10-Q 1 a10-q20130930bofiq1.htm FORM 10-Q 10-Q 2013.09.30 BOFI Q1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2013
 
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-51201
BofI HOLDING, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-0867444
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4350 La Jolla Village Drive, Suite 140, San Diego, CA
 
92122
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (858) 350-6200
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
 
Large accelerated filer  o
 
Accelerated filer  x
 
Non-accelerated filer  ¨
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    ¨  Yes    x  No
The number of shares outstanding of the Registrant’s common stock on the last practicable date: 13,853,069 shares of common stock, $0.01 par value per share, as of October 30, 2013.




BofI HOLDING, INC.
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
September 30,
2013
 
June 30,
2013
ASSETS
 
 
 
Cash and due from banks
$
195,231

 
$
196,264

Federal funds sold
1,752

 
5,430

Total cash and cash equivalents
196,983

 
201,694

Securities:
 
 
 
Trading
7,734

 
7,111

Available-for-sale
220,081

 
185,607

Held-to-maturity fair value $258,906 as of September 2013 and $271,854 as of June 2012
267,670

 
275,691

Stock of the Federal Home Loan Bank, at cost
30,832

 
27,750

Loans held for sale, carried at fair value
19,695

 
36,665

Loans held for sale, lower of cost or fair value
51,223

 
40,326

Loans - net of allowance for loan losses of $14,546 as of September 2013 and $14,182 as of June 2013
2,433,001

 
2,256,918

Accrued interest receivable
9,172

 
9,763

Furniture, equipment and software—net
6,594

 
6,418

Deferred income tax
21,510

 
23,555

Cash surrender value of life insurance
5,490

 
5,445

Other real estate owned and repossessed vehicles
2,562

 
2,006

Other assets
11,635

 
11,822

TOTAL ASSETS
$
3,284,182

 
$
3,090,771

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
92,900

 
$
81,524

Interest bearing
2,100,064

 
2,010,475

Total deposits
2,192,964

 
2,091,999

Securities sold under agreements to repurchase
110,000

 
110,000

Advances from the Federal Home Loan Bank
656,000

 
590,417

Subordinated debentures
5,155

 
5,155

Accrued interest payable
1,655

 
1,674

Accounts payable and accrued liabilities and other liabilities
35,791

 
23,264

Total liabilities
3,001,565

 
2,822,509

COMMITMENTS AND CONTINGENCIES (Note 8)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock— $0.01 par value; 1,000,000 shares authorized;
 
 
 
Series A—$10,000 stated value and liquidation preference per share; 515 shares issued and outstanding as of September 2013 and June 2013
5,063

 
5,063

Common stock—0.01 par value; 25,000,000 shares authorized; 14,729,240 shares issued and 13,803,247 shares outstanding as of September 2013; 14,638,229 shares issued and 13,733,325 shares outstanding as of June 2013
147

 
146

Additional paid-in capital
159,304

 
156,297

Accumulated other comprehensive income (loss)—net of tax
(10,190
)
 
(10,800
)
Retained earnings
139,917

 
127,813

Treasury stock, at cost; 925,993 shares as of September 2013 and 904,904 shares as of June 2013
(11,624
)
 
(10,257
)
Total stockholders' equity
282,617

 
268,262

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
3,284,182

 
$
3,090,771

See accompanying notes to the condensed consolidated financial statements.

