volumes in the six months ended December 31, 2004
compared to refinance volumes in the same period in 2003.
Banking fees and other income increased by $74,000 as a result
of value increases in bank-owned life insurance policies for our
executives.
Noninterest Expense.
The following table sets forth information regarding our
noninterest expense for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
Ended
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits
|
|
$
|
1,373
|
|
|
$
|
941
|
|
|
Professional services
|
|
|
149
|
|
|
|
64
|
|
|
Occupancy and equipment
|
|
|
128
|
|
|
|
120
|
|
|
Data processing and internet
|
|
|
181
|
|
|
|
152
|
|
|
Advertising and promotional
|
|
|
131
|
|
|
|
97
|
|
|
Depreciation and amortization
|
|
|
56
|
|
|
|
47
|
|
|
Service contract termination
|
|
|
59
|
|
|
|
197
|
|
|
Other general and administrative
|
|
|
469
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses
|
|
$
|
2,546
|
|
|
$
|
1,985
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense totaled $2.5 million for
the six months ended December 31, 2004, an increase of
$561,000 compared to the same period in 2003. This increase was
due primarily to a $432,000 increase in salaries and employee
benefits, including $280,000 in special one-time bonuses for our
executives, $76,000 in accruals for executive performance
bonuses and additional operations staff. The increase in
noninterest expense was also due to a $85,000 increase in
professional services due to an increase in audit, legal and
professional fees related to corporate planning and increased
audit fees. This was offset by a $138,000 reduction in expenses
associated with the termination of two contracts for advice and
placement of a capital funding.
Income Tax Expense.
Income tax expense was $776,000 for the six months ended
December 31, 2004 compared to $580,000 for the same period
in 2003. Our effective tax rates were 39.8% and 43.6% for the
six months ended December 31, 2004 and 2003, respectively.
Our effective tax rate decreased for the six months ended
December 31, 2004 primarily due to six months of tax-free
income earned on $3.8 million in bank-owned life insurance
purchased in November and December 2003.
36
|
|
|
Comparison of Fiscal Years Ended
June 30, 2004 and 2003
|
Net Interest Income.
Net interest income totaled $6.5 million for the fiscal
year ended June 30, 2004, compared to $5.1 million for
the fiscal year ended June 30, 2003. The following table
sets forth the effects of changing rates and volumes on our net
interest income. Information is provided with respect to
(i) effects on interest income and interest expense
attributable to changes in volume (changes in volume multiplied
by prior rate); (ii) effects on interest income and
interest expense attributable to changes in rate (changes in
rate multiplied by prior volume); and (iii) changes in
rate/volume (changes in rate multiplied by change in volume) for
the fiscal year ended June 30, 2004 compared to the fiscal
year ended June 30, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2004 vs.
|
|
|
Fiscal Year Ended June 30, 2003
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Increase
|
|
|
Volume
|
|
Rate
|
|
Rate/Volume
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
5,119
|
|
|
$
|
(1,908
|
)
|
|
$
|
(757
|
)
|
|
$
|
2,454
|
|
Federal funds sold
|
|
|
64
|
|
|
|
(84
|
)
|
|
|
(23
|
)
|
|
|
(43
|
)
|
Interest-earning deposits in other financial
institutions
|
|
|
(193
|
)
|
|
|
17
|
|
|
|
(8
|
)
|
|
|
(184
|
)
|
Investment securities
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
(10
|
)
|
Stock of the FHLB, at cost
|
|
|
81
|
|
|
|
(21
|
)
|
|
|
(19
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,064
|
|
|
$
|
(2,001
|
)
|
|
$
|
(805
|
)
|
|
$
|
2,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
$
|
1,083
|
|
|
$
|
(120
|
)
|
|
$
|
(149
|
)
|
|
$
|
814
|
|
Time deposits
|
|
|
(440
|
)
|
|
|
(586
|
)
|
|
|
38
|
|
|
|
(988
|
)
|
Advances from the FHLB
|
|
|
1,681
|
|
|
|
(378
|
)
|
|
|
(373
|
)
|
|
|
930
|
|
Other borrowings
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,324
|
|
|
$
|
(1,084
|
)
|
|
$
|
(424
|
)
|
|
$
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income.
Interest income for the fiscal year ended June 30, 2004
totaled $15.8 million, an increase of $2.3 million, or
17.0%, compared to $13.5 million in interest income for the
fiscal year ended June 30, 2003. Average interest-earning
assets for the fiscal year ended June 30, 2004 increased by
$79.1 million compared to the fiscal year ended
June 30, 2003 due primarily to an $81.7 million
increase in the average balance of the loan portfolio as a
result of our emphasis on building our multifamily loan
portfolio. We reduced our average balances in interest-earning
deposits in other financial institutions and investment
securities by $8.4 million during the fiscal year ended
June 30, 2004 compared to the fiscal year ended
June 30, 2003, as we redirected maturing time deposits into
higher yielding mortgage loans. Average interest-earning
balances associated with our stock of the FHLB increased by
$1.6 million during the fiscal year ended June 30,
2004 compared to the fiscal year ended June 30, 2003
because our required minimum investment increased, as a result
of increased advances from the FHLB. The average yield earned on
our interest-earning assets declined to 4.9% for the fiscal year
ended June 30, 2004 from 5.6% for the fiscal year ended
June 30, 2003 due primarily to the lower yield on our loan
portfolio as market interest rates declined. The widespread
increase in prepayments and refinancing of mortgage loans during
the fiscal years ended June 30, 2003 and 2004 reduced the
amount of higher yielding older loans, which were replaced with
lower yielding loans, causing the average yield on the loan
portfolio to decline to 5.3% for the fiscal year ended
June 30, 2004 from 6.3% for the fiscal year ended
June 30, 2003. Thus, the average rate declined, reducing
interest income from what it otherwise would have been by
$2.7 million, resulting in a net increase in interest
income of $2.5 million. The average rate on all other
interest-earning assets declined in the fiscal year ended
June 30, 2004 due to the general decline in market interest
rates in the fiscal years ended June 30, 2003 and 2004.
37
Interest Expense.
Interest expense totaled $9.2 million for the fiscal year
ended June 30, 2004, an increase of $816,000 from
$8.4 million in interest expense during the fiscal year
ended June 30, 2003. Average interest-bearing liabilities
in the fiscal year ended June 30, 2004 increased
$77.4 million compared to the fiscal year ended
June 30, 2003, due to higher deposits from increased
customer accounts and increased advances from the FHLB. In the
fiscal year ended June 30, 2004, we emphasized increasing
our savings and checking accounts, particularly our money market
savings accounts. As a result, average balances in
interest-bearing demand and savings accounts increased by
$52.4 million in the fiscal year ended June 30, 2004
compared to the fiscal year ended June 30, 2003, while
average time deposits declined $10.7 million in the fiscal
year ended June 30, 2004 as we replaced maturing time
deposits with money market savings accounts. The average
interest-bearing balances of advances from the FHLB increased
$34.6 million as new 2-, 3-, 4-, 5- and 7-year fixed rate
advances were added during the fiscal years ended June 30,
2003 and 2004. In addition, $15.9 million of advances
scheduled to mature during the fiscal year ended June 30,
2004 were modified and extended for three to six years. Our
increase in long-term fixed rate borrowings during the fiscal
years ended June 30, 2003 and 2004 was part of our strategy
to manage our interest rate risk. The average rate paid on our
interest-bearing liabilities declined to 3.1% for the fiscal
year ended June 30, 2004 from 3.8% for the fiscal year
ended June 30, 2003, due principally to the addition of new
money market savings accounts, the maturity of higher-rate term
deposits and the adding of new advances from the FHLB at market
rates that were significantly lower in the fiscal year ended
June 30, 2004 compared to past periods. During the fiscal
year ended June 30, 2004, our savings account balances
(including money market savings) increased by $75.3 million
and had an average interest rate of 2.0%. At June 30, 2003,
time deposits scheduled to mature within one year from that time
were $71.1 million, which bore a weighted average interest
rate of 3.7%. The declines in average rates paid on our
interest-bearing demand and savings accounts, time deposits and
advances from the FHLB were 29 basis points, 42 basis
points and 107 basis points, respectively, during the
fiscal year ended June 30, 2004. Thus, the growth in
average balances in demand and savings accounts and advances
from the FHLB would have increased interest expense by
$2.8 million. However, the volume decrease in time deposits
and the decline in interest rates paid on all interest-bearing
liabilities reduced interest expense by $1.9 million,
resulting in a net increase in interest expense of $816,000.
Provision for loan
losses.
Provision for loan losses was
$255,000 and $285,000 for the fiscal years ended June 30,
2004 and 2003, respectively. We have not had any nonperforming
loans through June 30, 2004. Our history is limited, and we
expect over time to have some defaulted and nonperforming loans.
As there were no nonperforming loans for the fiscal years ended
June 30, 2004 and 2003, the provisions for loan losses
represent increases in general allowances which are determined
based upon the overall volume of loans, the loan types and the
estimated collateral values. Our loans held for investment
increased by net amounts of $109.3 million and
$78.7 million during the fiscal years ended June 30,
2004 and 2003, respectively. The provisions for loan losses were
approximately 23 basis points and 36 basis points on
the net increase in our loans held for investment for the fiscal
years ended June 30, 2004 and 2003, respectively. The
provision for loan losses for the fiscal year ended
June 30, 2004 declined by 13 basis points primarily
due to the addition of more multifamily loans with lower
loan-to-value ratios in the fiscal year ended June 30, 2004
compared to the fiscal year ended June 30, 2003. Management
estimates that the lower average loan-to-value ratio should
result in a smaller percentage of impairment.
Noninterest income.
The following table sets forth information regarding our
noninterest income for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years
|
|
|
Ended June 30,
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Prepayment penalty fee income
|
|
$
|
624
|
|
|
$
|
446
|
|
|
Gain on sale of loans originated for sale
|
|
|
364
|
|
|
|
778
|
|
|
Banking service fees and other income
|
|
|
202
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
1,190
|
|
|
$
|
1,349
|
|
|
|
|
|
|
|
|
|
|
38
Noninterest income totaled $1.2 million for
the fiscal year ended June 30, 2004, compared to
$1.3 million for the fiscal year ended June 30, 2003.
The decrease is attributable to lower gains on sale, partially
reduced by higher prepayment penalty fee income and income from
banking services fees. Prepayment penalty fee income increased
$178,000 in the fiscal year ended June 30, 2004 due to a
higher volume of multifamily loans and market interest rates
that continued to be low compared to historical rates, which
encouraged more multifamily borrowers to refinance and incur a
prepayment penalty. Most of our multifamily mortgage loans have
prepayment penalties at the time of origination, while most of
our single family mortgage loans do not have prepayment
penalties. Our gain on sale income is derived from the
origination and sale of single family loans, which we generally
do not hold for investment. During the fiscal year ended
June 30, 2003, the mortgage industry experienced record
volumes of mortgage refinancings. Many of the single family
loans that we originated in the fiscal year ended June 30,
2003 were mortgage refinancings with lower rates and longer
fixed terms, which we sold. During the fiscal year ended
June 30, 2004, the mortgage refinancing volumes declined,
leading to a $414,000 decline in our gain on sales in the fiscal
year ended June 30, 2004 compared to the fiscal year ended
June 30, 2003. Mortgage loan refinancing activity has
declined and will likely decline further if mortgage rates rise.
In the near term, we believe that prepayment penalty fee income
and gain on sale income likely will be reduced by rising
interest rates.
Noninterest Expense.
The following table sets forth information regarding our
noninterest expense for the fiscal years ended June 30,
2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal
|
|
|
Years Ended
|
|
|
June 30,
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
|
|
|
thousands)
|
|
Salaries and employee benefits
|
|
$
|
1,880
|
|
|
$
|
1,538
|
|
|
Professional services
|
|
|
166
|
|
|
|
152
|
|
|
Occupancy and equipment
|
|
|
245
|
|
|
|
205
|
|
|
Data processing and Internet
|
|
|
328
|
|
|
|
278
|
|
|
Advertising and promotional
|
|
|
220
|
|
|
|
189
|
|
|
Depreciation and amortization
|
|
|
97
|
|
|
|
144
|
|
|
Service contract termination
|
|
|
197
|
|
|
|
|
|
|
Other general and administrative
|
|
|
686
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
3,819
|
|
|
$
|
3,158
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense totaled $3.8 million for
the fiscal year ended June 30, 2004, an increase of
$661,000 compared to $3.2 million for the fiscal year ended
June 30, 2003. This increase was due principally to a
$342,000 increase in salaries and employee benefits for
additional operations staff, increased existing staff wages and
new management bonus plans, and a $197,000 charge for
unrecoverable expenses associated with the termination of a
contract for advice regarding a capital funding.
Income Tax Expense.
Income tax expense was $1.5 million for the fiscal year
ended June 30, 2004, compared to $1.3 million for the
fiscal year ended June 30, 2003. Our effective tax rates
were 40.4% and 42.2% for the fiscal years ended June 30,
2004 and 2003, respectively. The lower effective tax rate for
the fiscal year ended June 30, 2004 included the benefit
primarily from nontaxable income from our investment in
bank-owned life insurance.
39
|
|
|
Comparison of Fiscal Years Ended
June 30, 2003 and 2002
|
Net Interest Income.
Net interest income totaled $5.1 million for the fiscal
year ended June 30, 2003 as compared to $3.5 million
for the fiscal year ended June 30, 2002. The following
table sets forth the effects of changing rates and volumes on
our net interest income. Information is provided with respect to
(i) effects on interest income and interest expense
attributable to changes in volume (changes in volume multiplied
by prior rate); (ii) effects on interest income and
interest expense attributable to changes in rate (changes in
rate multiplied by prior volume); and (iii) changes in
rate/volume (change in rate multiplied by change in volume) for
the fiscal year ended June 30, 2003 compared to the fiscal
year ended June 30, 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2003 vs.
|
|
|
Fiscal Year Ended June 30, 2002
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Increase
|
|
|
Volume
|
|
Rate
|
|
Rate/Volume
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,054
|
|
|
$
|
(854
|
)
|
|
$
|
(242
|
)
|
|
$
|
1,958
|
|
Federal funds sold
|
|
|
(115
|
)
|
|
|
(145
|
)
|
|
|
36
|
|
|
|
(224
|
)
|
Interest-earning deposits in other financial
institutions
|
|
|
365
|
|
|
|
(103
|
)
|
|
|
(122
|
)
|
|
|
140
|
|
Investment securities
|
|
|
(21
|
)
|
|
|
(14
|
)
|
|
|
6
|
|
|
|
(29
|
)
|
Stock of the FHLB, at cost
|
|
|
38
|
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,321
|
|
|
$
|
(1,122
|
)
|
|
$
|
(326
|
)
|
|
$
|
1,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
$
|
347
|
|
|
$
|
(173
|
)
|
|
$
|
(79
|
)
|
|
$
|
95
|
|
Time deposits
|
|
|
955
|
|
|
|
(1,127
|
)
|
|
|
(170
|
)
|
|
|
(342
|
)
|
Advances from the FHLB
|
|
|
632
|
|
|
|
(36
|
)
|
|
|
(21
|
)
|
|
|
575
|
|
Other borrowings
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,888
|
|
|
$
|
(1,336
|
)
|
|
$
|
(270
|
)
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income.
Interest income totaled $13.5 million for the fiscal year
ended June 30, 2003, an increase of $1.9 million, or
16.4%, from $11.6 million during the fiscal year ended
June 30, 2002. Average interest-earning assets in the
fiscal year ended June 30, 2003 increased
$50.1 million compared to the fiscal year ended
June 30, 2002 due primarily to the $44.9 million
increase in the average balance of our loan portfolio. Our
average balances in interest-earning deposits in other financial
institutions and investment securities increased by
$10.0 million in the fiscal year ended June 30, 2003
compared to the fiscal year ended June 30, 2002. The
average interest-earning balance associated with our stock of
the FHLB increased $684,000 in the fiscal year ended
June 30, 2003 compared to the fiscal year ended
June 30, 2002 because our required minimum investment
increased due to increased advances from the FHLB. The average
yield earned on interest-earning assets declined to 5.6% for the
fiscal year ended June 30, 2003 from 6.1% for the fiscal
year ended June 30, 2002, due primarily to the decline in
interest rates generally during this period. The widespread
increase in prepayments and refinancings of mortgage loans
during the fiscal years ended June 30, 2003 and 2002
reduced the higher yielding loans which were replaced with lower
yielding loans, causing the average yield on the loan portfolio
to decline to 6.3% for the fiscal year ended June 30, 2003
from 6.8% for the fiscal year ended June 30, 2002. Thus,
the loan portfolio volume increase in the fiscal year ended
June 30, 2003 was partially offset by the decline in
average rate, thereby reducing the interest income by
$1.1 million, resulting in a net increase in interest
income of $1.9 million. The average rate on all other
interest-earning assets declined in the fiscal year ended
June 30, 2003 due to the general decline in market interest
rates in the fiscal years ended June 30, 2002 and 2003.
40
Interest Expense.
Interest expense for the fiscal year ended June 30, 2003
totaled $8.4 million, an increase of $282,000 from
$8.1 million in interest expense during the fiscal year
ended June 30, 2002. Average interest-bearing liabilities
in the fiscal year ended June 30, 2003 increased
$44.2 million compared to the fiscal year ended
June 30, 2002 due to higher deposits in customer accounts
and additional advances from the FHLB. The average balance of
time deposits increased by $19.1 million in the fiscal year
ended June 30, 2003 compared to the fiscal year ended
June 30, 2002. The average balance of advances from the
FHLB increased $12.6 million in the fiscal year ended
June 30, 2003 compared to the fiscal year ended
June 30, 2002, as new 3-and 5-year fixed rate advances were
added. Our increased borrowing of long-term fixed rate amounts
was part of our strategy to manage interest rate risk. The
average rate paid on our interest-bearing liabilities declined
to 3.8% for the fiscal year ended June 30, 2003 from 4.6%
for the fiscal year ended June 30, 2002, due principally to
the maturity of higher-rate term deposits and the addition of
new lower rate deposits and advances. The declines in our
average rates paid on interest-bearing demand and savings
accounts, time deposits and advances from the FHLB were
60 basis points, 90 basis points and 16 basis
points, respectively. The decline in average rates paid on
interest-bearing liabilities was more than offset by the growth
of average balances in demand and savings accounts, time
deposits and advances from the FHLB, which, had rates not
declined, would have resulted in an increase in interest expense
of $1.9 million. The net increase in interest expense for
the year was $282,000.
Provision for loan
losses.
Provision for loan losses was
$285,000 and $195,000 for the fiscal years ended June 30,
2003 and 2002, respectively. Since we did not have any
nonperforming loans during these periods, our loan loss
provisions were added to general loan loss reserves. Our loans
held for investment increased by net amounts of
$78.7 million and $27.6 million during the fiscal
years ended June 30, 2003 and 2002, respectively. The
provisions for loan losses were approximately 36 basis
points and 71 basis points on the net increase in our loans
held for investment for the fiscal years ended June 30,
2003 and 2002, respectively. The provision declined to
36 basis points in the fiscal year ended June 30, 2003
because the prior fiscal year included a large shift away from
single family loans with lower estimated loss rates towards
multifamily loans with higher estimated loss rates. During the
fiscal year ended June 30, 2002, our mix of loans held for
investment moved from 9.2% to 75.2% in multifamily loans, while
during the fiscal year ended June 30, 2003 the mix moved a
smaller amount, from 75.2% to 78.0% in multifamily loans.
Noninterest income.
Noninterest income totaled $1.3 million for the fiscal year
ended June 30, 2003, compared to $297,000 for the fiscal
year ended June 30, 2002. The increase in the fiscal year
ended June 30, 2003 is attributable to greater prepayment
penalty fee income and increased gains on sale of loans.
Prepayment penalty income increased $332,000 due to our
increased investment in multifamily loans and declining mortgage
rates. Our gain on sale of loans increased $711,000 in the
fiscal year ended June 30, 2003, the first full year of
operation of our single family mortgage loan origination
website. Also, in the fiscal year ended June 30, 2003,
declining interest rates encouraged high levels of mortgage
refinancing nationwide. Our single family mortgage loan
originations in the fiscal year ended June 30, 2003 were
primarily refinancings which were sold.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal
|
|
|
Years Ended
|
|
|
June 30,
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
|
|
|
thousands)
|
|
Prepayment penalty fee income
|
|
$
|
446
|
|
|
$
|
114
|
|
|
Gain on sale of loans originated for sale
|
|
|
778
|
|
|
|
67
|
|
|
Banking service fees and other income
|
|
|
125
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
1,349
|
|
|
$
|
297
|
|
|
|
|
|
|
|
|
|
|
41
Noninterest expense.
The following table sets forth information regarding our
noninterest expense for the fiscal years ended June 30,
2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Fiscal Years
|
|
|
Ended June 30,
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
|
|
|
thousands)
|
|
Salaries and employee benefits
|
|
$
|
1,538
|
|
|
$
|
1,300
|
|
|
Professional services
|
|
|
152
|
|
|
|
172
|
|
|
Occupancy and equipment
|
|
|
205
|
|
|
|
161
|
|
|
Data processing and Internet
|
|
|
278
|
|
|
|
210
|
|
|
Advertising and promotional
|
|
|
189
|
|
|
|
141
|
|
|
Depreciation and amortization
|
|
|
144
|
|
|
|
118
|
|
|
Other general and administrative
|
|
|
652
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
3,158
|
|
|
$
|
3,008
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense was $3.2 million and
$3.0 million for the fiscal years ended June 30, 2003
and 2002, respectively. The increase of $150,000 in noninterest
expense was due principally to a $238,000 increase in salaries
and employee benefits for additional operations staff and
reduced by a $254,000 decrease in other general and
administrative expenses. The decrease in other general and
administrative expenses is due to a $318,000 non-cash expense
incurred in the fiscal year ended June 30, 2002 for a
two-year extension of previously issued warrants to acquire
736,750 shares of common stock.
Income Tax Benefit.
Income tax expense was $1.3 million for the fiscal year
ended June 30, 2003, compared to an income tax benefit of
$429,000 in the fiscal year ended June 30, 2002. During the
fiscal year ended June 30, 2002, we began to operate
profitably, making it likely that our deferred tax benefits
accumulated from operating losses incurred since inception could
be realized. The valuation allowance of $823,000 at
June 30, 2001 associated with the tax benefit of operating
loss carryforwards was reversed in the fiscal year ended
June 30, 2002, reducing our effective tax rate. The
reversal of the valuation allowance was large enough to create a
net tax benefit for the fiscal year ended June 30, 2002.
Liquidity and Capital Resources
Liquidity.
Our
sources of liquidity include deposits, borrowings, payments and
maturities of outstanding loans, sales of loans, maturities or
gains on sales of investment securities and other short term
investments. While scheduled loan payments and maturing
investment securities and short term investments are relatively
predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic
conditions and competition. We invest excess funds in overnight
deposits and other short term interest-earning assets. We use
cash generated through retail deposits, our largest funding
source, to offset the cash utilized in lending and investing
activities. Our short term interest-earning investment
securities are also used to provide liquidity for lending and
other operational requirements. As an additional source of
funds, we have three credit agreements. Bank of Internet USA can
borrow up to 35% of its total assets from the FHLB. Borrowings
are collateralized by the pledge of certain mortgage loans and
investment securities to the FHLB. Based on the loans and
securities pledged at December 31, 2004 we had total
borrowing capacity of approximately $158.7 million, of
which $148.9 million was outstanding and $9.8 million
was available. At December 31, 2004, we also had a
$4.5 million unsecured fed funds purchase line with a major
bank under which no borrowings were outstanding. In the past, we
have used long-term borrowings to fund our loans and to minimize
our interest rate risk. Our future borrowings will depend on the
growth of our lending operations and our exposure to interest
rate risk.
We intend to contribute approximately
$16.0 million of the net proceeds from the offering to Bank
of Internet USA to provide additional regulatory capital to
support its growth. We expect to continue to use deposits and
advances from the FHLB as the primary sources of funding our
future asset growth.
42
On October 24, 2003, we entered into a
$5.0 million loan facility with a commercial bank
consisting of a one-year revolving line of credit plus a fully
amortizing term loan of up to nine years. Interest is payable
quarterly under the credit line at prime plus 1% per annum.
Principal is payable in 36 equal quarterly installments starting
on January 24, 2005. We may prepay all or a portion of the
principal at anytime without a prepayment penalty. At
December 31, 2004, the note payable balance was
$5.0 million and the interest rate was 6.25% per annum. We
entered into this loan facility to provide additional regulatory
capital to our bank to support its growth. We intend to use a
portion of the net proceeds from the offering to prepay in full
the entire amount outstanding under the note payable. See
Use of Proceeds.
The loan facility is secured by our banks
common stock held by BofI Holding, Inc. Under the terms of the
loan facility, we are bound by a number of significant covenants
that restrict our ability, out of the ordinary course of
business, to dispose of assets, to incur additional debt or
guarantees, to invest in or acquire any interest in another
enterprise and to suffer a change in ownership of 51% or more of
our common stock. The loan facility also requires us to maintain
a debt coverage ratio of 1.50 as calculated by the lender. At
December 31, 2004, management believes we were in
compliance with all such covenants and restrictions and does not
anticipate that such covenants and restrictions will limit our
operations.
On December 16, 2004, we completed a
transaction in which we formed a trust and issued
$5.0 million of trust preferred securities. The net
proceeds from the offering were used to purchase approximately
$5.2 million of junior subordinated debentures of our
company with a stated maturity date of February 23, 2035.
The debentures are the sole assets of the trust. The trust
preferred securities are mandatorily redeemable upon maturity,
or upon earlier redemption as provided in the indenture. We have
the right to redeem the debentures in whole (but not in part) on
or after specific dates, at a redemption price specified in the
indenture plus any accrued but unpaid interest through the
redemption date. Interest accrues at the rate of three-month
LIBOR plus 2.4%, which was 4.9% at December 31, 2004, with
interest to be paid quarterly starting in February 2005. We
entered into this transaction to provide additional regulatory
capital to our bank to support its growth.
During the six months ended December 31,
2004, interest income earned on loans and interest expense paid
on deposits were influenced by a general decline in the
historical spread between short term and long term rates earned
on U.S. Treasury securities. If short term rates continue
to rise faster than long term rates, our ability and replace
maturing short term deposits may be negatively impacted. We
believe the historical spread between short term and long term
U.S. Treasury rates will increase over time. We cannot
predict when this might occur or what effect any change in rates
will have on our future liquidity needs. However, we believe we
can adjust the interest rates we pay on our deposits to reduce
deposit outflows should they occur. We can also increase our
level of borrowings to address our future liquidity needs.
Contractual
Obligations.
At December 31,
2004, we had $2.1 million in loan commitments outstanding.
Time deposits due within one year of December 31, 2004
totaled $106.8 million. We believe the large percentage of
time deposits that mature within one year reflects
customers hesitancy to invest their funds long term when
they expect interest rates to rise. If these maturing deposits
do not remain with us, we may be required to seek other sources
of funds, including other time deposits and borrowings.
Depending on market conditions, we may be required to pay higher
rates on deposits and borrowings than we currently pay on time
deposits maturing with one year. We believe, however, based on
past experience, that a significant portion of our time deposits
will remain with us. We believe we have the ability to attract
and retain deposits by adjusting interest rates offered.
The following table presents certain of our
contractual obligations as of June 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
Less than
|
|
One to
|
|
Three to
|
|
More Than
|
|
|
Total
|
|
One Year
|
|
Three Years
|
|
Five Years
|
|
Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Long-term debt obligations
|
|
$
|
114,243
|
|
|
$
|
6,451
|
|
|
$
|
62,883
|
|
|
$
|
35,866
|
|
|
$
|
9,043
|
|
Operating lease obligations(1)
|
|
|
220
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114,463
|
|
|
$
|
6,671
|
|
|
$
|
62,883
|
|
|
$
|
35,866
|
|
|
$
|
9,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Payments are for the lease of real property.
|
43
Capital
Requirements.
Bank of Internet USA is
subject to various regulatory capital requirements set by the
federal banking agencies. Failure by our bank to meet minimum
capital requirements could result in certain mandatory and
discretionary actions by regulators that could have a material
adverse effect on our consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, our bank must meet specific capital
guidelines that involve quantitative measures of our banks
assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Our
banks capital amounts and classifications are also subject
to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation
require our bank to maintain certain minimum capital amounts and
ratios. The OTS requires our bank to maintain minimum ratios of
tangible capital to tangible assets of 1.5%, core capital to
tangible assets of 4.0% and total risk-based capital to
risk-weighted assets of 8.0%. At December 31, 2004, our
bank met all the capital adequacy requirements to which it was
subject.
At December 31, 2004, our bank was
well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized,
our bank must maintain minimum leverage, tier 1 risk-based and
total risk-based capital ratios of at least 5.0%, 6.0% and
10.0%, respectively. No conditions or events have occurred since
that date that management believes would change the banks
capital levels. To maintain its status as a well
capitalized financial institution under applicable
regulations and to support additional growth, we anticipate the
need for additional capital, which includes raising funds in
this offering. From time to time after the offering, we may need
to raise additional capital to support our banks further
growth and to maintain its well-capitalized status.
Bank of Internet capital amounts, ratios and
requirements at December 31, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
For Capital
|
|
Prompt Corrective
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Regulations
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Tier 1 leverage (core) capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and ratio to adjusted tangible assets
|
|
$
|
38,137
|
|
|
|
7.45
|
%
|
|
$
|
20,479
|
|
|
|
4.00
|
%
|
|
$
|
25,598
|
|
|
|
5.00
|
%
|
Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and ratio to risk-weighted assets
|
|
$
|
38,137
|
|
|
|
11.44
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
20,004
|
|
|
|
6.00
|
%
|
Total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and ratio to risk-weighted assets
|
|
$
|
39,357
|
|
|
|
11.80
|
%
|
|
$
|
26,672
|
|
|
|
8.00
|
%
|
|
$
|
33,340
|
|
|
|
10.00
|
%
|
Tangible capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and ratio to tangible assets
|
|
$
|
38,137
|
|
|
|
7.45
|
%
|
|
$
|
7,679
|
|
|
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Quantitative and Qualitative Disclosures About
Market Risk
Market risk is defined as the sensitivity of
income and capital to changes in interest rates, foreign
currency exchange rates, commodity prices and other relevant
market rates or prices. The primary market risk to which we are
exposed is interest rate risk. Changes in interest rates can
have a variety of effects on our business. In particular,
changes in interest rates affect out net interest income, net
interest margin, net income, the value of our securities
portfolio, the volume of loans originated, and the amount of
gain or loss on the sale of our loans.
44
We are exposed to different types of interest
rate risk. These risks include lag, repricing, basis, prepayment
and lifetime cap risk, each of which is described in further
detail below:
Lag/ Repricing Risk.
Lag risk results from the inherent timing difference between the
repricing of our adjustable rate assets and our liabilities.
Repricing risk is caused by the mismatch of repricing methods
between interest-earning assets and interest-bearing
liabilities. Lag/repricing risk can produce short term
volatility in our net interest income during periods of interest
rate movements even though the effect of this lag generally
balances out over time. One example of lag risk is the repricing
of assets indexed to the monthly treasury average, or the MTA.
The MTA index is based on a moving average of rates outstanding
during the previous 12 months. A sharp movement in interest
rates in a month will not be fully reflected in the index for
12 months resulting in a lag in the repricing of our loans
and securities based on this index. We expect more of our
interest-bearing liabilities will mature or reprice within one
year than will our interest-earning assets, resulting in a one
year negative interest rate sensitivity gap (the difference
between our interest rate sensitive assets maturing or repricing
within one year and our interest rate sensitive liabilities
maturing or repricing within one year, expressed as a percentage
of total interest-earning assets). In a rising interest rate
environment, an institution with a negative gap would generally
be expected, absent the effects of other factors, to experience
a greater increase in its cost of liabilities relative to its
yield on assets, and thus a decrease in its net interest income.
Basis Risk.
Basis
risk occurs when assets and liabilities have similar repricing
timing but repricing is based on different market interest rate
indices. Our adjustable rate loans that reprice are directly
tied to indices based upon U.S. Treasury rates, LIBOR,
Eleventh District Cost of Funds and the prime rate. Our deposit
rates are not directly tied to these same indices. Therefore, if
deposit interest rates rise faster than the adjustable rate loan
indices and there are no other changes in our asset/liability
mix, our net interest income will likely decline due to basis
risk.
Prepayment Risk.
Prepayment risk results from the right of customers to pay their
loans prior to maturity. Generally, loan prepayments increase in
falling interest rate environments and decrease in rising
interest rate environments. In addition, prepayment risk results
from the right of customers to withdraw their time deposits
before maturity. Generally, early withdrawals of time deposits
increase during rising interest rate environments and decrease
in falling interest rate environments. When estimating the
future performance of our assets and liabilities, we make
assumptions as to when and how much of our loans and deposits
will be prepaid. If the assumptions prove to be incorrect, the
asset or liability may perform differently than expected. In the
last three fiscal years, the mortgage industry and our bank have
experienced high rates of loan prepayments due to historically
low interest rates. Market rates began rising in the fiscal year
ended June 30, 2004 and, if they continue, mortgage loan
prepayments are expected to decrease. In addition, if that
occurs, we may experience increased rates of customer early
withdrawals of their time deposits.
Lifetime Cap Risk.
Our adjustable rate loans have lifetime interest rate caps. In
periods of rising interest rates, it is possible for the fully
indexed interest rate (index rate plus the margin) to exceed the
lifetime interest rate cap. This feature prevents the loan from
repricing to a level that exceeds the caps specified
interest rate, thus adversely affecting net interest income in
periods of relatively high interest rates. On a weighted average
basis, our adjustable rate loans at December 31, 2004 had
lifetime rate caps that were 500 basis points or more
greater than the effective rate at December 31, 2004. If
market rates rise by more than the interest rate cap, we will
not be able to increase these customers loan rates above
the interest rate cap.
The principal objective of our asset/liability
management is to manage the sensitivity of net income to
changing interest rates. Asset/liability management is governed
by policies reviewed and approved annually by our board of
directors. Our board of directors has delegated the
responsibility to oversee the administration of these policies
to the asset/liability committee, or ALCO. ALCOs members
are board members Theodore C. Allrich and Robert Eprile, our
President and Chief Executive Officer Gary Lewis Evans and our
Chief Financial Officer Andrew J. Micheletti. ALCO meets
regularly to consider investment and financing alternatives with
particular emphasis on duration and interest rate risk. The
interest rate risk strategy currently deployed by ALCO is to use
natural balance sheet hedging (as opposed to
derivative hedging) or to avoid
45
holding loans which ALCO views as higher risk.
Specifically, we attempt to match the effective duration of our
assets with our borrowings. To reduce the repricing risk
associated with holding certain adjustable loans, which
typically are fixed for the first three to five years, we have
matched estimated maturities by obtaining long-term three to
five year advances from the FHLB. Other examples of ALCO
policies designed to reduce our interest rate risk include
limiting the premiums paid to purchase mortgage loans or
mortgage-backed securities to 3% or less of mortgage principal.
This policy addresses mortgage prepayment risk by capping the
yield loss from an unexpected high level of mortgage loan
prepayments. Once a quarter, ALCO members report to our board of
directors the status of our interest rate risk profile.
We measure interest rate sensitivity as the
difference between amounts of interest-earning assets and
interest-bearing liabilities that mature within a given period
of time. The difference, or the interest rate sensitivity gap,
provides an indication of the extent to which an
institutions interest rate spread will be affected by
changes in interest rates. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities and negative when the amount
of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. In a rising interest rate
environment, an institution with a positive gap would be in a
better position than an institution with a negative gap to
invest in higher yielding assets or to have its asset yields
adjusted upward, which would result in the yield on its assets
to increase at a faster pace than the cost of its
interest-bearing liabilities. During a period of falling
interest rates, however, an institution with a positive gap
would tend to have its assets mature at a faster rate than one
with a negative gap, which would tend to reduce the growth in
its net interest income. The following table sets forth the
interest rate sensitivity of our assets and liabilities at
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term to Repricing, Repayment, or Maturity at
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
Over
|
|
Over
|
|
|
|
|
One Year
|
|
One Year
|
|
Five Years
|
|
|
|
|
or
|
|
through
|
|
and
|
|
|
|
|
Less
|
|
Five Years
|
|
Insensitive
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,577
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,577
|
|
Interest-earning deposits in other financial
institutions
|
|
|
4,648
|
|
|
|
2,874
|
|
|
|
|
|
|
|
7,522
|
|
Investment securities(1)
|
|
|
9,592
|
|
|
|
43,449
|
|
|
|
|
|
|
|
53,041
|
|
Stock of FHLB, at cost
|
|
|
6,998
|
|
|
|
|
|
|
|
|
|
|
|
6,998
|
|
Loans held for investment, net of allowance for
loan loss(2)
|
|
|
110,089
|
|
|
|
247,329
|
|
|
|
60,497
|
|
|
|
417,915
|
|
Loans held for sale, at cost
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
150,749
|
|
|
|
293,652
|
|
|
|
60,497
|
|
|
|
504,898
|
|
Noninterest-earning assets
|
|
|
|
|
|
|
|
|
|
|
8,210
|
|
|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
150,749
|
|
|
$
|
293,652
|
|
|
$
|
68,707
|
|
|
$
|
513,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term to Repricing, Repayment, or Maturity at
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
Over
|
|
Over
|
|
|
|
|
One Year
|
|
One Year
|
|
Five Years
|
|
|
|
|
or
|
|
through
|
|
and
|
|
|
|
|
Less
|
|
Five Years
|
|
Insensitive
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits(3)
|
|
$
|
215,519
|
|
|
$
|
100,650
|
|
|
$
|
|
|
|
$
|
316,169
|
|
Advances from the FHLB
|
|
|
21,000
|
|
|
|
119,588
|
|
|
|
7,916
|
|
|
|
148,504
|
|
Other borrowings
|
|
|
10,155
|
|
|
|
|
|
|
|
|
|
|
|
10,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
246,674
|
|
|
|
220,238
|
|
|
|
7,916
|
|
|
|
474,828
|
|
Other noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
5,436
|
|
|
|
5,436
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
32,844
|
|
|
|
32,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
246,674
|
|
|
$
|
220,238
|
|
|
$
|
46,196
|
|
|
$
|
513,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate sensitivity gap
|
|
$
|
(95,925
|
)
|
|
$
|
73,414
|
|
|
$
|
52,581
|
|
|
$
|
30,070
|
|
Cumulative gap
|
|
$
|
(95,925
|
)
|
|
$
|
(22,511
|
)
|
|
$
|
30,070
|
|
|
$
|
30,070
|
|
Net interest rate sensitivity gap as
a % of interest-earning assets
|
|
|
(63.63
|
)%
|
|
|
25.00
|
%
|
|
|
86.92
|
%
|
|
|
5.96
|
%
|
Cumulative gap as a % of cumulative
interest-earning assets
|
|
|
(63.63
|
)%
|
|
|
(5.07
|
)%
|
|
|
5.96
|
%
|
|
|
5.96
|
%
|
|
|
(1)
|
Comprised of U.S. government securities and
mortgage-backed securities which are classified as held to
maturity and available for sale. The table reflects contractual
repricing dates.
|
|
(2)
|
The table reflects either contractual repricing
dates or maturities.
|
|
(3)
|
The table assumes that the principal balances for
demand deposit and savings accounts will reprice in the first
year.
|
Although gap analysis is a useful
measurement device available to management in determining the
existence of interest rate exposure, its static focus as of a
particular date makes it necessary to utilize other techniques
in measuring exposure to changes in interest rates. For example,
gap analysis is limited in its ability to predict trends in
future earnings and makes no assumptions about changes in
prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in
the interest rate environment.
We supplement our gap analysis above to include
certain assumptions. There are $215.5 million of
interest-bearing deposits shown in the gap table as repricing in
one year or less, which includes all $108.7 million of
checking and savings account balances. There also are
$247.3 million of interest-earning loans held for
investment shown in the gap table as repricing or maturing in
one through five years, with no prepayment assumptions included
in the loan totals. Based on prior experience, we believe that
checking and savings account customers do not act immediately to
close or move their checking and savings accounts in response to
rising interest rates and that some mortgage loans will be
prepaid (for example, due to sale of property) before scheduled.
