BofI Holding in San Diego had many things to celebrate in 2015.
The $6.3 billion-asset company successfully completed a complicated deal to buy H&R Block Bank and is now in the early stages of a seven-year pact to provide financial services to the tax preparer's customers.
The company is also generating record profits. BofI's 2015 earnings for the three months that ended Sept. 30 increased 43% from a year earlier, to $25.4 million, as total loans rose by roughly 32%.
Still, the year ended on a sour note, with the company facing allegations from a former employee, as part of a wrongful termination lawsuit, that it violated anti-money-laundering laws. Those claims, which BofI has vigorously denied, have sent the company's stock down roughly 40% since they first surfaced in October. (BofI has filed a countersuit; a call to the ex-employee's lawyer was not returned.)
So Greg Garrabrants, BofI's president and chief executive, will spend much of next year sharing his company's story while reassuring investors that its fundamentals and prospects are still sound, if not even better, than they were in the past. He will also look to build off of the H&R Block deal by cross-selling products while keeping an eye out for more acquisitions.
For these reasons, Garrabrants was selected one of American Banker's Community Bankers to Watch. The following is an edited transcript of a wide-ranging interview with Garrabrants.
What are your plans for BofI in 2016?
GREG GARRABRANTS: This is the first year of our … strategic partnership with H&R Block where we're providing three financial services products that we expect to generate $13 million to $15 million of after-tax net income annually. We have an exclusive cross-sell arrangement for single-family mortgages and IRAs, and we've already rolled out other financial products, such as a franchise lending product to their customers. They have about 20 million tax prep customers.
Outside of H&R Block, we'll continue to expand our data analytics capacities, both in deposits and lending. These initiatives will enhance our cross-sell capabilities for consumer and commercial customers. We're further diversifying our funding and lending businesses to position ourselves well for a variety of interest rate environments. We recently launched an enhanced cash management software system that's allowing us to compete for larger and more sophisticated middle-market business accounts. We've been adding team members to our small-balance commercial real estate group, which had been previously focused on multifamily, to expand into some of the other commercial real estate lending products groups.
Why was the closing of the H&R Block acquisition delayed by regulators?
They never delayed the deal as a result of anything related to us. It was a complex transaction that involved a lot of parties. [The regulators] provided us the approval the day after they issued guidance [on tax products]. I think that's indicative of the thorough thought process they had related to that.
What are your plans for future acquisitions?
We have opportunities to acquire deposits from nonbank institutions. We're interested in specialty lending and deposits businesses that have characteristics such as intellectual property, efficient and scalable platforms that are not branch dependent and other low-cost distribution channels. We look at companies with interesting data and analytics capabilities. We can leverage our existing customers in a data-centric way. It's a bit of a different M&A strategy, but it is still active and viable. At any one time we're looking at quite a few different targets.
Many banks talk about cross selling but few are good at it. How do you plan to sell products to H&R Block customers?
We believe analytics are important to our strategy. We believe you can create personalized offers and increase efficiency of your marketing dramatically if you understand — based on propensity models — whether a customer will be interested in the product you're selling them. We believe our products are very good. If you look at our online checking account, we have no overdraft fees, no NSF fees and unlimited ATM reimbursements at any ATM in the country. If you get a line of credit that's attached to your checking account, you won't be charged a fee when you use that line of credit. Those products have much broader applicability. But there are many products that you can utilize data to microtarget customers based on their behavior, demographics, transaction data and a variety of other sets of information, to more accurately target them. We think we're more advanced in that.
Is that because you're an online bank?
I think the question of what's an online bank and how you service customers is a fuzzy one in some respects. We've always taken the approach that centralization of customer service was a competitive advantage. You can control the customer access points and move those access points to the folks that are best able to handle a situation. For example, consider a large cash management customer worried about ensuring they have dual-factor authentication, and they want a security review of their external cash management processing. They walk into a branch and ask a teller about this. That conservation, if done well, will simply say, "I don't know anything and let me refer you to the right person." That person won't be at the branch. We have the ability to control how those interactions happen and bring those interactions to experts.
How is the rise of online lenders affecting your business?
Those lenders are focused on the ability to generate lower-cost [customer] acquisition models. That occurs in several areas. It occurs through the acquisition side of modeling of customers. It occurs through data analytics and processing efficiency. We certainly pay attention to everything they're doing and we continue to recognize it is going to be important for us to maintain a strong technological infrastructure and great user experience.
There's been discussion about the future of branches. What do you think?
People need to ask themselves if someone will pay for the cost of the branch. There's no doubt if you give people things for free they will want them. Over time, the question will involve the cost of maintaining a branch, given that a lot of the revenue sources that have powered consumer banking have been diminished. It also depends on where you start. If you start with a large infrastructure, then it's a little different. Your customers may have come to expect that infrastructure.
What is the value proposition of an online bank? How do you promote that to customers?
I think the branchless banking model will evolve from saying that we have better fees and a better deal for you to having software and a user experience that is much better than physical locations. When I think about buying things from Amazon, I don't even know if they cost more or less. I have a general notion they're pretty well priced. But I do it because I love the user experience and the convenience and the fact that when I log on, it reminds me to buy needles for the pump for the football that I bought for the kids, and that's something that physical locations can't do. Online banks, and really all banks, need to figure out a way to make that user experience compelling.
Your response to the claims of AML violations from a former employee was interesting. A lot of banks would refuse to respond, yet you hosted a conference call to face it head on. Why did you do that?
We've always been committed to transparency and open communication, and we felt strongly that the facts were on our side and wanted to correct any misperceptions in the marketplace. What's interesting about this is that we know of no regulatory agency that has deemed this person to be a whistle-blower. He really is a disgruntled employee. It has been thoroughly investigated internally and externally and has been found without merit. We know of no ongoing regulatory investigation or pending action against us. We just want to remain focused on executing our business plan and continuing to grow our bank.
Did you learn anything about crisis management from this situation?
What I did learn is, unfortunately, how quickly and easily misperceptions and falsehoods can enter the market, particularly if they are coordinated with short-sellers who are focused on obviously making a profit. It is also a good lesson to stay close to your investors and have good channels of communication. That's something we recognize, and we've done a decent job of it, but it's something that brought it home for us.
Will you reach out to investors more in 2016?
We're continuing to focus on investor relations. We probably will spend more time getting investors into the company. Right now, the stock is an incredible value, based on the fact that the business is fundamentally unchanged from before and our growth prospects are the same or better with the H&R Block deal. All of the underlying core businesses are doing so well. It is a unique opportunity to get in front of shareholders and tell them an incredibly positive story.