1


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) 
 
Three Months Ended
 
September 30,
(Dollars in thousands, except per share data)
2013
 
2012
INTEREST AND DIVIDEND INCOME:
 
 
 
Loans, including fees
$
30,385

 
$
25,208

Investments
5,961

 
5,781

Total interest and dividend income
36,346

 
30,989

INTEREST EXPENSE:
 
 
 
Deposits
5,605

 
5,537

Advances from the Federal Home Loan Bank
1,363

 
1,587

Other borrowings
1,268

 
1,380

Total interest expense
8,236

 
8,504

Net interest income
28,110

 
22,485

Provision for loan losses
500

 
2,550

Net interest income, after provision for loan losses
27,610

 
19,935

NON-INTEREST INCOME:
 
 
 
Realized gain on sale of mortgage-backed securities
208

 

Other than temporary loss on securities:
 
 
 
Total impairment losses
253

 
(2,872
)
Loss recognized in other comprehensive income
(825
)
 
1,998

Net impairment loss recognized in earnings
(572
)
 
(874
)
Fair value gain on trading securities
623

 
602

Total unrealized loss on securities
51

 
(272
)
Prepayment penalty fee income
654

 
202

Gain on sale - other
3,089

 

Mortgage banking income
1,986

 
6,456

Banking service fees and other income
988

 
375

Total non-interest income
6,976

 
6,761

NON-INTEREST EXPENSE:
 
 
 
Salaries and related costs
7,782

 
6,369

Professional services
1,680

 
918

Occupancy and equipment
549

 
507

Data processing and internet
1,185

 
571

Advertising and promotional
589

 
794

Depreciation and amortization
721

 
337

Real estate owned and repossessed vehicles
69

 
98

FDIC and regulator fees
547

 
488

Other general and administrative
1,392

 
1,450

Total non-interest expense
14,514

 
11,532

INCOME BEFORE INCOME TAXES
20,072

 
15,164

INCOME TAXES
7,890

 
6,175

NET INCOME
$
12,182

 
$
8,989

NET INCOME ATTRIBUTABLE TO COMMON STOCK
$
12,104

 
$
8,912

COMPREHENSIVE INCOME
$
12,792

 
$
7,707

Basic earnings per share
$
0.85

 
$
0.73

Diluted earnings per share
$
0.85

 
$
0.67

See accompanying notes to the condensed consolidated financial statements.

2



BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
NET INCOME
$
12,182

 
$
8,989

Other comprehensive income:
 
 
 
Net unrealized gain (loss) from available-for-sale securities
(62
)
 
(198
)
Other-than-temporary impairment on hold to maturity securities recognized in other comprehensive income
1,078

 
(1,940
)
Unrealized gain (loss), net of reclassification adjustments, before income tax
1,016

 
(2,138
)
Income tax (expense) benefit related to items of other comprehensive income
(406
)
 
856

Other comprehensive income (loss)
610

 
(1,282
)
Comprehensive income
$
12,792

 
$
7,707


See accompanying notes to the condensed consolidated financial statements.



3


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited) 
 
Convertible
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss, Net of Income Tax
 
Treasury
Stock
 
Total
 
Number of Shares
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
BALANCE — July 1, 2013
515

 
$
5,063

 
14,638,229

 
(904,904
)
 
13,733,325

 
$
146

 
$
156,297

 
$
127,813

 
$
(10,800
)
 
$
(10,257
)
 
$
268,262

Net income

 

 

 

 

 

 

 
12,182

 

 

 
12,182

Other comprehensive income

 

 

 

 

 

 

 

 
610

 

 
610

Cash dividends on preferred stock

 

 

 

 

 

 

 
(78
)
 

 

 
(78
)
Issuance of common stock

 

 

 

 

 

 
(110
)
 

 

 

 
(110
)
Stock-based compensation expense

 

 

 

 

 

 
966

 

 

 

 
966

Restricted stock grants

 

 
64,931

 
(21,089
)
 
43,842

 

 
1,345

 

 

 
(1,367
)
 
(22
)
Stock option exercises and tax benefits of equity compensation

 

 
26,080

 

 
26,080

 
1

 
806

 

 

 

 
807

BALANCE — September 30, 2013
515

 
$
5,063

 
14,729,240

 
(925,993
)
 
13,803,247

 
$
147

 
$
159,304

 
$
139,917

 
$
(10,190
)
 
$
(11,624
)
 
$
282,617


See accompanying notes to the condensed consolidated financial statements.