If 70% of our checking and savings accounts close or reprice
during the year (rather than 100% as shown in the table) and
assuming that on average 10% of our loans are prepaid during the
year (rather than no prepayments as shown in the table), our
negative gap would be reduced from $95.9 million to
approximately $32.5 million. We believe we can adjust the
interest rates we pay on our deposits to reduce deposit outflows
should they occur.
Our net interest margin for the six months ended
December 31, 2004 declined to 1.98% compared to 2.02% for
the six months ended December 31, 2003. During the six
months ended December 31, 2004, interest income earned on
loans and interest expense paid on deposits were influenced by a
general decline in the historical spread between short term and
long term rates earned on U.S. Treasury securities. If short
term rates continue to rise faster than long term rates, our net
interest income may be negatively impacted. We believe the
historical spread between short term and long term U.S. Treasury
rates will increase over time.
47
However, we cannot predict when this might occur
or what effect any change in rates will have on our net interest
income or results of operations.
As of December 31, 2004, we had not entered
into any derivative financial instruments such as futures,
forwards, swaps and options. On February 15, 2005, we
entered into an interest rate cap, with a notional amount of
$5.0 million and a term of four years expiring in March
2009, to lower the interest payments on the junior subordinated
debentures should the three-month LIBOR increase above 5.25%. We
designated this derivative as a non-hedging instrument and
intend to report changes in the fair value of this instrument in
current-period earnings. We have no market risk-sensitive
instruments held for trading purposes. Our exposure to market
risk is reviewed on a regular basis by management.
We attempt to measure the effect market interest
rate changes will have on the net present value of assets and
liabilities, which is defined as market value of equity. At
September 30, 2004 (the most recent period for which data
is available), we analyzed the market value of equity
sensitivity to an immediate parallel and sustained shift in
interest rates derived from the current treasury and LIBOR yield
curves. For rising interest rate scenarios, the base market
interest rate forecast was increased by 100 and 200 basis
points. For the falling interest rate scenarios, we used a
100 basis point decrease due to limitations inherent in the
current rate environment. The following table indicates the
sensitivity of market value of equity to the interest rate
movement described above at September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Present
|
|
|
|
|
|
|
Percentage
|
|
Value as
|
|
Board
|
|
|
|
|
Change from
|
|
Percentage
|
|
Established
|
|
|
Sensitivity
|
|
Base
|
|
of Assets
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Up 200 basis points
|
|
$
|
(6,267
|
)
|
|
|
(15.00
|
)%
|
|
|
8.07
|
%
|
|
|
8.00
|
%
|
Up 100 basis points
|
|
$
|
(3,007
|
)
|
|
|
(7.00
|
)%
|
|
|
8.64
|
%
|
|
|
8.00
|
%
|
Base
|
|
|
|
|
|
|
|
|
|
|
9.14
|
%
|
|
|
8.00
|
%
|
Down 100 basis points
|
|
$
|
2,389
|
|
|
|
6.00
|
%
|
|
|
9.50
|
%
|
|
|
8.00
|
%
|
The board of directors of our bank establishes
limits on the amount of interest rate risk we may assume, as
estimated by the net present value model. At September 30,
2004, the boards established limit was 8.0%, meaning that
the net present value after a theoretical instantaneous increase
or decrease in interest rates must be greater than 8.0%. At
September 30, 2004, the net present value for a
200 basis point and 100 basis point increase in
interest rates exceed the board requirement by 7 basis
points and 64 basis points, respectively.
The computation of the prospective effects of
hypothetical interest rate changes is based on numerous
assumptions, including relative levels of interest rates, asset
prepayments, runoffs in deposits and changes in repricing levels
of deposits to general market rates, and should not be relied
upon as indicative of actual results. Furthermore, these
computations do not take into account any actions that we may
undertake in response to future changes in interest rates.
Recent Accounting Pronouncements
In March 2004, SEC Staff Accounting Bulletin, or
SAB, No. 105 was issued, which provides guidance regarding
loan commitments that are accounted for as derivative
instruments under Financial Accounting Standards Board, or the
FASB, No. 133 (as amended),
Accounting for Derivative
Instruments and Hedging Activities
. In this Bulletin, the
SEC ruled that the amount of the expected servicing rights
should not be included when determining the fair value of
derivative interest rate lock commitments. This guidance must be
applied to rate locks initiated after March 31, 2004. The
adoption of SAB No. 105 did not have a material effect on
our consolidated financial statements.
In December 2003, the FASB issued Interpretation
No. 46R, or FIN 46R, which revised the January 2003,
FASB issued Interpretation No. 46, or FIN 46,
Consolidation of Variable Interest Entities
. FIN 46R
is a revision to the original FIN 46 that addresses the
consolidation of certain variable interest entities
(
e.g.
, nonqualified special purpose entities). The
revision clarifies how variable interest entities should be
48
identified and evaluated for consolidation
purposes. We adopted FIN 46R as of June 30, 2004. The
adoption of FIN 46R did not have a material effect on our
consolidated financial statements.
In December 2003, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position
No. 03-3, or SOP 03-3,
Accounting for Certain Loans
or Debt Securities Acquired in a Transfer
. SOP 03-3
addresses the accounting for differences between contractual
cash flows and the cash flows expected to be collected from
purchased loans or debt securities if those differences are
attributable, in part, to credit quality. SOP 03-3 requires
purchased loans and debt securities to be recorded initially at
fair value based on the present value of the cash flows expected
to be collected with no carryover of any valuation allowance
previously recognized by the seller. Interest income should be
recognized based on the effective yield from the cash flows
expected to be collected. To the extent that the purchased loans
or debt securities experience subsequent deterioration in credit
quality, a valuation allowance would be established for any
additional cash flows that are not expected to be received.
However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be
adjusted on a prospective basis. SOP 03-3 will be effective
for loans and debt securities acquired after December 31,
2004. Management does not expect the adoption of this statement
to have a material effect on our consolidated financial
statements.
In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150,
Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity
. This Statement establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some
circumstances). Many of these instruments were previously
classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise is effective for public companies at the beginning
of the first interim period beginning after June 15, 2003.
The adoption of this standard did not have a material effect on
our consolidated financial statements.
In December 2004, the FASB issued
SFAS No. 123 (R), or SFAS 123(R),
Share-Based
Payment
. SFAS No. 123 (R) replaces the existing
requirements under SFAS No. 123 and APB 25.
SFAS 123 (R) requires companies to measure and recognize
compensation expense equal to the fair value of stock options or
other share based payments. SFAS 123 (R) is effective for
all interim and annual periods beginning after June 15,
2005 and, thus, will be effective for our company beginning with
the first quarter of fiscal 2006. We are in the process of
evaluating the impact of this standard on our consolidated
financial statements.
49
BUSINESS
General
We are the holding company for Bank of Internet
USA, a consumer-focused, nationwide savings bank operating
primarily over the Internet. We provide a variety of consumer
banking services, focusing primarily on gathering retail
deposits over the Internet and originating and purchasing
multifamily and single family loans for investment. Since the
inception of our bank in 2000, we have designed and implemented
an automated Internet-based banking platform and electronic
workflow process that we believe affords us low operating
expenses and allows us to pass these savings along to our
customers in the form of attractive interest rates and low fees
on deposits and loans. This approach to banking is the
foundation of our business model, allowing us to leverage
technology and handle routine banking functions electronically.
We operate our Internet-based bank from a single
location in San Diego, California. At December 31,
2004, we had total assets of $513.1 million, net loans held
for investment of $417.9 million and total deposits of
$320.0 million. Our deposits consist primarily of
interest-bearing checking and savings accounts and time
deposits. Our loans are primarily first mortgages secured by
multifamily (five or more units) and single family (one to four
units) real property. To a lesser extent, we also make
commercial real estate and consumer loans.
Business Strategy
Our business strategy is to lower the cost of
delivering banking products and services by leveraging
technology, while continuing to grow our assets and deposits to
achieve increased economies of scale. Our strategy includes a
number of key elements:
|
|
|
|
|
Leverage Technology.
We believe that efficient management and processing of
information is critical in online banking. We have designed and
implemented an automated Internet-based banking platform and
workflow process to handle traditional banking functions with
reduced paperwork and human intervention. Our websites and CRM
software support our customer self-service model by automating
interactions with customers. Our banking platform also increases
the efficiency of routine analysis work by our personnel and
assists our account representatives in handling customer
requests and applications. Our banking platform transfers much
of the data entry tasks to the customer and allows for batch
handling of applications by our employees. We plan to continue
to incrementally improve our proprietary software and systems on
an ongoing basis. We currently expect the annual rate of capital
expenditures for technology-related improvements will remain
consistent with our past growth experience.
|
|
|
|
Exploit Advantages of Nationwide
Presence.
Our nationwide, online
presence allows us increased flexibility to target a large
number of loan and deposit customers based on demographics,
geographic location and price and provides us with a low cost of
customer acquisition and the ability to be selective in
approving prospective loan customers. Our advertising is carried
mostly over the Internet so we can rapidly shift and target our
marketing based on the demographics and location of the target
audience nationwide. We can also establish a presence in new
geographic and demographic markets with relatively low entry
costs, such as our recent efforts to target multifamily lending
in the State of Texas. Our thrift charter allows us to operate
in all 50 states without the need to seek regulatory
approval to enter new markets. Our marketing costs are fairly
uniform on a nationwide basis because we advertise mainly over
the Internet.
|
|
|
|
Continue to Grow Online Deposits and Expand
Services.
We offer a broad selection
of retail deposit instruments, including interest-bearing demand
accounts, savings accounts (including money market savings) and
time deposits. We provide our customers with many options for
accessing funds, including ATM machines, debit cards, automated
clearing house funds and checking accounts. We plan to
continually develop new products and services within the next
two years in order to serve specific demographics. For example,
we recently opened our Senior Banking Center website
to market to seniors, who we believe tend to maintain relatively
high balances but are also more interest rate sensitive. We are
also developing Banco de Internet, a redesigned
version of our existing website to
|
50
|
|
|
|
|
|
focus on Spanish speaking U.S. customers.
During our fiscal year ended June 30, 2004, we opened
6,408 new deposit accounts, resulting in approximately
$136.0 million in new deposits, and spent approximately
$29,000 in external advertising targeted for deposit gathering.
For the six months ended December 31, 2004, we opened 5,028
new deposit accounts, resulting in approximately
$110.3 million in new deposits, and spent approximately
$46,000 in external advertising for deposit gathering. We intend
to expand the volume and breadth of our deposit marketing over
the Internet through websites and search engines such as Google.
We expect that the annual rate of our marketing costs compared
to growth in new customers will remain consistent with our past
growth experience.
|
|
|
|
|
Increase Loan Originations and
Purchases.
As we increase our
deposits, we intend to utilize the funds to originate
multifamily and single family mortgage loans over the Internet.
We offer single family mortgage loans in 50 states for
sale, servicing released, to generate fee income. We also
originate multifamily loans primarily in California, Arizona,
Texas and Washington. We intend to continually increase single
family and multifamily loan originations through our websites,
including our Broker Advantage website, which we
have developed to manage our relationships with loan brokers and
our wholesale loan pipeline. We also plan to continue to
purchase multifamily and single family loans. We expect that our
loan marketing and origination costs will rise incrementally as
our originations grow at a rate in line with our past experience.
|
Lending and Investment Activities
General.
We
originate single family mortgage loans on a nationwide basis,
and currently originate multifamily loans primarily in
California, Arizona, Texas and Washington. We currently sell
substantially all of the single family loans that we originate
and retain all of our multifamily loan originations. In
addition, we purchase single family and multifamily mortgage
loans from other lenders to hold in our portfolio. Our
originations, purchases and sales of mortgage loans include both
fixed and adjustable interest rate loans. All originations and
purchases are sourced, underwritten, processed, controlled and
tracked primarily through our customized websites and software.
We believe that, due to our automated systems, our lending
business is highly scalable, allowing us to handle increasing
volumes of loans and enter into new geographic lending markets
with only a small increase in personnel, in accordance with our
strategy of leveraging technology to lower our operating
expenses.
Loan Products.
Our
loans consist of first mortgage loans secured by single family
and multifamily properties and, to a lesser extent, commercial
properties. We also provide a limited amount of home equity
financing and unsecured consumer loans. Further details
regarding our loan programs are discussed below:
|
|
|
|
|
Single Family Loans.
We offer fixed and adjustable rate, single family mortgage loans
in all 50 states, and provide both conforming and jumbo
loans. We currently sell substantially all of the single family
loans that we originate on a nonrecourse basis to wholesale
lending institutions, typically with servicing rights released
to the purchaser. Before we fund each loan, we obtain prior
approval by a purchaser, who delivers a specific delivery and
pricing commitment, which reduces our risk in funding the loan.
In addition, while each loan is underwritten to our standard
guidelines, we may also follow specific underwriting guidelines
put in place by the purchaser of the loan.
|
|
|
|
|
Multifamily Loans.
We currently originate adjustable rate multifamily mortgage
loans primarily in California, Arizona, Texas and Washington,
and we plan to expand in the future the states and geographic
markets in which we originate new multifamily loans. In
addition, we held multifamily loans secured by property in
17 states at December 31, 2004. We typically hold all
of the multifamily loans that we originate and perform the loan
servicing directly on these loans. Our multifamily loans as of
December 31, 2004 ranged in amount from approximately
$43,000 to $3.0 million and were secured by first liens on
properties typically ranging from five to 70 units. We
offer multifamily loans with interest rates that adjust based on
a variety of industry standard indices, including
U.S. Treasury security yields, LIBOR and Eleventh District
Cost of Funds. Borrowers may obtain a fixed initial interest
rate for a period of up to five years, which then floats
based on a spread to the applicable index. Our loans typically
have prepayment protection clauses, interest rate floors,
ceilings and rate change caps.
|
|
51
|
|
|
|
|
Commercial Loans.
We
originate a small volume of adjustable rate commercial real
estate loans, primarily in California. We currently hold all of
the commercial loans that we originate and perform the loan
servicing on these loans. Our commercial loans as of
December 31, 2004 ranged in amount from approximately
$113,000 to $2.2 million, and were secured by first liens
on mixed-use, shopping and retail centers, office buildings and
multi-tenant industrial properties. We offer commercial loans on
similar terms and interest rates as our multifamily loans.
|
Loan Portfolio
Composition.
The following table sets
forth the composition of our loan portfolio in amounts and
percentages by type of loan at December 31, 2004 and at
each fiscal year-end since inception of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Residential real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family (one to four units)
|
|
$
|
35,893
|
|
|
|
8.64
|
%
|
|
$
|
21,753
|
|
|
|
6.14
|
%
|
|
$
|
42,124
|
|
|
|
17.16
|
%
|
|
$
|
32,763
|
|
|
|
19.67
|
%
|
|
$
|
118,377
|
|
|
|
84.89
|
%
|
Multifamily (five units or more)
|
|
|
366,658
|
|
|
|
88.22
|
%
|
|
|
320,971
|
|
|
|
90.55
|
%
|
|
|
191,426
|
|
|
|
77.99
|
%
|
|
|
125,303
|
|
|
|
75.22
|
%
|
|
|
12,878
|
|
|
|
9.23
|
%
|
|
Commercial real estate and land
|
|
|
12,980
|
|
|
|
3.12
|
%
|
|
|
11,659
|
|
|
|
3.29
|
%
|
|
|
11,839
|
|
|
|
4.82
|
%
|
|
|
8,396
|
|
|
|
5.04
|
%
|
|
|
8,122
|
|
|
|
5.82
|
%
|
|
Consumer loans and other
|
|
|
81
|
|
|
|
0.02
|
%
|
|
|
63
|
|
|
|
0.02
|
%
|
|
|
62
|
|
|
|
0.03
|
%
|
|
|
109
|
|
|
|
0.07
|
%
|
|
|
78
|
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
$
|
415,612
|
|
|
|
100
|
%
|
|
$
|
354,446
|
|
|
|
100
|
%
|
|
$
|
245,451
|
|
|
|
100
|
%
|
|
$
|
166,571
|
|
|
|
100
|
%
|
|
$
|
139,455
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
(1,045
|
)
|
|
|
|
|
|
|
(790
|
)
|
|
|
|
|
|
|
(505
|
)
|
|
|
|
|
|
|
(310
|
)
|
|
|
|
|
|
Unamortized premiums, net of deferred loan fees
|
|
|
3,523
|
|
|
|
|
|
|
|
1,860
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
1,185
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans held for investment
|
|
$
|
417,915
|
|
|
|
|
|
|
$
|
355,261
|
|
|
|
|
|
|
$
|
245,933
|
|
|
|
|
|
|
$
|
167,251
|
|
|
|
|
|
|
$
|
139,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amount of
loans maturing in our total loans held for investment at
December 31, 2004 and June 30, 2004 based on the
contractual terms to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term to Contractual Repayment or Maturity
|
|
|
|
|
|
|
|
Over Three
|
|
|
|
|
Less
|
|
Months
|
|
Over One
|
|
|
|
|
Than Three
|
|
through One
|
|
Year through
|
|
Over Five
|
|
|
|
|
Months
|
|
Year
|
|
Five Years
|
|
Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2004
|
|
$
|
81
|
|
|
|
|
|
|
$
|
4,046
|
|
|
$
|
411,485
|
|
|
$
|
415,612
|
|
June 30, 2004
|
|
$
|
454
|
|
|
|
|
|
|
$
|
3,090
|
|
|
$
|
350,902
|
|
|
$
|
354,446
|
|
52
The following table sets forth the amount of our
loans at December 31, 2004 and June 30, 2004 that are
due after December 31, 2005 and June 30, 2005,
respectively, and indicates whether they have fixed or floating
or adjustable interest rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating or
|
|
|
|
|
Fixed
|
|
Adjustable
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family (one to four units)
|
|
$
|
251
|
|
|
$
|
35,642
|
|
|
$
|
35,893
|
|
Multifamily (five units or more)
|
|
|
26,911
|
|
|
|
339,747
|
|
|
|
366,658
|
|
Commercial real estate and land
|
|
|
272
|
|
|
|
12,708
|
|
|
|
12,980
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,434
|
|
|
$
|
388,097
|
|
|
$
|
415,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family (one to four units)
|
|
$
|
1,230
|
|
|
$
|
20,523
|
|
|
$
|
21,753
|
|
Multifamily (five units or more)
|
|
|
26,872
|
|
|
|
293,700
|
|
|
|
320,572
|
|
Commercial real estate and land
|
|
|
187
|
|
|
|
11,472
|
|
|
|
11,659
|
|
Consumer
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,289
|
|
|
$
|
325,703
|
|
|
$
|
353,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loans are secured by properties primarily
located in the western United States. The following table shows
the largest states and regions ranked by location of these
properties at December 31, 2004 and June 30, 2004:
Percent of Loan Principal Secured by Real
Estate Located in State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real
|
|
|
|
|
|
|
|
|
Estate
|
|
Single
|
|
|
|
|
State
|
|
Loans
|
|
Family
|
|
Multifamily
|
|
Commercial and Land
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California-south(1)
|
|
|
49.21
|
%
|
|
|
24.44
|
%
|
|
|
50.46
|
%
|
|
|
81.71
|
%
|
California-north(2)
|
|
|
8.96
|
%
|
|
|
21.34
|
%
|
|
|
8.07
|
%
|
|
|
|
|
Colorado
|
|
|
6.23
|
%
|
|
|
0.35
|
%
|
|
|
7.03
|
%
|
|
|
|
|
Washington
|
|
|
9.88
|
%
|
|
|
3.18
|
%
|
|
|
10.89
|
%
|
|
|
|
|
Arizona
|
|
|
5.41
|
%
|
|
|
1.65
|
%
|
|
|
5.97
|
%
|
|
|
|
|
Texas
|
|
|
5.08
|
%
|
|
|
1.20
|
%
|
|
|
5.47
|
%
|
|
|
4.63
|
%
|
Oregon
|
|
|
5.01
|
%
|
|
|
2.75
|
%
|
|
|
5.41
|
%
|
|
|
|
|
All other states
|
|
|
10.22
|
%
|
|
|
45.09
|
%
|
|
|
6.70
|
%
|
|
|
13.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California-south(1)
|
|
|
54.83
|
%
|
|
|
46.68
|
%
|
|
|
54.28
|
%
|
|
|
90.84
|
%
|
California-north(2)
|
|
|
9.71
|
%
|
|
|
44.58
|
%
|
|
|
7.50
|
%
|
|
|
|
|
Colorado
|
|
|
8.27
|
%
|
|
|
|
|
|
|
9.13
|
%
|
|
|
|
|
Washington
|
|
|
7.61
|
%
|
|
|
|
|
|
|
8.40
|
%
|
|
|
|
|
Arizona
|
|
|
5.14
|
%
|
|
|
1.82
|
%
|
|
|
5.55
|
%
|
|
|
|
|
Texas
|
|
|
3.84
|
%
|
|
|
|
|
|
|
4.05
|
%
|
|
|
5.20
|
%
|
Oregon
|
|
|
4.05
|
%
|
|
|
|
|
|
|
4.47
|
%
|
|
|
|
|
All other states
|
|
|
6.55
|
%
|
|
|
6.92
|
%
|
|
|
6.62
|
%
|
|
|
3.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists of loans secured by real property in
California with zip code ranges from 90000 to 92999.
|
|
(2)
|
Consists of loans secured by real property in
California with zip code ranges from 93000 to 96999.
|
53
Another measure of credit risk is the ratio of
the loan amount to the value of the property securing the loan
(called loan-to-value ratio or LTV). The following table shows
the LTVs of our loan portfolio on weighted average and median
bases at December 31, 2004 and June 30, 2004. The LTVs
were calculated by dividing (a) the loan principal balance
less principal repayments by (b) the appraisal value of the
property securing the loan at the time of funding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real
|
|
|
|
|
|
|
|
|
Estate
|
|
Single
|
|
|
|
Commercial
|
|
|
Loans
|
|
Family
|
|
Multifamily
|
|
and Land
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average LTV
|
|
|
52.66%
|
|
|
|
61.47%
|
|
|
|
52.05%
|
|
|
|
46.13%
|
|
Median LTV
|
|
|
50.99%
|
|
|
|
65.39%
|
|
|
|
49.78%
|
|
|
|
36.43%
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average LTV
|
|
|
53.45%
|
|
|
|
61.61%
|
|
|
|
53.09%
|
|
|
|
48.45%
|
|
Median LTV
|
|
|
53.00%
|
|
|
|
61.44%
|
|
|
|
52.00%
|
|
|
|
39.68%
|
|
54
Lending Activities.
The following table summarizes the volumes of real estate loans
originated, purchased and sold for the six months ended
December 31, 2004 and for each fiscal year since inception
of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
|
Months Ended
|
|
For Years Ended June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Loans Held for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family (one to four units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
435
|
|
|
$
|
3,602
|
|
|
$
|
128
|
|
|
$
|
22
|
|
|
$
|
|
|
|
|
Loan originations
|
|
|
9,795
|
|
|
|
76,550
|
|
|
|
124,739
|
|
|
|
6,994
|
|
|
|
3,317
|
|
|
|
Loans purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of loans held for sale
|
|
|
(9,429
|
)
|
|
|
(80,081
|
)
|
|
|
(122,042
|
)
|
|
|
(6,932
|
)
|
|
|
(3,317
|
)
|
|
|
Gains on sales of loans held for sale
|
|
|
44
|
|
|
|
364
|
|
|
|
778
|
|
|
|
67
|
|
|
|
22
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
845
|
|
|
$
|
435
|
|
|
$
|
3,602
|
|
|
$
|
128
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family (one to four units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
21,753
|
|
|
$
|
42,124
|
|
|
$
|
32,763
|
|
|
$
|
118,377
|
|
|
$
|
|
|
|
|
Loan originations
|
|
|
489
|
|
|
|
1,641
|
|
|
|
1,838
|
|
|
|
3,595
|
|
|
|
6,797
|
|
|
|
Loans purchases
|
|
|
19,208
|
|
|
|
7,855
|
|
|
|
32,919
|
|
|
|
7,792
|
|
|
|
127,340
|
(1)
|
|
|
Loans sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
(5,557
|
)
|
|
|
(29,867
|
)
|
|
|
(25,396
|
)
|
|
|
(97,024
|
)
|
|
|
(14,807
|
)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
(953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
35,893
|
|
|
$
|
21,753
|
|
|
$
|
42,124
|
|
|
$
|
32,763
|
|
|
$
|
118,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily (five units or more):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
320,971
|
|
|
$
|
191,426
|
|
|
$
|
125,303
|
|
|
$
|
12,878
|
|
|
$
|
|
|
|
|
Loan originations
|
|
|
24,902
|
|
|
|
57,337
|
|
|
|
49,949
|
|
|
|
29,970
|
|
|
|
4,945
|
|
|
|
Loans purchases
|
|
|
49,733
|
|
|
|
120,264
|
|
|
|
48,267
|
|
|
|
123,349
|
|
|
|
7,965
|
|
|
|
Loans sold
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
(28,405
|
)
|
|
|
(48,056
|
)
|
|
|
(32,093
|
)
|
|
|
(40,894
|
)
|
|
|
(32
|
)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
366,658
|
|
|
$
|
320,971
|
|
|
$
|
191,426
|
|
|
$
|
125,303
|
|
|
$
|
12,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
11,659
|
|
|
$
|
11,839
|
|
|
$
|
8,397
|
|
|
$
|
8,122
|
|
|
$
|
|
|
|
|
Loan originations
|
|
|
2,265
|
|
|
|
5,467
|
|
|
|
6,784
|
|
|
|
1,073
|
|
|
|
4,261
|
|
|
|
Loans purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,273
|
|
|
|
Loans sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
(944
|
)
|
|
|
(5,647
|
)
|
|
|
(3,342
|
)
|
|
|
(798
|
)
|
|
|
(412
|
)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12,980
|
|
|
$
|
11,659
|
|
|
$
|
11,839
|
|
|
$
|
8,397
|
|
|
$
|
8,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
63
|
|
|
$
|
62
|
|
|
$
|
108
|
|
|
$
|
78
|
|
|
$
|
|
|
|
|
Loan originations
|
|
|
26
|
|
|
|
33
|
|
|
|
38
|
|
|
|
21
|
|
|
|
|
|
|
|
Loans purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
(8
|
)
|
|
|
(33
|
)
|
|
|
(108
|
)
|
|
|
8
|
|
|
|
(272
|
)
|
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
24
|
|
|
|
1
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
81
|
|
|
$
|
63
|
|
|
$
|
62
|
|
|
$
|
108
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LOANS HELD FOR INVESTMENT
|
|
$
|
415,612
|
|
|
$
|
354,446
|
|
|
$
|
245,451
|
|
|
$
|
166,571
|
|
|
$
|
139,455
|
|
|
|
Allowance for loan losses
|
|
|
(1,220
|
)
|
|
|
(1,045
|
)
|
|
|
(790
|
)
|
|
|
(505
|
)
|
|
|
(310
|
)
|
|
|
Unamortized premiums, net of deferred
loan fees
|
|
|
3,523
|
|
|
|
1,860
|
|
|
|
1,272
|
|
|
|
1,185
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOANS HELD FOR INVESTMENT
|
|
$
|
417,915
|
|
|
$
|
355,261
|
|
|
$
|
245,933
|
|
|
$
|
167,251
|
|
|
$
|
139,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Single family loan purchases in our first year of
operations provided us the time to develop our internal loan
origination capabilities.
|
55
The following table summarizes the amount funded,
the number and the size of real estate loans originated and
purchased for the six months ended December 31, 2004 and
for each fiscal year since inception of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
Ended
|
|
For the Fiscal Years Ended June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Type of Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family (one to four units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount funded
|
|
$
|
10,284
|
|
|
$
|
78,191
|
|
|
$
|
126,577
|
|
|
$
|
10,589
|
|
|
$
|
10,114
|
|
|
|
Number of loans
|
|
|
28
|
|
|
|
317
|
|
|
|
560
|
|
|
|
46
|
|
|
|
38
|
|
|
|
Average loan size
|
|
$
|
367
|
|
|
$
|
247
|
|
|
$
|
226
|
|
|
$
|
230
|
|
|
$
|
266
|
|
|
Loans purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount funded
|
|
$
|
19,208
|
|
|
$
|
7,855
|
|
|
$
|
32,919
|
|
|
$
|
7,792
|
|
|
$
|
127,340
|
|
|
|
Number of loans
|
|
|
85
|
|
|
|
11
|
|
|
|
68
|
|
|
|
130
|
|
|
|
296
|
|
|
|
Average loan size
|
|
$
|
226
|
|
|
$
|
714
|
|
|
$
|
484
|
|
|
$
|
60
|
|
|
$
|
430
|
|
Multifamily (five or more units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount funded
|
|
$
|
24,902
|
|
|
$
|
57,337
|
|
|
$
|
49,949
|
|
|
$
|
29,970
|
|
|
$
|
4,945
|
|
|
|
Number of loans
|
|
|
33
|
|
|
|
84
|
|
|
|
80
|
|
|
|
50
|
|
|
|
9
|
|
|
|
Average loan size
|
|
$
|
755
|
|
|
$
|
683
|
|
|
$
|
624
|
|
|
$
|
599
|
|
|
$
|
549
|
|
|
Loans purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount funded
|
|
$
|
49,733
|
|
|
$
|
120,264
|
|
|
$
|
48,267
|
|
|
$
|
123,349
|
|
|
$
|
7,965
|
|
|
|
Number of loans
|
|
|
52
|
|
|
|
116
|
|
|
|
79
|
|
|
|
315
|
|
|
|
16
|
|
|
|
Average loan size
|
|
$
|
956
|
|
|
$
|
1,037
|
|
|
$
|
611
|
|
|
$
|
392
|
|
|
$
|
498
|
|
Commercial real estate and land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount funded
|
|
$
|
2,265
|
|
|
$
|
5,467
|
|
|
$
|
6,784
|
|
|
$
|
1,073
|
|
|
$
|
4,261
|
|
|
|
Number of loans
|
|
|
3
|
|
|
|
5
|
|
|
|
6
|
|
|
|
3
|
|
|
|
5
|
|
|
|
Average loan size
|
|
$
|
755
|
|
|
$
|
1,093
|
|
|
$
|
1,131
|
|
|
$
|
358
|
|
|
$
|
852
|
|
|
Loans purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount funded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,273
|
|
|
|
Number of loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
Average loan size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
267
|
|
Loan Marketing.
We
market our lending products through a variety of channels
depending on the product. We market single family mortgage loans
in all 50 states to Internet comparison shoppers through
our purchase of advertising on search engines, such as Google
and Yahoo, and popular product comparison sites, such as
Bankrate.com. We market multifamily loans primarily in four
states through Internet search engines and through traditional
origination techniques, such as direct mail marketing, personal
sales efforts and limited media advertising.
Loan Originations.
We originate loans through three different origination channels:
online retail; online wholesale; and direct.
|
|
|
|
|
Online Retail Loan
Origination.
We originate single
family and multifamily mortgage loans directly online through
our websites, where our customers can review interest rates and
loan terms, enter their loan applications and lock in interest
rates directly over the Internet.
|
56
|
|
|
|
|
|
Single Family Loan
Website.
Our primary website for
single family loans is located at homeloans.bankofinternet.com.
We maintain and update the rate and other information on this
website. Once a single family loan application is received, we
outsource processing of the loan application to a third-party
processor, which handles all of the tasks of underwriting and
processing the loan. Customers seeking direct contact with a
loan officer during the application process are directed to a
loan officer at the third-party loan processor.
|
|
|
|
|
Multifamily Loan
Website.
Our primary website for
multifamily loans is located at www.ApartmentBank.com, where
customers can obtain loan rates and terms, prequalify loan
requests, submit loan applications, communicate with loan
officers and monitor loan processing in a secure, online
environment. Multifamily loan applications are underwritten and
processed internally by our personnel. We designed our
multifamily website and underlying software to expedite the
origination, processing and management of multifamily loans. For
example, customers can directly input or import loan application
data electronically, or submit data by facsimile. Once a
customer begins an online application, he or she can save the
application and resume the process at a later date through a
secure password. Our software determines which forms are needed,
populates the forms and allows multiple parties, such as
guarantors, to access the application.
|
|
|
|
|
Online Wholesale Loan
Origination.
We have developed
relationships with independent multifamily loan brokers in our
four primary multifamily markets, and we manage these
relationships and our wholesale loan pipeline through our
Broker Advantage website located at broker.bofi.com.
Through this password-protected website, our approved
independent loan brokers can compare programs, terms and pricing
on a real time basis and communicate with our staff.
Additionally, through a secure loan pipeline management feature,
brokers can submit prequalification requests, submit, edit and
manage full loan applications, manage loans in process, track
outstanding documents and obtain any necessary forms required
for documentation. We do not allow brokers to perform any loan
processing beyond acting as the originating broker of record. We
handle all further loan processing, including verification of
loan requests, underwriting, preparation of loan documents and
obtaining third party reports and appraisals. We believe that
the tools and services offered by Broker Advantage free loan
brokers from much of the administrative tasks of loan processing
and allow brokers to focus more of their time on local marketing
and business development efforts.
|
|
|
|
|
Direct Loan
Origination.
We employ a staff of
three loan originators who directly originate multifamily and
commercial loans and develop wholesale lending relationships
with loan brokers on a regional basis. Our internal software,
known as Origination Manager, allows each loan
originator to have direct online access to our multifamily loan
origination system and originate and manage their loan
portfolios in a secure online environment from anywhere in the
nation. Routine tasks are automated, such as researching loan
program and pricing updates, prequalifying loans, submitting
loan applications, viewing customer applications, credit
histories and other application documents and monitoring the
status of loans in process. We have three direct loan
originators, located in Dallas/ Fort Worth, Phoenix and
San Diego.
|
Loan Purchases.
We
purchase selected single family and multifamily loans from other
lenders, allowing us to utilize excess cash when direct
originations are not available and diversify our loan portfolio
geographically. We currently purchase loans primarily from three
major banks or mortgage companies. We evaluate each purchased
loan as an independent credit decision and apply the same
lending policies as our originated loans. Each purchased loan is
internally underwritten pursuant to our credit policies for the
applicable loan type, and subject to the same loan credit
quality scrutiny and approval levels as originated loans. As
part of the underwriting and due diligence process for purchased
multifamily loans, additional techniques are employed, including
a full credit file review for each loan, on-site property
inspection, acquisition of independent third party reports as
needed, and compliance/documentation quality control audits. At
December 31, 2004, approximately $218.1 million, or
52%, of our loan portfolio was acquired from other lenders who
are servicing the loans on our behalf, of which 85.7% were
multifamily loans and 14.3% were single family loans.
57
Loan Servicing.
We
typically retain servicing rights for all multifamily loans that
we originate. We typically do not acquire servicing rights on
purchased single family and multifamily loans, and we typically
release servicing rights to the purchaser when we sell single
family loans that we originate. At December 31, 2004, we
serviced 300 mortgage loans with two full time employees.
Loan Underwriting Process and
Criteria.
We individually underwrite
all multifamily and commercial loans that we originate, and all
loans that we purchase. We outsource to a third-party processor
the underwriting of all single family loans that we originate,
based on underwriting criteria that we establish and provide to
the processor. Our loan underwriting policies and procedures are
written and adopted by our board of directors and our loan
committee, consisting of President and Chief Executive Officer
Gary Lewis Evans and board members Thomas Pancheri and Robert
Eprile. Each loan, regardless of how it is originated, must meet
underwriting criteria set forth in our lending policies and the
requirements of applicable lending regulations of the OTS.
Our staff of loan underwriters operates
independently of commissioned loan officers. Utilizing our
required format, policies and procedures, the underwriters
analyze the credit request and prepare credit memoranda and
financial analyses for submission to the Chief Credit Officer
and loan committee. Loans under $1.0 million require the
approval of both the Chief Credit Officer and one loan committee
member, while loans over $1.0 million require the approval
of the Chief Credit Officer and two loan committee members.
We have designed our loan application and review
process so that much of the information that is required to
underwrite and evaluate a loan is created electronically during
the loan application process. Therefore we can automate many of
the mechanical procedures involved in preparing underwriting
reports and reduce the need for human interaction, other than in
the actual credit decision process. We believe that our systems
will allow us to handle increasing volumes of loans with only a
small increase in personnel, in accordance with our strategy of
leveraging technology to lower our operating expenses.
We apply different underwriting criteria
depending on the type of loan. Each single family loan is
underwritten by our third-party processor based on standard
FNMA/ FHLMC guidelines, and we may from time to time implement
additional underwriting guidelines determined by the expected
purchaser of the loan. For example, a purchaser may specify
single family loans that meet additional underwriting criteria,
such as loan size and type of property.
We perform underwriting directly on all
multifamily and commercial loans that we originate and purchase.
We rely primarily on the cash flow from the underlying property
as the expected source of repayment, but we also endeavor to
obtain personal guarantees from all borrowers or substantial
principals of the borrower. In evaluating multifamily and
commercial loans, we review the value and condition of the
underlying property, as well as the financial condition, credit
history and qualifications of the borrower. In evaluating the
borrowers qualifications, we consider primarily the
borrowers other financial resources, experience in owning
or managing similar properties and payment history with us or
other financial institutions. In evaluating the underlying
property, we consider primarily the net operating income of the
property before debt service and depreciation, the ratio of net
operating income to debt service and the ratio of the loan
amount to the appraised value. We typically require a debt
service coverage ratio, after operating expense adjustments, of
at least 1.25 times for multifamily and 1.50 times for
commercial loans, based on the actual operating history of the
property over the prior two calendar years and assuming an
interest rate equal to the greater of the contractual start rate
or the fully indexed margin. We also prepare a pro forma debt
service coverage ratio, which must also meet or exceed a 1.25 or
1.50 multiple, based on assumptions including current macro,
regional and local economic trends, recent financial statements
and current rent rolls. In evaluating multifamily and commercial
properties securing loans we originate, we obtain third-party
reports, including title and environmental risk reports,
third-party appraisals and review appraisals. One of our
employee underwriters typically visits each multifamily or
commercial property before loan approval and may also visit
related properties owned by the borrower or its affiliates or
comparable properties in the area, to further our comfort with
the loan. We typically do not require updated appraisals or cash
flow analysis on our loans held for investment.
58
Lending Limits.
As a
savings association, we generally are subject to the same
lending limit rules applicable to national banks. With limited
exceptions, the maximum amount that we may lend to any borrower,
including related entities of the borrower, at one time may not
exceed 15% of our unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus for loans fully
secured by readily marketable collateral. We are additionally
authorized to make loans to one borrower, by order of the
Director of the OTS, in an amount not to exceed the lesser of
$30.0 million or 30% of our unimpaired capital and surplus
for the purpose of developing residential housing, if certain
specified conditions are met. See Regulation
Regulation of Bank of Internet USA.
At December 31, 2004, Bank of
Internets loans-to-one-borrower limit was
$5.7 million, based upon the 15% of unimpaired capital and
surplus measurement. At December 31, 2004, no single loan
was larger than $3.0 million and our largest single lending
relationship had an outstanding balance of $4.7 million. We
expect that our lending limit will increase to approximately
$8.1 million immediately following this offering, assuming
that $21.8 million in net proceeds are raised in the
offering and that $16.0 million of the net proceeds are
contributed to our bank, based on the assumptions set forth
below the table in Capitalization.
Asset Quality and Credit
Risk.
