Where did my money go?
To answer this question, all I need is 10 minutes, the income statement, a pen, paper, and a calculator. Next, assume that I “spend” $100 with each company. To determine how management used my money, I divide cost of goods sold (COGS) by revenue. For example, look at BofI Holding, Inc. (NASDAQ:BOFI)s latest 10K: COGS (21,254) / revenue (93,888) = .22638 x $100 = $22.64. It is costing the company $22.64 to supply the goods and services that I paid $100 for. Now, lets take a look at the other sub-categories on the income statement.
| BOFI | 6-29-2010 | 6-29-2011 | 6-29-2012 |
| COGS | $22.64 | $22.07 | $18.84 |
| SG&A | $18.16 | $25.68 | $27.74 |
| Other Expenses | $6.40 | $6.36 | $7.01 |
| Interest Expense | $14.59 | $12.03 | $8.82 |
| Income Tax | $15.71 | $13.47 | $15.19 |
| Net Income | $22.50 | $20.39 | $22.31 |
At first glance, this looks to be a very handsome 22.31% net income margin, but to see how strong this number is, let’s take a look at Bank of America Corp (NYSE:BAC), a more traditional “brick and mortar” bank.
| BAC | 12-30-10 | 12-30-11 | 12-30-12 |
| COGS | $4.89 | $4.53 | $3.75 |
| SG&A | $50.05 | $65.13 | $70.77 |
| Non-Recurring | $10.60 | $3.32 | NA |
| Others | $22.48 | $12.97 | $9.43 |
| Interest Expense | $12.97 | $14.26 | $12.98 |
| Income Tax | $0.68 | ($1.46) | ($1.11) |
| Net Income | ($1.67) | $1.26 | $4.19 |
Wow…check that out!
Yes, Bank of America Corp (NYSE:BAC) has been battling back from the Great Recession, and doing a good job, but that does not dismiss the huge difference in net incomes from these two banks. I find it interesting to look at the different costs associated with running an internet bank vs. a brick-and-mortar bank. It is costing BofI Holding, Inc. (NASDAQ:BOFI) five times as much to pay for COGS as Bank of America Corp (NYSE:BAC). On the other hand, look at what it is costing Bank of America Corp (NYSE:BAC) to run its business. It is spending two and a half times as much in sales, general and administrative (SG&A) expenses than BofI Holding, Inc. (NASDAQ:BOFI).
Comparing the two, at least in my mind, highlights the advantages that internet banking has over traditional banking. What I would like to look at now is how BofI Holding, Inc. (NASDAQ:BOFI) compares to one of its peers, Flagstar Bancorp Inc (NYSE:FBC). For this I am only interested in COGS, SG&A and net income.
| FBC | 12-30-10 | 12-30-2011 | 12-30-2012 |
| COGS | $15.68 | $11.23 | $4.67 |
| SG&A | $60.42 | $66.89 | $45.88 |
| Net Income | ($37.99) | ($21.36) | $4.55 |
Once again, it is costing BofI Holding, Inc. (NASDAQ:BOFI) quite a bit more to supply goods and services to its customers, but it is also controlling its overhead better than Flagstar Bancorp Inc (NYSE:FBC). Even with net income four and a half times larger than Flagstar Bancorp Inc (NYSE:FBC) and Bank of America Corp (NYSE:BAC), BofI still has room to improve. Every dollar it can lower its COGS, net income will increase by that same amount, making a profitable business even stronger.
Traditional banking – not going the way of the dinosaur
For years, people have been predicting the demise of everything “brick and mortar” as the internet takes over. While internet banking is taking market share on a daily basis, there will always be room for traditional banks like Bank of America. Yes, some people feel comfortable doing everything online, but there is still a large number of consumers that want to work with someone face to face.
Bank of America has been struggling to overcome some of the mistakes made during the Great Recession, like the Countrywide purchase and housing foreclosures, just to name two. While Bank of Amereica still has work to do, the worst is behind it and the future is beginning to look very bright. Management is enacting cost-cutting measures to reduce spending by $8 billion annually, which should drop directly to the bottom line.
I expect market-beating stock price appreciation over the next five to 10 years, plus some massive dividend increases in the not-too-distant future. Back in 2008, Bank of America was paying a $0.64 quarterly dividend. Even if in a few years the dividend “only” climbs back to $0.32 quarterly, that is an 8% yield on today’s stock price. Today’s investors have potential for some very handsome returns.
Internet banking – the new money centers?
BofI is still tiny when compared to traditional banks, but it has carved out a very profitable niche. With only one “location,” it serves over 40,000 retail customers nationwide by providing check deposits, bill paying and mortgage originations. By keeping its overhead low, it is able to offer higher rates on savings and CDs, while also offering lower interest rates on auto loans and mortgages.
Management has been able to grow at some very impressive rates and still be profitable. My favorite stat is the fact that the company has grown net income by over 50% annually the past five years.
BofI is still a small bank, but the runway is very long for this company. It could grow its deposit base 10 times over and still be small when compared to Bank of America, the next 10 years should be very interesting.
Flagstar Bancorp Inc (NYSE:FBC) has fallen on hard times, but a new CEO with 30 years experience with the company should get things turned around. The company has already lowered noninterest expenses by $22 million and has increased book value from $16.46 to $17.66.
Flagstar Bancorp Inc (NYSE:FBC) management has three goals that should produce a nice turnaround. First, increase revenue by expanding its mortgage business. Second, doing a better job at controlling costs. Third, get a handle on its legacy costs. I do not own Flagstar Bancorp Inc (NYSE:FBC), but it is a worthy company to watch/study.
Performing this exercise on a quarterly basis will allow you to see and understand trends. It will also alert you to potential problems that might require a little more digging.
The article Investments in 2 Large Banks: Where Did My Money Go? originally appeared on Fool.com and is written by David Paxton.
David Paxton owns shares of Bank of America and BofI Holding. The Motley Fool recommends Bank of America and BofI Holding. The Motley Fool owns shares of Bank of America and BofI Holding. David is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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