How BofI Holding, Inc. Revolutionized the Banking Industry Almost 20 Years Ago

The most revolutionary companies are founded by leaders who thrive on challenging industry norms.

For BofI Holding,  (NASDAQ: BOFI  ) founder & former CEO Gary Lewis Evans set out to challenge the well-established brick-and-mortar branch banking system by providing branchless banking via the Internet.

Source: Company

Pioneer of Internet banking
When most Americans were struggling with their dial-up connection in 1995, Gary Lewis Evans was enabling consumers of La Jolla Bank to make deposits and apply for loans over the Internet.

In fact, the first non-USA deposit over the Internet may have occurred at La Jolla Bank when the first account on its electronic product, aptly named Bank of the Internet, was opened by a consumer in Germany.

This initial success at La Jolla Bank led Gary Lewis Evans to become a pioneer of Internet banking, and his steadfast vision led to the opening of Bank of Internet USA, a subsidiary of BofI Holding, on July 4, 2000—intentionally done on a national banking holiday.

One remarkable feature of this nationwide launch was that Bank of Internet USA opened with just one branch in San Diego, California.

And this one-branch approach is still working for BofI.

Fewer employees equals heightened efficiency
Gary Lewis Evans went from concept to public company in less than a decade but like any founder, he did not accomplish this by himself. Investors may be surprised to learn that at the time of BofI Holding's IPO, he only had twenty-five employees.

Comparing employee count to assets can provide insight into the efficiency of a bank. Simply stated, if you have fewer employees managing more assets, then there is a greater efficiency.

Source: Flickr Ervins Strauhmanis

At the time of BofI Holding's IPO, the company had $532 million in assets resulting in an impressive $21.28 million in assets per employee. 

Since then BofI has scaled up to $3.5 billion in assets and 339 employees as of May 2014. This, however, still yields $11.4 million in assets per employee.  

In comparison, America's largest bank, Wells Fargo & Company (NYSE: WFC  ) , currently has $5.8 million in assets for each of their 256,000 employees.

BofI Holding is also more efficient as compared to its peer brick-and-mortar bank, Pacific Premier BanCorp (NASDAQ: PPBI  ) (NASDAQ: PPBI  ) , which has $7.6 million in assets per employee.

For BofI Holding, this high assets-per-employee ratio results in a lower cost structure and generates higher interest rates for personal savings accounts as compared to its larger peers.

Can consumers ditch the branch?

A switch to a branchless bank would be the first major revolution to the banking industry in over a century as the branch banking system has been at the core of banking since the early 20th century.  

In fact, investors are currently seeing even behemoths like Bank of America start to close branches. Change could be just around the corner. But this time, the transformation of the banking industry will not be led by the banks themselves—as it was in the transition from small banks to bank branches—but by consumers.

This consumer-led transformation has already been accomplished in other industries with the advent of low cost airlines and online brokerages. But the banking industry has lagged behind.

Are consumers fearful of ditching the branch? It's not likely—85% of bank transactions are currently non-branch.

Source: BofI Holding Investor Presentation July 2014

Consumers are clearly becoming more comfortable with online banking, but it remains unclear whether they can fully ditch the familiar presence of the branch. But consumers definitely seem open to the idea: since 2005 BofI Holding has increased its assets six-fold to $3.5 billion.

Foolish conclusion
Gary Lewis Evans' vision had initial success with its winning technology but will now be dependent on the consumer for future success. His original vision is still strong at BofI Holding, even after his resignation in 2007.

Current CEO Gregory Garrabrants remains committed to BofI Holding being the "most innovative branchless bank in the United States." And with the increasing popularity of online banking, remote deposits and mobile payments, BofI Holding has a ripe opportunity to garner the interest of the consumer that they need to stay at the top of the branchless banks.

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  • Report this Comment On July 23, 2014, at 1:47 AM, erich69 wrote:

    I'm always amused at the BOFI writeups talking about how overvalued BOFI is on it's book value. The critics fail to recognize 2 key points of why this is an apples to oranges comparison fallacy. BOFI inherently has less book value because of its business model operating with superior profit margins without branches. It's like comparing the book value of a brick and mortar retailer like walmart to amazon. Now granted, price/book is how banks are traditionally valued against one another, this fails to recognize that higher valuations are placed upon small fast growing companies and not on mature slow growers. Even David Gardner explained this one when he talked about how to choose investments with potential. While Wells Fargo may be a well run bank with a reasonable valuation, you will not be doubling your money on it anytime in the near future, whereas if BOFI continues its expansion gaining more accounts and making more loans, a double in your investment can happen quite easily.

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