For every quarter from inception
to June 30, 2004, we had no nonperforming assets or
troubled debt restructurings. Since that time, one loan with a
principal balance of approximately $152,000 at June 30,
2004 defaulted, but the loan was repaid in full in
September 2004. At September 30, 2004 and
December 31, 2004, we had no loan defaults, no
foreclosures, no nonperforming loans and no specific loan loss
allowances. Since our history is limited, we expect in the
future to have additional loans that default or become
nonperforming. Nonperforming assets are defined as nonperforming
loans and real estate acquired by foreclosure or deed-in-lieu
thereof. Nonperforming loans are defined as nonaccrual loans and
loans 90 days or more overdue but still accruing interest
to the extent applicable. Troubled debt restructurings are
defined as loans that we have agreed to modify by accepting
below market terms either by granting interest rate concessions
or by deferring principal or interest payments. Our policy in
the event of nonperforming assets is to place such assets on
nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed
on nonaccrual status, previously accrued but unpaid interest
will be deducted from interest income. Our policy is to not
accrue interest on loans past due 90 days or more.
Investment
Portfolio.
In addition to loans, we
invest available funds in investment grade fixed income
securities, consisting mostly of federal agency securities. We
also invest available funds in term deposits of other
FDIC-insured financial institutions. Our investment policy, as
established by our board of directors, is designed primarily to
maintain liquidity and generate a favorable return on investment
without incurring undue interest rate risk, credit risk or
portfolio asset concentration. Our investment policy is
currently implemented by an investment committee of the board of
directors, comprised of Messrs. Evans, Allrich and Eprile,
within overall parameters set by our board of directors. Under
our investment policy, we are currently authorized to invest in
obligations issued or fully guaranteed by the United States
government, specific federal agency obligations, specific time
deposits, negotiable certificates of deposit issued by
commercial banks and other insured financial institutions,
investment grade corporate debt securities and other specified
investments.
59
The following table sets forth changes in our
investment portfolio for the six months ended December 31,
2004 and for each fiscal year since 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
|
Months Ended
|
|
For the Fiscal Years Ended
|
|
|
December 31,
|
|
June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Securities at beginning of period
|
|
$
|
3,665
|
|
|
$
|
441
|
|
|
$
|
441
|
|
|
$
|
726
|
|
|
$
|
1,522
|
|
|
Purchases
|
|
|
52,808
|
|
|
|
|
|
|
|
3,409
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments and prepayments
|
|
|
(3,221
|
)
|
|
|
(64
|
)
|
|
|
(185
|
)
|
|
|
(285
|
)
|
|
|
(796
|
)
|
|
(Decrease) increase in unrealized gains/losses on
available-for-sale securities(1)
|
|
|
(211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities at end of period
|
|
$
|
53,041
|
|
|
$
|
377
|
|
|
$
|
3,665
|
|
|
$
|
441
|
|
|
$
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Through June 30, 2004, we did not have any
securities designated as available-for-sale.
|
The following table sets forth, at
December 31, 2004, the dollar amount of our investment
portfolio by type, based on the contractual terms to maturity
and the weighted average yield for each range of maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within
|
|
After One but
|
|
After Five but
|
|
|
|
|
Total Amount
|
|
One Year
|
|
within Five Years
|
|
within Ten Years
|
|
After Ten Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Yield(1)
|
|
Amount
|
|
Yield(1)
|
|
Amount
|
|
Yield(1)
|
|
Amount
|
|
Yield(1)
|
|
Amount
|
|
Yield(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Investment Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA MBS(2)
|
|
$
|
9,380
|
|
|
|
3.07
|
%
|
|
$
|
205
|
|
|
|
3.02
|
%
|
|
$
|
889
|
|
|
|
3.03
|
%
|
|
$
|
1,286
|
|
|
|
3.03
|
%
|
|
$
|
7,000
|
|
|
|
3.08
|
%
|
FNMA MBS(2)
|
|
|
35,656
|
|
|
|
3.66
|
%
|
|
|
625
|
|
|
|
3.66
|
%
|
|
|
2,773
|
|
|
|
3.66
|
%
|
|
|
4,180
|
|
|
|
3.66
|
%
|
|
|
28,078
|
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
45,036
|
|
|
|
3.54
|
%
|
|
$
|
830
|
|
|
|
3.50
|
%
|
|
$
|
3,662
|
|
|
|
3.51
|
%
|
|
$
|
5,466
|
|
|
|
3.51
|
%
|
|
$
|
35,078
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of debt securities
|
|
$
|
44,825
|
|
|
|
3.54
|
%
|
|
$
|
830
|
|
|
|
3.50
|
%
|
|
$
|
3,662
|
|
|
|
3.51
|
%
|
|
$
|
5,466
|
|
|
|
3.51
|
%
|
|
$
|
34,867
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held to
Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Agency
|
|
$
|
3,425
|
|
|
|
3.65
|
%
|
|
$
|
|
|
|
|
|
|
|
$
|
3,425
|
|
|
|
3.65
|
%
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
FHLMC MBS(2)
|
|
|
4,579
|
|
|
|
4.10
|
%
|
|
|
87
|
|
|
|
4.10
|
%
|
|
|
352
|
|
|
|
4.10
|
%
|
|
|
534
|
|
|
|
4.10
|
%
|
|
|
3,606
|
|
|
|
4.10
|
%
|
FNMA MBS(2)
|
|
|
212
|
|
|
|
2.56
|
%
|
|
|
6
|
|
|
|
2.56
|
%
|
|
|
24
|
|
|
|
2.56
|
%
|
|
|
34
|
|
|
|
2.56
|
%
|
|
|
148
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
8,216
|
|
|
|
3.87
|
%
|
|
$
|
93
|
|
|
|
4.00
|
%
|
|
$
|
3,801
|
|
|
|
3.68
|
%
|
|
$
|
568
|
|
|
|
4.01
|
%
|
|
$
|
3,754
|
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of debt securities
|
|
$
|
8,191
|
|
|
|
3.87
|
%
|
|
$
|
93
|
|
|
|
4.00
|
%
|
|
$
|
3,811
|
|
|
|
3.68
|
%
|
|
$
|
568
|
|
|
|
4.01
|
%
|
|
$
|
3,719
|
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Weighted average yield is based on amortized cost
of the securities.
|
|
(2)
|
Mortgage-backed securities are allocated based on
contractual principal maturities, assuming no prepayments.
|
Allowance for Loan
Losses.
We maintain an allowance for
loan losses in an amount that we believe is sufficient to
provide adequate protection against probable losses in our loan
portfolio. We evaluate quarterly the adequacy of the allowance
based upon reviews of individual loans, recent loss experience,
current economic conditions, risk characteristics of the various
categories of loans and other pertinent factors. The evaluation
is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes
available. The allowance is increased by the provision for loan
losses, which is charged
60
against current period operating results. The
allowance is decreased by the amount of charge-offs of loans
deemed uncollectible and increased by recoveries of loans
previously charged off.
Under our allowance for loan loss policy,
impairment calculations are determined based on general
portfolio data for general reserves and loan level data.
Specific loans are evaluated for impairment and are to be
classified as nonperforming or in foreclosure if they are
90 days or more delinquent. A loan is considered impaired
when, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of
principal or interest when due according to the contractual
terms of the loan agreement. Factors that we consider in
determining impairment include payment status, collateral value
and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not
classified as impaired. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows
discounted at the loans effective interest rate or the
fair value of the collateral if repayment of the loan is
expected from the sale of collateral.
General loan loss reserves are calculated by
grouping each loan by collateral type and by grouping the
loan-to-value ratios of each loan within the collateral type. An
estimated impairment rate for each loan-to-value group within
each type of loan is multiplied by the total principal amount in
the group to calculate the required general reserve attributable
to that group. We use an allowance rate that provides a larger
loss allowance for loans with greater loan-to-value ratios,
measured at the time the loan was funded. The internal asset
review committee of our board of directors reviews and approves
the banks calculation methodology. Specific reserves are
to be calculated when an internal asset review of a loan
identifies a significant adverse change in the financial
position of the borrower or the value of the collateral. The
specific reserve is based on discounted cash flows, observable
market prices or the estimated value of underlying collateral.
For every quarter from inception to June 30,
2004, we had no loan defaults, foreclosures, nonperforming loans
or specific loan loss allowances. Since that time, one loan with
a principal balance of approximately $152,000 at June 30,
2004 defaulted, but the loan was repaid in full in September
2004. At September 30, 2004 and December 31, 2004, we
had no loan defaults, no foreclosures, no nonperforming loans
and no specific loan loss allowances. Since our history is
limited, we expect in the future to have additional loans that
default or become nonperforming. We have provided general loan
loss allowances as an estimate of the impairment inherent in our
portfolio.
61
The following table sets forth the changes in our
allowance for loan losses, by loan type, from inception through
December 31, 2004. We have not recorded any specific loan
loss reserves or any loan charge-offs or recoveries in the
period from inception through December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
as a
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
of Total
|
|
|
Single Family
|
|
Multifamily
|
|
and Land
|
|
Consumer
|
|
Total
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Balance at July 6, 1999 (inception)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
198
|
|
|
|
76
|
|
|
|
33
|
|
|
|
3
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2001
|
|
|
198
|
|
|
|
76
|
|
|
|
33
|
|
|
|
3
|
|
|
|
310
|
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(107
|
)
|
|
|
300
|
|
|
|
2
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2002
|
|
|
91
|
|
|
|
376
|
|
|
|
35
|
|
|
|
3
|
|
|
|
505
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(14
|
)
|
|
|
302
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2003
|
|
|
77
|
|
|
|
678
|
|
|
|
35
|
|
|
|
|
|
|
|
790
|
|
|
|
0.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(35
|
)
|
|
|
284
|
|
|
|
6
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004
|
|
|
42
|
|
|
|
962
|
|
|
|
41
|
|
|
|
|
|
|
|
1,045
|
|
|
|
0.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
28
|
|
|
|
142
|
|
|
|
5
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$
|
70
|
|
|
$
|
1,104
|
|
|
$
|
46
|
|
|
$
|
|
|
|
$
|
1,220
|
|
|
|
0.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth how our allowance
for loan losses is allocated by type of loan at each of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
June 30, 2004
|
|
June 30, 2003
|
|
June 30, 2002
|
|
June 30, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
|
Loan
|
|
|
|
Loan
|
|
|
|
Loan
|
|
|
|
Loan
|
|
|
|
|
Category
|
|
|
|
Category
|
|
|
|
Category
|
|
|
|
Category
|
|
|
|
Category
|
|
|
Amount
|
|
as a %
|
|
Amount
|
|
as a %
|
|
Amount
|
|
as a %
|
|
Amount
|
|
as a %
|
|
Amount
|
|
as a %
|
|
|
of
|
|
of Total
|
|
of
|
|
of Total
|
|
of
|
|
of Total
|
|
of
|
|
of Total
|
|
of
|
|
of Total
|
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
Allowance
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Single family
|
|
$
|
70
|
|
|
|
5.74
|
%
|
|
$
|
42
|
|
|
|
4.02
|
%
|
|
$
|
77
|
|
|
|
9.75
|
%
|
|
$
|
91
|
|
|
|
18.02
|
%
|
|
$
|
198
|
|
|
|
63.87
|
%
|
Multifamily
|
|
|
1,104
|
|
|
|
90.49
|
%
|
|
|
962
|
|
|
|
92.06
|
%
|
|
|
678
|
|
|
|
85.82
|
%
|
|
|
376
|
|
|
|
74.46
|
%
|
|
|
76
|
|
|
|
24.52
|
%
|
Commercial real estate and land
|
|
|
46
|
|
|
|
3.77
|
%
|
|
|
41
|
|
|
|
3.92
|
%
|
|
|
35
|
|
|
|
4.43
|
%
|
|
|
35
|
|
|
|
6.93
|
%
|
|
|
33
|
|
|
|
10.64
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
0.59
|
%
|
|
|
3
|
|
|
|
0.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,220
|
|
|
|
100
|
%
|
|
$
|
1,045
|
|
|
|
100
|
%
|
|
$
|
790
|
|
|
|
100
|
%
|
|
$
|
505
|
|
|
|
100
|
%
|
|
$
|
310
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Deposit Products and Services
Deposit Products.
We
offer a full line of deposit products over the Internet to
customers in all 50 states. Our deposit products consist of
demand deposits (interest bearing and non-interest bearing),
savings accounts and time deposits. Our customers access their
funds through ATMs, debit cards, Automated Clearing House funds
(electronic transfers) and checks. We also offer the following
additional services in connection with our deposit accounts:
|
|
|
|
|
Online Bill Payment
Service.
Customers can pay their bills
online through electronic funds transfer or a written check
prepared and sent to the payee.
|
|
|
|
Online Check
Imaging.
Online images of cancelled
checks and deposit slips are available to customers
24 hours a day. Images of cancelled checks are available
real time (at the time the check clears our bank) and may be
printed or stored electronically.
|
|
|
|
ATM Cards or VISA® Check
Cards.
Each customer may choose to
receive a free ATM card or VISA® check card upon opening an
account. Customers can access their accounts at ATMs and any
other location worldwide that accept VISA® check cards. We
do not charge a fee for ATM/ VISA® usage, and we reimburse
our customers up to $10 per month for fees imposed by
third-party operators of ATM/ VISA® locations.
|
|
|
|
Overdraft
Protection.
Overdraft protection, in
the form of an overdraft line of credit, is available to all
checking account customers who request the protection and
qualify.
|
|
|
|
Electronic
Statements.
Statements are produced
and imaged automatically each month and may be printed or stored
electronically by the customer.
|
Deposit Marketing.
We currently market to deposit customers through targeted,
online marketing in all 50 states by purchasing key
word advertising on Internet search engines, such as
Google, and placement on product comparison sites, such as
Bankrate.com. We target deposit customers based on demographics,
such as age, income, geographic location and other criteria. For
example, we recently opened our Senior Banking
Center website to target seniors who tend to maintain
relatively high balances but are also rate sensitive. This
account offers greater interest rates and higher amounts of free
bill paying, but lower amounts of ATM reimbursement. We also
offer a Boomers account targeting baby-boomers, and
are developing Banco de Internet, a redesigned
version of our website to focus on Spanish speaking
U.S. customers. We also plan to create in the future
strategic alliances with financial and similar websites to
target deposit-taking products to their customers. We have never
obtained any brokered deposits, or deposits for
which we have paid a commission.
As part of our deposit marketing strategies, we
actively manage deposit interest rates offered on our websites
and displayed in our advertisements. Senior management is
directly involved in executing overall growth and interest rate
guidance established by ALCO. Within these parameters,
management and staff survey our competitors interest rates
and evaluate consumer demand for various products and our
existing deposit mix. They then establish our marketing
campaigns accordingly and monitor and adjust our marketing
campaigns on an ongoing basis. Within minutes our management and
staff can react to changes in deposit inflows and external
events by altering interest rates reflected on our websites and
in our advertising.
During our fiscal year ended June 30, 2004,
we opened 6,408 new deposit accounts, resulting in approximately
$136.0 million in new deposits, and spent approximately
$29,000 in external advertising costs for deposit gathering. For
the six months ended December 31, 2004, we opened 5,028 new
deposit accounts, resulting in approximately $110.3 million
in new deposits, and spent approximately $46,000 in external
advertising costs for deposit gathering.
63
Deposit Composition.
The following table sets forth the dollar amount of deposits by
type and weighted average interest rates at December 31,
2004 and at each of June 30, 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Rate(1)
|
|
Amount
|
|
Rate(1)
|
|
Amount
|
|
Rate(1)
|
|
Amount
|
|
Rate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest-bearing
|
|
$
|
3,850
|
|
|
|
|
|
|
$
|
2,279
|
|
|
|
|
|
|
$
|
3,299
|
|
|
|
|
|
|
$
|
1,405
|
|
|
|
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
28,685
|
|
|
|
1.31
|
%
|
|
|
26,725
|
|
|
|
1.35
|
%
|
|
|
29,902
|
|
|
|
1.38
|
%
|
|
|
34,283
|
|
|
|
3.07
|
%
|
|
Savings
|
|
|
80,036
|
|
|
|
1.93
|
%
|
|
|
94,120
|
|
|
|
1.96
|
%
|
|
|
18,823
|
|
|
|
1.91
|
%
|
|
|
7,977
|
|
|
|
1.87
|
%
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under $100,000
|
|
|
136,005
|
|
|
|
3.30
|
%
|
|
|
88,082
|
|
|
|
3.44
|
%
|
|
|
95,489
|
|
|
|
3.93
|
%
|
|
|
82,889
|
|
|
|
4.23
|
%
|
|
|
$100,000 or more
|
|
|
71,443
|
|
|
|
3.26
|
%
|
|
|
58,635
|
|
|
|
3.20
|
%
|
|
|
46,479
|
|
|
|
3.96
|
%
|
|
|
41,064
|
|
|
|
4.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total time deposits
|
|
|
207,448
|
|
|
|
3.29
|
%
|
|
|
146,717
|
|
|
|
3.35
|
%
|
|
|
141,968
|
|
|
|
3.94
|
%
|
|
|
123,953
|
|
|
|
4.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
316,169
|
|
|
|
2.76
|
%
|
|
|
267,562
|
|
|
|
2.66
|
%
|
|
|
190,693
|
|
|
|
3.34
|
%
|
|
|
166,213
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
320,019
|
|
|
|
2.73
|
%
|
|
$
|
269,841
|
|
|
|
2.64
|
%
|
|
$
|
193,992
|
|
|
|
3.28
|
%
|
|
$
|
167,618
|
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on weighted average stated interest rates
at the end of the period.
|
The following tables set forth the average
balance of each type of deposit and the average rate paid on
each type of deposit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Average
|
|
Interest
|
|
Rate
|
|
Average
|
|
Interest
|
|
Rate
|
|
|
Balance
|
|
Expense
|
|
Paid
|
|
Balance
|
|
Expense
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Demand
|
|
$
|
29,382
|
|
|
$
|
196
|
|
|
|
1.33
|
%
|
|
$
|
29,496
|
|
|
$
|
210
|
|
|
|
1.42
|
%
|
Savings
|
|
|
89,490
|
|
|
|
881
|
|
|
|
1.97
|
%
|
|
|
42,765
|
|
|
|
410
|
|
|
|
1.92
|
%
|
Time deposits
|
|
|
174,763
|
|
|
|
2,867
|
|
|
|
3.28
|
%
|
|
|
129,726
|
|
|
|
2,512
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
293,635
|
|
|
|
3,944
|
|
|
|
2.69
|
%
|
|
|
201,987
|
|
|
|
3,132
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
296,990
|
|
|
$
|
3,944
|
|
|
|
2.66
|
%
|
|
$
|
204,159
|
|
|
$
|
3,132
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Average
|
|
Interest
|
|
Rate
|
|
Average
|
|
Interest
|
|
Rate
|
|
Average
|
|
Interest
|
|
Rate
|
|
|
Balance
|
|
Expense
|
|
Paid
|
|
Balance
|
|
Expense
|
|
Paid
|
|
Balance
|
|
Expense
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Demand
|
|
$
|
29,600
|
|
|
$
|
416
|
|
|
|
1.41
|
%
|
|
$
|
33,213
|
|
|
$
|
735
|
|
|
|
2.21
|
%
|
|
$
|
17,518
|
|
|
$
|
487
|
|
|
|
2.78
|
%
|
Savings
|
|
|
64,197
|
|
|
|
1,252
|
|
|
|
1.95
|
%
|
|
|
8,160
|
|
|
|
119
|
|
|
|
1.46
|
%
|
|
|
10,873
|
|
|
|
272
|
|
|
|
2.50
|
%
|
Time deposits
|
|
|
132,166
|
|
|
|
4,866
|
|
|
|
3.68
|
%
|
|
|
142,903
|
|
|
|
5,854
|
|
|
|
4.10
|
%
|
|
|
123,812
|
|
|
|
6,196
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
225,963
|
|
|
|
6,534
|
|
|
|
2.89
|
%
|
|
|
184,276
|
|
|
|
6,708
|
|
|
|
3.64
|
%
|
|
|
152,203
|
|
|
|
6,955
|
|
|
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
227,966
|
|
|
$
|
6,534
|
|
|
|
2.87
|
%
|
|
$
|
186,032
|
|
|
$
|
6,708
|
|
|
|
3.61
|
%
|
|
$
|
153,028
|
|
|
$
|
6,955
|
|
|
|
4.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The following table shows the maturity dates of
our certificates of deposit at December 31, 2004 and at
each of June 30, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
|
|
|
December 31,
|
|
At June 30,
|
|
|
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Within 12 months
|
|
$
|
106,798
|
|
|
$
|
80,365
|
|
|
$
|
71,147
|
|
13 to 24 months
|
|
|
40,647
|
|
|
|
23,018
|
|
|
|
35,465
|
|
25 to 36 months
|
|
|
35,498
|
|
|
|
14,760
|
|
|
|
11,116
|
|
37 to 48 months
|
|
|
8,557
|
|
|
|
14,309
|
|
|
|
10,803
|
|
49 months and thereafter
|
|
|
15,948
|
|
|
|
14,265
|
|
|
|
13,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
207,448
|
|
|
$
|
146,717
|
|
|
$
|
141,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows maturities of our time
deposits having principal amounts of $100,000 or more at
December 31, 2004 and June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term to Maturity
|
|
|
|
|
|
|
|
Over Three
|
|
Over Six
|
|
|
|
|
Within
|
|
Months
|
|
Months
|
|
|
|
|
Three
|
|
through Six
|
|
through One
|
|
Over One
|
|
|
|
|
Months
|
|
Months
|
|
Year
|
|
Year
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits with balances of $100,000 or more
|
|
$
|
11,537
|
|
|
$
|
8,538
|
|
|
$
|
17,406
|
|
|
$
|
33,962
|
|
|
$
|
71,443
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits with balances of $100,000 or more
|
|
$
|
13,355
|
|
|
$
|
11,785
|
|
|
$
|
10,599
|
|
|
$
|
22,897
|
|
|
$
|
58,635
|
|
Borrowings
In addition to deposits, we have historically
funded our asset growth through advances from the FHLB. Our bank
can borrow up to 35.0% of its total assets from the FHLB, and
borrowings are collateralized by mortgage loans and
mortgage-backed securities pledged to the FHLB. Based on loans
and securities pledged at December 31, 2004, we had a total
borrowing capacity of approximately $158.7 million, of
which $148.9 million was outstanding and $9.8 million
was available. At December 31, 2004, we also had a
$4.5 million unsecured fed funds purchase line with a major
bank under which no borrowings were outstanding.
On October 24, 2003, we entered into a
$5.0 million loan facility with a commercial bank
consisting of a one-year revolving line of credit plus a fully
amortizing term loan of up to nine years. We entered into this
loan facility to provide additional regulatory capital to our
bank to support its growth. Advances from the FHLB are not
capital for regulatory purposes. Interest is payable quarterly
under this credit line at prime plus 1% per annum.
Principal is payable in 36 equal quarterly installments starting
on January 24, 2005. We may prepay all or a portion of the
principal at anytime without a prepayment penalty. At
December 31, 2004, the note payable balance was
$5.0 million and the interest rate was 6.25% per annum. We
intend to use a portion of the net proceeds from the offering to
prepay in full the entire amount outstanding under the note
payable. See Use of Proceeds.
The loan facility is secured by our banks
common stock held by BofI Holding, Inc. Under the terms of the
loan facility, we are bound by a number of significant covenants
that restrict our ability, out of the ordinary course of
business, to dispose of assets, to incur additional debt or
guarantees, to invest in or acquire any interest in another
enterprise and to suffer a change in ownership of 51% or more of
our common stock. The loan facility also requires us to maintain
a debt coverage ratio of 1.50 as calculated by the lender. We
were in compliance with all such covenants and restrictions at
December 31, 2004, and do not anticipate that such
covenants and restrictions will limit our operations.
65
On December 16, 2004, we completed a
transaction in which we formed a trust and issued
$5.0 million of trust preferred securities. The net
proceeds from the offering were used to purchase approximately
$5.2 million of junior subordinated debentures of our
company with a stated maturity date of February 23, 2035.
The debentures are the sole assets of the trust. The trust
preferred securities are mandatorily redeemable upon maturity,
or upon earlier redemption as provided in the indenture. We have
the right to redeem the debentures in whole (but not in part) on
or after specific dates, at a redemption price specified in the
indenture plus any accrued but unpaid interest through the
redemption date. Interest accrues at the rate of three-month
LIBOR plus 2.4%, which was 4.9% at December 31, 2004, with
interest to be paid quarterly starting in February 2005.
The table below sets forth the amount of our
borrowings, the maximum amount of borrowings in each category
during any month-end during each reported period, the
approximate average amounts outstanding during each reported
period and the approximate weighted average interest rate
thereon at or for the six months ended December 31,
2004 and 2003 and at or for the fiscal years ended June 30,
2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the
|
|
|
|
|
Six Months Ended
|
|
At or For the Fiscal Years Ended
|
|
|
December 31,
|
|
June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Advances from the FHLB(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
107,551
|
|
|
$
|
59,072
|
|
|
$
|
69,932
|
|
|
$
|
35,343
|
|
|
$
|
22,764
|
|
|
|
Maximum amount outstanding at any month-end
during the period
|
|
|
148,504
|
|
|
|
66,389
|
|
|
|
101,446
|
|
|
|
55,900
|
|
|
|
29,900
|
|
|
Balance outstanding at end of period
|
|
|
148,504
|
|
|
|
66,389
|
|
|
|
101,446
|
|
|
|
55,900
|
|
|
|
29,900
|
|
|
Average interest rate at end of period
|
|
|
3.35
|
%
|
|
|
3.72
|
%
|
|
|
3.19
|
%
|
|
|
4.40
|
%
|
|
|
5.05
|
%
|
|
Average interest rate during period
|
|
|
3.45
|
%
|
|
|
4.06
|
%
|
|
|
3.79
|
%
|
|
|
4.86
|
%
|
|
|
5.02
|
%
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
3,042
|
|
|
$
|
447
|
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding at any month-end
during the period
|
|
|
5,000
|
|
|
|
3,060
|
|
|
|
3,060
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at end of period
|
|
|
5,000
|
|
|
|
3,060
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at end of period
|
|
|
6.25
|
%
|
|
|
5.00
|
%
|
|
|
5.25
|
%
|
|
|
|
|
|
|
|
|
|
Average interest rate during period
|
|
|
6.11
|
%
|
|
|
5.00
|
%
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
Notes payable related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
487
|
|
|
|
Maximum amount outstanding at any month-end
during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570
|
|
|
Balance outstanding at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.45
|
%
|
Junior subordinated debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
448
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding at any month-end
during the period
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at end of period
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at end of period
|
|
|
4.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate during period
|
|
|
4.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Advances from the FHLB have been reduced by debt
issue costs of $396, $511 and $454 for the six months ended
December 31, 2004 and 2003 and the fiscal year ended
June 30, 2004, respectively.
|
66
Technology
We have implemented customized software and
hardware systems to provide products and services to our
customers. Most of our key customer interfaces were designed by
us specifically to address the needs of an Internet-only bank
and its customers. Our website and CRM technology drive our
customer self-service model, reducing the need for human
interaction while increasing our overall operating efficiencies.
Our CRM software enables us to collect customer data over our
websites, which is automatically uploaded into our customer
databases. The databases drive our workflow processes by
automatically linking to third-party processors and storing all
customer contract and correspondence data, including emails,
hard copy images and telephone notes. With customer information
readily accessible through our CRM software, our service
personnel can respond to customers rapidly. We intend to
continue to improve our systems and implement new systems, with
the goal of providing for increased transaction capacity without
materially increasing personnel costs.
The following summarizes our current technology
resources:
Core Banking
Systems.
We use Jack Henry &
Associates, Inc. for substantially all our core banking systems.
Jack Henry is responsible for all our basic core processing
applications, including general ledger, loans, deposits, ATM
networks, electronic fund transfers, item processing and
imaging. These outsourced services for our core banking systems
are located in California, Wisconsin and North Carolina, with a
backup location in New York. Our bill pay system is outsourced
to Metavante Corporation. We use a variety of vendors to provide
automated information for our customers, including credit,
identity authentication, tax status and property appraisal.
Internet and CRM
Systems.
We use our own customized
software for our website interface with loan and deposit
customers, including collection and initial processing of new
customer information. We have also created customized software
to manage workflow and fraud control and provide automated
interfaces to our outsourced service providers. We directly host
our primary web servers, which are located in San Diego,
California, and fully control and manage the content of our
websites with a staff of technology personnel. Web servers used
by our customers to access real time account data are located in
California and Kansas, with a backup location in Texas.
Systems
Architecture.
Our Internet and CRM
platforms have been developed using Microsoft software and
Intel-based hardware. Our outsourced core processing system uses
IBM hardware and software. We use a variety of specialized
companies to provide hardware and software for firewalls,
network routers, intrusion detection, load balancing, data
storage and data backup. To aid in disaster recovery, customer
access to our websites is supported by a fully redundant network
and our servers are mirrored so that most hardware
failures or software bugs should cause no more than a few
minutes of service outage. Mirroring means that our
server is backed up continuously so that all data is stored in
two physical locations.
Security
Because we operate almost exclusively through
electronic means, we believe that we must be vigilant in
detecting and preventing fraudulent transactions. We have
implemented stringent computer security and internal control
procedures to reduce our susceptibility to identity
theft, hackers, theft and other types of
fraud. We have implemented an automated approach to detecting
identity theft that we believe is highly effective, and we have
integrated our fraud detection processes into our CRM
technology. For example, when opening new deposit accounts, our
CRM programs automatically collect a customers personal
and computer identification from our websites, send the data to
internal and third-party programs which analyze the data for
potential fraud, and quickly provide operating personnel with a
summary report for final assessment and decision making during
the account-opening process.
67
We continually evaluate the systems, services and
software used in our operations to ensure that they meet high
standards of security. The following are among the security
measures that are currently in place:
|
|
|
|
|
Encrypted
Transactions.
All banking transactions
and other appropriate Internet communications are encrypted so
that sensitive information is not transmitted over the Internet
in a form that can be read or easily deciphered.
|
|
|
|
Secure Log-on.
To
protect against the possibility of unauthorized downloading of a
customers password protected files, user identification
and passwords are not stored on the Internet or our web server.
|
|
|
|
Authenticated Session
Integrity.
An authenticated user is
any user who signs onto our website with a valid user ID and
password. To protect against fraudulent bank customers, our
server is programmed to alert our core processing vendor of any
attempted illegitimate entry so that its staff can quickly
investigate and respond to such attempts.
|
|
|
|
Physical Security.
Our servers and network computers reside in secure facilities.
Currently, computer operations supporting our outsourced core
banking systems are based in Lenexa, Kansas with backup
facilities in Houston, Texas. Only employees with proper
photographic identification may enter the primary building. The
computer operations are located in a secure area that can be
accessed only by using a key card and further password
identification. In addition, our marketing and account opening
servers reside in a secure third-party location in
San Diego with a mirror site at our corporate offices.
These servers are physically separate from our outsourced core
back-office processing system and maintain the same level of
security services as our outsourced core processing servers in
Lenexa, Kansas.
|
|
|
|
|
Service Continuity.
Jack Henry & Associates, Inc. and our bank provide a fully
redundant network. Our server is also mirrored. This
network and server redundancy is designed to provide reliable
access to our bank. However, if existing customers are not able
to access their accounts over the Internet, customers retain
access to their funds through paper checks, ATM cards, customer
service by telephone and an automated telephone response system.
|
|
|
|
|
Monitoring.
All
customer transactions on our server produce one or more entries
into transaction logs, which we monitor for unusual or
fraudulent activity. We are notified and log any attempt by an
authenticated user to modify a command or request from our
websites. Additionally, all financial transactions are logged,
and these logs are constantly reviewed for abnormal or unusual
activity.
|
Competition
The market for banking and financial services is
intensely competitive, and we expect competition to continue to
intensify in the future. We believe that competition in our
market is based predominantly on price, customer service and
brand recognition. Our competitors include:
|
|
|
|
|
large, publicly-traded, Internet-based banks, as
well as smaller Internet-based banks;
|
|
|
|
brick and mortar banks, including
those that have implemented websites to facilitate online
banking; and
|
|
|
|
traditional banking institutions such as thrifts,
finance companies, credit unions and mortgage banks.
|
In real estate lending, we compete against
traditional real estate lenders, including large and small
savings banks, commercial banks, mortgage bankers and mortgage
brokers. Many of our current and potential competitors have
greater brand recognition, longer operating histories, larger
customer bases and significantly greater financial, marketing
and other resources and are capable of providing strong price
and customer service competition. In order to compete
profitably, we may need to reduce the rates we offer on loans
and investments and increase the rates we offer on deposits,
which actions may adversely affect our overall financial
condition and earnings. We may not be able to compete
successfully against current and future competitors.
68
Intellectual Property and Proprietary
Rights
We register our various Internet URL addresses
with service companies, and work actively with bank regulators
to identify potential naming conflicts with competing financial
institutions. We also work with various regulators to shut down
websites with names which may be misleading to our customers.
Policing unauthorized use of proprietary information is
difficult and litigation may be necessary to enforce our
intellectual property rights.
We own the Internet domain names
bankofinternet.com, bofi.com,
apartmentbank.com, insurancesales.com,
investmentsales.com, bancodeinternet.com
and many other similar names. Domain names in the United States
and in foreign countries are regulated, and the laws and
regulations governing the Internet are continually evolving.
Additionally, the relationship between regulations governing
domain names and laws protecting intellectual property rights is
not entirely clear. As a result, we may in the future be unable
to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademark and
other intellectual property rights.
Employees
At December 31, 2004, we had two part-time
and 24 full time employees (or 25 full time equivalent
employees), of which seven were in administration, finance and
accounting, seven were in deposit operations, seven were in
lending operations and three were in information technology.
None of our employees is represented by a labor union or subject
to a collective bargaining agreement. We have not experienced
any work stoppage and consider our relations with our employees
to be good.
Facilities
Our principal executive offices, which also serve
as our banks main office and branch, are located at
12220 El Camino Real, Suite 220, San Diego,
California 92130, and our telephone number is
(858) 350-6200. This facility occupies a total of
approximately 8,000 square feet under a lease that expires
in June 2005. We believe our facilities are adequate for our
current needs.
Legal Proceedings
We may from time to time become a party to legal
proceedings arising in the ordinary course of our business. We
are not currently a party to any material legal proceedings.
69
MANAGEMENT
Directors and Executive Officers
The following table lists our directors and
executive officers at December 31, 2004:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Gary Lewis Evans
|
|
|
55
|
|
|
Director; President and Chief Executive Officer
of BofI Holding and Bank of Internet USA
|
Patrick A. Dunn
|
|
|
40
|
|
|
Vice President and Chief Credit Officer of Bank
of Internet USA
|
Andrew J. Micheletti
|
|
|
47
|
|
|
Chief Financial Officer of BofI Holding; Vice
President and Chief Financial Officer of Bank of Internet USA
|
Michael J. Berengolts
|
|
|
34
|
|
|
Vice President and Chief Technology Officer of
Bank of Internet USA
|
Jerry F. Englert
|
|
|
64
|
|
|
Chairman
|
Theodore C. Allrich
|
|
|
58
|
|
|
Vice Chairman
|
Robert Eprile(1)(3)
|
|
|
51
|
|
|
Director
|
Paul Grinberg(2)
|
|
|
43
|
|
|
Director
|
Thomas J. Pancheri(1)(2)
|
|
|
45
|
|
|
Director
|
Connie M. Paulus(3)
|
|
|
44
|
|
|
Director
|
Gordon L. Witter(1)(2)(3)
|
|
|
69
|
|
|
Director
|
|
|
(1)
|
Member of the compensation committee.
|
|
(2)
|
Member of the audit committee.
|
|
(3)
|
Member of the nominating committee.
|
Gary Lewis Evans.
Mr. Evans has served as President and Chief Executive
Officer of Bank of Internet USA since its formation and as a
member of the board of directors of BofI Holding since April
2004. Mr. Evans has also served as President and Chief
Executive Officer of BofI Holding since October 2004.
Mr. Evans has over 30 years of experience in the
operation and management of commercial and savings banks. He
served as President of La Jolla Bank from June 1988 to June
1996. In June 1996, he formed an Internet marketing and
development consulting company. Mr. Evans also co-authored
the 1997 McGraw-Hill publication,
The Financial Institutions
Internet Sourcebook
, and was a key participant in the
educational video,
The ABCs of Internet Banking
,
American Bankers Association. Mr. Evans has published the
Investment Management and Tactics chapter for the
1989 book,
Savings and Loan Investment Management
published by Sheshunoff and Company. Mr. Evans
currently is a member of the CFA Institute and The Financial
Analysts Society of San Diego. Mr. Evans holds a
Bachelor of Science degree in Business Administration, as well
as a Masters of Science degree in Finance, from California State
University at Northridge.
Patrick A. Dunn.
Mr. Dunn has served as Vice President and Chief Credit
Officer of Bank of Internet USA since its formation and is
responsible for the banks credit administration, including
portfolio management, compliance and origination management.
Mr. Dunn joined Bank of Internet USA to organize and direct
the banks lending operations, as part of the banks
original management team. Prior to Bank of Internet USA,
Mr. Dunn was an officer of La Jolla Bank, serving as
Vice President and Chief Loan Officer from March 1994 to March
2000, and as Regional Loan Officer and Branch Manager from
September 1989 to March 1994. Mr. Dunn holds a Bachelor of
Science degree in Finance from Colorado State University.
Andrew J.
Micheletti.
Mr. Micheletti has
served as Vice President and Chief Financial Officer of BofI
Holding and Bank of Internet USA since April 2001. Prior to
joining our company, from June 1997 to March 2001,
Mr. Micheletti was Vice President Finance for
TeleSpectrum Worldwide Inc., an international provider of
outsourced telephone and Internet services. In July 1999,
TeleSpectrum acquired International
70
Data Response Corporation, where
Mr. Micheletti had served as Vice President and Corporate
Controller since 1997. From September 1990 to May 1997,
Mr. Micheletti was Vice President and Chief Financial
Officer of Linsco/ Private Ledger Corporation, an independent
contractor securities broker-dealer with offices throughout the
United States. Starting as an internal auditor in 1985,
Mr. Micheletti held various positions at Imperial Savings
Association, including Vice President Financial
Reporting and, upon its receivership, Controller.
Mr. Micheletti was also an auditor with Deloitte &
Touche LLP from 1980 to 1985. Mr. Micheletti is licensed as
a CPA in the State of California and has held various NASD
securities licenses. He holds a Bachelor of Science degree from
San Diego State University.
Michael J.
Berengolts.
Mr. Berengolts has
served as Vice President and Chief Technology Officer of Bank of
Internet USA since April 1999. Mr. Berengolts joined Bank
of Internet USA as part of the original management team to
organize and direct its technology development.
Mr. Berengolts is responsible for all hardware and software
systems for the bank, including the development of our CRM
system. Prior to joining the bank, from June 1997 to June 1999,
Mr. Berengolts was the information systems manager for
Benefit Management Systems, a software provider to the managed
health care industry. In addition to Mr. Berengolts
information systems experience, he founded a manufacturing
company producing hockey equipment, operated it from November
1994 to June 1997 and then sold it to an industry competitor.
Mr. Berengolts holds a Bachelor of Science degree in
Business Administration from the University of San Diego.
Jerry F. Englert.
Mr. Englert has served as Chairman of the board of
directors of BofI Holding since July 1999 and as President and
Chief Executive Officer of BofI Holding from July 1999 to
October 2004. Since May 2003, Mr. Englert has been Director
of Strategic Planning and Financial Relations for Hollis-Eden
Pharmaceuticals, Inc. In addition, Mr. Englert is the owner
of Harvard Fair, a specialty supply company, and has been its
Chairman and CEO since 1982. He was a founder of Bank Del Mar
and its Vice Chairman from 1989 to 1994. Mr. Englert served
as the President, Chief Executive Officer and a Director of
Winfield Industries from 1972 until it was sold to Maxxim
Medical in 1991. From 1968 to 1972, he was Vice President of
Marketing for IVAC Corporation, and, from 1963 to 1968, he was a
Regional Sales Manager for Baxter Health Care, Inc.
Mr. Englert holds a Bachelor of Arts degree from Morris
Harvey College. In addition, Mr. Englert received an
honorary Ph.D. from the University of Charleston.
Theodore C. Allrich.
