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.
