A few years ago, BofI‘s (NASDAQ:BOFI) lending business was almost entirely mortgage-based, and its deposit accounts were mainly CDs. That’s no longer the case. Here’s a discussion of how the bank’s business has evolved over the years.

A full transcript follows the video.

This video was recorded on Dec. 4, 2017.

Michael Douglass: As you noted earlier, Matt, BofI is historically a residential lender, both single-family and multi-family. They really only started in business banking in 2011, and C&I lending in 2013. They’re in the process of spinning up a consumer auto business now, which we’ll talk about more on the going forward part of the episode. One thing that I want to highlight is, they’ve done a really good job of continuing to diversify their growth into new areas. That’s one of the things that Anand’s framework doesn’t always give you, that historical perspective, so that’s why it’s important to start with those questions and then expand into other, broader ones that get highlighted as you’re researching those initial ones.

Let’s also talk about H&R Block. This is something that doesn’t really pop up in Anand’s framework, but it’s a really interesting and important part of BofI’s business.

Matt Frankel: Yeah, definitely. H&R Block and BofI, last year, for the 2017 tax year, entered into a partnership where BofI would start to provide refund anticipation loans for H&R Block’s customers. You’ve seen the signs in the windows at the tax offices, “Get your refund now,” things like that. For 2018, they’ve expanded their relationship where BofI is the exclusive provider of H&R Block’s refund advance loans. The thing to know is, BofI doesn’t make much money on this. They’re interest-free loans. They charge no finance fees. The idea here is, this opens up, one, diversification, and two, cross-selling opportunities to recruit more BofI customers, hopefully, out of H&R Block’s customers.

Douglass: It’s a very interesting and frankly different model, and it’s one that BofI has so far leveraged pretty successfully. Of course, we’ll have to see how it pans out from here. Another thing that I want to highlight is the deposits side of things. Matt, you referenced this earlier, but I wanted to put some numbers to it. BofI used to be primarily time deposit based. Think a CD. About 50% of their deposits as of June 30, 2013, were timed deposits, things like CDs, and they had 2.1 billion deposits at the time. Fast-forward to the most recent quarter, they have $7.2 billion in deposits, so more than three times as much, and time deposits only make up 12% of their deposits, with checking other immediate demand accounts at 53%, savings accounts at 31%, and IRAs at 4%.

So that’s the incredible growth, and they’ve really been able to achieve that by offering an attractive cost structure for consumers so that people can get higher yield savings accounts and things like that. So that has enabled that growth and diversification in loans that we were just talking about.

Another thing I want to highlight is, a few episodes ago, we talked about credit cycles and how they inevitably turn. Non-performing loans, frankly, are going to look good today. That’s just part of the deal. BofI’s are at 0.4%. Everyone’s look good right now, because frankly, the economy is more or less humming along. The question, of course, is, what happens when the tide goes out?

Frankel: When recessions hit, banks have higher non-performing loans. People have a tougher time covering their bills, and this trickles into the bank’s balance sheets. Just to give you some perspective, some banks were approaching double digits back in 2008-10 timeframe. Bank of America‘s credit card portfolio was over 10% at its peak. BofI only got to about 1.5% of its total loans at the end of 2010, were non-performing, not even charge-offs. So, this is an amazingly low ratio considering what was going on at the time. And will another 2008-09 style housing crisis happen? Probably not to that extent. But if it does, BofI should be well covered.

Douglass: Certainly, if their historical credit lending standards continue to hold true. Finally, it’s worth noting, and we foreshadowed that this was coming a little bit. There’s a reason why BofI has gotten cheaper over the last four years, and that has in large part been because of some allegations against the company.

Frankel: Yeah. Without going into too much detail about this, basically there were some accusations involving money laundering through the bank’s channels. The New York Post, I believe, ran a story claiming this. The bank has repeatedly denied it. No wrongdoing has really ever been found. But there are still a high percentage of its shares that have been sold short, which is the reason why BofI’s not trading at as high of a valuation as it was a couple of years ago.

Douglass: Right. So that’s something to keep in mind. Again, nothing has been proven of the allegations. I am a shareholder and a very happy one, but there may still be more to the story that we don’t know everything about. So that’s just your usual standard cautionary commentary there.

Matthew Frankel owns shares of Bank of America. Michael Douglass owns shares of BofI Holding. The Motley Fool owns shares of and recommends BofI Holding. The Motley Fool has a disclosure policy.

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