Mr. Allrich has served as Vice Chairman of the board of
directors of BofI Holding since 1999. Mr. Allrich is the
founder of the financial educational website, The Online
Investor (www.theonlineinvestor.com), based on his book of the
same name, and served as an investment advisor with his own
firm, Allrich Investment Management, from June 1991 to June
2003. Prior to starting his own firm, Mr. Allrich spent
20 years with various Wall Street brokerage firms, where he
was involved with investment banking, fixed income sales and
management, specializing in mortgage-backed securities,
institutional equity sales and trading. His last position with a
brokerage firm was in 1990 as the regional manager for high
grade fixed income investments with Drexel Burnham Lambert in
San Francisco. Mr. Allrich holds a Bachelor of Arts
degree from the University of California at Davis and a Master
of Business Administration degree in Finance from Stanford
University.
Robert Eprile.
Mr. Eprile has served as a member of the board of directors
of BofI Holding since July 1999. Mr. Eprile is a founder of
US Encode Corporation and has served as President since June
2002. US Encode develops and markets a proprietary
authentication technology to secure credit card and other
financial transactions over the Internet. Mr. Eprile also
serves as an outside director on the board of Compliance Coach,
an
e
-learning company that provides online compliance
training to financial services companies. From October 1996 to
May 1999, Mr. Eprile served as Chairman of the Ashton
Technology Group, a developer of electronic commerce and
electronic transactional systems for the financial services
industry. Mr. Eprile was a founder of Universal Trading
Technologies Corporation (UTTC), which develops and markets
electronic trading systems, and served as its President and CEO
from March 1995 to May 1999. Mr. Eprile holds a Bachelor of
Arts degree from Oberlin College in Ohio and a Master of
Business Administration degree from Stanford University.
Paul Grinberg.
Mr. Grinberg has served as a member of the board of
directors of BofI Holding since April 2004. Since October 2004,
Mr. Grinberg has served as the Senior Vice
President-Finance of Encore
71
Capital Group, a purchaser of charged-off,
unsecured consumer loans. Mr. Grinberg has also served as
the President and CEO of Brio Consulting Group, Inc., a company
he founded that provides financial consulting services,
primarily to small and mid-size private equity and
venture-backed companies, since May 2003. From May 2000 to April
2003, Mr. Grinberg was the Chief Financial Officer of
Stellcom, Inc., a systems integration firm focused on providing
mobile and wireless technology solutions to Fortune
1000 companies. From July 1999 to April 2000,
Mr. Grinberg was the Executive Vice President and Chief
Financial Officer for TeleSpectrum Worldwide, Inc., a leading
provider of direct marketing and multichannel CRM solutions to
Fortune 1000 companies in the United States and Canada. In
July 1999, TeleSpectrum acquired International Data Response
Corporation, where Mr. Grinberg served as Executive Vice
President and Chief Financial Officer since February 1997. From
September 1983 to January 1997, Mr. Grinberg held several
positions at Deloitte & Touche LLP, the most recent of
which was as a partner in the firms Merger &
Acquisition Services Group. Mr. Grinberg is licensed as a
CPA in the state of New York. Mr. Grinberg holds a Bachelor
of Science degree in accounting from Yeshiva University and a
Masters of Business Administration degree in Finance from
Columbia Universitys Graduate School of Business.
Thomas J. Pancheri.
Mr. Pancheri has served as a member of the board of
directors of BofI Holding since July 1999. Since July 1981,
Mr. Pancheri has served as the President of San Diego
Pension Consultants, Inc., a company specializing in the design
and administration of retirement plans. San Diego Pension
Consultants is the main division of Pen/Flex, Inc., which
services qualified plans, primarily in the San Diego area.
Mr. Pancheri is active in the National Institute of Pension
Administrators and was the Charter President of the
San Diego chapter. In addition, he has been a member of the
Western Pension & Benefits Conference since 1980.
Connie M. Paulus.
Ms. Paulus has served as a member of the board of directors
of BofI Holding since July 1999. Ms. Paulus is a scientist
specializing in transgenic technology and has more than
20 years of laboratory experience, including appointments
at Washington State University, UC Irvine Medical Center, The
Salk Institute for Biological Sciences and the University of
California at San Diego. From January 1992 to December
1999, Ms. Paulus served as a research associate at the
University of California at San Diego, managing the
transgenic animal facility. She also participates in a family
owned business specializing in residential and commercial land
development and real estate lending. Ms. Paulus holds a
Bachelor of Science degree from Western Washington University
and a Masters of Science degree from Washington State University.
Gordon L. Witter.
Mr. Witter has served as a member of the board of directors
of BofI Holding since July 1999. Following his retirement as a
Chief Pilot for American Airlines, Captain Witter formed Witter
Associates, a flight operations consulting firm, where he has
been serving as President since April 1995. He is a co-founder
of Air Carrier Associates, Inc., a firm specializing in risk
management issues for airline and general aviation clients and
has been its Managing Partner from July 1997 to the present.
Mr. Witter serves as Treasurer of the Sharp Healthcare
Foundation and as Chairman of the San Diego Aerospace
Museum and is on the Greater San Diego Chamber of Commerce
Military Affairs Council.
Board Composition
Our board of directors is authorized to have up
to, and is currently comprised of, eight members. In accordance
with the terms of our amended and restated certificate of
incorporation and bylaws, following the offering, our board of
directors will be divided into three classes, class I,
class II and class III, with each class serving
staggered three-year terms. The members of the classes are
divided as follows:
|
|
|
|
|
the class I directors will be
Messrs. Eprile and Allrich, and their terms will expire at
the 2005 annual meeting of stockholders;
|
|
|
|
the class II directors will be
Messrs. Englert, Grinberg and Evans, and their terms will
expire at the 2006 annual meeting of stockholders; and
|
|
|
|
the class III directors will be
Messrs. Witter and Pancheri and Ms. Paulus, and their
terms will expire at the 2007 annual meeting of stockholders.
|
72
The authorized number of directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
directors will be distributed between the three classes so that,
as nearly as possible, each class will consist of one third of
the directors. This classification of our board of directors may
have the effect of delaying or preventing changes in our control
or management. Our directors will hold office until their
successors have been elected and qualified or until their
earlier death, resignation, disqualification or removal for
cause by the affirmative vote of the holders of a majority of
our outstanding stock entitled to vote on election of directors.
Board Committees
Our board of directors has an audit committee, a
compensation committee and a nominating committee.
Audit Committee.
The
audit committee consists of Messrs. Witter, Grinberg and
Pancheri. Our board of directors has determined that
Mr. Grinberg, who serves as chairperson of our audit
committee, is an audit committee financial expert as defined
under the applicable rules of the SEC and has the requisite
financial sophistication as defined under the applicable Nasdaq
stock market rules. We believe the composition of our audit
committee meets the criteria for independence under, and the
functioning of our audit committee complies with applicable
requirements of, the Sarbanes-Oxley Act of 2002, the current
rules of the Nasdaq Stock Market and SEC rules and regulations.
We intend to comply with future audit committee requirements as
they become applicable to us.
Our audit committee oversees our accounting and
financial reporting processes, internal systems of control,
independent auditor relationships and the audits of our
financial statements. This committees responsibilities
include, among other things:
|
|
|
|
|
selecting and hiring our independent auditors;
|
|
|
|
evaluating the qualifications, independence and
performance of our independent auditors;
|
|
|
|
approving the audit and nonaudit services to be
performed by our independent auditors;
|
|
|
|
reviewing the design, implementation, adequacy
and effectiveness of our internal controls and our critical
accounting policies;
|
|
|
|
overseeing and monitoring the integrity of our
financial statements and our compliance with legal and
regulatory requirements as they relate to financial statements
or accounting matters; and
|
|
|
|
reviewing with management and our auditors any
earnings announcements and other public announcements regarding
our results of operations.
|
Our independent auditors and internal financial
personnel regularly meet privately with our audit committee and
have unrestricted access to this committee.
Compensation
Committee.
The compensation committee
consists of Messrs. Pancheri, Witter and Eprile. We believe
the composition of our compensation committee meets the criteria
for independence under, and the functioning of our compensation
committee complies with applicable requirements of, the
Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq
Stock Market and SEC rules and regulations. We intend to comply
with future compensation committee requirements as they become
applicable to us.
Our compensation committee assists our board of
directors in determining the development plans and compensation
of our senior management, directors and employees and recommends
these plans to our board of directors. This committees
responsibilities include, among other things:
|
|
|
|
|
reviewing the employee-wide compensation
standards;
|
|
|
|
reviewing and recommending compensation and
benefit plans for our executive officers and directors;
|
|
|
|
setting performance goals for our officers and
reviewing their performance against these goals;
|
73
|
|
|
|
|
management succession planning; and
|
|
|
|
administering our equity incentive plans.
|
Nominating
Committee.
The nominating committee
consists of Messrs. Eprile and Witter and Ms. Paulus.
We believe the composition of our nominating committee meets the
criteria for independence under, and the functioning of our
nominating committee complies with applicable requirements of,
the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq
Stock Market and SEC rules and regulations. We intend to comply
with future nominating committee requirements as they become
applicable to us.
Our nominating committees purpose is to
assist our board of directors by identifying individuals
qualified to become directors. This committees
responsibilities include, among other things:
|
|
|
|
|
evaluating the composition, size and governance
of our board of directors and make recommendations regarding
future planning and the appointment of directors;
|
|
|
|
establishing a policy for considering stockholder
nominees for election to our board of directors; and
|
|
|
|
evaluating and recommending candidates for
election to our board of directors.
|
Bank of Internet USA
Committees.
In addition, Bank of
Internet USA has an asset/liability committee, loan committee,
investment committee, internal asset review committee and
compliance committee.
Our asset/liability committee, or ALCO, manages
the sensitivity of net income to changing interest rates,
consistent with the policies reviewed and approved annually by
our board of directors. ALCO meets regularly to consider
investment and financing alternatives with particular emphasis
on duration and interest rate risk. Once a quarter, ALCO members
report to our board of directors the status of our banks
interest rate risk profile. The members of ALCO are board
members Messrs. Allrich and Eprile, our President and Chief
Executive Officer Gary Lewis Evans and our Chief Financial
Officer Andrew J. Micheletti.
Our loan committee oversees our underwriting
policies and loan portfolio, and is primarily responsible for
preparing and updating our loan underwriting policies and
procedures. Members of our loan committee also review and
approve specific credit requests in excess of specified dollar
amounts. The members of our loan committee are
Messrs. Evans, Eprile and Pancheri, who serves as the
chairman.
Our investment committee manages our investment
portfolio consistent with the investment policy established by
our board of directors. Our investment policy is designed
primarily to provide and maintain liquidity and to generate a
favorable return on investment without incurring undue interest
rate risk, credit risk and investment portfolio asset
concentrations. The members of our investment committee are
Messrs. Evans, Allrich and Eprile,
Our internal asset review committee monitors the
credit quality of our loan portfolio on an ongoing basis and
also monitors nonperforming assets and reviews our calculation
of the allowance for loan and lease losses quarterly. The
members of our internal asset review committee are
Ms. Paulus, Mr. Witter and Chief Financial Officer
Andrew J. Micheletti.
Our compliance committee oversees all aspects of
our banks compliance with applicable regulations,
including the Community Reinvestment Act. The members of our
compliance committee are Robert Eprile, who serves as chairman,
and co-compliance officers Patrick Dunn and Barabara Fronek.
Compensation Committee Interlocks and Insider
Participation
No member of our compensation committee serves as
a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving as a
member of our board of directors or compensation committee.
There are no family relationships among any of our directors or
executive officers.
74
Director Compensation
Our directors who are also employees of our
company receive no additional compensation for their services as
directors. Our nonemployee directors receive $2,000 per
month for serving on our board and are reimbursed for travel
expenses and other out-of-pocket costs of attending board and
committee meetings. Our nonemployee and employee directors are
eligible to receive options and shares of common stock directly
under our 2004 stock incentive plan.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information
concerning the compensation we paid during the fiscal year ended
June 30, 2004 to our Chief Executive Officer and each of
our other most highly compensated executive officers who earned
more than $100,000 during that fiscal year. We refer to these
individuals in this prospectus as the named executive
officers. In accordance with the rules of the SEC, the
compensation described in this table does not include
perquisites and other personal benefits received by the
executive officers named in the table below that do not exceed
the lesser of $50,000 or 10% of the total salary and bonus
reported for these executed officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Compensation
|
|
|
Annual Compensation
|
|
|
|
|
|
|
Shares
|
|
All Other
|
Name and Principal Position
|
|
Salary
|
|
Bonus
|
|
Underlying Options
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
Gary Lewis Evans
|
|
$
|
170,700
|
|
|
$
|
2,700
|
|
|
|
22,000
|
|
|
|
|
|
|
President and Chief Executive Officer of BofI
Holding and Bank of Internet USA(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerry F. Englert
|
|
$
|
87,500
|
|
|
|
|
|
|
|
5,810
|
|
|
$
|
9,750
|
(3)
|
|
Former President and Chief Executive Officer of
BofI Holding(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick A. Dunn
|
|
$
|
151,885
|
|
|
$
|
2,700
|
|
|
|
15,000
|
|
|
|
|
|
|
Vice President and Chief Credit Officer of Bank
of Internet USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew J. Micheletti
|
|
$
|
132,908
|
|
|
$
|
17,700
|
|
|
|
20,000
|
|
|
|
|
|
|
Chief Financial Officer of BofI Holding; Vice
President and Chief Financial Officer of Bank of Internet USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Berengolts
|
|
$
|
114,908
|
|
|
$
|
2,700
|
|
|
|
6,000
|
|
|
|
|
|
|
Vice President and Chief Technology Officer of
Bank of Internet USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr. Evans was appointed as President and
Chief Executive Officer of BofI Holding in October 2004.
|
|
|
(2)
|
Mr. Englert resigned as President and Chief
Executive Officer of BofI Holding in October 2004.
|
|
|
(3)
|
Represents fees earned for serving as a director
of BofI Holding.
|
75
Option Grants in Fiscal Year Ended
June 30, 2004
The following table sets forth information with
respect to stock options granted to each of our named executive
officers during the fiscal year ended June 30, 2004. The
percentage of total options set forth below is based on options
to purchase an aggregate of 93,001 shares of common stock
granted to employees during the fiscal year ended June 30,
2004. All of these options were granted under our amended and
restated 1999 stock option plan at an exercise price per share
equal to the fair market value of our common stock at the time
of grant, as determined by our board of directors. Potential
realizable values are net of exercise price but before taxes
associated with exercise. Amounts represent hypothetical gains
that could be achieved for the options if exercised at the end
of the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with the rules of the
SEC and do not represent our estimate or projection of the
future common stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our
common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants
|
|
Potential Realizable
|
|
|
|
|
Value at Assumed Annual
|
|
|
|
|
% of
|
|
|
|
Rates of Stock
|
|
|
Number of
|
|
Total Options
|
|
|
|
Appreciation for
|
|
|
Shares
|
|
Granted to
|
|
Exercise
|
|
|
|
Option Term
|
|
|
Underlying
|
|
Employees in
|
|
Price Per
|
|
Expiration
|
|
|
Name
|
|
Options Granted
|
|
Fiscal Year
|
|
Share
|
|
Date
|
|
5%
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Lewis Evans
|
|
|
22,000
|
|
|
|
23.7
|
%
|
|
$
|
10.00
|
|
|
|
6/30/14
|
|
|
$
|
138,357
|
|
|
$
|
350,623
|
|
Jerry F. Englert
|
|
|
5,810
|
|
|
|
6.2
|
%
|
|
$
|
10.00
|
|
|
|
6/30/14
|
|
|
$
|
36,539
|
|
|
$
|
92,596
|
|
Patrick A. Dunn
|
|
|
15,000
|
|
|
|
16.1
|
%
|
|
$
|
10.00
|
|
|
|
6/30/14
|
|
|
$
|
94,334
|
|
|
$
|
239,061
|
|
Andrew J. Micheletti
|
|
|
20,000
|
|
|
|
21.5
|
%
|
|
$
|
10.00
|
|
|
|
6/30/14
|
|
|
$
|
125,779
|
|
|
$
|
318,748
|
|
Michael J. Berengolts
|
|
|
6,000
|
|
|
|
6.5
|
%
|
|
$
|
10.00
|
|
|
|
6/30/14
|
|
|
$
|
37,734
|
|
|
$
|
95,625
|
|
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth information
concerning exercisable and unexercisable stock options held by
each of the named executive officers at June 30, 2004. The
value realized upon exercise is based on the estimated fair
market value of our common stock at the time of exercise less
the per share exercise price, multiplied by the number of shares
acquired upon exercise. The value of unexercised in-the-money
options is based on the assumed initial public offering price of
$11.00 per share less the per share exercise price,
multiplied by the number of shares underlying the options. All
options were granted under our amended and restated 1999 stock
option plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Value of Unexercised
|
|
|
|
|
|
|
Underlying Unexercised
|
|
In-the-Money
|
|
|
|
|
|
|
Options at June 30, 2004
|
|
Options at June 30, 2004
|
|
|
Shares Acquired
|
|
|
|
|
|
|
Name
|
|
on Exercise
|
|
Value Realized
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Lewis Evans
|
|
|
|
|
|
|
|
|
|
|
85,116
|
|
|
|
48,893
|
|
|
$
|
526,287
|
|
|
$
|
148,105
|
|
Jerry F. Englert
|
|
|
|
|
|
|
|
|
|
|
93,361
|
|
|
|
7,645
|
|
|
$
|
582,482
|
|
|
$
|
7,645
|
|
Patrick A. Dunn
|
|
|
|
|
|
|
|
|
|
|
48,742
|
|
|
|
31,258
|
|
|
$
|
269,829
|
|
|
$
|
88,196
|
|
Andrew J. Micheletti
|
|
|
|
|
|
|
|
|
|
|
22,667
|
|
|
|
36,083
|
|
|
$
|
119,258
|
|
|
$
|
92,004
|
|
Michael J. Berengolts
|
|
|
|
|
|
|
|
|
|
|
28,342
|
|
|
|
15,658
|
|
|
$
|
174,754
|
|
|
$
|
52,261
|
|
Employment Agreements
In July 2003, Bank of Internet USA entered into
employment agreements with each of our named executive officers,
Messrs. Evans, Dunn, Micheletti and Berengolts. Under these
agreements, if we terminate a protected officers
employment for any reason other than for cause, then we must
(a) pay that officer normal compensation in effect through
the date of termination; (b) pay that officer a severance
payment equal to twelve times his then-current base monthly
salary, payable at the option of our board of directors either
in one lump sum or in twelve equal installments; and
(c) continue group insurance benefits for that officer for
one
76
year from termination or until that officer
commences work with a new employer providing group medical
insurance benefits to that officer. In addition, if a protected
officers employment is terminated for any reason other
than for cause, or that officers employment is terminated
due to death or disability, then all stock options currently
held by such officer will fully vest as of the termination date.
Each agreement automatically renews in one year terms unless
terminated by either Bank of Internet USA or the officer. In
addition, each employment agreement specifies bonuses for each
executive officer, which bonuses are contingent upon our
financial performance and the executive officers continued
employment with our company. We accrued bonus expense of
$356,000 and $33,000 for the six months ended December 31,
2004 and for the fiscal year ended June 30, 2004,
respectively, in connection with these bonuses.
Employee Benefit Plans
Our amended and restated 1999 stock option plan
was approved by our board of directors and our stockholders in
2003. At December 31, 2004, a total of 755,969 shares
of common stock were reserved for issuance under our 1999 stock
option plan. For a period of eight years commencing with the
annual stockholders meeting in 2001, the aggregate number of
shares available for issuance under our 1999 stock option plan
on any date will be automatically increased to that number of
shares equal to the lesser of (a) 15% of the number of
issued and outstanding shares of our common stock and (b) a
lesser number of shares as determined by our board of directors.
For purposes of calculating the foregoing 15% limit, shares of
common stock issuable upon conversion of any outstanding
convertible securities are considered to be issued and
outstanding. However, in no event shall the number of shares
issuable under our 1999 stock option plan exceed
3,000,000 shares. At December 31, 2004, options to
purchase 722,017 shares of common stock remain outstanding
and 10,344 shares of common stock are available for grant
under this plan.
After the closing of the offering, all shares of
common stock subject to options granted under our 1999 stock
option plan that expire without having been exercised or are
cancelled will become available for grant under the 2004 stock
incentive plan. Awards under our 1999 stock option plan consist
of incentive stock options, which are stock options that are
intended to qualify under Section 422 of the Internal
Revenue Code, and nonqualified stock options, which are stock
options that do not qualify under Section 422 of the
Internal Revenue Code.
Our 1999 stock option plan provides for the grant
of:
|
|
|
|
|
incentive stock options to our employees,
including officers and employee directors; and
|
|
|
|
nonqualified stock options to our employees,
employee and nonemployee directors and consultants.
|
The compensation committee of our board of
directors administers our 1999 stock option plan, including
selecting the persons eligible to receive options under our 1999
stock option plan, determining the number of shares to be
subject to each option grant, determining the exercise price of
each option grant and determining the vesting and exercise
periods of each option grant. The exercise price of all
incentive stock options and nonqualified stock options granted
under our 1999 stock option plan must be at least equal to the
fair value of our common stock on the date of grant. With
respect to any participant who owns stock possessing more than
10% of the total combined voting power of all our classes of
stock or the stock of any parent or subsidiary of ours, the
exercise price of any incentive stock option or nonqualified
stock option granted must equal at least 110% of the fair value
on the grant date. The maximum term of an incentive stock option
or nonqualified stock option granted to any participant must not
exceed ten years. The maximum term of an incentive stock option
granted to any participant who owns stock possessing more than
10% of the voting power of all our classes of stock or the stock
of any parent or subsidiary of ours must not exceed five years.
The aggregate fair market value of stock for which incentive
stock options are exercisable for the first time by an optionee
in any calendar year may not exceed $100,000. If the value of
the stock exceeds $100,000, the options for the amount in excess
of $100,000 will be treated as nonqualified stock options.
During an optionees lifetime, only the
optionee can exercise his or her options. The optionee cannot
transfer his or her option other than by will or the laws of
descent and distribution. If an optionees status as an
77
employee, director or consultant terminates for
any reason other than death or disability or for cause, the
optionee may exercise his or her vested options within the
three-month period following the termination, or for such other
period of time (not less than 30 days) specified in the
option agreement. In the event an optionee dies while an
employee, director or consultant of our company, the options
vested as of the date of death may be exercised within the
twelve-month period following the date of the optionees
death, or for such other period (not less than six months)
specified in the option agreement. In the event an optionee
becomes disabled, the options vested as of the date of
disability may be exercised within the six-month period
following date of the optionees disability. In the event
an optionees employment is terminated for cause, all
options held by such optionee shall terminate without the
opportunity for exercise. In no event may an optionee exercise
an option after the expiration date of the term of an option
grant set forth in the option agreement.
The type and maximum number of shares available
under our 1999 stock option plan, as well as the number and type
of shares subject to, and per share exercise price of,
outstanding option grants under our 1999 stock option plan
will be appropriately adjusted in the event of a stock split,
reverse stock split, stock dividend, recapitalization,
combination or reclassification involving our company.
In the event of a change in control of our
company, all options granted under our 1999 stock option plan
will accelerate and become fully vested and exercisable. Under
our 1999 stock option plan, a change in control occurs upon:
|
|
|
|
|
any person becoming the beneficial owner of
securities representing a majority of the voting power of our
then outstanding securities; or
|
|
|
|
a sale of all or substantially all of our assets,
or a merger or consolidation involving our company in which the
holders of our securities immediately prior to such event hold
in the aggregate less than a majority of the securities of the
surviving or resulting entity immediately after such event.
|
Pursuant to requirements of the OTS, our 1999
stock option plan provides that, if our banks capital
falls below minimum regulatory requirements, as determined by
the OTS, we may require all optionees to exercise or forfeit
their options. In such event, any options that are not exercised
as so required by the OTS will terminate and be forfeited.
Our 1999 stock option plan will terminate
automatically in 2009 unless terminated earlier by our board of
directors. Our board of directors has the authority to amend or
terminate our 1999 stock option plan, subject to stockholder
approval of some amendments. However, no action may be taken
that will adversely affect any option previously granted under
our 1999 stock option plan, without the optionees consent.
We do not intend to make further grants under our
1999 stock option plan after the closing of the offering.
|
|
|
2004 Stock Incentive Plan
|
Our board of directors approved our 2004 stock
incentive plan in August 2004, and our stockholders approved our
2004 stock incentive plan in October 2004. The maximum number of
shares of common stock available for issuance under our 2004
stock incentive plan, plus the number of shares available for
issuance under outstanding stock options awarded under our 1999
stock option plan, will be equal to 14.8% of our outstanding
common stock at any time. However, the number of shares
available for issuance as restricted stock grants may not exceed
5.0% of our outstanding common stock at any time (subject to the
overall maximum of 14.8% of our outstanding shares of common
stock). Each share of restricted stock that is issued under our
2004 stock incentive plan and that vests will be deemed to be
the issuance of three shares for purposes of calculating the
overall maximum number of shares of common stock available for
issuance under our 2004 stock incentive plan but not for
purposes of calculating the above 5.0% limit applicable to the
issuance of restricted stock. No awards have yet been granted
under our 2004 stock incentive plan. We anticipate that all
future option grants will be made solely under our 2004 stock
incentive plan.
Our 2004 stock incentive plan provides for the
grant of stock options, restricted stock, restricted stock
units, stock appreciation rights and dividend equivalent rights,
collectively referred to as awards. Awards may be
granted to employees, directors and consultants.
78
The compensation committee of our board of
directors, referred to as the plan administrator,
will administer our 2004 stock incentive plan, including
selecting the grantees, determining the number of shares to be
subject to each award, determining the exercise or purchase
price of each award, determining the term of each award, and
determining the vesting and exercise periods of each award.
Awards shall be transferable by will or by the
laws of descent or distribution and to the extent provided in
the award agreement. Our 2004 stock incentive plan permits the
designation of beneficiaries by holders of awards.
In the event a participant in our 2004 stock
incentive plan terminates employment or is terminated by us
without cause, any options which have become exercisable prior
to the time of termination will remain exercisable for three
months from the date of termination (unless a shorter or longer
period of time is determined by the plan administrator). In the
event a participant in our 2004 stock incentive plan is
terminated by us for cause, any options which have become
exercisable prior to the time of termination will immediately
terminate. If termination was caused by death or disability, any
options which have become exercisable prior to the time of
termination, will remain exercisable for twelve months from the
date of termination (unless a shorter or longer period of time
is determined by the plan administrator). In no event may a
participant exercise the option after the expiration date of the
option.
The plan administrator, which currently is our
compensation committee, shall have discretion to provide for
acceleration of vesting in connection with a corporate
transaction. Under our 2004 stock incentive plan, a corporate
transaction is generally defined as:
|
|
|
|
|
acquisition of more than 40% of our stock through
a reverse merger or series of related transactions culminating
in a reverse merger including, but not limited to, a tender
offer followed by a reverse merger (but excluding any such
transaction that the plan administrator determines shall not be
a corporate transaction);
|
|
|
|
acquisition of more than 50% of our stock in a
single or series of related transactions by any person or
related group of persons (but excluding any such transaction
that the plan administrator determines shall not be a corporate
transaction);
|
|
|
|
a sale, transfer or other disposition of all or
substantially all of the assets of our company;
|
|
|
|
a merger or consolidation in which our company is
not the surviving entity; or
|
|
|
|
a complete liquidation or dissolution.
|
Unless terminated sooner, our 2004 stock
incentive plan will automatically terminate ten years after
stockholder approval of our 2004 stock incentive plan. Our board
of directors will have authority to amend or terminate our 2004
stock incentive plan. No suspension or termination of our 2004
stock incentive plan shall adversely affect any rights under
awards already granted to a participant unless agreed to by the
affected participant. To the extent necessary to comply with
applicable provisions of federal securities laws, state
corporate and securities laws, the Internal Revenue Code, the
rules of any applicable stock exchange or national market
system, and the rules of any non-U.S. jurisdiction
applicable to awards granted to residents therein, we shall
obtain stockholder approval of any such amendment to our 2004
stock incentive plan in such a manner and to such a degree as
required.
|
|
|
2004 Employee Stock Purchase
Plan
|
Our board of directors approved our 2004 employee
stock purchase plan in August 2004, and our stockholders
approved our 2004 employee stock purchase plan in October 2004.
Our 2004 employee stock purchase plan is intended to qualify as
an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code in order to
provide our employees with an opportunity to purchase common
stock through payroll deductions. An aggregate of
500,000 shares of common stock has been reserved for
issuance and will be available for purchase under our 2004
employee stock purchase plan, subject to adjustment for a stock
split, or any future stock dividend or other similar change in
our common stock or our capital structure.
79
The compensation committee of our board of
directors, referred to as the plan administrator,
will administer our 2004 employee stock purchase plan. All of
our employees who are regularly employed for more than five
months in any calendar year and work more than 20 hours per
week will be eligible to participate in our 2004 employee stock
purchase plan, subject to a five day waiting period after
hiring. Nonemployee directors, consultants and employees subject
to the rules or laws of a non-U.S. jurisdiction that
prohibit or make impractical their participation in an employee
stock purchase plan will not be eligible to participate in our
2004 employee stock purchase plan.
Our 2004 employee stock purchase plan will
designate offer periods, purchase periods and exercise dates.
Offer periods will generally be overlapping periods of
24 months. The first offer period under our 2004 employee
stock purchase plan will begin on the date determined by our
board of directors. Purchase periods will generally be six month
periods. Exercise dates are the last day of each purchase
period. In the event of a corporate transaction, the plan
administrator may elect to either (a) shorten the offer
periods then in progress and set a new exercise date for the
purchase of shares or (b) pay each participant a cash
amount in settlement of the participants purchase rights
under the applicable offering periods.
Under our 2004 employee stock purchase plan, a
corporate transaction is generally defined as:
|
|
|
|
|
acquisition of more than 40% of our stock through
a reverse merger or series of related transactions culminating
in a reverse merger including, but not limited to, a tender
offer followed by a reverse merger (but excluding any such
transaction that the plan administrator determines shall not be
a corporate transaction);
|
|
|
|
acquisition of more than 50% of our stock in a
single or series of related transactions by any person or
related group of persons (but excluding any such transaction
that the plan administrator determines shall not be a corporate
transaction);
|
|
|
|
a sale, transfer or other disposition of all or
substantially all of the assets of our company;
|
|
|
|
a merger or consolidation in which our company is
not the surviving entity; or
|
|
|
|
a complete liquidation or dissolution.
|
On the first day of each offer period, a
participating employee will be granted a purchase right. A
purchase right is a form of option to be automatically exercised
on the forthcoming exercise dates within the offer period during
which authorized deductions are to be made from the pay of
participants and credited to their accounts under our 2004
employee stock purchase plan. When the purchase right is
exercised, the participants withheld salary is used to
purchase shares of common stock. The price per share at which
shares of common stock are to be purchased under our 2004
employee stock purchase plan during any purchase period will be
expressed as a percentage not less than the lower of
(a) 85% of the fair market value of the common stock on the
date of grant of the option (which is the commencement of the
offer period or (b) 85% of the fair market value of the
common stock on the date the purchase right is exercised, with
such percentage (and any discount) to be determined by our board
of directors.
The participants purchase right is
exercised in this manner on each exercise date arising in the
offer period unless, on the first day of any purchase period,
the fair market value of the common stock is lower than the fair
market value of the common stock on the first day of the offer
period. If so, the participants participation in the
original offer period is terminated, and the participant is
automatically enrolled in the new offer period effective the
same date.
Payroll deductions may range from 1% to 15% in
whole percentage increments of a participants regular base
pay. The plan administrator will determine the maximum number of
shares of common stock that any employee may purchase under our
2004 employee stock purchase plan during a purchase period. The
Internal Revenue Code imposes additional limitations on the
amount of common stock that may be purchased during any calendar
year.
Unless terminated sooner, our 2004 employee stock
purchase plan will terminate automatically ten years after
stockholder approval of our 2004 employee stock purchase plan.
The plan administrator will have
80
authority to amend or terminate our 2004 employee
stock purchase plan. The plan administrator may terminate any
offer period on any exercise date or establish a new exercise
date with respect to any offer period then in progress if the
plan administrator determines that the termination of the offer
period is in the best interests of our company and its
stockholders. To the extent necessary to comply with applicable
provisions of federal securities laws, state corporate and
securities laws, the Internal Revenue Code, the rules of any
applicable stock exchange or national market system, and the
rules of any non-U.S. jurisdiction applicable to awards
granted to residents therein, we shall obtain stockholder
approval of any such amendment to the 2004 employee stock
purchase plan in such a manner and to such a degree as required.
|
|
|
Retirement and Death Benefits
|
During the quarter ended December 31, 2003,
we purchased life insurance policies on the lives of our key
employees. These policies, which are assets of our company, have
been paid for in their entirety and are intended to offset
obligations entered into by us in connection with the
retirement, involuntary termination or disability of these
executives.
|
|
|
Deferred Compensation Plans
|
Effective January 1, 2003, we adopted the
Bank of Internet USA Nonqualified Deferred Compensation Plan to
provide designated key executive and management employees with
an opportunity to defer additional compensation beyond the
limitations imposed on our 401(k) plan by the Internal Revenue
Code. Our deferred compensation plan allows eligible employees
to elect to defer up to 100% of their compensation, including
commissions and bonuses. Although the plan provides that we may
make discretionary contributions to a participants
account, no such discretionary contributions have been made to
date. Participant deferrals are fully vested at all times, and
discretionary contributions, if any, will be subject to a
vesting schedule specified by us. The liabilities associated
with the plan are unfunded and unsecured. All five of our
currently eligible employees currently participate in the plan.
We also have a substantially similar deferred compensation plan
for our outside directors, of whom one director currently is a
participant.
We maintain a defined contribution plan intended
to qualify as an eligible cash or deferred
arrangement under Section 401(k) of the Internal
Revenue Code. Under our 401(k) plan, each participant
(a) may contribute up to 15% of his or her pretax
compensation, up to a statutory limit, and (b) is fully
vested in his or her deferred salary contributions. Our 401(k)
plan also permits us to make discretionary and matching
contributions, subject to limitations specified by our board of
directors. Participants are entitled to direct the trustee to
invest their accounts in authorized investment alternatives
selected by us. To date, we have not made any discretionary or
matching contributions to our 401(k) plan on behalf of
participants.
Limitations on Liability and Indemnification
Matters
Our certificate of incorporation and bylaws
provide that we will indemnify all of our directors and officers
to the fullest extent permitted by Delaware law. Our certificate
of incorporation and bylaws also authorize us to indemnify our
employees and other agents, at our option, to the fullest extent
permitted by Delaware law. We have entered into agreements to
indemnify our directors and officers, in addition to
indemnification provided for in our charter documents. These
agreements, among other things, provide for the indemnification
of our directors and officers for expenses, including
attorneys fees, judgments, fines and settlement amounts
incurred by any person in any action or proceeding, including
any action by or in the right of our company, arising out of
that persons services as a director or officer of our
company or any other company or enterprise to which that person
provides services at our request to the fullest extent permitted
by applicable law. We believe that these provisions and
agreements will assist us in attracting and retaining qualified
persons to serve as directors and officers.
Delaware law permits a corporation to provide in
its certificate of incorporation that a director of the
corporation shall not be personally liable to the corporation or
its stockholders for monetary damages for breach
81
of fiduciary duty as a director, except for
liability for any breach of the directors duty of loyalty
to the corporation or its stockholders, for acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law, for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in
Section 174 of the Delaware General Corporation Law or for
any transaction from which the director derived an improper
personal benefit. Our certificate of incorporation provides for
the elimination of personal liability of a director for breach
of fiduciary duty to the extent permitted by Delaware law.
The limitation of liability and indemnification
provisions in our certificate of incorporation and bylaws may
discourage stockholders from bringing a lawsuit against our
directors for breach of their fiduciary duty. They may also
reduce the likelihood of derivative litigation against our
directors and officers, even though an action, if successful,
might benefit us and our stockholders. Furthermore, a
stockholders investment may be adversely affected to the
extent that we pay the costs of settlement and damage awards
against directors and officers as required by these
indemnification provisions. At present, there is no pending
litigation or proceeding involving any of our directors,
officers or employees regarding which indemnification is sought,
and we are not aware of any threatened litigation that may
result in claims for indemnification.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers and controlling persons of our company in accordance
with the provisions contained in our charter documents, Delaware
law or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. If a claim for indemnification against
these liabilities, other than the payment by us of expenses
incurred or paid by a director, officer or controlling person of
our company in the successful defense of any action, suit or
proceeding, is asserted by a director, officer or controlling
person, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in
the Securities Act, and we will follow the courts
determination.
We maintain insurance on behalf of our officers
and directors, insuring them against liabilities that they may
incur in such capacities or arising out of this status.
82
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Common Stock and Warrant Issuances
In September and October 2001, we issued and sold
an aggregate of 587,200 shares of our common stock at
$10.00 per share, including 27,500 shares to The
Englert Family Trust, 100,000 shares to The Chipman First
Family Limited Partnership, 6,500 shares to Robert Eprile,
25,000 shares to J. Gary Burke and 15,000 shares
to Theodore C. Allrich. Jerry F. Englert is a co-trustee of
The Englert Family Trust and a member of our board of directors.
Messrs. Allrich and Eprile are also members of our board of
directors. Each of The Chipman First Family Limited Partnership
and J. Gary Burke owns more than five percent of our
outstanding common stock.
In June and July 2002, we issued and sold an
aggregate of 179,850 shares of our common stock, together
with warrants to purchase up to an additional 59,950 shares
of our common stock. Three shares of our common stock and a
warrant to purchase one share of our common stock were sold as a
single unit to investors at $36.00 per unit. Each warrant
sold in the offering has an exercise price of $14.00 per
share, is currently exercisable and terminates on July 31,
2005, subject to the right of our board of directors, in its
sole discretion, to extend the purchase period of these warrants
for up to two additional years. In the offering, The Chipman
First Family Limited Partnership purchased 27,700 units, or
83,100 shares of our common stock and a warrant to purchase
up to 27,700 shares of our common stock.
Preferred Stock Issuance
Between November 2003 and June 2004, we issued
and sold an aggregate of 675 shares of our preferred stock
designated Series A 6% Cumulative
Nonparticipating Perpetual Preferred Stock, Convertible through
January 1, 2009 at $10,000 per share to 22
investors, including 100 shares to The Englert Family
Trust, 200 shares to The Chipman First Family Limited
Partnership, 25 shares to Connie M. Paulus, 25 shares
to the Penfield Group LLC and 10 shares to Gordon L.
Witter. Ms. Paulus is the managing member of the Penfield Group
LLC, and Ms. Paulus and Mr. Witter are members of our board
of directors. The rights, preferences and privileges of the
Series A preferred stock were established in a certificate
of designation filed by us with the Delaware Secretary of State
on October 27, 2003, and generally include (a) the
holders right to six percent per annum cumulative
dividends, payable quarterly, (b) our right to redeem some
or all of the outstanding shares of Series A preferred
stock and (c) the holders right to convert all or a
portion of the shares of Series A preferred stock into
common stock. See Description of Capital Stock
Preferred Stock for more information on our Series A
preferred stock.
Indebtedness of Management
We in the past have made, and from time to time
in the future may make, loans to our executive officers and
directors in compliance with applicable laws. At
December 31, 2004, we had outstanding to one of our
directors one residential loan with a principal balance of
approximately $946,000. The loan was, and any loan we may make
to our directors or executives officers in the future will be,
made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other
persons. In addition, this loan did not, and any loan we may
make to our directors or executives officers in the future will
not, involve more than the normal risk of collectability or
present other unfavorable features.
Loans to Us
Since inception, we borrowed a total of
$2.8 million from directors, officers and other organizers
on an unsecured basis to provide capital to our bank, including
$1.0 million from Chipman First Family Limited Partnership,
$250,000 from J. Gary Burke and $275,000 from Jerry F. Englert.
We believe these borrowings were made on terms prevailing at the
time for comparable transactions with unaffiliated third
parties. All of the loans were repaid in full during the fiscal
year ended June 30, 2002.
83
Consulting Arrangements
Jerry F. Englert, our Chairman, and Theodore C.
Allrich, our Vice Chairman, each served as a consultant to our
company from February 2003 to January 2004 in connection with
our capital raising efforts during that period. We paid each of
them $12,500 per month, or an aggregate of $150,000 to
each, for their consulting services to us.
Indemnification Agreements
We have entered into indemnification agreements
with our each of our executive officers and directors. These
indemnification agreements require us to indemnify these
individuals to the fullest extent permitted by Delaware law.
We believe that all transactions set forth above
were on terms no less favorable to us than could have been
obtained from unaffiliated third parties. We intend that all
future transactions between us and our officers, directors,
principal stockholders and their affiliates will be approved by
a majority of the directors on our board, including a majority
of the independent directors on our board of directors, and will
be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
84
PRINCIPAL STOCKHOLDERS
The table below provides information regarding
the beneficial ownership of our common stock at
December 31, 2004 by:
|
|
|
|
|
each person known by us to own beneficially more
than 5% of our common stock;
|
|
|
|
each of our directors and named executive
officers; and
|
|
|
|
all of our directors and executive officers as a
group.
|
The information regarding beneficial ownership of
our common stock has been presented according to the rules of
the SEC and is not necessarily indicative of beneficial
ownership for any other purpose. Under the rules of the SEC,
beneficial ownership includes shares over which the indicated
beneficial owner exercises voting or investment power. Shares of
common stock subject to options or warrants that are currently
exercisable or will become exercisable within 60 days of
December 31, 2004 are deemed outstanding for the purpose of
computing the percentage ownership of that person or group
holding the options or warrants but are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person or group. The percentages for
beneficial ownership after the offering assume that the
underwriters do not exercise their over-allotment option. Unless
otherwise indicated in the footnotes below, we believe that the
persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned,
subject to applicable community property laws. Unless otherwise
indicated, the following beneficial owners can be reached at our
principal offices. Percentage ownership in the table is based on
4,563,399 shares of common stock outstanding at
December 31, 2004, together with applicable options,
warrants and shares of Series A preferred stock for each
stockholder.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Shares
|
|
|
|
|
Beneficially Owned
|
|
|
Number of Shares
|
|
|
Name and Address of Beneficial Owner
|
|
Beneficially Owned
|
|
Before Offering
|
|
After Offering
|
|
|
|
|
|
|
|
The Chipman First Family Limited Partnership(1)
|
|
|
751,200
|
|
|
|
15.43
|
%
|
|
|
10.55
|
%
|
Jerry F. Englert(2)
|
|
|
620,396
|
|
|
|
12.78
|
%
|
|
|
8.73
|
%
|
Robert Eprile(3)
|
|
|
426,510
|
|
|
|
9.06
|
%
|
|
|
6.13
|
%
|
J. Gary Burke(4)
|
|
|
392,500
|
|
|
|
8.43
|
%
|
|
|
5.68
|
%
|
Gary Lewis Evans(5)
|
|
|
153,550
|
|
|
|
3.29
|
%
|
|
|
2.22
|
%
|
Patrick A. Dunn(6)
|
|
|
57,408
|
|
|
|
1.24
|
%
|
|
|
*
|
|
Andrew J. Micheletti(7)
|
|
|
30,333
|
|
|
|
*
|
|
|
|
*
|
|
Michael Berengolts(8)
|
|
|
38,145
|
|
|
|
*
|
|
|
|
*
|
|
Theodore C. Allrich(9)
|
|
|
63,583
|
|
|
|
1.38
|
%
|
|
|
*
|
|
Paul Grinberg
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Thomas J. Pancheri(10)
|
|
|
141,078
|
|
|
|
3.05
|
%
|
|
|
2.05
|
%
|
Connie M. Paulus(11)
|
|
|
183,778
|
|
|
|
3.93
|
%
|
|
|
2.66
|
%
|
Gordon L. Witter(12)
|
|
|
96,349
|
|
|
|
2.08
|
%
|
|
|
1.40
|
%
|
All directors and executive officers as a group
(11 persons)(13)
|
|
|
1,811,130
|
|
|
|
33.02
|
%
|
|
|
23.42
|
%
|
|
|
|
|
(1)
|
The address for The Chipman First Family Limited
Partnership is P.O. Box 7216, Incline Village, Nevada
89452. Includes warrants to purchase 115,200 shares of
our common stock exercisable within 60 days of
December 31, 2004. Also includes 190,400 shares of
common stock currently issuable upon conversion of our
Series A preferred stock, based on the current effective
conversion price of $10.50 per share.
|
85
|
|
|
|
|
(2)
|
Includes options to
purchase 95,196 shares of our common stock exercisable
within 60 days of December 31, 2004. Also includes
warrants to purchase 100,625 shares of our common stock
exercisable within 60 days of December 31, 2004 and
95,200 shares of common stock currently issuable upon
conversion of our Series A preferred stock, based on the
current effective conversion price of $10.50 per share,
held by The Englert Family Trust. Mr. Englert is a
co-trustee of The Englert Family Trust.
|
|
|
|
|
(3)
|
Includes options and warrants to
purchase 52,510 and 91,875 shares, respectively, of
our common stock exercisable within 60 days of
December 31, 2004.
|
|
|
|
|
(4)
|
The address for J. Gary Burke is
P.O. Box 248, Hubbard, Ohio 44425. Includes warrants
to purchase 91,875 shares of our common stock
exercisable within 60 days of December 31, 2004.
|
|
|
|
|
(5)
|
Includes options to purchase 100,050 shares
of our common stock exercisable within 60 days of
December 31, 2004.
|
|
|
|
|
(6)
|
Includes options to
purchase 57,408 shares of our common stock exercisable
within 60 days of December 31, 2004.
|
|
|
|
|
(7)
|
Includes options to
purchase 27,833 shares of our common stock exercisable
within 60 days of December 31, 2004.
|
|
|
|
|
(8)
|
Includes options and warrants to
purchase 33,408 and 450 shares, respectively, of our
common stock exercisable within 60 days of
December 31, 2004.
|
|
|
|
|
(9)
|
Includes options and warrants to
purchase 32,658 and 3,981 shares, respectively, of our
common stock exercisable within 60 days of
December 31, 2004.
|
|
|
|
|
(10)
|
Includes options and warrants to
purchase 38,078 and 24,500 shares, respectively, of
our common stock exercisable within 60 days of
December 31, 2004. Also includes 65,625, 7,875 and
5,000 shares of our common stock held by The Thomas J.
Pancheri Separate Property Trust, Pancheri Enterprises and
TJP Enterprises, Inc., respectively. Mr. Pancheri is
the sole trustee of The Thomas J. Pancheri Separate
Property Trust, the sole general partner of Pancheri Enterprises
and the chief executive officer and sole director of
TJP Enterprises, Inc.
|
|
|
|
(11)
|
Includes options and warrants to
purchase 38,078 and 23,275 shares, respectively, of
our common stock exercisable within 60 days of
December 31, 2004. Also includes 23,800 and
23,800 shares of common stock currently issuable upon
conversion of our Series A preferred stock, based on the
current effective conversion price of $10.50 per share,
held by Ms. Paulus and the Penfield Group LLC,
respectively. Ms. Paulus is the managing member of the
Penfield Group LLC.
|
|
|
|
(12)
|
Includes options and warrants to
purchase 38,078 and 10,938 shares, respectively, of
our common stock exercisable within 60 days of
December 31, 2004. Also includes 9,520 shares of
common stock currently issuable upon conversion of our
Series A preferred stock, based on the current effective
conversion price of $10.50 per share.
|
|
|
|
(13)
|
Includes options and warrants to
purchase 513,297 and 255,644 shares, respectively, of
our common stock exercisable within 60 days of
December 31, 2004. Also includes 152,320 shares of
common stock currently issuable upon conversion of our
Series A preferred stock, based on the current effective
conversion price of $10.50 per share.
|
|
86
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of
25,000,000 shares of common stock, $0.01 par value per
share, and 1,000,000 shares of preferred stock,
$0.01 par value per share. The following description of our
capital stock is subject to, and qualified in its entirety by,
the provisions of our certificate of incorporation, including
any certificates of designation thereto, and bylaws, which are
included as exhibits to the registration statement of which this
prospectus is a part, and by the provisions of applicable law.
Our capital stock is not an account of an
insurable type and is not insured by the FDIC or any other
government agency.
Common Stock
Outstanding Shares.
At December 31, 2004, there were 4,563,399 shares of
our common stock outstanding that were held of record by 233
stockholders. After the offering, based on the number of shares
outstanding at December 31, 2004 and on the assumptions set
forth below the table in Capitalization, there will
be 7,497,649 shares of our common stock outstanding, or
7,835,149 shares if the underwriters over-allotment
option is exercised in full.
Dividends.
Subject
to preferences that may be applicable to any then outstanding
shares of our preferred stock, and subject to compliance with
limitations imposed by law, the holders of our common stock are
entitled to receive ratably those dividends, if any, as may be
declared from time to time by our board of directors out of
legally available funds.
Voting Rights.
Each
holder of our common stock is entitled to one vote for each
share held of record on all matters submitted to a vote of the
stockholders, including the election of directors. Under our
certificate of incorporation and bylaws, our stockholders will
not have cumulative voting rights. Because of this, the holders
of a majority of the shares of our common stock entitled to vote
in any election of directors can elect all of the directors
standing for election, if they should so choose.
Liquidation.
In the
event of our liquidation, dissolution or winding up, holders of
our common stock will be entitled to share ratably in the net
assets legally available for distribution to stockholders after
the payment of all of our debts and other liabilities and the
satisfaction of any liquidation preferences granted to the
holders of any outstanding shares of our preferred stock.
Rights and
Preferences.
Holders of our common
stock have no preemptive, conversion or subscription rights, and
there are no redemption or sinking fund provisions applicable to
our common stock. The rights, preferences and privileges of the
holders of our common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series
of our preferred stock, including any which we may designate in
the future.
Fully Paid and
Nonassessable.
All outstanding shares
of our common stock are, and the shares of our common stock to
be issued in the offering will be, fully paid and nonassessable.
Preferred Stock
Outstanding Shares.
At December 31, 2004, 1,200 shares of our preferred
stock were designated Series A 6%
Cumulative Nonparticipating Perpetual Preferred Stock,
Convertible through January 1, 2009, which we refer
to in this prospectus as Series A preferred stock, of which
675 shares of Series A preferred stock were issued and
outstanding. The remaining 998,800 shares of our preferred
stock has not be designated as a particular class.
Cumulative
Dividends.
Subject to preferences that
may be applicable to any then outstanding shares of our
preferred stock, and subject to compliance with limitations
imposed by law, the holders of our Series A preferred stock
are entitled to receive, out of legally available funds,
cumulative dividends at the annual rate of $600 per share,
payable in quarterly installments of $150 on each of
March 31, June 30, September 30 and
87
December 31, when and as declared by our
board of directors. No dividends or other distributions may be
made with respect to our common stock until all accumulated
dividends with respect to our Series A preferred stock have
been paid in full or set apart.
Voting Rights.
Except for amendments to our certificate of incorporation that
create or authorize the issuance of a series of preferred stock
with liquidation preferences senior to our Series A
preferred stock, which requires the approval of the holders of a
majority of our Series A preferred stock, and except as
otherwise provided by law, holders of our Series A
preferred stock will not have any voting rights.
Liquidation.
In the
event of our liquidation, dissolution or winding up, holders of
our Series A preferred stock will be entitled to receive,
in preference to any payment on our common stock, an amount
equal to $10,000 per share plus all accumulated and unpaid
dividends thereon.
Redemption.
We have
the right (but are not obligated) to redeem, out of legally
available funds, in whole or from time to time in part, our
Series A preferred stock. The redemption price to be paid
by us for our shares of Series A preferred stock will vary
depending on when the shares are redeemed with the redemption
price decreasing by $100 every calendar year from
$10,500 per share (if redeemed on or before
December 31, 2004) to $10,000 per share (if redeemed
on or after January 1, 2009).
Conversion.
Holders
of Series A preferred stock have the right (but are not
obligated) to convert their Series A preferred stock into
shares of our common stock. The number of shares of our common
stock to be issued upon conversion of our Series A
preferred stock will vary depending on when a holder elects to
convert, with the number of shares of our common stock to be
issued upon conversion of a share of Series A preferred
stock ranging from 952 shares (if converted between
January 1, 2004 and January 1, 2006) and
555 shares (if converted between April 1, 2008 and
January 1, 2009). Shares of our Series A preferred
stock only may be converted on the first day of a calendar
quarter and only through January 1, 2009. The following
table sets forth the conversion price and the number of shares
of common stock issuable upon conversion of one share of
Series A preferred stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Common Stock
|
|
|
|
|
Issuable Upon Conversion
|
|
|
|
|
of One Share of Series A
|
Conversion Date
|
|
Conversion Price(1)
|
|
Preferred Stock(2)
|
|
|
|
|
|
Current through January 1, 2006
|
|
$
|
10.50
|
|
|
|
952
|
|
April 1, 2006 through January 1, 2007
|
|
$
|
13.00
|
|
|
|
769
|
|
April 1, 2007 through January 1, 2008
|
|
$
|
15.50
|
|
|
|
645
|
|
April 1, 2008 through January 1, 2009
|
|
$
|
18.00
|
|
|
|
555
|
|
|
|
(1)
|
The conversion price is subject to adjustment for
stock dividends, stock splits and similar events.
|
|
(2)
|
Does not include fractional shares.
|
Preemptive Rights.
Holders of our common stock have no preemptive or subscription
rights.
Fully Paid and
Nonassessable.
All of our outstanding
shares of Series A preferred stock are fully paid and
nonassessable.
Undesignated Preferred
Stock.
We are authorized to issue up
to an additional 998,800 shares of preferred stock that has
not been designated as a particular class. Our board of
directors has the authority to issue the undesignated preferred
stock in one or more series and to determine the powers,
preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of the series
without any further vote or action by our stockholders. The
issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our
outstanding voting stock. We have no present plans to issue any
additional shares of preferred stock.
88
Warrants
At December 31, 2004, warrants to purchase
an aggregate of 744,200 shares of our common stock were
issued and outstanding. All of the warrants are currently
exercisable. Warrants to purchase 59,950 shares of our
common stock have an exercise price of $14.00 per share and
terminate on July 31, 2005, subject to the right of our
board of directors, in its sole discretion, to extend the
exercise period of these warrants for up to an additional
two years. The remaining warrants to
purchase 684,250 shares of our common stock have an
exercise price of $4.19 per share and will terminate
immediately prior to the closing of the offering if not
exercised prior to that time. We expect that the warrants to
purchase 684,250 shares of our common stock with an
exercise price of $4.19 per share will be exercised on a
cash basis prior to the closing of the offering. Each warrant
contains provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon exercise of such
warrant in the event of stock dividends, stock splits,
reorganization, reclassifications and similar events.
Anti-Takeover Provisions
Provisions of Delaware law and our certificate of
incorporation and bylaws could make our acquisition by means of
a tender offer, a proxy contest or otherwise, and the removal of
incumbent officers and directors more difficult. These
provisions are expected to discourage types of coercive takeover
practices and inadequate takeover bids and to encourage persons
seeking to acquire control to first negotiate with us. We
believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us
outweighs the disadvantages of discouraging proposals, including
proposals that are priced above the then current market value of
our common stock, because, among other things, negotiation of
these proposals could result in an improvement of their terms.
These provisions may also have the effect of preventing changes
in our management. It is possible that these provisions could
make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interests.
We are subject to Section 203 of the
Delaware General Corporation Law. Under this provision, we may
not engage in any business combination with any interested
stockholder for a period of three years following the date
the stockholder became an interested stockholder, unless:
|
|
|
|
|
prior to that date our board of directors
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
|
|
|
|
upon completion of the transaction that resulted
in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock
outstanding at the time the transaction began; or
|
|
|
|
on or following that date, the business
combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
|
Section 203 defines business
combination to include:
|
|
|
|
|
any merger or consolidation involving the
corporation and the interested stockholder;
|
|
|
|
any sale, transfer, pledge or other disposition
of 10% or more of the assets of the corporation involving the
interested stockholder;
|
|
|
|
subject to some exceptions, any transaction that
results in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder;
|
|
|
|
any transaction involving the corporation that
has the effect of increasing the proportionate share of the
stock of any class or series of the corporation beneficially
owned by the interested stockholder; or
|
89
|
|
|
|
|
the receipt by the interested stockholder of the
benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation.
|
In general, Section 203 defines an
interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock
of the corporation and any entity or person affiliated with or
controlling or controlled by the entity or person.
|
|
|
Certificate of Incorporation and
Bylaws
|
Our certificate of incorporation and bylaws
contain provisions that could have the effect of discouraging
potential acquisition proposals or tender offers or delaying or
preventing a change in control of our company. In particular,
our certificate of incorporation and bylaws, as applicable,
among other things:
|
|
|
|
|
provide that our board of directors will be
divided into three classes of directors;
|
|
|
|
provide that special meetings of our stockholders
may be called only by our president, our chairman or our
secretary;
|
|
|
|
provide that our stockholders will not be
permitted to act by written consent, which may lengthen the
amount of time required to take stockholder actions;
|
|
|
|
do not include a provision for cumulative voting
in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may
be able to ensure the election of one or more directors. The
absence of cumulative voting may have the effect of limiting the
ability of minority stockholders to effect changes in our board
of directors;
|
|
|
|
|
provide that vacancies on our board of directors
may be filled by a majority of directors in office, although not
by less than a quorum, and not by our stockholders; and
|
|
|
|
|
allow us to issue up to 998,800 shares of
undesignated preferred stock with rights senior to those of our
common stock and that otherwise could adversely affect the
rights and powers, including voting rights, of the holders of
our common stock. In some circumstances, such an issuance could
also have the effect of decreasing the market price of our
common stock.
|
The amendment of any of these provisions would
require the approval of the holders of at least 75% of our then
outstanding capital stock.
These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our
board and its policies and to discourage certain types of
transactions that may involve an actual or threatened change in
control of our company. These provisions are designed to reduce
our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights.
However, these provisions could have the effect of discouraging
others from making tender offers for our shares that could
result from actual or rumored takeover attempts. These
provisions also may have the effect of preventing changes in our
management.
The Change in Bank Control Act provides that no
person, acting directly or indirectly or through or in concert
with one or more other persons, may acquire control of a savings
association unless the OTS has been given 60 days
prior written notice. The Home Owners Loan Act, or the HOLA,
provides that no company may acquire control of a
savings association without the prior approval of the OTS. Any
company that acquires such control becomes a savings and loan
holding company subject to registration, examination and
regulation by the OTS.
Under federal law, acquisition of more than 10%
of our common stock would result in a rebuttable presumption of
control of our bank and the ownership of 25% of the voting stock
would result in conclusive control of our bank. Depending on the
circumstances, the foregoing banking regulations may prevent or
frustrate a change in control of us, discourage bids at a
premium over the market price of our common stock
90
and adversely affect the market price of our
common stock and the voting or other rights of our common stock.
Nasdaq National Market Listing
We have applied to have our common stock listed
for quotation on the Nasdaq National Market under the symbol
BOFI.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is U.S. Stock Transfer Corporation. Its address is
1745 Gardena Avenue, Glendale, California 91204, and its
telephone number is (818) 502-1404.
91
REGULATION
General
Savings and loan holding companies and savings
associations are extensively regulated under both federal and
state law. This regulation is intended primarily for the
protection of depositors and the Savings Association Insurance
Fund, or SAIF, and not for the benefit of our stockholders. The
following information describes aspects of the material laws and
regulations applicable to us and our subsidiary, and does not
purport to be complete. The discussion is qualified in its
entirety by reference to all particular applicable laws and
regulations.
Legislation is introduced from time to time in
the U.S. Congress that may affect the operations of our
company and Bank of Internet USA. In addition, the regulations
governing us and Bank of Internet USA may be amended from time
to time by the OTS. Any such legislation or regulatory changes
in our future could adversely affect Bank of Internet USA. No
assurance can be given as to whether or in what form any such
changes may occur.
Regulation of BofI Holding, Inc.
General.
We are a
savings and loan holding company subject to regulatory oversight
by the OTS. As such, we are required to register and file
reports with the OTS and are subject to regulation and
examination by the OTS. In addition, the OTS has enforcement
authority over us and our subsidiary, which also permits the OTS
to restrict or prohibit activities that are determined to be a
serious risk to Bank of Internet USA.
Activities
Restrictions.
Our activities, other
than through Bank of Internet USA or any other SAIF-insured
savings association we may hold in the future, are subject to
restrictions applicable to bank holding companies. Bank holding
companies are prohibited, subject to exceptions, from engaging
in any business or activity other than a business or activity
that the Federal Reserve Board has determined to be closely
related to banking. The Federal Reserve Board has by regulation
determined that specified activities satisfy this
closely-related-to-banking standard. Although we currently do
not engage in these activities, the following include examples
of FRB-approved activities:
|
|
|
|
|
operating a mortgage company, finance company,
credit card company, factoring company, trust company or savings
association;
|
|
|
|
performing specified data processing operations;
|
|
|
|
providing limited securities brokerage services,
acting as an investment or financial advisor;
|
|
|
|
acting as an insurance agent for specified types
of credit-related insurance; leasing personal property on a
full-payout, non-operating basis;
|
|
|
|
providing tax planning and preparation services;
|
|
|
|
operating a collection agency; and
|
|
|
|
providing specified courier services.
|
The Federal Reserve Board also has determined
that other specified activities, including real estate brokerage
and syndication, land development, property management and
underwriting of life insurance not related to credit
transactions, are not closely related to banking nor a proper
incident thereto. Legislation enacted in 1999 has expanded the
types of activities that may be conducted by qualifying holding
companies that register as financial holding
companies.
Regulation of Bank of Internet USA
General.
As a
federally chartered, SAIF-insured savings association, Bank of
Internet USA is subject to extensive regulation by the OTS and
the FDIC. Lending activities and other investments of Bank of
Internet USA must comply with various statutory and regulatory
requirements. Bank of Internet USA is also subject to
92
reserve requirements promulgated by the Federal
Reserve Board. The OTS, together with the FDIC, regularly
examines Bank of Internet USA and prepares reports for Bank of
Internet USAs board of directors on any deficiencies found
in the operations of Bank of Internet USA. The relationship
between Bank of Internet USA and depositors and borrowers is
also regulated by federal and state laws, especially in such
matters as the ownership of savings accounts and the form and
content of mortgage documents utilized by Bank of Internet USA.
Bank of Internet USA must file reports with the
OTS and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior
to entering into specified transactions such as mergers with or
acquisitions of other financial institutions or raising capital
or issuing trust preferred securities. This regulation and
supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for
the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with
respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change
in such regulations, whether by the OTS, the FDIC or the
Congress, could have a material adverse effect on us, Bank of
Internet USA and our operations.
Insurance of Deposit
Accounts.
The SAIF, as administered by
the FDIC, insures Bank of Internet USAs deposit accounts
up to the maximum amount permitted by law. The FDIC may
terminate insurance of deposits upon a finding that Bank of
Internet USA:
|
|
|
|
|
has engaged in unsafe or unsound practices;
|
|
|
|
is in an unsafe or unsound condition to continue
operations; or
|
|
|
|
has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC or the OTS.
|
The FDIC charges an annual assessment for the
insurance of deposits based on the risk a particular institution
poses to its deposit insurance fund. Under this system, as of
December 31, 2001, SAIF members pay zero to $0.27 per
$100 of domestic deposits, depending upon the institutions
risk classification. This risk classification is based on an
institutions capital group and supervisory subgroup
assignment. In addition, all FDIC-insured institutions are
required to pay assessments to the FDIC at an annual rate for
the third quarter of 2002 of approximately $0.0172 per $100
of assessable deposits to fund interest payments on bonds issued
by the Financing Corporation, or FICO, an agency of the Federal
government established to recapitalize the predecessor to the
SAIF. These assessments will continue until the FICO bonds
mature in 2017.
Regulatory Capital Requirements and Prompt
Corrective Action.
The prompt
corrective action regulation of the OTS requires mandatory
actions and authorizes other discretionary actions to be taken
by the OTS against a savings association that falls within
undercapitalized capital categories specified in the regulation.
Under the regulation, an institution is well
capitalized if it has a total risk-based capital ratio of at
least 10.0%, a Tier 1 risk-based capital ratio of at least
6.0% and a leverage ratio of at least 5.0%, with no written
agreement, order, capital directive, prompt corrective action
directive or other individual requirement by the OTS to maintain
a specific capital measure. An institution is adequately
capitalized if it has a total risk-based capital ratio of at
least 8.0%, a Tier 1 risk-based capital ratio of at least
4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a
composite rating of 1 and is not experiencing or
anticipating significant growth). The regulation also
establishes three categories for institutions with lower ratios:
undercapitalized, significantly undercapitalized and critically
undercapitalized. At December 31, 2004, Bank of Internet
USA met the capital requirements of a well
capitalized institution under applicable OTS regulations.
In general, the prompt corrective action
regulation prohibits an insured depository institution from
declaring any dividends, making any other capital distribution,
or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any
of the three undercapitalized categories. In addition,
adequately capitalized institutions may accept brokered deposits
only with a waiver from the FDIC and are subject to restrictions
on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over
brokered deposits.
93
If the OTS determines that an institution is in
an unsafe or unsound condition, or if the institution is deemed
to be engaging in an unsafe and unsound practice, the OTS may,
if the institution is well capitalized, reclassify it as
adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with
restrictions applicable to undercapitalized institutions; and,
if the institution is undercapitalized, require it to comply
with restrictions applicable to significantly undercapitalized
institutions. Finally, pursuant to an interagency agreement, the
FDIC can examine any institution that has a substandard
regulatory examination score or is considered undercapitalized
without the express permission of the institutions primary
regulator.
OTS capital regulations also require savings
associations to meet three additional capital standards:
|
|
|
|
|
tangible capital equal to at least 1.5% of total
adjusted assets;
|
|
|
|
leverage capital (core capital) equal to 4.0% of
total adjusted assets; and
|
|
|
|
risk-based capital equal to 8.0% of total
risk-weighted assets.
|
These capital requirements are viewed as minimum
standards by the OTS, and most institutions are expected to
maintain capital levels well above the minimum. In addition, the
OTS regulations provide that minimum capital levels greater than
those provided in the regulations may be established by the OTS
for individual savings associations upon a determination that
the savings associations capital is or may become
inadequate in view of its circumstances. Bank of Internet USA is
not subject to any such individual minimum regulatory capital
requirement and our regulatory capital exceeded all minimum
regulatory capital requirements as of December 31, 2004.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
Loans-to-One-Borrower
Limitations.
Savings associations
generally are subject to the lending limits applicable to
national banks. With limited exceptions, the maximum amount that
a savings association or a national bank may lend to any
borrower, including related entities of the borrower, at one
time may not exceed 15% of the unimpaired capital and surplus of
the institution, plus an additional 10% of unimpaired capital
and surplus for loans fully secured by readily marketable
collateral. Savings associations are additionally authorized to
make loans to one borrower by order of the Director of the OTS,
in an amount not to exceed the lesser of $30.0 million or
30% of unimpaired capital and surplus for the purpose of
developing residential housing, if specified conditions are met:
|
|
|
|
|
the purchase price of each single family dwelling
in the development does not exceed $500,000;
|
|
|
|
the savings association is in compliance with its
fully phased-in capital requirements;
|
|
|
|
the loans comply with applicable loan-to-value
requirements; and
|
|
|
|
the aggregate amount of loans made under this
authority does not exceed 150% of unimpaired capital and surplus.
|
At December 31, 2004, Bank of Internet
USAs loans-to-one-borrower limit was $5.7 million
based upon the 15% of unimpaired capital and surplus
measurement. At December 31, 2004, no single loan was
larger than $3.0 million and Bank of Internet USAs
largest single lending relationship had an outstanding balance
of $4.7 million. We expect that our lending limit will
increase to approximately $8.1 million immediately
following the offering, assuming $21.8 million in net
proceeds are raised in the offering and that $16.0 million
of the net proceeds are contributed to our subsidiary bank,
based on the assumptions set forth below the table in
Capitalization.
Qualified Thrift Lender
Test.
Savings associations must meet a
qualified thrift lender, or QTL, test. This test may be met
either by maintaining a specified level of portfolio assets in
qualified thrift investments as specified by the HOLA, or by
meeting the definition of a domestic building and loan
association under the Internal Revenue Code of 1986, as
amended, or the Code. Qualified thrift investments are primarily
residential mortgage loans and related investments, including
mortgage related securities. Portfolio assets generally mean
total assets less specified liquid assets, goodwill and other
intangible assets and the value of property used in the conduct
of Bank of Internet USAs business. The required percentage
of qualified thrift
94
investments under the HOLA is 65% of portfolio.
An association must be in compliance with the QTL test or the
definition of domestic building and loan association on a
monthly basis in nine out of every 12 months. Associations
that fail to meet the QTL test will generally be prohibited from
engaging in any activity not permitted for both a national bank
and a savings association. At December 31, 2004, Bank of
Internet USA was in compliance with its QTL requirement and met
the definition of a domestic building and loan association.
Liquidity Standard.
Savings associations are required to maintain sufficient
liquidity to ensure safe and sound operations.
Affiliate
Transactions.
Transactions between a
savings association and its affiliates are quantitatively and
qualitatively restricted pursuant to OTS regulations. Affiliates
of a savings association include, among other entities, the
savings associations holding company and companies that
are under common control with the savings association. In
general, a savings association or its subsidiaries are limited
in their ability to engage in covered transactions
with affiliates:
|
|
|
|
|
to an amount equal to 10% of the
associations capital and surplus, in the case of covered
transactions with any one affiliate; and
|
|
|
|
to an amount equal to 20% of the
associations capital and surplus, in the case of covered
transactions with all affiliates.
|
In addition, a savings association and its
subsidiaries may engage in covered transactions and other
specified transactions only on terms and under circumstances
that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at
the time for comparable transactions with nonaffiliated
companies. A covered transaction includes:
|
|
|
|
|
a loan or extension of credit to an affiliate;
|
|
|
|
a purchase of investment securities issued by an
affiliate;
|
|
|
|
a purchase of assets from an affiliate, with some
exceptions;
|
|
|
|
the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any
party; and
|
|
|
|
the issuance of a guarantee, acceptance or letter
of credit on behalf of an affiliate.
|
In addition, under the OTS regulations:
|
|
|
|
|
a savings association may not make a loan or
extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding
companies;
|
|
|
|
a savings association may not purchase or invest
in securities of an affiliate other than shares of a subsidiary;
|
|
|
|
a savings association and its subsidiaries may
not purchase low-quality assets from an affiliate;
|
|
|
|
covered transactions and other specified
transactions between a savings association or its subsidiaries
and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices; and
|
|
|
|
with some exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured
by collateral with a market value ranging from 100% to 130% of
the amount of the loan or extension of credit, depending on the
type of collateral.
|
The OTS regulations generally exclude all
non-bank and non-savings association subsidiaries of savings
associations from treatment as affiliates, except to the extent
that the OTS or the Federal Reserve Board decides to treat these
subsidiaries as affiliates. The regulations also require savings
associations to make and retain records that reflect affiliate
transactions in reasonable detail and provide that specified
classes of savings associations may be required to give the OTS
prior notice of affiliate transactions.
95
Capital Distribution
Limitations.
OTS regulations impose
limitations upon all capital distributions by savings
associations, like cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of
another institution in a cash-out merger and other distributions
charged against capital. Under these regulations, a savings
association may, in circumstances described in those regulations:
|
|
|
|
|
be required to file an application and await
approval from the OTS before it makes a capital distribution;
|
|
|
|
be required to file a notice 30 days before
the capital distribution; or
|
|
|
|
be permitted to make the capital distribution
without notice or application to the OTS.
|
The OTS regulations require a savings association
to file an application if:
|
|
|
|
|
it is ineligible for expedited treatment of its
other applications under OTS regulations;
|
|
|
|
the total amount of all of capital distributions,
including the proposed capital distribution, for the applicable
calendar year exceeds its net income for that year to date plus
retained net income for the preceding two years;
|
|
|
|
it would not be at least adequately capitalized
under the prompt corrective action regulations of the OTS
following the distribution, as described above; or
|
|
|
|
the associations proposed capital
distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings
association and the OTS or the FDIC, or violate a condition
imposed on the savings association in an OTS-approved
application or notice.
|
In addition, a savings association must give the
OTS notice of a capital distribution if the savings association
is not required to file an application, but:
|
|
|
|
|
would not be well capitalized under the prompt
corrective action regulations of the OTS following the
distribution, as described above;
|
|
|
|
the proposed capital distribution would reduce
the amount of or retire any part of the savings
associations common or preferred stock or retire any part
of its debt instruments like notes or debentures included in
capital, other than regular payments required under a debt
instrument approved by the OTS; or
|
|
|
|
the savings association is a subsidiary of a
savings and loan holding company.
|
If neither the savings association nor the
proposed capital distribution meet any of the above listed
criteria, the OTS does not require the savings association to
submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital
distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or
unsound practice.
Community Reinvestment Act and the Fair
Lending Laws.
Savings associations
have a responsibility under the Community Reinvestment Act and
related regulations of the OTS to help meet the credit needs of
their communities, including low- and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics
specified in those statutes. An institutions failure to
comply with the provisions of the Community Reinvestment Act
could, at a minimum, result in regulatory restrictions on its
activities and the denial of applications. In addition, an
institutions failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in the
OTS, other federal regulatory agencies or the Department of
Justice taking enforcement actions against the institution.
Based on an examination commenced in June, 2001, Bank of
Internet USA received a satisfactory rating with respect to its
performance pursuant to the Community Reinvestment Act.
Federal Home Loan Bank
System.
Bank of Internet USA is a
member of the FHLB system. Among other benefits, each FHLB
serves as a reserve or central bank for its members within its
assigned region. Each FHLB is financed primarily from the sale
of consolidated obligations of the FHLB system. Each FHLB makes
96
available loans or advances to its members in
compliance with the policies and procedures established by the
board of directors of the individual FHLB. As an FHLB member,
Bank of Internet USA is required to own capital stock in an FHLB
in specified amounts based on either its aggregate outstanding
principal amount of its residential mortgage loans, home
purchase contracts and similar obligations at the beginning of
each calendar year or its outstanding advances from the FHLB. At
December 31, 2004, Bank of Internet USA had
$7.0 million of the stock of the FHLB of
San Francisco, which met the applicable required investment
at that time.
Federal Reserve
System.
The Federal Reserve Board
requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and nonpersonal time deposits. At
December 31, 2004, Bank of Internet USA was in compliance
with these requirements.
Activities of
Subsidiaries.
A savings association
seeking to establish a new subsidiary, acquire control of an
existing company or conduct a new activity through a subsidiary
must provide 30 days prior notice to the FDIC and the OTS
and conduct any activities of the subsidiary in compliance with
regulations and orders of the OTS. The OTS has the power to
require a savings association to divest any subsidiary or
terminate any activity conducted by a subsidiary that the OTS
determines to pose a serious threat to the financial safety,
soundness or stability of the savings association or to be
otherwise inconsistent with sound banking practices.
Recent Legislation
Sarbanes-Oxley Act of
2002.
In July 2002, the Sarbanes-Oxley
Act of 2002, or the SOX, was enacted. The stated goals of the
SOX are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant
to the securities laws.
The SOX is the most far-reaching
U.S. securities legislation enacted in some time. The SOX
generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the
Securities and Exchange Commission, or the SEC, under the
Securities Exchange Act of 1934, or the Exchange Act.
The SOX includes very specific additional
disclosure requirements and new corporate governance rules,
requires the SEC and securities exchanges to adopt extensive
additional disclosure, corporate governance and other related
rules and mandates further studies of specified issues by the
SEC and the Comptroller General. The SOX represents significant
federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board
of directors and its committees.
The SOX and subsequently enacted SEC and other
regulations address, among other matters:
|
|
|
|
|
audit committees;
|
|
|
|
implementation of disclosure controls and
procedures and internal control and financial reporting;
|
|
|
|
certification of financial statements by the
chief executive officer and the chief financial officer;
|
|
|
|
the forfeiture of bonuses or other
incentive-based compensation and profits from the sale of an
issuers securities by directors and senior officers in the
twelve month period following initial publication of any
financial statements that later require restatement;
|
|
|
|
a prohibition on insider trading during pension
plan black-out periods;
|
|
|
|
disclosure of off-balance sheet transactions;
|
|
|
|
a prohibition on personal loans to directors and
officers subject to certain exceptions for loans made by insured
depository institutions;
|
|
|
|
expedited filing requirements for changes in
beneficial ownership of securities owned by officers, directors
and principal stockholders of publicly held companies;
|
97
|
|
|
|
|
disclosure of a code of ethics and filing a
Form 8-K for a change or waiver of such code;
|
|
|
|
real time filing of periodic reports;
|
|
|
|
the formation of a public accounting oversight
board;
|
|
|
|
auditor independence; and
|
|
|
|
various increased criminal penalties for
violations of securities laws.
|
98
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public
market for our common stock. No prediction can be made as to the
effect, if any, that sales of common stock or the availability
of common stock for sale will have on the market price of our
common stock. The market price of our common stock could decline
because of the sale of a large number of shares of our common
stock or the perception that such sales could occur. These
factors could also make it more difficult to raise funds through
future offerings of common stock.
After the offering, and based on the number of
shares of our common stock outstanding at December 31, 2004
and on the assumptions set forth under the table in
Capitalization, 7,497,649 shares of our common
stock will be outstanding, or 7,835,149 shares if the
underwriters over-allotment option is exercised in full.
Of these shares, the 2,250,000 shares sold in the offering,
or 2,587,500 shares if the underwriters
over-allotment is exercised in full, will be freely tradable
without restriction under the Securities Act, except that any
shares held by our affiliates as defined in
Rule 144 under the Securities Act may be sold only in
compliance with the limitations described below. The remaining
5,247,649 shares of common stock are restricted
securities, within the meaning of Rule 144 under the
Securities Act. The restricted securities generally may not be
sold unless they are registered under the Securities Act or are
sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144 under the Securities Act.
In connection with the offering, our existing
officers, directors and certain holders of our common stock have
entered into lock-up agreements pursuant to which they have
agreed not to offer or sell any shares of common stock for a
period of 180 days after the date of this prospectus
without the prior written consent of
WR Hambrecht + Co, LLC, who may, in its sole
discretion, at any time and without notice, waive any of the
terms of these lock-up agreements. In addition, certain other
holders of our common stock have entered into lock-up agreements
pursuant to which they have agreed not to offer or sell any
shares of common stock for a period of 90 days.
2,505,457 shares and 1,622,967 shares will be eligible
for sale 90 days and 180 days, respectively, from the
date of this prospectus upon the expiration of the foregoing
lock-up agreements. The underwriters presently have no intention
to allow any shares of common stock to be sold or otherwise
offered by us prior to the expiration of these lock-up periods.
In general, under Rule 144, as currently in
effect, any person or persons whose shares are required to be
aggregated, including an affiliate of ours, who has beneficially
owned shares for a period of at least one year is entitled to
sell, within any three month period, commencing 90 days
after the date of this prospectus, a number of shares that does
not exceed the greater of:
|
|
|
|
|
|
1% of the then outstanding shares of our common
stock; or
|
|
|
|
|
the average weekly trading volume in our common
stock during the four calendar weeks immediately preceding the
date on which the notice of such sale on Form 144 is filed
with the Securities and Exchange Commission.
|
Sales under Rule 144 are also subject to
provisions relating to notice and manner of sale and the
availability of current public information about us during the
90 days immediately preceding a sale. In addition, a person
who is not an affiliate of ours during the 90 days
preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years would be entitled to
sell such shares under Rule 144(k) without regard to the
volume limitation and other conditions described above.
Our directors or officers who purchased our
shares in connection with a written compensatory plan or
contract may be entitled to rely on the resale provisions of
Rule 701. Rule 701 permits non-affiliates to sell
their Rule 701 shares without having to comply with
the public information, holding period, volume limitation or
notice provisions of Rule 144. Affiliates may sell their
Rule 701 shares without having to comply with
Rule 144s holding period restrictions. In each of
these cases, Rule 701 allows the stockholders to sell
90 days after the date of this prospectus.
We intend to register on a registration statement
on Form S-8 the shares of common stock issuable upon the
exercise of options issued or reserved for future issuance under
our amended and restated 1999 stock option plan, our 2004 stock
incentive plan and our 2004 employee stock purchase plan. The
Form S-8 will permit the resale in the public market of
shares so registered by non-affiliates without restriction under
the Securities Act.
99
PLAN OF DISTRIBUTION
In accordance with the terms of the underwriting
agreement between WR Hambrecht + Co, LLC and The
Seidler Companies Incorporated, as representatives of the
underwriters, and us, each underwriter has agreed to purchase
from us that number of shares of common stock set forth opposite
the underwriters name below at the public offering price
less the underwriting discounts and commissions described on the
cover page of this prospectus.
|
|
|
|
|
|
|
|
Number of
|
Underwriters
|
|
Shares
|
|
|
|
WR Hambrecht + Co, LLC
|
|
|
|
|
The Seidler Companies Incorporated
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,250,000
|
|
|
|
|
|
|
The underwriting agreement provides that the
obligations of the underwriters are subject to conditions,
including the absence of any material adverse change in our
business, and the receipt of certificates, opinions and letters
from us and counsel. Subject to those conditions, the
underwriters are committed to purchase all of the shares of our
common stock offered by this prospectus if any of the shares are
purchased.
The underwriters propose to offer the shares of
our common stock directly to the public at the offering price
set forth on the cover page of this prospectus, as this price is
determined by the OpenIPO process described below, and to
certain dealers at this price less a concession not in excess of
$ per
share. The underwriters may allow, and dealers may reallow, a
concession not to exceed
$ per
share on sales to other dealers. Any dealers that participate in
the distribution of our common stock may be deemed to be
underwriters within the meaning of the Securities Act, and any
discount, commission or concession received by them and any
provided by the sale of the shares by them may be deemed to be
underwriting discounts and commissions under the Securities Act.
After completion of the initial public offering of the shares,
the underwriters may change the offering price and other selling
terms to the extent that the underwriters are left with shares
that successful bidders have failed to pay for.
The following table shows the per share and total
underwriting discount to be paid to the underwriters by us in
connection with this offering. The underwriting discount has
been determined through negotiations between us and the
underwriters, and has been calculated as a percentage of the
offering price. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
No Exercise
|
|
Full Exercise
|
|
|
|
|
|
|
|
Public Offering Price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting Discount
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The expenses of the offering, exclusive of the
underwriting discounts, will be approximately $1.4 million.
We have also agreed to reimburse the underwriters for certain
fees and expenses. These fees and expenses are payable entirely
by us. These fees include, among other things, our legal and
accounting fees, printing expenses, expenses incurred in
connection with meetings with potential investors, filing fees
of the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., fees of our transfer
agent and registrar and the listing fees of the Nasdaq National
Market.
An electronic prospectus is available on the
website maintained by WR Hambrecht + Co and The
Seidler Companies Incorporated, two of the underwriters in this
offering, and may also be made available on websites maintained
by selected dealers and selling group members participating in
this offering.
The OpenIPO Auction Process
The distribution method being used in this
offering is known as the OpenIPO auction, which differs from
methods traditionally used in underwritten public offerings. In
particular, as described under the captions Determination
of the Public Offering Price and Allocation of
Shares, the public offering price and the
100
allocation of shares are determined by an auction
conducted by the underwriters and other factors as described
below. All qualified individual and institutional investors may
place bids in an OpenIPO auction and investors submitting valid
bids have an equal opportunity to receive an allocation of
shares.
The following describes how the underwriters and
some selected dealers conduct the auction process and confirm
bids from prospective investors:
|
|
|
Prior to Effectiveness of the Registration
Statement
|
Before the registration statement relating to
this offering becomes effective, the underwriters and
participating dealers solicit bids from prospective investors
through the Internet and by telephone and facsimile. The bids
specify the number of shares of our common stock the potential
investor proposes to purchase and the price the potential
investor is willing to pay for the shares. These bids may be
above or below the range set forth on the cover page of the
prospectus. The minimum size of any bid is 100 shares.
The shares offered by this prospectus may not be
sold, nor may offers to buy be accepted, prior to the time that
the registration statement filed with the Securities and
Exchange Commission becomes effective. A bid received by
the underwriters or a dealer involves no obligation or
commitment of any kind prior to the closing of the auction. Bids
can be modified or revoked at any time prior to the closing of
the auction.
Approximately two business days prior to the
registration statement being declared effective, prospective
investors receive, by e-mail, telephone or facsimile, a notice
indicating the proposed effective date. Potential investors may
at any time expressly request that all, or any specific,
communications between them and the underwriters and
participating dealers be made by specific means of
communication, including e-mail, telephone and facsimile. The
underwriters and participating dealers will contact the
potential investors in the manner they request.
|
|
|
Effectiveness of the Registration
Statement
|
After the registration statement relating to this
offering has become effective, potential investors who have
submitted bids to the underwriters or a dealer are contacted by
e-mail, telephone or facsimile. Potential investors are advised
that the registration statement has been declared effective and
that the auction may close in as little as one hour following
effectiveness. Bids will continue to be accepted in the time
period after the registration statement is declared effective
but before the auction closes. Bidders may also withdraw their
bids in the time period following effectiveness but before the
close of the auction.
We will require that bidders reconfirm the bids
that they have submitted in the offering if any of the following
events shall occur:
|
|
|
|
|
More than 15 business days have elapsed since the
bidder submitted his bid in the offering;
|
|
|
|
There is a material change in the prospectus that
requires recirculation of the prospectus by us and the
underwriters; or
|
|
|
|
|
The initial public offering price in the offering
is more than 20% above the high end of the price range or below
the low end of the price range. In this event, we will
recirculate a revised preliminary prospectus with our request
for reconfirmation.
|
|
If a reconfirmation of bids is required, we will
send an electronic notice (or communicate in an alternative
manner as requested by a bidder) to everyone who has submitted a
bid notifying them that they must reconfirm their bids by
contacting the underwriters or participating dealers with which
they have their brokerage accounts. Bidders will have a minimum
of four hours to reconfirm their bids. Bidders will have the
ability to cancel, modify or reconfirm their bid at any time
until the auction closes. If bidders do not reconfirm their bids
before the auction is closed (which will be no sooner than four
hours after the request for reconfirmation is sent), we and the
underwriters will disregard their bids in the auction, and they
will be
101
deemed to have been withdrawn. If appropriate,
the underwriters may include the request for reconfirmation in a
notice of effectiveness of the registration statement.
|
|
|
Changes in the Price Range Prior to
Effectiveness of the Registration Statement
|
If, prior to the date on which the SEC declares
our registration statement effective, there is a change in the
price range or the number of shares to be sold in our offering,
in each case in a manner that is not otherwise material to our
offering, we and the underwriters will:
|
|
|
|
|
Provide notice on our offering web site of the
revised price range or number of shares to be sold in our
offering, as the case may be.
|
|
|
|
Issue a press release announcing the revised
price range or number of shares to be sold in our offering, as
the case may be.
|
|
|
|
|
Send an electronic notice (or communicate in an
alternative manner as requested by a bidder) to everyone who has
submitted a bid notifying them of the revised price range or
number of shares to be sold in our offering, as the case may be.
|
|
In these situations, the underwriters could
accept an investors bid after the SEC declares the
registration statement effective without requiring a bidder to
reconfirm. However, the underwriters may decide at any time to
require potential investors to reconfirm their bids, and if they
fail to do so, unconfirmed bids will be invalid.
|
|
|
Closing of the Auction and
Pricing
|
The auction will close and a public offering
price will be determined after the registration statement
becomes effective at a time agreed to by us and WR
Hambrecht + Co, which we anticipate will be after the
close of trading on the Nasdaq National Market on the same day
on which the registration statement is declared effective. The
auction may close in as little as one hour following
effectiveness of the registration statement. However, the date
and time at which the auction will close and a public offering
price will be determined cannot currently be predicted and will
be determined by us and WR Hambrecht + Co based on
general market conditions during the period after the
registration statement is declared effective. If we are unable
to close the auction, determine a public offering price and file
a final prospectus with the Securities and Exchange Commission
within 15 days after the registration statement is
initially declared effective, we will be required to file with
the Securities and Exchange Commission and have declared
effective a post-effective amendment to the registration
statement before the auction may be closed and before any bids
may be accepted.
Once a potential investor submits its bid, the
bid remains valid unless subsequently withdrawn by the potential
investor. Potential investors are able to withdraw their bids at
any time before the close of the auction by notifying the
underwriters or a participating dealer.
Following the closing of the auction, the
underwriters determine the highest price at which all of the
shares offered, including shares that may be purchased by the
underwriters to cover any over-allotments, may be sold to
potential investors. This price, which is called the
clearing price, is determined based on the results
of all valid bids at the time the auction is closed. The
clearing price is not necessarily the public offering price,
which is set as described in Determination of Public
Offering Price below. The public offering price determines
the allocation of shares to potential investors, with all valid
bids submitted at or above the public offering price receiving a
pro rata portion of the shares bid for.
You will have the ability to withdraw your bid at
any time until the closing of the auction. The underwriters will
accept successful bids by sending notice of acceptance after the
auction closes and a public offering price has been determined,
and bidders who submitted successful bids will be obligated to
purchase the shares allocated to them regardless of
(1) whether such bidders are aware that the registration
statement has been declared effective and that the auction has
closed or (2) whether they are aware that the notice of
acceptance of that bid has been sent. The underwriters will not
cancel or reject a valid bid after the notice of acceptance has
been sent.
102
Once the auction closes and a clearing price is
set as described below, the underwriters or a participating
dealer accept the bids from those bidders whose bid is at or
above the public offering price but may allocate to a
prospective investor fewer shares than the number included in
the investors bid, as described in Allocation of
Shares below.
Determination of Public Offering
Price
The public offering price for this offering is
ultimately determined by negotiation between the underwriters
and us after the auction closes and does not necessarily bear
any direct relationship to our assets, current earnings or book
value or to any other established criteria of value, although
these factors are considered in establishing the initial public
offering price. Prior to the offering, there has been no public
market for our common stock. The principal factor in
establishing the public offering price is the clearing price
resulting from the auction, although other factors are
considered as described below. The clearing price is used by the
underwriters and us as the principal benchmark, among other
considerations described below, in determining the public
offering price for the stock that will be sold in this offering.
The clearing price is the highest price at which
all of the shares offered, including the shares that may be
purchased by the underwriters to cover any over-allotments, may
be sold to potential investors, based on the valid bids at the
time the auction is run. The shares subject to the
underwriters over-allotment option are used to calculate
the clearing price whether or not the option is actually
exercised.
Depending on the outcome of negotiations between
the underwriters and us, the public offering price may be lower,
but will not be higher, than the clearing price. The bids
received in the auction and the resulting clearing price are the
principal factors used to determine the public offering price of
the stock that will be sold in this offering. The public
offering price may be lower than the clearing price depending on
a number of additional factors, including general market trends
or conditions, the underwriters assessment of our
management, operating results, capital structure and business
potential and the demand and price of similar securities of
comparable companies. The underwriters and we may also agree to
a public offering price that is lower than the clearing price in
order to facilitate a wider distribution of the stock to be sold
in the offering. For example, the underwriters and us may elect
to lower the public offering price to include certain
institutional or retail bidders in the offering. The
underwriters and us may also lower the public offering price to
create a more stable post-offering trading price for our shares.
The public offering price always determines the
allocation of shares to potential investors. Therefore, if the
public offering price is below the clearing price, all valid
bids that are at or above the public offering price receive a
pro rata portion of the shares bid for. If sufficient bids are
not received, or if we do not consider the clearing price to be
adequate, or if the underwriters and we are not able to reach
agreement on the public offering price, then the underwriters
and we will either postpone or cancel this offering.
Alternatively, we may file with the SEC a post-effective
amendment to the registration statement in order to conduct a
new auction.
The following simplified example illustrates how
the public offering price is determined through the auction
process:
Company X offers to sell 1,000 shares in its
public offering through the auction process. The underwriters,
on behalf of Company X, receive five bids to purchase, all of
which are kept confidential until the auction closes.
The first bid is to pay $10.00 per share for
200 shares. The second bid is to pay $9.00 per share
for 300 shares. The third bid is to pay $8.00 per
share for 600 shares. The fourth bid is to pay
$7.00 per share for 400 shares. The fifth bid is to
pay $6.00 per share for 800 shares.
Assuming that none of these bids are withdrawn or
modified before the auction closes, and assuming that no
additional bids are received, the clearing price used to
determine the public offering price would be $8.00 per
share, which is the highest price at which all 1,000 shares
offered may be sold to potential investors who have submitted
valid bids. However, the shares may be sold at a price below
$8.00 per share based on negotiations between Company X and
the underwriters.
103
If the public offering price is the same as the
$8.00 per share clearing price, the underwriters would
accept bids at or above $8.00 per share. Because
1,100 shares were bid for at or above the clearing price,
each of the three potential investors who bid $8.00 per
share or more would receive approximately 90% of the shares for
which bids were made. The two potential investors whose bids
were below $8.00 per share would not receive any shares in
this example.
If the public offering price is $7.00 per
share, the underwriters would accept bids that were made at or
above $7.00 per share. No bids made at a price of less than
$7.00 per share would be accepted. The four potential
investors with the highest bids would receive a pro rata portion
of the 1,000 shares offered, based on the 1,500 shares
they requested, or two-thirds of the shares for which bids were
made. The potential investor with the lowest bid would not
receive any shares in this example.
As described in Allocation of Shares
below, because bids that are reduced on a pro rata basis may be
rounded down to round lots, a potential investor may be
allocated less than two-thirds of the shares bid for. Thus, the
potential investor who bid for 200 shares may receive a pro
rata allocation of 100 shares (one-half of the shares bid
for), rather than receiving a pro rata allocation of
133 shares (two-thirds of the shares bid for).
The following table illustrates the example
described above, before rounding down any bids to the nearest
round lot, assuming that the initial public offering price is
set at $8.00 per share. The table also assumes that these
bids are the final bids, and that they reflect any modifications
that have been made to reflect any prior changes to the offering
range, and to avoid the issuance of fractional shares.
Initial Public Offering of Company X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bid Information
|
|
Auction Results
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
Allocated
|
|
|
|
|
Shares
|
|
Shares
|
|
|
|
Shares
|
|
Requested
|
|
Clearing
|
|
Amount
|
|
|
Requested
|
|
Requested
|
|
Bid Price
|
|
Allocated
|
|
Shares
|
|
Price
|
|
Raised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
200
|
|
|
$
|
10.00
|
|
|
|
180
|
|
|
|
90
|
%
|
|
$
|
8.00
|
|
|
$
|
1,440
|
|
|
|
|
300
|
|
|
|
500
|
|
|
$
|
9.00
|
|
|
|
270
|
|
|
|
90
|
%
|
|
$
|
8.00
|
|
|
$
|
2,160
|
|
Clearing Price
|
|
|
600
|
|
|
|
1,100
|
|
|
$
|
8.00
|
|
|
|
550
|
|
|
|
90
|
%
|
|
$
|
8.00
|
|
|
$
|
4,400
|
|
|
|
|
400
|
|
|
|
1,500
|
|
|
$
|
7.00
|
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
2,300
|
|
|
$
|
6.00
|
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
$
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Shares
Bidders receiving a pro rata portion of the
shares they bid for generally receive an allocation of shares on
a round-lot basis, rounded to multiples of 100 or
1,000 shares, depending on the size of the bid. No bids are
rounded to a round lot higher than the original bid size.
Because bids may be rounded down to round lots in multiples of
100 or 1,000 shares, some bidders may receive allocations
of shares that reflect a greater percentage decrease in their
original bid than the average pro rata decrease. Thus, for
example, if a bidder has confirmed a bid for 200 shares,
and there is an average pro rata decrease of all bids of 30%,
the bidder may receive an allocation of 100 shares (a 50%
decrease from 200 shares) rather than receiving an
allocation of 140 shares (a 30% decrease from
200 shares). In addition, some bidders may receive
allocations of shares that reflect a lesser percentage decrease
in their original bid than the average pro rata decrease. For
example, if a bidder has submitted a bid for 100 shares,
and there is an average pro rata decrease of all bids of 30%,
the bidder may receive an allocation of all 100 shares to
avoid having the bid rounded down to zero.
Generally the allocation of shares in the
offering will be determined in the following manner:
|
|
|
|
|
Any bid with a price below the public offering
price is allocated no shares.
|
|
|
|
The pro-rata percentage is determined by dividing
the number of shares offered (including the overallotment
option) by the total number of shares bid at or above the public
offering price. For
|
104
|
|
|
|
|
|
example, if there are 2,000 shares bid for
at or above the public offering price, and 1,500 shares
offered in the offering, then the pro-rata percentage is 75%.
|
|
|
|
|
|
All of the successful bids are then multiplied by
the pro-rata percentage to determine the allocations before
rounding. For example, three winning bids for 1,000 shares
(Bid 1), 900 shares (Bid 2) and 100 shares
(Bid 3) would be allocated 750 shares, 675 shares
and 75 shares respectively, based on the pro rata
percentage.
|
|
|
|
|
|
The bids are then rounded down to the nearest
100 share round lot, so the bids would be rounded to 700,
600 and 0 shares respectively. This creates a stub of 200
unallocated shares.
|
|
|
|
|
|
The 200 stub shares are then allocated to the
bids. Continuing the example above, because Bid 3 for
100 shares was rounded down to 0 shares, 100 of the
stub shares would be allocated to Bid 3. If there were not
sufficient stub shares to allocate at least 100 shares to
Bid 3, Bid 3 would not receive any shares in the
offering. After allocation of these shares, 100 unallocated stub
shares would remain.
|
|
|
|
|
|
Because Bid 2 for 900 shares was reduced, as
a result of rounding, by more total shares then Bid 1 for
1,000 shares, Bid 2 would then be allocated the
remaining 100 stub shares up to the nearest 100 round lot (from
600 shares to 700 shares).
|
|
If there are not sufficient remaining stub shares
to enable a bid to be rounded up to a round lot of
100 shares the remaining 37 unallocated stub shares would
be allocated to smaller orders that are below their bid amounts.
The table below illustrates the allocations in the example above.
Initial Public Offering of Company X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
Pro-Rata Allocation
|
|
Initial
|
|
Allocation of
|
|
Final
|
|
|
Bid
|
|
(75% of Initial Bid)
|
|
Rounding
|
|
Stub Shares
|
|
Allocation
|
|
|
|
|
|
|
|
|
|
|
|
Bid 1
|
|
|
1,000
|
|
|
|
750
|
|
|
|
700
|
|
|
|
0
|
|
|
|
700
|
|
Bid 2
|
|
|
900
|
|
|
|
675
|
|
|
|
600
|
|
|
|
100
|
|
|
|
700
|
|
Bid 3
|
|
|
100
|
|
|
|
75
|
|
|
|
0
|
|
|
|
100
|
|
|
|
100
|
|
|
Total
|
|
|
2,000
|
|
|
|
1,500
|
|
|
|
1,300
|
|
|
|
200
|
|
|
|
1,500
|
|
Requirements for Valid Bids
Valid bids are those that meet the requirements,
including eligibility, account status and size, established by
the underwriters or participating dealers. In order to open a
brokerage account with WR Hambrecht + Co, a potential
investor must deposit $2,000 in its account. This brokerage
account will be a general account subject to WR
Hambrecht + Cos customary rules, and will not be
limited to this offering. The auction may close in as little as
one hour after the registration statement is declared effective.
However, other than the $2,000 described above, prospective
investors are not required to deposit any money into their
accounts until after the registration statement becomes
effective. No funds will be transferred to WR
Hambrecht + Co, and any amounts in excess of $2,000
may be withdrawn at any time until the auction closes and the
bid is accepted. Of course, any potential bidder that decides
not to participate in the auction may close its account at WR
Hambrecht + Co and withdraw its funds at any time. The
underwriters reserve the right in their sole discretion to
reject or reduce any bids that they deem manipulative or
disruptive or not creditworthy in order to facilitate the
orderly completion of the offering. For example, in previous
transactions for other issuers in which the auction process was
used, the underwriters have rejected or reduced bids when the
underwriters, in their sole discretion, deemed the bids not
creditworthy or had reason to question the bidders intent
or means to fund its bid. In the absence of other information,
an underwriter or participating dealer may assess a
bidders creditworthiness based solely on the bidders
account balance or history with the underwriter or participating
dealer. The underwriters have also reduced or rejected bids that
they deemed, in their sole discretion, to be potentially
manipulative or disruptive or because the bidder had a history
of alleged securities law violations. Other conditions for valid
bids, including eligibility standards and account funding
requirements of The Seidler Companies Incorporated and
participating dealers other than WR Hambrecht + Co,
may vary. As a result of these varying requirements, a bidder
may have its bid rejected by an underwriter or participating
dealer while another bidders identical bid is accepted.
105
The Closing of the Auction and Allocation of
Shares
The auction will close on a date and at a time
estimated and publicly disclosed in advance by the underwriters
on the websites of WR Hambrecht + Co at
www.wrhambrecht.com and
www.openipo.com
. The auction may
close in as little as one hour following effectiveness of the
registration statement. The 2,250,000 shares offered by
this prospectus, or 2,587,500 shares if the
underwriters over-allotment option is exercised in full,
will be purchased from us by the underwriters and sold through
the underwriters and participating dealers to investors who have
submitted valid bids at or higher than the public offering price.
The underwriters or a participating dealer notify
successful bidders by sending a notice of acceptance by e-mail,
telephone or facsimile or mail (according to any preference
indicated by a bidder) informing bidders that the auction has
closed and that their bids have been accepted. The notice will
indicate the price and number of shares that have been allocated
to the successful bidder. Other bidders are notified that their
bids have not been accepted.
Each participating dealer has agreed with the
underwriters to sell the shares it purchases from the
underwriters in accordance with the auction process described
above, unless the underwriters otherwise consent. The
underwriters do not intend to consent to the sale of any shares
in this offering outside of the auction process. The
underwriters reserve the right in their sole discretion to
reject or reduce any bids that they deem manipulative or
disruptive in order to facilitate the orderly completion of this
offering, and they reserve the right, in exceptional
circumstances, to alter this method of allocation as they deem
necessary to ensure a fair and orderly distribution of the
shares of our common stock. For example, large orders may be
reduced to ensure a public distribution and bids may be rejected
or reduced by the underwriters or participating dealers based on
eligibility or creditworthiness criteria. Once the underwriters
have accepted a bid and closed the auction, the allocation of
shares sold in the offering will be made according to the
process described in Allocation of Shares above, and
no shares sold in the offering will be allocated on a
preferential basis or outside of the allocation rules to any
institutional or retail bidders. In addition, the underwriters
or the participating dealers may reject or reduce a bid by a
prospective investor who has engaged in practices that could
have a manipulative, disruptive or otherwise adverse effect on
the offering.
Some dealers participating in the selling group
may submit firm bids that reflect indications of interest from
their customers that they have received at prices within the
initial public offering price range. In these cases, the dealer
submitting the bid is treated as the bidder for the purposes of
determining the clearing price and allocation of shares.
Price and volume volatility in the market for our
common stock may result from the somewhat unique nature of the
proposed plan of distribution. Price and volume volatility in
the market for our common stock after the completion of this
offering may adversely affect the market price of our common
stock.
We have granted to the underwriters an option,
exercisable no later than 30 days after the date of this
prospectus, to purchase up to an aggregate of 337,500 additional
shares of our common stock from us at the offering price, less
the underwriting discounts and commissions set forth on the
cover page of this prospectus. To the extent that the
underwriters exercise this option, they will have a firm
commitment to purchase the additional shares and we will be
obligated to sell the additional shares to the underwriters. The
underwriters may exercise the option only to cover
over-allotments made in connection with the sale of shares
offered. The underwriting agreement provides that we will
indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make.
We have agreed not to offer, sell, contract to
sell, pledge, grant any option to purchase, make any short sale
or otherwise dispose of any shares of common stock, or any
options or warrants to purchase common stock other than the
shares of common stock or options to acquire common stock issued
under our stock plans, for a period of 180 days after the
date of this prospectus, except with the prior written consent
of WR Hambrecht + Co. Each of our directors and
executive officers and certain holders of our common stock, who
collectively will hold approximately 64.9% of our common stock
following the offering, based on the number of shares
outstanding at December 31, 2004 and on the assumptions set
forth under the table in Capitalization, have agreed
to restrictions on their ability to sell, offer, contract or
grant any option to sell, pledge, transfer or
106
otherwise dispose of shares of our common stock
for a period of 180 days in the case of our directors and
officers and certain holders of our common stock, and
90 days in the case of certain other holders of our common
stock, after the date of this prospectus, without the prior
written consent of WR Hambrecht + Co. The persons
signing the lock-up agreements will be able to transfer their
shares of common stock as a bona fide gift to immediate family
members or to a trust or partnership or other business entity,
or as a distribution without compensation to partners, members
or shareholders of a business entity, subject to the transferees
agreeing to enter into a lock-up agreement. In considering any
request to release shares subject to a lock-up agreement,
WR Hambrecht + Co will consider the possible
impact of the release of the shares on the trading price of the
stock sold in the offering.
In connection with the offering, the underwriters
may purchase and sell shares of common stock in the open market.
These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short
sales. Any short sales made by the underwriters would be made at
the public offering price. Short sales involve the sale by the
underwriters of a greater number of shares than they are
required to purchase in the offering. Covered short
sales are sales made in an amount not greater than the
underwriters option to purchase additional shares from us
in the offering. The underwriters may close out any covered
short position by either exercising its option to purchase
additional shares or purchasing shares in the open market. As
described above, the number of shares that may be sold pursuant
to the underwriters overallotment option is included in
the calculation of the clearing price. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment option. Naked short sales are any
sales in excess of such option. To the extent that the
underwriters engage in any naked short sales, the naked short
position would not be included in the calculation of the
clearing price. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or
purchases of common stock made by the underwriters in the open
market prior to the completion of the offering.
The underwriters may also impose a penalty bid.
This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by
it because one underwriter has repurchased shares sold by or for
the account of the other underwriter in stabilizing or short
covering transactions.
These activities by the underwriters may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, the underwriters may
discontinue them at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or
otherwise.
WR Hambrecht + Co, LLC, The Seidler
Companies Incorporated and at least one other selling group
member currently intend to act as a market maker for the common
stock following this offering. However, they are not obligated
to do so and may discontinue any market making at any time.
Indemnity
The underwriting agreement contains covenants of
indemnity between the underwriter and us against certain civil
liabilities, including liabilities under the Securities Act, and
liabilities arising from breaches of representations and
warranties contained in the underwriting agreement.
VALIDITY OF THE SECURITIES
The validity of our common stock offered by this
prospectus will be passed upon for us by Morrison &
Foerster LLP, Los Angeles, California. The validity of the
common stock offered by this prospectus will be passed upon for
the underwriters by Manatt, Phelps & Phillips, LLP, Costa
Mesa, California.
107
EXPERTS
The consolidated financial statements of BofI
Holding, Inc. included in this prospectus have been audited by
Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report appearing herein, and
has been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1 with the Securities and Exchange Commission, or
the SEC. This prospectus, which is part of the registration
statement, does not contain all the information included in the
registration statement. Because some information is omitted, you
should refer to the registration statement and its exhibits. For
copies of actual contracts of documents referred to in this
prospectus, you should refer to the exhibits attached to the
registration statement. You may review a copy of the
registration statement, including the attached exhibits, at the
SECs Public Reference Room:
Public Reference Room
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports,
proxy statements, and other information regarding issuers that
file electronically with the SEC. The address of the SECs
website is http://www.sec.gov.
108
BOFI HOLDING, INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
Report of Independent Registered Public
Accounting Firm
|
|
|
F-2
|
|
Consolidated Balance Sheets at December 31,
2004 (unaudited) and June 30, 2004 and 2003
|
|
|
F-3
|
|
Consolidated Statements of Income for the six
months ended December 31, 2004 and 2003
(unaudited) and for each of the years ended June 30,
2004, 2003 and 2002
|
|
|
F-4
|
|
Consolidated Statements of Stockholders
Equity and Comprehensive Income for the six months ended
December 31, 2004 (unaudited) and for each of the
years ended June 30, 2004, 2003 and 2002
|
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the six
months ended December 31, 2004 and 2003 (unaudited) and for
each of the years ended June 30, 2004, 2003 and 2002
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and Stockholders
Bofl Holding, Inc.
We have audited the consolidated balance sheets
of Bofl Holding, Inc. and subsidiary (the Company)
as of June 30, 2004 and 2003, and the related consolidated
statements of income, stockholders equity and
comprehensive income, and cash flows for each of the
three years in the period ended June 30, 2004. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Bofl Holding, Inc. and subsidiary as of
June 30, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the
period ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.
|
|
|
/s/ DELOITTE & TOUCHE LLP
|
Los Angeles, California
October 13, 2004
F-2
BofI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
Cash and due from banks
|
|
$
|
2,531
|
|
|
$
|
1,838
|
|
|
$
|
2,673
|
|
|
Money market mutual funds
|
|
|
523
|
|
|
|
519
|
|
|
|
514
|
|
|
Federal funds sold
|
|
|
15,523
|
|
|
|
22,502
|
|
|
|
3,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
18,577
|
|
|
|
24,859
|
|
|
|
6,462
|
|
|
Time deposits in financial institutions
|
|
|
7,522
|
|
|
|
9,503
|
|
|
|
11,872
|
|
|
Investment securities available for sale
|
|
|
44,825
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity
|
|
|
8,216
|
|
|
|
3,665
|
|
|
|
441
|
|
|
Stock of the Federal Home Loan Bank, at cost
|
|
|
6,998
|
|
|
|
4,789
|
|
|
|
2,795
|
|
|
Loans held for investment net of
allowance for loan losses of $1,220 in December 2004, $1,045 in
June 2004 and $790 in June 2003
|
|
|
417,915
|
|
|
|
355,261
|
|
|
|
245,933
|
|
|
Loans held for sale
|
|
|
845
|
|
|
|
435
|
|
|
|
3,602
|
|
|
Accrued interest receivable
|
|
|
1,793
|
|
|
|
1,486
|
|
|
|
1,107
|
|
|
Furniture, equipment and software net
|
|
|
154
|
|
|
|
181
|
|
|
|
214
|
|
|
Deferred income tax
|
|
|
532
|
|
|
|
407
|
|
|
|
461
|
|
|
Bank-owned life insurance cash
surrender value
|
|
|
3,971
|
|
|
|
3,893
|
|
|
|
|
|
|
Other assets
|
|
|
1,760
|
|
|
|
560
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
513,108
|
|
|
$
|
405,039
|
|
|
$
|
273,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
3,850
|
|
|
$
|
2,279
|
|
|
$
|
3,299
|
|
|
Interest bearing
|
|
|
316,169
|
|
|
|
267,562
|
|
|
|
190,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
320,019
|
|
|
|
269,841
|
|
|
|
193,992
|
|
Advances from the Federal Home Loan Bank
|
|
|
148,504
|
|
|
|
101,446
|
|
|
|
55,900
|
|
Note payable
|
|
|
5,000
|
|
|
|
1,300
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
576
|
|
|
|
283
|
|
|
|
272
|
|
Accounts payable and accrued liabilities
|
|
|
1,010
|
|
|
|
410
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
480,264
|
|
|
|
373,280
|
|
|
|
250,579
|
|
COMMITMENTS AND CONTINGENCIES
(Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
$10,000 stated value; 1,000,000 shares authorized;
675 shares issued and outstanding
|
|
|
6,637
|
|
|
|
6,637
|
|
|
|
|
|
|
Common stock $.01 par value;
10,000,000 shares authorized; 4,563,399 (December 2004),
4,506,524 (June 2004) and 4,474,351 (June 2003) shares issued
and outstanding
|
|
|
46
|
|
|
|
45
|
|
|
|
45
|
|
|
Additional paid-in capital
|
|
|
22,601
|
|
|
|
22,363
|
|
|
|
22,161
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
3,686
|
|
|
|
2,714
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
32,844
|
|
|
|
31,759
|
|
|
|
22,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
513,108
|
|
|
$
|
405,039
|
|
|
$
|
273,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
BofI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except earnings per
share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
INTEREST AND DIVIDEND INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
9,169
|
|
|
$
|
6,929
|
|
|
$
|
15,177
|
|
|
$
|
12,723
|
|
|
$
|
10,765
|
|
|
Investments
|
|
|
1,023
|
|
|
|
289
|
|
|
|
595
|
|
|
|
791
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
10,192
|
|
|
|
7,218
|
|
|
|
15,772
|
|
|
|
13,514
|
|
|
|
11,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,944
|
|
|
|
3,132
|
|
|
|
6,534
|
|
|
|
6,708
|
|
|
|
6,955
|
|
|
Advances from the Federal Home Loan Bank
|
|
|
1,857
|
|
|
|
1,198
|
|
|
|
2,648
|
|
|
|
1,718
|
|
|
|
1,143
|
|
|
Other borrowings
|
|
|
104
|
|
|
|
12
|
|
|
|
60
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
5,905
|
|
|
|
4,342
|
|
|
|
9,242
|
|
|
|
8,426
|
|
|
|
8,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,287
|
|
|
|
2,876
|
|
|
|
6,530
|
|
|
|
5,088
|
|
|
|
3,497
|
|
Provision for loan losses
|
|
|
175
|
|
|
|
35
|
|
|
|
255
|
|
|
|
285
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, after provision for loan
losses
|
|
|
4,112
|
|
|
|
2,841
|
|
|
|
6,275
|
|
|
|
4,803
|
|
|
|
3,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment penalty fee income
|
|
|
200
|
|
|
|
203
|
|
|
|
624
|
|
|
|
446
|
|
|
|
114
|
|
|
|
Gain on sale of loans originated for sale
|
|
|
44
|
|
|
|
204
|
|
|
|
364
|
|
|
|
778
|
|
|
|
67
|
|
|
|
Banking service fees and other income
|
|
|
141
|
|
|
|
67
|
|
|
|
202
|
|
|
|
125
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
385
|
|
|
|
474
|
|
|
|
1,190
|
|
|
|
1,349
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,373
|
|
|
|
941
|
|
|
|
1,880
|
|
|
|
1,538
|
|
|
|
1,300
|
|
|
Professional services
|
|
|
149
|
|
|
|
64
|
|
|
|
166
|
|
|
|
152
|
|
|
|
172
|
|
|
Occupancy and equipment
|
|
|
128
|
|
|
|
120
|
|
|
|
245
|
|
|
|
205
|
|
|
|
161
|
|
|
Data processing and internet
|
|
|
181
|
|
|
|
152
|
|
|
|
328
|
|
|
|
278
|
|
|
|
210
|
|
|
Advertising and promotional
|
|
|
131
|
|
|
|
97
|
|
|
|
220
|
|
|
|
189
|
|
|
|
141
|
|
|
Depreciation and amortization
|
|
|
56
|
|
|
|
47
|
|
|
|
97
|
|
|
|
144
|
|
|
|
118
|
|
|
Service contract termination
|
|
|
59
|
|
|
|
197
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
469
|
|
|
|
367
|
|
|
|
686
|
|
|
|
652
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
2,546
|
|
|
|
1,985
|
|
|
|
3,819
|
|
|
|
3,158
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
1,951
|
|
|
|
1,330
|
|
|
|
3,646
|
|
|
|
2,994
|
|
|
|
591
|
|
INCOME TAXES (BENEFIT)
|
|
|
776
|
|
|
|
580
|
|
|
|
1,471
|
|
|
|
1,264
|
|
|
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,175
|
|
|
$
|
750
|
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON STOCK
|
|
$
|
972
|
|
|
$
|
731
|
|
|
$
|
2,035
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.25
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
|
0.39
|
|
|
|
0.34
|
|
|
|
0.21
|
|
See notes to consolidated financial statements.
F-4
BofI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
Retained
|
|
Other
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
|
|
Earnings
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
(Accumulated
|
|
Loss, Net of
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit)
|
|
Tax
|
|
Income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE July 1, 2001
|
|
|
|
|
|
$
|
|
|
|
|
3,707,116
|
|
|
$
|
37
|
|
|
$
|
13,937
|
|
|
$
|
(2,071
|
)
|
|
$
|
|
|
|
|
|
|
|
$
|
11,903
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
627,100
|
|
|
|
6
|
|
|
|
6,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,183
|
|
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
Extension of term to exercise common stock
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020
|
|
|
|
|
|
|
$
|
1,020
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30, 2002
|
|
|
|
|
|
|
|
|
|
|
4,334,401
|
|
|
|
43
|
|
|
|
20,509
|
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
|
|
|
|
19,501
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
139,950
|
|
|
|
2
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,654
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
|
|
|
|
$
|
1,730
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30, 2003
|
|
|
|
|
|
|
|
|
|
|
4,474,351
|
|
|
|
45
|
|
|
|
22,161
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
22,885
|
|
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
23,423
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
8,750
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
Issuance of convertible preferred stock
|
|
|
675
|
|
|
|
6,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,637
|
|
|
Cash dividends on convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,175
|
|
|
|
|
|
|
$
|
2,175
|
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30, 2004
|
|
|
675
|
|
|
|
6,637
|
|
|
|
4,506,524
|
|
|
|
45
|
|
|
|
22,363
|
|
|
|
2,714
|
|
|
|
|
|
|
|
|
|
|
|
31,759
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,175
|
|
|
|
|
|
|
$
|
1,175
|
|
|
|
1,175
|
|
|
Net unrealized loss from investment
securities net of income tax benefit of $85
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
(126
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on convertible preferred stock
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
|
Exercise of common stock warrants (unaudited)
|
|
|
|
|
|
|
|
|
|
|
56,875
|
|
|
|
1
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2004
(unaudited)
|
|
|
675
|
|
|
$
|
6,637
|
|
|
|
4,563,399
|
|
|
$
|
46
|
|
|
$
|
22,601
|
|
|
$
|
3,686
|
|
|
$
|
(126
|
)
|
|
|
|
|
|
$
|
32,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
BofI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,175
|
|
|
$
|
750
|
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of premiums on investment securities
|
|
|
39
|
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
10
|
|
|
|
Amortization of premiums and deferred loan fees
|
|
|
255
|
|
|
|
256
|
|
|
|
485
|
|
|
|
481
|
|
|
|
505
|
|
|
|
Provision for loan losses
|
|
|
175
|
|
|
|
35
|
|
|
|
255
|
|
|
|
285
|
|
|
|
195
|
|
|
|
Deferred income taxes
|
|
|
(40
|
)
|
|
|
60
|
|
|
|
54
|
|
|
|
(31
|
)
|
|
|
(430
|
)
|
|
|
Origination of loans held for sale
|
|
|
(9,795
|
)
|
|
|
(43,643
|
)
|
|
|
(76,550
|
)
|
|
|
(124,739
|
)
|
|
|
(6,994
|
)
|
|
|
Gain on sales of loans held for sale
|
|
|
(44
|
)
|
|
|
(204
|
)
|
|
|
(364
|
)
|
|
|
(778
|
)
|
|
|
(67
|
)
|
|
|
Proceeds from sale of loans held for sale
|
|
|
9,429
|
|
|
|
47,449
|
|
|
|
80,081
|
|
|
|
122,042
|
|
|
|
6,932
|
|
|
|
Depreciation and amortization
|
|
|
56
|
|
|
|
47
|
|
|
|
97
|
|
|
|
144
|
|
|
|
118
|
|
|
|
Amortization of borrowing costs
|
|
|
58
|
|
|
|
53
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividends from the Federal Home
Loan Bank
|
|
|
(97
|
)
|
|
|
(55
|
)
|
|
|
(118
|
)
|
|
|
(89
|
)
|
|
|
(51
|
)
|
|
|
Extension of term to exercise common stock
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
Net changes in assets and liabilities which
provide (use) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(307
|
)
|
|
|
(12
|
)
|
|
|
(379
|
)
|
|
|
(139
|
)
|
|
|
(106
|
)
|
|
|
|
Other assets
|
|
|
(1,152
|
)
|
|
|
101
|
|
|
|
(76
|
)
|
|
|
17
|
|
|
|
(534
|
)
|
|
|
|
Accrued interest payable
|
|
|
293
|
|
|
|
(5
|
)
|
|
|
11
|
|
|
|
(111
|
)
|
|
|
(95
|
)
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
600
|
|
|
|
(185
|
)
|
|
|
(5
|
)
|
|
|
203
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
|
645
|
|
|
|
4,648
|
|
|
|
5,776
|
|
|
|
(982
|
)
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investment securities available for
sale
|
|
|
(48,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities held to
maturity
|
|
|
(5,882
|
)
|
|
|
(1,388
|
)
|
|
|
(9,142
|
)
|
|
|
(14,355
|
)
|
|
|
(10,575
|
)
|
|
Proceeds from maturities of investments
|
|
|
6,451
|
|
|
|
4,371
|
|
|
|
8,287
|
|
|
|
13,055
|
|
|
|
4,150
|
|
|
Net increase in stock of the Federal Home
Loan Bank
|
|
|
(2,112
|
)
|
|
|
(495
|
)
|
|
|
(1,876
|
)
|
|
|
(1,005
|
)
|
|
|
(854
|
)
|
|
Origination of loans
|
|
|
(27,682
|
)
|
|
|
(37,198
|
)
|
|
|
(64,478
|
)
|
|
|
(58,609
|
)
|
|
|
(34,659
|
)
|
|
Purchases of loans
|
|
|
(70,859
|
)
|
|
|
(52,468
|
)
|
|
|
(129,193
|
)
|
|
|
(81,778
|
)
|
|
|
(132,298
|
)
|
|
Principal repayments on loans
|
|
|
35,457
|
|
|
|
51,544
|
|
|
|
83,603
|
|
|
|
60,939
|
|
|
|
138,708
|
|
|
Purchases of furniture, equipment and software
|
|
|
(29
|
)
|
|
|
(11
|
)
|
|
|
(64
|
)
|
|
|
(58
|
)
|
|
|
(29
|
)
|
|
Premium paid for bank-owned life insurance
|
|
|
|
|
|
|
(3,814
|
)
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing
activities
|
|
|
(112,870
|
)
|
|
|
(39,459
|
)
|
|
|
(116,663
|
)
|
|
|
(81,811
|
)
|
|
|
(35,557
|
)
|
F-6
BofI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
$
|
50,178
|
|
|
$
|
26,243
|
|
|
$
|
75,849
|
|
|
$
|
26,374
|
|
|
$
|
40,414
|
|
|
Proceeds from the Federal Home Loan Bank
advances
|
|
|
47,000
|
|
|
|
10,436
|
|
|
|
48,436
|
|
|
|
26,000
|
|
|
|
18,000
|
|
|
Repayment of the Federal Home Loan Bank
advance
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
(4,000
|
)
|
|
Proceeds from federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
Repayment of federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
|
Proceeds from issuance of notes payable to
related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,700
|
|
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,570
|
)
|
|
Proceeds from issuance of junior subordinated
debentures
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt issue costs for junior
subordinated debentures
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,654
|
|
|
|
6,184
|
|
|
Proceeds from revolving line term loan facility
|
|
|
3,700
|
|
|
|
3,060
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible
preferred stock
|
|
|
|
|
|
|
2,860
|
|
|
|
6,637
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options
and warrants
|
|
|
239
|
|
|
|
147
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on convertible preferred stock
|
|
|
(203
|
)
|
|
|
(19
|
)
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
105,943
|
|
|
|
42,727
|
|
|
|
129,284
|
|
|
|
54,028
|
|
|
|
59,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(6,282
|
)
|
|
|
7,916
|
|
|
|
18,397
|
|
|
|
(28,765
|
)
|
|
|
25,007
|
|
CASH AND CASH EQUIVALENTS Beginning
of year
|
|
|
24,859
|
|
|
|
6,462
|
|
|
|
6,462
|
|
|
|
35,227
|
|
|
|
10,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of
period
|
|
$
|
18,577
|
|
|
$
|
14,378
|
|
|
$
|
24,859
|
|
|
$
|
6,462
|
|
|
$
|
35,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on deposits and borrowed funds
|
|
$
|
5,554
|
|
|
$
|
4,847
|
|
|
$
|
9,686
|
|
|
$
|
8,537
|
|
|
$
|
8,238
|
|
|
Income taxes paid
|
|
$
|
912
|
|
|
$
|
586
|
|
|
$
|
1,364
|
|
|
$
|
1,301
|
|
|
$
|
2
|
|
See notes to consolidated financial statements.
F-7
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002
(Dollars in thousands, except per share
data)
|
|
1.
|
Organizations and Summary of Significant
Accounting Policies
|
Basis of Presentation and
Consolidation
The
consolidated financial statements include the accounts of BofI
Holding, Inc. and its wholly owned subsidiary, Bank of Internet
USA (collectively, the Company). All significant
intercompany balances have been eliminated in consolidation.
BofI Holding, Inc. was incorporated in the State
of Delaware on July 6, 1999 for the purpose of organizing
and launching an Internet-based savings bank. The Bank of
Internet USA (the Bank), which opened for business
over the Internet on July 4, 2000, is subject to regulation
and examination by the Office of Thrift Supervision
(OTS), its primary regulator. The Federal Deposit
Insurance Corporation (FDIC) insures the Banks
deposit accounts up to the maximum allowable amount.
During the year ended June 30, 2003, the
Company changed its name from BofI.com Holding, Inc.
to BofI Holding, Inc.
Unaudited Interim Financial
Information
The
accompanying unaudited interim consolidated balance sheet as of
December 31, 2004, the consolidated statements of income
for the six months ended December 31, 2004 and 2003, the
consolidated statements of cash flows for the six months ended
December 31, 2004 and 2003 and the consolidated statement
of stockholders equity and comprehensive income for the
six months ended December 31, 2004 are unaudited. These
unaudited interim consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles. In the opinion of the Companys management, the
unaudited interim consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and include all adjustments necessary for the fair
presentation of the Companys statement of financial
position at December 31, 2004, its results of operations
and its cash flows for the six months ended December 31,
2004 and 2003. The results for the six months ended
December 31, 2004 are not necessarily indicative of the
results to be expected for the year ending June 30, 2005.
Use of
Estimates
In preparing
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results may differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation
of deferred tax assets.
Business
The Bank provides financial services to consumers through the
Internet. The Banks deposit products are demand accounts,
savings accounts and time deposits marketed to consumers located
in all fifty states. The Banks primary lending products
are residential single family and multifamily mortgage loans.
The Banks business is primarily concentrated in the State
of California and is subject to the general economic conditions
of that State.
Cash
Equivalents
Cash and cash
equivalents include cash and due from banks, money market mutual
funds and federal funds sold, all of which have original
maturities within ninety days.
Federal Reserve Board regulations require
depository institutions to maintain certain minimum reserve
balances. Included in cash were balances maintained at the
Federal Reserve Bank of San Francisco of $908 at
December 31, 2004 and $770 and $1,037 at June 30, 2004
and 2003, respectively.
Interest Rate
Risk
The Banks
assets and liabilities are generally monetary in nature and
interest rate changes have an effect on the Banks
performance. The Bank decreases the effect of interest rate
changes on its performance by striving to match maturities and
interest sensitivity between loans and deposits. A significant
change in interest rates could have a material effect on the
Banks results of operations.
F-8
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Deferred Loan Fees and
Costs
Loan origination
fees and certain direct origination costs for loans held for
investment are capitalized and recognized as an adjustment to
the interest yield of the related loans over their estimated
lives.
Loans Held for
Sale
Loans originated and
intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation
allowance by charges to income. The Bank generally sells its
loans with the servicing released to the buyer. Gains and loses
on loan sales are recorded in noninterest income, based on the
difference between sales proceeds and carrying value.
Allowance for Loan
Losses
The allowance for
loan losses is maintained at a level estimated to provide for
probable losses in the loan portfolio. Management determines the
adequacy of the allowance based upon reviews of individual loans
and pools of loans, recent loss experience, current economic
conditions, the risk characteristics of the various categories
of loans and other pertinent factors. This evaluation is
inherently subjective and requires estimates that are
susceptible to significant revision as more information becomes
available. The allowance is increased by the provision for loan
losses, net of recoveries of loans previously charged-off, which
is charged against current period operating results. The
allowance is decreased by the amount of charge-offs of loans
deemed uncollectible.
Under the allowance for loan loss policy,
impairment calculations are determined based on general
portfolio data for general reserves and loan level data for
specific reserves. Specific loans are evaluated for impairment
and are classified as nonperforming or in foreclosure when they
are 90 days or more delinquent. A loan is considered
impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally
are not classified as impaired. Impairment is measured on a loan
by loan basis by either the present value of expected future
cash flows discounted at the loans effective interest rate
or the fair value of the collateral if repayment of the loan is
expected primarily from the sale of collateral.
General loan loss reserves are calculated by
grouping each loan by collateral type and by grouping the
loan-to-value ratios of each loan within the collateral type. An
estimated allowance rate for each loan-to-value group within
each type of loan is multiplied by the total principal amount in
the group to calculate the required general reserve attributable
to that group. Management uses an allowance rate that provides a
larger loss allowance for loans with greater loan-to-value
ratios. Specific reserves are calculated when an internal asset
review of a loan identifies a significant adverse change in the
financial position of the borrower or the value of the
collateral. The specific reserve is based on discounted cash
flows, observable market prices or the estimated value of
underlying collateral.
Investment Securities Available for
Sale
Securities
available-for-sale are reported at estimated fair value, with
unrealized gains and losses, net of the related tax effects,
excluded from operations and reported as a separate component of
accumulated other comprehensive income or loss. Amortization of
premiums and accretion of discounts on securities are recorded
as yield adjustments on such securities using the effective
interest method. The specific identification method is used for
purposes of determining cost in computing realized gains and
losses on investment securities sold. At each reporting date,
available-for-sale securities are assessed to determine whether
there is an other-than-temporary impairment. Such impairment is
required to be recognized in current earnings rather than other
comprehensive income or loss.
F-9
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Investment Securities Held to
Maturity
Securities that
management has the positive intent and ability to hold to
maturity are classified as held to maturity and
recorded at amortized cost. Purchase premiums and discounts are
recognized in interest income using the interest method over the
terms of the securities. Declines in the fair value of
held-to-maturity securities below their cost that are deemed to
be other-than-temporary are reflected in earnings as realized
losses.
Furniture, Equipment and
Software
Fixed asset
purchases in excess of five hundred dollars are capitalized and
recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, which is three to seven years. Leasehold improvements
are amortized over the lesser of the assets useful lives
or the lease term.
Interest Income on
Loans
Interest on loans is
generally recorded over the terms of the loans based on the
unpaid principal balances. Accrual of interest is discontinued
when either principal or interest becomes 90 days past due
or when, in managements opinion, collectibility of such
interest is doubtful. In addition, accrued but uncollected
interest is reversed when a loan becomes 90 days past due.
Premiums and Discounts on Loans
Purchased
Premiums and
discounts on loans purchased from third parties are capitalized
and amortized or accreted over the expected lives of the loans
as an adjustment to yield. Such premiums and discounts are
classified with the loan balance to which they relate for
financial reporting purposes.
Income
Taxes
Deferred income tax
assets and liabilities are determined using the liability (or
balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws. The Company
records a valuation allowance when management believes it is
more likely than not that deferred tax assets will not be
realized.
Earnings Per
Share
Earnings per share
are presented under two formats: basic EPS and diluted EPS.
Basic EPS is computed by dividing the net income (after
deducting dividends on preferred stock) by the weighted average
number of common shares outstanding during the year. Diluted EPS
is computed by dividing the net income (after deducting
dividends on preferred stock) by the weighted-average number of
common shares outstanding during the year, plus the impact of
dilutive potential common shares, such as stock options and
stock warrants. The impact on earnings per share from the
convertible preferred stock is anti-dilutive.
F-10
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Stock
Options
The Company
accounts for its stock-based employee compensation under the
recognition and measurement principles of APB Opinion
No. 25,
Accounting for Stock Issued to Employees,
and related interpretations. No stock-based employee
compensation cost is reflected in the income statements, as all
options granted under those plans are granted with exercise
prices not less than the fair market value of the Companys
common stock on the date of grant. The following table
illustrates the effect on net income and net income per share
had the Company applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123,
Accounting for Stock-Based Compensation,
to
stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Ended December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Net income attributable to common stock,
as reported
|
|
$
|
972
|
|
|
$
|
731
|
|
|
$
|
2,035
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effect
|
|
|
(45
|
)
|
|
|
(44
|
)
|
|
|
(90
|
)
|
|
|
(112
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
927
|
|
|
$
|
687
|
|
|
$
|
1,945
|
|
|
$
|
1,618
|
|
|
$
|
913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.25
|
|
|
Basic pro forma
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.43
|
|
|
$
|
0.36
|
|
|
$
|
0.22
|
|
|
Diluted as reported
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
$
|
0.39
|
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
Diluted pro forma
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.38
|
|
|
$
|
0.32
|
|
|
$
|
0.19
|
|
The weighted-average grant-date fair values of
options granted were calculated using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Ended
|
|
Year Ended June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Risk-free interest rates
|
|
|
3.9
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
|
|
5.1
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Weighted average expected life
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
7 years
|
|
The weighted-average fair value at grant date for
the options granted during the six months ended
December 31, 2004 was $2.37 and during the year ended
June 30, 2004, 2003 and 2002 was $2.52, $1.83 and
$2.97 per share, respectively.
New Accounting
Pronouncements
In March
2004, Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 105 (SAB 105) was
issued, which provides guidance regarding loan commitments that
are accounted for as derivative instruments under FASB
No. 133 (as amended),
Accounting for Derivative
Instruments and Hedging Activities.
In this Bulletin, the
SEC ruled that the
F-11
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
amount of the expected servicing rights should
not be included when determining the fair value of derivative
interest rate lock commitments. This guidance must be applied to
rate locks initiated after March 31, 2004. The adoption of
SAB 105 did not have a material impact on the
Companys consolidated financial statements.
In December 2003, the FASB issued Interpretation
No. 46R (FIN 46R), which revised the
January 2003, Interpretation No. 46
(FIN 46),
Consolidation of Variable Interest
Entities,
an interpretation of Accounting Research Bulletin
No. 51. The revision clarifies how variable interest
entities should be identified and evaluated for consolidation
purposes. The Company adopted FIN 46R as of June 30,
2004. The adoption of FIN 46R did not have a material
impact on the Companys consolidated financial statements.
In December 2003, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position
No. 03-3 (SOP 03-3),
Accounting for Certain
Loans or Debt Securities Acquired in a Transfer.
SOP 03-3
addresses the accounting for differences between contractual
cash flows and the cash flows expected to be collected from
purchased loans or debt securities if those differences are
attributable, in part, to credit quality. SOP 03-3 requires
purchased loans and debt securities to be recorded initially at
fair value based on the present value of the cash flows expected
to be collected with no carryover of any valuation allowance
previously recognized by the seller. Interest income should be
recognized based on the effective yield from the cash flows
expected to be collected. To the extent that the purchased loans
or debt securities experience subsequent deterioration in credit
quality, a valuation allowance would be established for any
additional cash flows that are not expected to be received.
However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be
adjusted on a prospective basis. SOP 03-3 will be effective for
loans and debt securities acquired after December 31, 2004.
Management does not expect the adoption of this statement to
have a material impact on the Companys consolidated
financial statements.
In March 2004, the Emerging Issues Task Force
(EITF) reached consensus on the guidance provided in
EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments
(EITF 03-1), as applicable to debt and
equity securities that are within the scope of
SFAS No. 115,
Accounting for Certain Investments in
Debt and Equity Securities
and equity securities that are
accounted for using the cost method specified in Accounting
Policy Board Opinion No. 18
The Equity Method of
Accounting for Investments in Common Stock.
An investment is
impaired if the fair value of the investment is less than its
cost. EITF 03-1 outlines an impairment would be considered
other-than-temporary unless: a) the investor has the
ability and intent to hold an investment for a reasonable period
of time sufficient for the recovery of the fair value up to (or
beyond) the cost of the investment, and b) evidence
indicating that the cost of the investment is recoverable within
a reasonable period of time outweighs evidence to the contrary.
Although not presumptive, a pattern of selling investments prior
to the forecasted recovery of fair value may call into question
the investors intent. In addition, the severity and
duration of the impairment should also be considered in
determining whether the impairment is other-than-temporary. In
September 2004, the FASB staff issued a proposed Board-directed
FASB Staff Position, FSP EITF Issue 03-1-a,
Implementation
Guidance for the Application of Paragraph 16 of EITF Issue No.
03-1.
The proposed FSP would provide implementation guidance
with respect to debt securities that are impaired solely due to
interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of Issue
03-1. The Board also issued FSP EITF Issue 03-1-b, which delays
the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF 03-1. The delay
does not suspend the requirement to recognize
other-than-temporary impairments as required by existing
authoritative literature. Adoption of this standard may cause
the Company to recognize impairment losses in the Consolidated
Statements of Income which would not have been recognized under
the current guidance or to recognize such losses in earlier
periods, especially those due to increases in interest rates.
Since fluctuations in the fair value
F-12
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
for available-for-sale securities are already
recorded in Accumulated Other Comprehensive Loss, adoption of
this standard is not expected to have a significant impact on
stockholders equity.
In December 2004, the FASB issued
SFAS No. 123 (R) (SFAS 123 (R)),
Share-Based Payment
. SFAS No. 123 (R) replaces the
existing requirements under SFAS No. 123 and APB 25.
SFAS 123 (R) requires companies to measure and recognize
compensation expense equal to the fair value of stock options or
other share based payments. SFAS 123 (R) is effective for
all interim and annual periods beginning after June 15,
2005 and, thus, will be effective for the Company beginning with
the first quarter of fiscal 2006. The Company is in the process
of evaluating the impact of this standard on its consolidated
financial statements.
Reclassifications
Certain amounts in the prior-period financial statements have
been reclassified to conform to the current-period presentation.
|
|
2.
|
Time Deposits in Financial
Institutions
|
The Company had insured time deposits at various
financial institutions totaling $7,522 at December 31, 2004
and $9,503 and $11,872 at June 30, 2004 and 2003,
respectively. The carrying amounts of such investments as shown
in the balance sheets are at cost. Time deposits at
June 30, 2004 of $6,430 will mature within one year and
$3,073 will mature within one to five years.
3. Investment
Securities
Available-for-sale
Amortized costs and fair value of investment securities
available-for-sale are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
Mortgage-backed securities (unaudited)
|
|
$
|
45,036
|
|
|
$
|
26
|
|
|
$
|
(237
|
)
|
|
$
|
44,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,036
|
|
|
$
|
26
|
|
|
$
|
(237
|
)
|
|
$
|
44,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values of available-for-sale securities by
contractual maturity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
Due
|
|
|
|
After One
|
|
|
|
After Five
|
|
|
|
After
|
|
|
|
|
Total
|
|
Yield
|
|
Within
|
|
Yield
|
|
But Within
|
|
Yield
|
|
But Within
|
|
Yield
|
|
Ten
|
|
Yield
|
|
|
Amount
|
|
(1)
|
|
One Year
|
|
(1)
|
|
Five Years
|
|
(1)
|
|
Ten Years
|
|
(1)
|
|
Years
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
GNMA MBS(2)
|
|
$
|
9,380
|
|
|
|
3.07
|
%
|
|
$
|
205
|
|
|
|
3.02
|
%
|
|
$
|
889
|
|
|
|
3.03
|
%
|
|
$
|
1,286
|
|
|
|
3.03
|
%
|
|
$
|
7,000
|
|
|
|
3.08
|
%
|
FNMA MBS(2)
|
|
|
35,656
|
|
|
|
3.66
|
%
|
|
|
625
|
|
|
|
3.66
|
%
|
|
|
2,773
|
|
|
|
3.66
|
%
|
|
|
4,180
|
|
|
|
3.66
|
%
|
|
|
28,078
|
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
45,036
|
|
|
|
3.54
|
%
|
|
$
|
830
|
|
|
|
3.50
|
%
|
|
$
|
3,662
|
|
|
|
3.51
|
%
|
|
$
|
5,466
|
|
|
|
3.51
|
%
|
|
$
|
35,078
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of debt securities
|
|
$
|
44,825
|
|
|
|
3.54
|
%
|
|
$
|
830
|
|
|
|
3.50
|
%
|
|
$
|
3,662
|
|
|
|
3.51
|
%
|
|
$
|
5,466
|
|
|
|
3.51
|
%
|
|
$
|
34,867
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Held-to-maturity
Amortized costs and fair values of investment securities held to
maturity are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
Mortgage-backed securities (unaudited)
|
|
$
|
4,791
|
|
|
$
|
1
|
|
|
$
|
(36
|
)
|
|
$
|
4,756
|
|
U.S. Government security
(unaudited)
|
|
|
3,425
|
|
|
|
10
|
|
|
|
|
|
|
|
3,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,216
|
|
|
$
|
11
|
|
|
$
|
(36
|
)
|
|
$
|
8,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
256
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
258
|
|
U.S. Government security
|
|
|
3,409
|
|
|
|
7
|
|
|
|
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,665
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
3,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2003
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
441
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
449
|
|
U.S. Government security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
441
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values of held-to-maturity securities by
contractual maturity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
Due
|
|
|
|
After One
|
|
|
|
After Five
|
|
|
|
After
|
|
|
|
|
Total
|
|
Yield
|
|
Within
|
|
Yield
|
|
But Within
|
|
Yield
|
|
But Within
|
|
Yield
|
|
Ten
|
|
Yield
|
|
|
Amount
|
|
(1)
|
|
One Year
|
|
(1)
|
|
Five Years
|
|
(1)
|
|
Ten Years
|
|
(1)
|
|
Years
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
U.S. Government and Agency
|
|
$
|
3,425
|
|
|
|
3.65
|
%
|
|
$
|
|
|
|
|
|
|
|
$
|
3,425
|
|
|
|
3.65
|
%
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
FHLMC MBS(2)
|
|
|
4,579
|
|
|
|
4.10
|
%
|
|
|
87
|
|
|
|
4.10
|
%
|
|
|
352
|
|
|
|
4.10
|
%
|
|
|
534
|
|
|
|
4.10
|
%
|
|
|
3,606
|
|
|
|
4.10
|
%
|
FNMA MBS(2)
|
|
|
212
|
|
|
|
2.56
|
%
|
|
|
6
|
|
|
|
2.56
|
%
|
|
|
24
|
|
|
|
2.56
|
%
|
|
|
34
|
|
|
|
2.56
|
%
|
|
|
148
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
8,216
|
|
|
|
3.87
|
%
|
|
$
|
93
|
|
|
|
4.00
|
%
|
|
$
|
3,801
|
|
|
|
3.68
|
%
|
|
$
|
568
|
|
|
|
4.01
|
%
|
|
$
|
3,754
|
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of debt securities
|
|
$
|
8,191
|
|
|
|
3.87
|
%
|
|
$
|
93
|
|
|
|
4.00
|
%
|
|
$
|
3,811
|
|
|
|
3.68
|
%
|
|
$
|
568
|
|
|
|
4.01
|
%
|
|
$
|
3,719
|
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
Due
|
|
|
|
After One
|
|
|
|
After Five
|
|
|
|
After
|
|
|
|
|
Total
|
|
Yield
|
|
Within
|
|
Yield
|
|
But Within
|
|
Yield
|
|
But Within
|
|
Yield
|
|
Ten
|
|
Yield
|
|
|
Amount
|
|
(1)
|
|
One Year
|
|
(1)
|
|
Five Years
|
|
(1)
|
|
Ten Years
|
|
(1)
|
|
Years
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Agency
|
|
$
|
3,409
|
|
|
|
3.64%
|
|
|
$
|
|
|
|
|
|
|
|
$
|
3,409
|
|
|
|
3.64%
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Mortgage-backed security
|
|
|
256
|
|
|
|
2.64%
|
|
|
|
6
|
|
|
|
2.64%
|
|
|
|
26
|
|
|
|
2.64%
|
|
|
|
38
|
|
|
|
2.64%
|
|
|
|
186
|
|
|
|
2.64%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
3,665
|
|
|
|
3.57%
|
|
|
$
|
6
|
|
|
|
2.64%
|
|
|
$
|
3,435
|
|
|
|
3.63%
|
|
|
$
|
38
|
|
|
|
2.64%
|
|
|
$
|
186
|
|
|
|
2.64%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of investment securities
|
|
$
|
3,674
|
|
|
|
3.57%
|
|
|
$
|
6
|
|
|
|
2.64%
|
|
|
$
|
3,442
|
|
|
|
3.63%
|
|
|
$
|
38
|
|
|
|
2.64%
|
|
|
$
|
188
|
|
|
|
2.64%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Weighted average yield at end of year is based on
the amortized cost of the securities.
|
|
|
(2)
|
Mortgage-backed securities were allocated based
on contractual principal maturities assuming no prepayments.
|
The following table shows the Companys
investments gross unrealized losses and related estimated
fair value, aggregated by investment category and length of time
that individual securities have been in a continuous loss
position at December 31, 2004 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
|
|
Gross
|
|
Estimated
|
|
|
Unrealized
|
|
Fair
|
|
|
Losses
|
|
Value
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (unaudited)
|
|
$
|
(36
|
)
|
|
$
|
4,544
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
|
(36
|
)
|
|
|
4,544
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (unaudited)
|
|
|
(237
|
)
|
|
|
35,301
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
(237
|
)
|
|
|
35,301
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(273
|
)
|
|
$
|
39,845
|
|
|
|
|
|
|
|
|
|
|
There were no securities that were in a
continuous loss position at December 31, 2004 for a period
of more than 12 months. There were no securities that were
in a continuous loss position at June 30, 2004.
Management believes that the estimated fair value
of the securities disclosed above is dependent upon the movement
in market interest rates. Although the fair value will fluctuate
as the market interest rates move, the majority of the
Companys investment portfolio consists of mortgage-backed
securities from GNMA and FNMA. If held to maturity, the
contractual principal and interest payments of the securities
are expected to be received in full. As such, no loss in value
is expected over the lives of the securities. Although not all
of the securities are classified as held to maturity, the
Company has the ability to hold these securities until they
mature and does not intend to sell the securities at a loss.
Thus, the unrealized losses are not other-than-temporary. The
determination of whether a decline in market value is
other-than-temporary is necessarily a matter of subjective
judgment. The timing and amount of any realized losses reported
in the Companys financial statements could vary if
conclusions other than those made by management were to
determine whether an other-than-temporary impairment exists.
F-15
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The composition of the portfolio of loans held
for investment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential single family (one to four units)
|
|
$
|
35,893
|
|
|
$
|
21,753
|
|
|
$
|
42,124
|
|
|
Residential multifamily (five units or more)
|
|
|
366,658
|
|
|
|
320,971
|
|
|
|
191,426
|
|
|
Commercial and land
|
|
|
12,980
|
|
|
|
11,659
|
|
|
|
11,839
|
|
|
Consumer
|
|
|
81
|
|
|
|
63
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
415,612
|
|
|
|
354,446
|
|
|
|
245,451
|
|
|
Allowance for loan losses
|
|
|
(1,220
|
)
|
|
|
(1,045
|
)
|
|
|
(790
|
)
|
|
Unamortized premiums, net of deferred loan fees
|
|
|
3,523
|
|
|
|
1,860
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
417,915
|
|
|
$
|
355,261
|
|
|
$
|
245,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An analysis of the allowance for loan losses is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
1,045
|
|
|
$
|
790
|
|
|
$
|
790
|
|
|
$
|
505
|
|
|
$
|
310
|
|
Provision for loan loss
|
|
|
175
|
|
|
|
35
|
|
|
|
255
|
|
|
|
285
|
|
|
|
195
|
|
Amounts charged off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period
|
|
$
|
1,220
|
|
|
$
|
825
|
|
|
$
|
1,045
|
|
|
$
|
790
|
|
|
$
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 and June 30, 2004
and 2003, approximately 58.2%, 64.5% and 70.0%, respectively, of
the Companys loans are collaterialized with real-property
collateral located in California and therefore exposed to
economic conditions within this market region.
In the ordinary course of business, the Company
has granted loans collaterialized by real property to principal
officers, directors and their affiliates and employees with
interest rates ranging from 4.5% to 7.875%. New loans granted to
principal officers, directors and their affiliates and employees
were none, none and $1,230 during the years ended June 30,
2004, 2003 and 2002, respectively. Total principal payments were
$413, $2,007 and $26 during the years ended June 30, 2004,
2003 and 2002, respectively. At December 31, 2004 and
June 30, 2004 and 2003, these loans amounted to $946, $953
and $1,366, respectively, and are included in loans held for
investment. Interest earned on these loans was $22, $26, $52,
$123 and $176 during the six months ended December 31,
2004 and 2003 and the years ended June 30, 2004, 2003 and
2002, respectively.
The Company had no loans on nonaccrual and no
impaired loans as of December 31, 2004 and 2003 and
June 30, 2004, 2003 and 2002.
F-16
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The Companys loan portfolio consists of
approximately 7% fixed interest rate loans and 93% adjustable
interest rate loans as of December 31, 2004. The
Companys adjustable rate loans are generally based upon
indices using U.S. Treasuries, LIBOR, and 11
th
District cost of funds.
As of December 31, 2004, June 30, 2004
and 2003, purchased loans serviced by others were $218,076 or
52%, $168,035 or 47%, and $119,887 or 49%, respectively, of the
loan portfolio.
|
|
5.
|
Furniture, Equipment and Software
|
A summary of the cost and accumulated
depreciation for furniture, equipment and software is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Leasehold improvements
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Furniture and fixtures
|
|
|
174
|
|
|
|
161
|
|
|
|
127
|
|
Computer hardware and equipment
|
|
|
317
|
|
|
|
310
|
|
|
|
291
|
|
Software
|
|
|
174
|
|
|
|
165
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
675
|
|
|
|
646
|
|
|
|
582
|
|
Less accumulated depreciation and amortization
|
|
|
(521
|
)
|
|
|
(465
|
)
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture, equipment and software net
|
|
$
|
154
|
|
|
$
|
181
|
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the
years ended June 30, 2004, 2003 and 2002 amounted to $97,
$144 and $118, respectively. Depreciation expense for the six
months ended December 31, 2004 and 2003 was $56 and $47,
respectively.
Deposits accounts are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Rate*
|
|
Amount
|
|
Rate*
|
|
Amount
|
|
Rate*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
3,850
|
|
|
|
0.00%
|
|
|
$
|
2,279
|
|
|
|
0.00%
|
|
|
$
|
3,299
|
|
|
|
0.00%
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
28,685
|
|
|
|
1.31%
|
|
|
|
26,725
|
|
|
|
1.35%
|
|
|
|
29,902
|
|
|
|
1.38%
|
|
|
Savings
|
|
|
80,036
|
|
|
|
1.93%
|
|
|
|
94,120
|
|
|
|
1.96%
|
|
|
|
18,823
|
|
|
|
1.91%
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under $100,000
|
|
|
136,005
|
|
|
|
3.30%
|
|
|
|
88,082
|
|
|
|
3.44%
|
|
|
|
95,489
|
|
|
|
3.93%
|
|
|
$100,000 or more
|
|
|
71,443
|
|
|
|
3.26%
|
|
|
|
58,635
|
|
|
|
3.20%
|
|
|
|
46,479
|
|
|
|
3.96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total time deposits
|
|
|
207,448
|
|
|
|
3.29%
|
|
|
|
146,717
|
|
|
|
3.35%
|
|
|
|
141,968
|
|
|
|
3.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
|
|
|
316,169
|
|
|
|
2.76%
|
|
|
|
267,562
|
|
|
|
2.66%
|
|
|
|
190,693
|
|
|
|
3.34%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
320,019
|
|
|
|
2.73%
|
|
|
$
|
269,841
|
|
|
|
2.64%
|
|
|
$
|
193,992
|
|
|
|
3.28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Based on weighted average stated interest rates.
|
F-17
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The scheduled maturities of time deposits are as
follows as of June 30, 2004:
|
|
|
|
|
Within 12 months
|
|
$
|
80,365
|
|
13 to 24 months
|
|
|
23,018
|
|
25 to 36 months
|
|
|
14,760
|
|
37 to 48 months
|
|
|
14,309
|
|
49 months and thereafter
|
|
|
14,265
|
|
|
|
|
|
|
Total
|
|
$
|
146,717
|
|
|
|
|
|
|
|
|
7.
|
Advances from the Federal Home Loan
Bank
|
At December 31, 2004, the Companys
fixed-rate advances from the Federal Home Loan Bank
(FHLB) had interest rates that ranged from 2.11% to
5.03% with a weighted-average of 3.35%. At June 30, 2004
and 2003, the Companys fixed-rate FHLB advances had
interest rates that ranged from 1.42% to 5.03% with a weighted
average of 3.19% and ranged from 2.56% to 5.21% with a weighted
average of 4.40%, respectively.
Fixed rate advances from FHLB are scheduled to
mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
June 30, 2004
|
|
June 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
Amount
|
|
Average Rate
|
|
Amount
|
|
Average Rate
|
|
Amount
|
|
Average Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
21,000
|
|
|
|
2.27
|
%
|
|
$
|
3,000
|
|
|
|
1.42
|
%
|
|
$
|
15,900
|
|
|
|
5.21
|
%
|
After one but within two years
|
|
|
28,500
|
|
|
|
2.99
|
%
|
|
|
20,500
|
|
|
|
2.36
|
%
|
|
|
|
|
|
|
0.00
|
%
|
After two but within three years
|
|
|
51,289
|
|
|
|
3.61
|
%
|
|
|
36,500
|
|
|
|
3.66
|
%
|
|
|
3,000
|
|
|
|
2.56
|
%
|
After three but within four years
|
|
|
31,799
|
|
|
|
3.68
|
%
|
|
|
22,768
|
|
|
|
3.35
|
%
|
|
|
14,000
|
|
|
|
4.86
|
%
|
After four but within five years
|
|
|
8,000
|
|
|
|
3.59
|
%
|
|
|
10,770
|
|
|
|
2.80
|
%
|
|
|
18,000
|
|
|
|
3.70
|
%
|
After five years
|
|
|
7,916
|
|
|
|
4.32
|
%
|
|
|
7,908
|
|
|
|
3.94
|
%
|
|
|
5,000
|
|
|
|
4.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
148,504
|
|
|
|
3.35
|
%
|
|
$
|
101,446
|
|
|
|
3.19
|
%
|
|
$
|
55,900
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances have been reduced by debt issuance
costs of $396 and $454 at December 31, and June 30,
2004, respectively. Debt issuance costs are amortized using the
interest method over the life of the FHLB advance. Amortization
of $58 for the six months ended December 31, 2004 and $110
for the year ended June 30, 2004 is included in interest
expense.
The Companys advances from FHLB were
collateralized by certain real estate loans with an aggregate
unpaid balance of $176,435, $154,700 and $89,792 at
December 31, 2004, June 30, 2004 and 2003,
respectively, by the Companys investment in capital stock
of FHLB of San Francisco and by its investment in
mortgage-backed securities.
The maximum amounts advanced from the FHLB were
$148,504 during the six months ended December 31, 2004. The
maximum amounts advanced from the FHLB were $101,446, $55,900
and $29,900
F-18
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
during the years ended June 30, 2004, 2003
and 2002, respectively. As of December 31, 2004, the
Company had $9,813 available for advances from the FHLB for
terms up to seven years and $4,500 available under a federal
funds line of credit with a major bank.
|
|
8.
|
Note Payable and Borrowings
|
On October 24, 2003, the Company entered
into a $5,000 loan facility with a commercial bank consisting of
a one-year revolving line of credit plus a fully amortizing term
loan of up to nine years. Under the terms of the loan facility,
a one-time loan fee of 1% ($50) was paid at commencement and
interest is payable quarterly at prime plus 1% per annum.
Principal is payable in 36 equal quarterly installments starting
on January 24, 2005. The Company may prepay all or a
portion of the principal at any time without a prepayment
penalty. At December 31, 2004, the note payable balance was
$5,000 and the interest rate was 6.25%.
The loan facility is collateralized by the
Banks common stock. Under the terms of the loan facility,
the Company is bound by a number of significant covenants that
restrict the Companys ability, out of the ordinary course
of business, to dispose of assets, to incur additional debt or
guarantees, to invest in or acquire any interest in another
enterprise and a change in the Company ownership by 51% or more.
The credit agreement also requires the Company to maintain a
debt coverage ratio of 1.50 times. At December 31, 2004 and
June 30, 2004, management believes the Company was in
compliance with all such covenants and restrictions and does not
anticipate that such covenants and restrictions will limit its
operations.
The provision (benefit) for income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
604
|
|
|
$
|
380
|
|
|
$
|
1,046
|
|
|
$
|
950
|
|
|
$
|
|
|
|
State
|
|
|
212
|
|
|
|
140
|
|
|
|
371
|
|
|
|
345
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
816
|
|
|
|
520
|
|
|
|
1,417
|
|
|
|
1,295
|
|
|
|
1
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(32
|
)
|
|
|
51
|
|
|
|
40
|
|
|
|
(21
|
)
|
|
|
(317
|
)
|
|
State
|
|
|
(8
|
)
|
|
|
9
|
|
|
|
14
|
|
|
|
(10
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
60
|
|
|
|
54
|
|
|
|
(31
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
776
|
|
|
$
|
580
|
|
|
$
|
1,471
|
|
|
$
|
1,264
|
|
|
$
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The differences between the statutory federal
income tax rate and the effective tax rates are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Ended December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Statutory federal tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes net of federal tax benefit
|
|
|
6.90
|
%
|
|
|
7.26
|
%
|
|
|
7.00
|
%
|
|
|
7.19
|
%
|
|
|
11.73
|
%
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(139.16
|
)%
|
|
Extension of organizer warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.64
|
%
|
|
Other
|
|
|
(1.13
|
)%
|
|
|
2.35
|
%
|
|
|
(0.65
|
)%
|
|
|
1.03
|
%
|
|
|
(1.80
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
39.77
|
%
|
|
|
43.61
|
%
|
|
|
40.35
|
%
|
|
|
42.22
|
%
|
|
|
(72.59
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax asset are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
351
|
|
|
$
|
273
|
|
|
$
|
160
|
|
|
Start-up costs
|
|
|
43
|
|
|
|
86
|
|
|
|
172
|
|
|
Deferred loan fees
|
|
|
152
|
|
|
|
123
|
|
|
|
109
|
|
|
Net operating loss carryforwards
|
|
|
34
|
|
|
|
34
|
|
|
|
34
|
|
|
State taxes
|
|
|
119
|
|
|
|
111
|
|
|
|
114
|
|
|
Unrealized loss on investment securities
available for sale
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
627
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
(40
|
)
|
|
|
(37
|
)
|
|
|
(42
|
)
|
|
FHLB stock dividend
|
|
|
(185
|
)
|
|
|
(137
|
)
|
|
|
(76
|
)
|
|
Other
|
|
|
(27
|
)
|
|
|
(46
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
|
|
(220
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
532
|
|
|
$
|
407
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, the Company has a
state net operating loss carryforward available to offset future
state tax liabilities of $312. Such state net operating loss
carryforward expires at various dates beginning in 2008.
The Company establishes a valuation allowance if,
based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. As of December 31, 2004 and
June 30, 2004 and 2003, the Company believes that it will
have sufficient earnings to realize its deferred tax asset and
has not provided an allowance.
F-20
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Stock
Dividend
The Company
declared a 2.5 to 1 common stock split, effected in the form of
a 150% stock dividend, to shareholders of record as of
July 4, 2001 and paid on August 15, 2001. The capital
accounts, all share data and earnings per share data in these
financial statements give effect to the stock split, applied
retroactively, to all periods presented.
1999 Stock Option
Plan
In July 1999,
the Companys Board of Directors approved the 1999 Stock
Option Plan (the Plan) as amended in May 2000. Under
the Plan, 553,875 shares are reserved for issuance as
incentive stock options and nonqualified stock options to
employees and directors of the Company. In August 2001, the
Companys shareholders approved an amendment to the Plan
such that 15% of the outstanding shares of the Company would
always be available for grants under the Plan (755,969 and
746,125 shares at December 31, 2004 and June 30,
2004, respectively). The Plan is designed to encourage selected
employees and directors to improve operations and increase
profits, to accept or continue employment or association with
the Company through participation in the growth in the value of
the common stock. Plan provisions require that option exercise
prices be not less than fair market value per share of common
stock on the option grant date for incentive and nonqualified
options. Option expiration dates are established by the plan
administrator but may not be later than ten years after the date
of the grant. As of June 30, 2004 there were 2,000 options
available for grant. The plan administrator determines vesting,
which may not be less than three years nor exceed five years.
Stock option activity during the period July 1, 2001 to
December 31, 2004 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Number of
|
|
Exercise Price
|
|
|
Shares
|
|
Per Share
|
|
|
|
|
|
Outstanding at July 1, 2001
|
|
|
509,596
|
|
|
$
|
4.19
|
|
|
Granted
|
|
|
111,790
|
|
|
$
|
10.00
|
|
|
Exercised
|
|
|
(185
|
)
|
|
$
|
4.19
|
|
|
Forfeited/ cancelled
|
|
|
(1,171
|
)
|
|
$
|
7.66
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2002
|
|
|
620,030
|
|
|
$
|
5.23
|
|
|
Granted
|
|
|
1,750
|
|
|
$
|
11.00
|
|
|
Forfeited/ cancelled
|
|
|
(3,322
|
)
|
|
$
|
6.98
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2003
|
|
|
618,458
|
|
|
$
|
5.24
|
|
|
Granted
|
|
|
132,036
|
|
|
$
|
10.00
|
|
|
Exercised
|
|
|
(23,423
|
)
|
|
$
|
4.74
|
|
|
Forfeited/ cancelled
|
|
|
(6,554
|
)
|
|
$
|
8.22
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2004
|
|
|
720,517
|
|
|
$
|
6.10
|
|
|
Granted (unaudited)
|
|
|
2,000
|
|
|
$
|
10.00
|
|
|
Forfeited/ cancelled (unaudited)
|
|
|
(500
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
(unaudited)
|
|
|
722,017
|
|
|
$
|
6.11
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2002
|
|
|
335,276
|
|
|
$
|
4.19
|
|
Options exercisable at June 30, 2003
|
|
|
444,642
|
|
|
$
|
4.71
|
|
Options exercisable at June 30, 2004
|
|
|
499,705
|
|
|
$
|
4.94
|
|
Options exercisable at December 31, 2004
(unaudited)
|
|
|
536,443
|
|
|
$
|
5.03
|
|
F-21
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The following table summarizes information
concerning currently outstanding and exercisable options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 (unaudited)
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Range of
|
|
Number
|
|
Contractual
|
|
Weighted-Average
|
|
Number
|
|
Weighted-Average
|
Exercise Prices
|
|
Outstanding
|
|
Life (Yrs)
|
|
Exercise Price
|
|
Exercisable
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.19
|
|
|
|
483,945
|
|
|
|
5.1
|
|
|
$
|
4.19
|
|
|
|
459,074
|
|
|
$
|
4.19
|
|
$
|
10.00
|
|
|
|
236,572
|
|
|
|
8.4
|
|
|
$
|
10.00
|
|
|
|
76,619
|
|
|
$
|
10.00
|
|
$
|
11.00
|
|
|
|
1,500
|
|
|
|
7.5
|
|
|
$
|
11.00
|
|
|
|
750
|
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722,017
|
|
|
|
|
|
|
|
|
|
|
|
536,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Range of
|
|
Number
|
|
Contractual
|
|
Weighted-Average
|
|
Number
|
|
Weighted-Average
|
Exercise Prices
|
|
Outstanding
|
|
Life (Yrs)
|
|
Exercise Price
|
|
Exercisable
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.19
|
|
|
|
483,945
|
|
|
|
5.6
|
|
|
$
|
4.19
|
|
|
|
435,432
|
|
|
$
|
4.19
|
|
$
|
10.00
|
|
|
|
235,072
|
|
|
|
8.9
|
|
|
$
|
10.00
|
|
|
|
63,673
|
|
|
$
|
10.00
|
|
$
|
11.00
|
|
|
|
1,500
|
|
|
|
8.0
|
|
|
$
|
11.00
|
|
|
|
600
|
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
720,517
|
|
|
|
|
|
|
|
|
|
|
|
499,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Stock Incentive
Plan
In October 2004, the
Companys Board of Directors and the stockholders approved
the 2004 Stock Incentive Plan, which provides for the grant of
stock options, restricted stock, restricted stock units, stock
appreciation rights and dividend equivalent rights to employees,
directors and consultants. The maximum number of shares of
common stock available for issuance under the 2004 Stock
Incentive Plan, plus the number of shares of common stock
available for issuance under the 1999 Stock Option Plan will be
equal to 14.8% of the Companys outstanding common stock at
any time. However, the number of shares available for issuance
as restricted stock grants may not exceed 5% of the
Companys outstanding common stock (subject to the overall
maximum of 14.8% of the outstanding shares of common stock).
Each share of restricted stock that is issued under the 2004
Stock Incentive Plan and vests will be deemed to be issuance of
three shares for purposes of calculating the overall maximum
number of shares of common stock available for issuance under
the 2004 Stock Incentive Plan but not for purposes of
calculating the above 5% limit applicable to the issuance of
restricted stock. At December 31, 2004, there were no stock
options available for grant or outstanding under the 2004 Stock
Incentive Plan.
2004 Employee Stock Purchase
Plan
In October 2004, the
Companys Board of Directors and stockholders approved the
2004 Employee Stock Purchase Plan, which is intended to qualify
as an Employee Stock Purchase Plan under Section 423
of the Internal Revenue Code. An aggregate of
500,000 shares of the Companys common stock has been
reserved for issuance and will be available for purchase under
the 2004 Employee Stock Purchase Plan. At December 31,
2004, there have been no shares issued under the 2004 Employee
Stock Purchase Plan
Common Stock and Common Stock
Warrants
During the
year ended June 30, 2000, the Company closed a private
placement of 3,694,031 shares of common stock, which were
issued for net proceeds of $13,923. In conjunction with the
private placement offering, the Company issued organizer
warrants to the
F-22
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
founders of the Company to purchase an additional
745,500 shares of common stock at a purchase price of
$4.19 per share, of which 658,000 organizer warrants were
issued during the fiscal year ended June 30, 2000 and the
remaining 87,500 organizer warrants were issued in May 2001.
In connection with the private placement, on
August 1, 2000 the Company issued an additional
13,125 shares of common stock for proceeds of $50, with
organizer warrants to purchase an additional 4,375 shares
at a purchase price of $4.19 per share. During the year
ended June 30, 2002, the Company closed its second private
placement and opened a third private placement of common stock
and equity units. The second private placement commenced on
September 3, 2001 and closed on November 16, 2001
after issuing 587,200 shares of common stock at
$10.00 per share for total proceeds of $5,769, net of issue
costs. On March 25, 2002, in order to plan for the
Companys future capital funding needs, the Company
extended the expiration date of the organizer warrants which
permit the holders to acquire 749,875 shares of our common
stock at a strike price of $4.19 by two years with all other
terms remaining the same. One of the holders of the organizer
warrants to purchase 13,125 shares of common stock was
an employee of the Company and as a result of the two year
extension of the expiration date the Company recorded salary and
employee benefits expense of $76. The remaining organizer
warrants to acquire 736,750 shares of common stock were
held by non employees and the Company recorded other general and
administrative expense of $318 as a result of the two year
extension of the expiration date. The Company recorded a
corresponding $394 increase to additional paid-in capital to
recognize the accounting consequences of extending the
expiration of all of the organizer warrants. All organizer
warrants now expire in July 2005 or upon the Companys
initial public offering. On June 3, 2002, the Company
commenced its third private placement by offering units of three
shares of common and one warrant for $36.00 per unit. Each
warrant entitles the holder to purchase one share of the
Companys common stock at $14.00 per share any time
during the next three years. These warrants expire three years
from the date of the termination of the third private placement.
As of June 30, 2002 the Company had issued
13,300 units representing 39,900 shares of common
stock and 13,300 warrants to purchase common stock for total
proceeds of $414, net of issue costs. Also during the year ended
June 30, 2002, the Company issued 185 shares of common
stock for $1 from the exercise of stock options.
During the year ended June 30, 2003, the
Company closed its third private placement on July 15,
2003. During July 2003, the Company issued 46,650 units
representing 139,950 shares of common stock and 46,650
warrants to purchase common stock for total proceeds of $1,654,
net of issue costs.
During the year ended June 30, 2004, the
Company issued 23,423 shares of common stock for $165
(including $55 income tax benefit) from the exercise of
nonqualified stock options and issued 8,750 shares of
common stock for $37 from the exercise of warrants.
During the six months ended December 31,
2004, the Company issued 56,875 shares of common stock for $239
from the exercise of common stock warrants at $4.19 per share.
At December 31, 2004, the Company had
deferred $943 of costs associated with its planned initial
public offering. In December 2004, the Company recorded a charge
of $59 for unrecoverable costs associated with the termination
of an agreement with one of its financial advisors relating to
its planned initial public offering.
Convertible Preferred
Stock
On
October 28, 2003, the Company commenced a private placement
of Series A6% Cumulative Nonparticipating Perpetual
Preferred Stock, Convertible through January 1, 2009 (the
Convertible Preferred Stock). The rights,
preferences and privileges of the Convertible Preferred Stock
were established in a certificate filed by the Company with the
State of Delaware on October 27, 2003, and generally
include the holders right to a six percent (6%) per annum
cumulative dividend payable quarterly, the Companys right
to redeem some or all of the outstanding shares at par after
five years and the holders right to convert all or part of
the face value of his Convertible Preferred Stock into the
Companys common
F-23
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
stock at $10.50 per share, increasing in
three increments to $18.00 per share after January 1,
2008. The Companys right to redeem the Convertible
Preferred Stock is perpetual and starts immediately after
issuance (with a premium payable to the holder starting at 5% in
the first year and declining to 1% in the fifth year). The
holders right to convert to the Companys common
stock starts immediately after purchase and expires on
January 1, 2009.
During the year ended June 30, 2004, the
Company issued $6,750 of Convertible Preferred Stock
representing 675 shares at $10,000 face value, less
issuance costs of $113. For the three quarters ended
June 30, 2004, the Company has declared and paid dividends
to holders of the Convertible Preferred Stock totaling $140. For
the six month period ended December 31, 2004 and 2003, the
Company declared and paid dividends totaling $203 and $19,
respectively, to the holders of the convertible preferred stock.
Warrant activity during the period June 30,
2001 to December 31, 2004 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Number of
|
|
Exercise Price
|
|
|
Shares
|
|
Per Share
|
|
|
|
|
|
Outstanding at June 30, 2001
|
|
|
749,875
|
|
|
$
|
4.19
|
|
|
Issued
|
|
|
13,300
|
|
|
$
|
14.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2002
|
|
|
763,175
|
|
|
$
|
4.36
|
|
|
Issued
|
|
|
46,650
|
|
|
$
|
14.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2003
|
|
|
809,825
|
|
|
$
|
4.92
|
|
|
Exercised
|
|
|
(8,750
|
)
|
|
$
|
4.19
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2004
|
|
|
801,075
|
|
|
$
|
4.93
|
|
|
Exercised (unaudited)
|
|
|
(56,875
|
)
|
|
$
|
4.19
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 (unaudited)
|
|
|
744,200
|
|
|
$
|
4.98
|
|
|
|
|
|
|
|
|
|
|
F-24
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Information used to calculate earnings per share
for the six months ended December 31, 2004 and 2003 and the
years ended June 30, 2004, 2003 and 2002, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Ended December 31,
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Net income
|
|
$
|
1,175
|
|
|
$
|
750
|
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
Dividends on preferred stock
|
|
|
203
|
|
|
|
19
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
|
|
$
|
972
|
|
|
$
|
731
|
|
|
$
|
2,035
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares
outstanding
|
|
|
4,527,519
|
|
|
|
4,498,045
|
|
|
|
4,502,284
|
|
|
|
4,468,296
|
|
|
|
4,128,051
|
|
|
Dilutive effect of stock options
|
|
|
221,901
|
|
|
|
223,211
|
|
|
|
222,556
|
|
|
|
231,002
|
|
|
|
231,708
|
|
|
Dilutive effect of warrants
|
|
|
423,444
|
|
|
|
435,642
|
|
|
|
435,642
|
|
|
|
435,642
|
|
|
|
435,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average number of common shares
outstanding
|
|
|
5,172,864
|
|
|
|
5,156,898
|
|
|
|
5,160,482
|
|
|
|
5,134,940
|
|
|
|
4,795,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.25
|
|
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
$
|
0.39
|
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
|
12.
|
Commitments and Contingencies
|
Operating
Leases
The Company
leases office space under an operating lease agreement scheduled
to expire in June 2005. The Company pays property taxes,
insurance and maintenance expenses related to this lease. Rent
expense under this lease agreement for the years ended
June 30, 2004, 2003 and 2002 was $213, $169 and $131,
respectively. Rent expense for the six months ended
December 31, 2004 and 2003 was $110 and $107, respectively.
Future minimum lease payments under this
noncancelable lease as of December 31, 2004 are $110
payable during the year ended June 30, 2005.
Legal
Contingencies
Various
legal claims also arise from time to time in the normal course
of business, which in the opinion of management after discussion
with legal counsel will have no material effect on the
Companys consolidated financial statements.
|
|
13.
|
Off-Balance Sheet Activities
|
Credit-Related Financial
Instruments
The
Company is a party to credit-related financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments are commitments to extend credit. Such commitments
involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
balance sheets.
F-25
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The Companys exposure to credit loss is
represented by the contractual amount of these commitments. The
Company follows the same credit policies in making commitments
as it does for on-balance-sheet instruments.
At December 31, 2004, the Company had
commitments to fund or purchase loans of $2,063.
Commitments to extend credit are agreements to
lend to a customer so long as there is no violation of any
condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of
credit may expire without being drawn upon. Therefore, the total
commitment amounts do not necessarily represent future cash
requirements. The amount of collateral obtained, if it is deemed
necessary by the Company, is based on managements credit
evaluation of the customer.
|
|
14.
|
Minimum Regulatory Capital
Requirements
|
The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Banks financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of its assets,
liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total
and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to tangible assets (as defined). As of June 30,
2004, that the Bank met all capital adequacy requirements to
which it is subject.
As of December 31, 2004, the most recent
filing date with the OTS, the Bank was categorized as well
capitalized under the regulatory framework for prompt
corrective action. To be categorized as well
capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following table. There are no
conditions or events since the notification that management
believes have changed the Banks categorization. The
Banks actual capital amounts and ratios as of
December 31, 2004 and June 30, 2004 and 2003 are
presented in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
For Capital
|
|
Capitalized Under
|
|
|
|
|
Adequacy
|
|
Prompt Corrective
|
|
|
Actual
|
|
Purposes
|
|
Action Provisions
|
|
|
|
|
|
|
|
December 31, 2004 (unaudited)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (core) capital (to
adjusted tangible assets) (unaudited)
|
|
$
|
38,137
|
|
|
|
7.45
|
%
|
|
$
|
20,479
|
|
|
|
4.00
|
%
|
|
$
|
25,598
|
|
|
|
5.00
|
%
|
Tier I capital (to risk-weighted assets)
(unaudited)
|
|
$
|
38,137
|
|
|
|
11.44
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
20,004
|
|
|
|
6.00
|
%
|
Total capital (to risk-weighted assets)
(unaudited)
|
|
$
|
39,357
|
|
|
|
11.80
|
%
|
|
$
|
26,672
|
|
|
|
8.00
|
%
|
|
$
|
33,340
|
|
|
|
10.00
|
%
|
Tangible capital (to tangible assets) (unaudited)
|
|
$
|
38,137
|
|
|
|
7.45
|
%
|
|
$
|
7,679
|
|
|
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
F-26
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
For Capital
|
|
Capitalized Under
|
|
|
|
|
Adequacy
|
|
Prompt Corrective
|
|
|
Actual
|
|
Purposes
|
|
Action Provisions
|
|
|
|
|
|
|
|
December 31, 2004 (unaudited)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (core) capital (to
adjusted tangible assets)
|
|
$
|
31,748
|
|
|
|
7.84
|
%
|
|
$
|
16,193
|
|
|
|
4.00
|
%
|
|
$
|
20,241
|
|
|
|
5.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
$
|
31,748
|
|
|
|
11.11
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
17,146
|
|
|
|
6.00
|
%
|
Total capital (to risk-weighted assets)
|
|
$
|
32,793
|
|
|
|
11.48
|
%
|
|
$
|
22,861
|
|
|
|
8.00
|
%
|
|
$
|
28,577
|
|
|
|
10.00
|
%
|
Tangible capital (to tangible assets)
|
|
$
|
31,748
|
|
|
|
7.84
|
%
|
|
$
|
6,072
|
|
|
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
June 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (core) capital (to
adjusted tangible assets)
|
|
$
|
21,108
|
|
|
|
8.09
|
%
|
|
$
|
10,928
|
|
|
|
4.00
|
%
|
|
$
|
13,660
|
|
|
|
5.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
$
|
21,108
|
|
|
|
11.40
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
11,635
|
|
|
|
6.00
|
%
|
Total capital (to risk-weighted assets)
|
|
$
|
22,898
|
|
|
|
11.81
|
%
|
|
$
|
15,514
|
|
|
|
8.00
|
%
|
|
$
|
19,392
|
|
|
|
10.00
|
%
|
Tangible capital (to tangible assets)
|
|
$
|
21,108
|
|
|
|
8.09
|
%
|
|
$
|
4,098
|
|
|
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
15.
|
Employment Agreements and Employee Benefit
Plans
|
Employment
Agreements
In July 2003,
the Company entered into employment agreements with four
executive officers. Under these agreements, if the Company
terminates one or more of the executive officers for any reason
other than cause, then the Company must (a) pay that
officer normal compensation in effect through the date of
termination; (b) pay that officer a severance payment equal
to twelve times his then-current base monthly salary, payable at
the option of the Board of Directors either in one lump sum or
in twelve equal installments; and (c) continue group
insurance benefits for that officer for one year from
termination or until that officer commences work with a new
employer providing group medical insurance benefits to that
officer. In addition, if the executive officers employment
is terminated for any reason other than for cause, or that
officers employment is terminated due to death or
disability, then all stock options currently held by such
officer will fully vest as of the termination date. Each
agreement automatically renews in one-year terms unless
terminated by either Bank of Internet USA or the officer. In
addition, each agreement specifies bonuses for each executive
officer, which are contingent upon the Companys financial
performance and the executive officers continued
employment with the Company. The Company accrued bonus expense
of $356 and $33 for the six months ended December 31, 2004
and the year ended June 30, 2004, respectively, in
connection with these executive officer bonuses.
401(k)
Plan
The Company has a
401(k) Plan whereby substantially all of its employees
participate in the Plan. Employees may contribute up to 15% of
their compensation subject to certain limits based on federal
tax laws. For the years ended June 30, 2004, 2003 and 2002
expense attributable to the Plan amounted to $2, $2 and $2,
respectively.
Deferred Compensation
Plans
Effective
August 1, 2003, the Company adopted the Bank of Internet
USA Nonqualified Deferred Compensation Plans (Deferred
Compensation Plans) which cover designated key management
employees and directors who elect to participate. The Deferred
Compensation Plans allow eligible employees and directors to
elect to defer up to 100% of their compensation, including
commissions, bonuses and director fees. Although the Deferred
Compensation Plans provide that the Company may make
F-27
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
discretionary contributions to a
participants account, no such discretionary contributions
have been made through the period ending June 30, 2004.
Participant deferrals are fully vested at all times, and
discretionary contributions, if any, will be subject to a
vesting schedule specified by the Company. Participants in the
Deferred Compensation Plans may elect to invest their accounts
in either of two accounts: (1) which earns interest based
upon the prime rate; or (2) which mirrors the performance
of the book value of the Companys common stock. The
Deferred Compensation Plans are administrated by the
Compensation Committee of the Board of Directors. At
December 31, 2004, there were $96 deferred in
connection with the Deferred Compensation Plans.
|
|
16.
|
Related Party Transactions
|
From February 2003 to January 2004, the Company
paid two members of the Board of Directors $175 and $125 during
the years ended June 30, 2004 and 2003, respectively, to
assist in raising capital for the Company. The amounts are
included in salary and employee benefits expense.
In the ordinary course of business, the Company
has granted loans to principal officers and directors and their
affiliates more fully described in Note 3.
|
|
17.
|
Fair Value of Financial Instruments
|
The fair value of a financial instrument is the
current amount that would be exchanged between willing parties,
other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the
Companys various financial instruments. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized
in an immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair
value of the Company.
The Company in estimating fair value disclosures
for financial instruments used the following methods and
assumptions:
|
|
|
Cash and Cash
Equivalents
The carrying
amounts of cash and short term instruments approximate fair
values.
|
|
|
Time Deposits in Financial
Institutions
The carrying
amount of time deposits in financial institutions approximates
fair value.
|
|
|
Investment
Securities
Fair values for
securities, excluding Federal Home Loan Bank stock, are
based on quoted market prices. The carrying value of Federal
Home Loan Bank stock approximates fair value based on the
redemption provisions of the Federal Home Loan Bank.
|
|
|
Loans Held for Investment and Held for
Sale
For adjustable rate
loans held for investment that reprice frequently with no
significant change in credit risk, fair values are based on
carrying values.
|
|
|
Fair values for fixed rate loans held for sale
are estimated using discounted cash flow analyses, assuming
interest rates currently being offered for loans with similar
terms to borrowers of similar credit. Fair values of loans held
for sale are based on commitments from investors or prevailing
market prices.
|
F-28
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
|
|
|
Deposits
The fair values disclosed for demand deposits (interest and
non-interest checking, savings, and certain types of money
market accounts) are equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). Fair values
for fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
|
|
|
Advances from
FHLB
The fair values of
the FHLB advance are estimated using discounted cash flow
analyses based on the Companys current incremental
borrowing rates for similar types of borrowing arrangements.
|
|
|
Accrued
Interest
The carrying
amounts of accrued interest approximate fair value.
|
|
|
Note
Payable
The carrying
amount of the note payable approximates fair value, as the rate
is based on current market rates.
|
|
|
|
Junior Subordinated
Debentures
The carrying
amount of the junior subordinated debentures approximates fair
value, as the rate is based on current market rates.
|
|
|
|
Off-Balance-Sheet
Instruments
Fair values
for off-balance-sheet, credit-related financial instruments are
based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties credit standing and are
not material.
|
F-29
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
The estimated fair values, and related carrying
or notional amounts, of the Companys financial instruments
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2004
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,577
|
|
|
$
|
18,577
|
|
|
$
|
24,859
|
|
|
$
|
24,859
|
|
|
$
|
6,462
|
|
|
$
|
6,462
|
|
|
Investment securities available for sale
|
|
|
44,825
|
|
|
|
44,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to
maturity MBS
|
|
|
4,791
|
|
|
|
4,756
|
|
|
|
256
|
|
|
|
258
|
|
|
|
441
|
|
|
|
449
|
|
|
Investment securities held to
maturity FHLB Agency
|
|
|
3,425
|
|
|
|
3,435
|
|
|
|
3,409
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
Time deposits in financial institutions
|
|
|
7,522
|
|
|
|
7,522
|
|
|
|
9,503
|
|
|
|
9,503
|
|
|
|
11,872
|
|
|
|
11,872
|
|
|
Stock of the Federal Home Loan Bank
|
|
|
6,998
|
|
|
|
6,998
|
|
|
|
4,789
|
|
|
|
4,789
|
|
|
|
2,795
|
|
|
|
2,795
|
|
|
Loans held for investment net
|
|
|
417,915
|
|
|
|
419,464
|
|
|
|
355,261
|
|
|
|
355,932
|
|
|
|
245,933
|
|
|
|
252,300
|
|
|
Loans held for sale
|
|
|
845
|
|
|
|
845
|
|
|
|
435
|
|
|
|
435
|
|
|
|
3,602
|
|
|
|
3,602
|
|
|
Accrued interest receivable
|
|
|
1,793
|
|
|
|
1,793
|
|
|
|
1,486
|
|
|
|
1,486
|
|
|
|
1,107
|
|
|
|
1,107
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and savings
|
|
|
112,571
|
|
|
|
112,571
|
|
|
|
123,124
|
|
|
|
123,124
|
|
|
|
52,024
|
|
|
|
52,024
|
|
|
Time deposits
|
|
|
207,448
|
|
|
|
208,995
|
|
|
|
146,717
|
|
|
|
147,469
|
|
|
|
141,968
|
|
|
|
145,079
|
|
|
Advances from the Federal Home Loan Bank
|
|
|
148,504
|
|
|
|
147,867
|
|
|
|
101,446
|
|
|
|
99,251
|
|
|
|
55,900
|
|
|
|
58,839
|
|
|
Note payable
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
1,300
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
5,155
|
|
|
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
576
|
|
|
|
576
|
|
|
|
283
|
|
|
|
283
|
|
|
|
272
|
|
|
|
272
|
|
The fair value estimates as of December 31,
2004 and June 30, 2004 and 2003 are based on pertinent
information available to management as of the respective dates.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from
the amounts presented herein.
F-30
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
|
|
18.
|
Parent-Only Financial Information
|
The following BofI Holding, Inc. (Parent company
only) financial information should be read in conjunction with
the other notes to the consolidated financial statements:
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
1,118
|
|
|
$
|
516
|
|
Other assets
|
|
|
218
|
|
|
|
256
|
|
Due from subsidiary
|
|
|
85
|
|
|
|
156
|
|
Investment in subsidiary
|
|
|
31,749
|
|
|
|
22,108
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
33,170
|
|
|
$
|
23,036
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
Note payable
|
|
$
|
1,300
|
|
|
$
|
|
|
Accrued interest payable
|
|
|
12
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
99
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,411
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock $10,000 stated
value; 1,000,000 shares authorized; 675 shares issued
and outstanding
|
|
|
6,637
|
|
|
|
|
|
|
Common stock $.01 par value;
10,000,000 shares authorized; 4,519,649 (September 2004),
4,506,524 (June 2004) and 4,474,351 (June 2003) shares issued
and outstanding
|
|
|
45
|
|
|
|
45
|
|
|
Additional paid-in capital
|
|
|
22,363
|
|
|
|
22,161
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
2,714
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
31,759
|
|
|
|
22,885
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
33,170
|
|
|
$
|
23,036
|
|
|
|
|
|
|
|
|
|
|
F-31
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Interest expense
|
|
|
60
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
|
(58
|
)
|
|
|
3
|
|
|
|
(44
|
)
|
Non-interest expense general and
administrative
|
|
|
478
|
|
|
|
323
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
478
|
|
|
|
323
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit, dividends from
subsidiary and equity in undistributed income of subsidiary
|
|
|
(536
|
)
|
|
|
(320
|
)
|
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
215
|
|
|
|
(213
|
)
|
Dividends from subsidiary
|
|
|
71
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiary
|
|
|
2,640
|
|
|
|
2,265
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,175
|
|
|
$
|
1,730
|
|
|
$
|
1,020
|
|
|
Adjustments to reconcile net income to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiary
|
|
|
(2,640
|
)
|
|
|
(2,265
|
)
|
|
|
(1,416
|
)
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
214
|
|
|
|
(214
|
)
|
|
|
Extension of terms to exercise common stock
warrants
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
Decrease (increase) in other assets
|
|
|
109
|
|
|
|
(393
|
)
|
|
|
(4
|
)
|
|
|
Increase (decrease) in other liabilities
|
|
|
(40
|
)
|
|
|
121
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(396
|
)
|
|
|
(593
|
)
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
|
(7,072
|
)
|
|
|
(1,051
|
)
|
|
|
(4,600
|
)
|
|
Dividends received from subsidiary
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,001
|
)
|
|
|
(1,051
|
)
|
|
|
(4,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 AND 2003 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 2004, 2003 AND
2002 (Continued)
(Dollars in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
1,654
|
|
|
|
6,184
|
|
|
Net proceeds from issuance of convertible
preferred stock
|
|
|
6,637
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable to
related parties
|
|
|
|
|
|
|
|
|
|
|
1,700
|
|
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(2,570
|
)
|
|
Proceeds from note payable
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options
and warrants
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on convertible preferred stock
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,999
|
|
|
|
1,654
|
|
|
|
5,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
602
|
|
|
|
10
|
|
|
|
479
|
|
CASH AND CASH EQUIVALENTS Beginning
of year
|
|
|
516
|
|
|
|
506
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
1,118
|
|
|
$
|
516
|
|
|
$
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
Other Information (Unaudited)
|
Junior Subordinated
Debentures
On
December 13, 2004, the Company entered into an agreement to
form a trust and issue $5,000 of trust preferred securities in a
transaction that closed on December 16, 2004. The net
proceeds from the offering were used to purchase $5,155 of
junior subordinated debentures (Debentures) of the
Company with a stated maturity date of February 23, 2035.
The Debentures are the sole assets of the trust. The trust
preferred securities are mandatorily redeemable upon maturity,
or upon earlier redemption as provided in the indenture. The
Company has the right to redeem the Debentures in whole (but not
in part) on or after specific dates, at a redemption price
specified in the indenture plus any accrued but unpaid interest
through the redemption date. Interest accrues at the rate of
three-month LIBOR plus 2.4% (4.9% at December 31, 2004),
with interest to be paid quarterly starting in February 16,
2005.
Subsequent
Events
On January 24,
2005, the Company increased the number of authorized shares of
common stock from 10,000,000 to 25,000,000.
On February 15, 2005, the Company entered
into an interest rate cap, with a notional amount of $5,000 and
a term of four years expiring in March 2009, to lower the
interest payments on the Debentures should the three-month LIBOR
increase above 5.25%. The Company designated this derivative as
a non-hedging instrument and intends to report changes in the
fair value of this instrument in current-period earnings after
December 31, 2004.
* * * * * *
F-33
BofI Holding, Inc.,
the holding company for:
2,250,000 Shares
Common Stock
Dealer Prospectus Delivery
Obligation
Until ,
2005 (25 days after the date of the offering), all dealers
that effect transactions in these securities, whether or not
participating in the offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
Information Not Required in
Prospectus
Item 13.
Other
Expenses of Issuance and Distribution.
The expenses to be paid by the Registrant in
connection with the distribution of the securities being
registered, other than underwriting discounts and commissions,
are as follows:
|
|
|
|
|
|
|
|
Amount*
|
|
|
|
Securities and Exchange Commission Filing Fee
|
|
$
|
3,959
|
|
NASD Filing Fee
|
|
|
3,864
|
|
Nasdaq National Market Listing Fee
|
|
|
100,000
|
|
Accounting Fees and Expenses
|
|
|
500,000
|
|
Blue Sky Fees and Expenses
|
|
|
5,000
|
|
Legal Fees and Expenses
|
|
|
500,000
|
|
Transfer Agent and Registrar Fees and Expenses
|
|
|
10,000
|
|
Printing Expenses
|
|
|
150,000
|
|
Miscellaneous Expenses
|
|
|
150,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,422,823
|
|
|
|
|
|
|
|
|
*
|
All amounts are estimates except the SEC filing
fee, the NASD filing fee and the Nasdaq National Market listing
fee.
|
|
|
Item 14.
|
Indemnification of Directors and
Officers.
|
Section 145 of the Delaware General
Corporation Law authorizes a court to award, or a
corporations board of directors to grant, indemnity to
officers, directors and other corporate agents under certain
circumstances and subject to certain limitations. The
Registrants certificate of incorporation and bylaws
provide that the Registrant shall indemnify its directors,
officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware
law. In addition, the Registrant intends to enter into separate
indemnification agreements with its directors, officers and
certain employees that would require the Registrant, among other
things, to indemnify them against certain liabilities which may
arise by reason of their status as directors, officers or
certain other employees. The Registrant also intends to maintain
director and officer liability insurance, if available on
reasonable terms.
These indemnification provisions and the
indemnification agreement to be entered into between the
Registrant and its officers and directors may be sufficiently
broad to permit indemnification of the Registrants
officers and directors for liabilities (including reimbursement
of expenses incurred) arising under the Securities Act.
The underwriting agreement, which is
Exhibit 1.1 to this registration statement, provides for
indemnification by our underwriters and their officers and
directors for certain liabilities arising under the Securities
Act or otherwise.
|
|
Item 15.
|
Recent Sales of Unregistered
Securities.
|
Since July, 1, 2001, the Registrant has
issued and sold the following unregistered securities:
|
|
|
1. Between July 1, 2001 and
December 31, 2004, the Registrant granted options to
purchase a total of 839,172 shares of its common stock at
prices ranging from $4.19 to $11.00 per share to employees,
directors and consultants pursuant to its amended and restated
1999 stock option plan. These issuances were made in reliance on
Rule 701 of the Securities Act.
|
II-1
|
|
|
2. In September 2001 and October 2001, the
Registrant issued and sold an aggregate of 587,200 shares
of its common stock to a total of 77 investors for an aggregate
purchase price of $5,872,000. These sales were made solely to
accredited investors or sophisticated investors in reliance on
Section 4(2) of the Securities Act.
|
|
|
3. In June 2002 and July 2002, the
Registrant issued and sold an aggregate of 179,850 shares
of its common stock, together with warrants to purchase up to an
additional 59,950 shares of its common stock, to a total of
29 investors for an aggregate purchase price of $2,158,200.
These sales were made solely to accredited investors or
sophisticated investors in reliance on Section 4(2) of the
Securities Act.
|
|
|
4. Between November 2003 and June 2004, the
Registrant issued and sold an aggregate of 675 shares of
its Series A 6% Cumulative Nonparticipating
Perpetual Preferred Stock, Convertible through January 1,
2009 to a total of 22 investors for an aggregate purchase price
of $6,750,000. These sales were made solely to accredited
investors or sophisticated investors in reliance on
Section 4(2) of the Securities Act.
|
|
|
5. In December 2004, the Registrant issued
and sold $5,000,000 of trust preferred securities to one
investor. This sale was made solely to an accredited investor in
reliance on Section 4(2) of the Securities Act.
|
The issuances of the securities in the
transactions above were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the
Securities Act promulgated thereunder as transactions by an
issuer not involving a public offering, where the purchasers
represented their intention to acquire the securities for
investment only and not with a view to distribution and received
or had access to adequate information about the Registrant, or
Rule 701 promulgated under the Securities Act as
transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.
Appropriate legends were affixed to the stock
certificates issued in the above transactions. Similar legends
were imposed in connection with any subsequent sales of any such
securities. No underwriters were employed in any of the above
transactions.
|
|
Item 16.
|
Exhibits and Financial Statement
Schedules.
|
(a) Exhibits
The exhibits are as set forth in the
Exhibit Index.
(b) Financial Statement Schedules.
All schedules have been omitted because they are
not required or are not applicable or the required information
is shown in the financial statements or related notes.
The Registrant hereby undertakes to provide to
the underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-2
indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any
liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial
bona fide
offering thereof.
II-3
Signatures
Pursuant to the requirements of the Securities
Act of 1933, the Registrant has duly caused this Amendment
No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California on the 24th day
of February 2005.
|
|
|
|
|
Gary Lewis Evans
|
|
President and Chief Executive
Officer
|
Pursuant to the requirements of the Securities
Act of 1933, this Amendment No. 2 to the Registration
Statement has been signed by the following persons in the
capacities and on the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ GARY LEWIS EVANS
Gary Lewis Evans
|
|
President, Chief Executive Officer and Director
(Principal
Executive Officer)
|
|
February 24, 2005
|
|
**
Andrew J. Micheletti
|
|
Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
February 24, 2005
|
|
**
Jerry F. Englert
|
|
Chairman
|
|
February 24, 2005
|
|
**
Theodore C. Allrich
|
|
Vice Chairman
|
|
February 24, 2005
|
|
**
Paul Grinberg
|
|
Director
|
|
February 24, 2005
|
|
**
Robert Eprile
|
|
Director
|
|
February 24, 2005
|
|
**
Thomas J. Pancheri
|
|
Director
|
|
February 24, 2005
|
|
**
Connie M. Paulus
|
|
Director
|
|
February 24, 2005
|
|
**
Gordon L. Witter
|
|
Director
|
|
February 24, 2005
|
|
**By:
|
|
/s/ GARY LEWIS EVANS
Gary Lewis Evans
(Attorney-in-fact)
|
|
|
|
|
II-4
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
|
|
1
|
.1**
|
|
Form of Underwriting Agreement
|
|
3
|
.1*
|
|
Certificate of Incorporation of the Registrant,
filed with the Delaware Secretary of State on July 6, 1999
|
|
3
|
.2*
|
|
Certificate of Amendment of Certificate of
Incorporation of the Registrant, filed with the Delaware
Secretary of State on January 25, 2005
|
|
3
|
.3*
|
|
Certificate of Designation of the Registrant,
filed with the Delaware Secretary of State on October 27,
2003
|
|
3
|
.4*
|
|
Bylaws of the Registrant
|
|
3
|
.5*
|
|
Certificate of Amendment of Certificate of
Incorporation of the Registrant, filed with the Delaware
Secretary of State on August 19, 1999
|
|
3
|
.6*
|
|
Certificate of Amendment of Certificate of
Incorporation of the Registrant, filed with the Delaware
Secretary of State on February 25, 2003
|
|
4
|
.1*
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3,
3.4, 3.5 and 3.6
|
|
4
|
.2
|
|
Specimen Stock Certificate of the Registrant
|
|
5
|
.1**
|
|
Opinion of Morrison & Foerster LLP as to
the legality of the common stock
|
|
10
|
.1
|
|
Form of Indemnification Agreement between the
Registrant and each of its executive officers and directors
|
|
10
|
.2*
|
|
Amended and Restated 1999 Stock Option Plan, as
amended
|
|
10
|
.3*
|
|
2004 Stock Incentive Plan
|
|
10
|
.4*
|
|
2004 Employee Stock Purchase Plan, including
forms of agreements thereunder
|
|
10
|
.5*
|
|
Assignment and Assumption Agreement and Consent
to Assignment, dated as of September 22, 1999, by and among
the Registrant, as assignee, Conti Receivables Management LLC
(Tenant), Prentiss Properties Acquisition Partners,
L.P. (Landlord) and Contifincial Corporation,
together with Lease, dated March 16, 1998, between Landlord
and Tenant, as amended by the First Amendment to Lease, dated
November 15, 2002, between Landlord and Tenants
|
|
10
|
.6*
|
|
Employment Agreement, dated as of July 1,
2003, between Bank of Internet USA and Gary Lewis Evans
|
|
10
|
.7*
|
|
Employment Agreement, dated as of July 1,
2003, between Bank of Internet USA and Patrick A. Dunn
|
|
10
|
.8*
|
|
Employment Agreement, dated as of July 1,
2003, between Bank of Internet USA and Andrew J. Micheletti
|
|
10
|
.9*
|
|
Employment Agreement, dated as of July 1,
2003, between Bank of Internet USA and Michael J. Berengolts
|
|
10
|
.10*
|
|
Amended and Restated Declaration of Trust of
BofITrust I dated as of December 16, 2004
|
|
21
|
.1
|
|
Subsidiaries of the Registrant consist of Bank of
Internet USA (federal charter) and BofI Trust I (Delaware
charter)
|
|
23
|
.1**
|
|
Consent of Morrison & Foerster LLP.
Reference is made to Exhibit 5.1
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP,
Independent Registered Public Accounting Firm
|
|
24
|
.1*
|
|
Powers of Attorney
|
|
|
**
|
To be filed by amendment
|