4


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
12,182

 
$
8,989

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Accretion of discounts on securities
(2,076
)
 
(2,047
)
Net accretion of discounts on loans
(552
)
 
(611
)
Stock-based compensation expense
966

 
708

Tax benefit from exercise of common stock options and vesting of restricted stock grants
(1,917
)
 
(312
)
Valuation of financial instruments carried at fair value
(623
)
 
(602
)
Impairment charge on securities
572

 
874

Provision for loan losses
500

 
2,550

Deferred income taxes
1,639

 
680

Origination of loans held for sale
(186,696
)
 
(254,796
)
Unrealized (gain) loss on loans held for sale
123

 
(779
)
Gain on sales of loans held for sale
(5,198
)
 
(5,677
)
Proceeds from sale of loans held for sale
226,306

 
219,753

Loss on sale of other real estate and foreclosed assets
12

 
46

Depreciation and amortization of furniture, equipment and software
721

 
337

Net changes in assets and liabilities which provide (use) cash:
 
 
 
Accrued interest receivable
591

 
(81
)
Other assets
380

 
(3,601
)
Accrued interest payable
(19
)
 
59

Accounts payable and accrued liabilities
13,077

 
2,171

Net cash provided by (used in) operating activities
59,988

 
(32,339
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities
(43,245
)
 
(7,238
)
Proceeds from repayment of securities
19,312

 
23,047

Purchase of stock of Federal Home Loan Bank
(6,652
)
 
(915
)
Proceeds from redemption of stock of Federal Home Loan Bank
3,570

 
1,103

Origination of loans
(470,669
)
 
(207,719
)
Origination of mortgage warehouse loans, net
45,120

 
(71,978
)
Proceeds from sales of other real estate owned and repossessed assets
146

 
454

Purchases of loans, net of discounts and premiums

 
(1,541
)
Principal repayments on loans
220,104

 
86,311

Net purchases of furniture, equipment and software
(897
)
 
(1,406
)
Net cash used in investing activities
(233,211
)
 
(179,882
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
100,965

 
237,883

Proceeds from Federal Home Loan Bank advances
143,000

 
33,000

Repayment of Federal Home Loan Bank advances
(77,417
)
 
(51,000
)
Proceeds from exercise of common stock options
235

 
21

Proceeds from issuance of common stock
(110
)
 

Tax benefit from exercise of common stock options and vesting of restricted stock grants
1,917

 
312

Cash dividends on preferred stock
(78
)
 
(77
)
Net cash provided by financing activities
168,512

 
220,139

NET CHANGE IN CASH AND CASH EQUIVALENTS
(4,711
)
 
7,918

CASH AND CASH EQUIVALENTS—Beginning of year
201,694

 
35,426

CASH AND CASH EQUIVALENTS—End of period
$
196,983

 
$
43,344

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Interest paid on deposits and borrowed funds
$
8,254

 
$
8,445

Income taxes paid
$
813

 
$
4,402

Transfers to other real estate owned and repossessed vehicles from loans
$
811

 
$

Transfers from loans held for investment to loans held for sale
$
31,367

 
$
541

Transfers from loans held for sale to loans held for investment
$
398

 
$

See accompanying notes to the condensed consolidated financial statements.

5


BOFI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIOD ENDED SEPTEMBER 30, 2013 AND 2012
(Dollars in thousands, except per share data)
(Unaudited)

1.
BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of BofI Holding, Inc. and its wholly owned subsidiary, BofI Federal Bank (formerly Bank of Internet USA, the “Bank” and collectively with BofI Holding, Inc., the “Company”). All significant intercompany balances have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three months ended September 30, 2013 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2013 included in our Annual Report on Form 10-K.
Certain reclassifications have been made to the prior-period financial statements to conform to the current period presentation.

2.
SIGNIFICANT ACCOUNTING POLICIES
Securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has both the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Trading securities refer to certain types of assets that banks hold for resale at a profit at fair value. Increases or decreases in the fair value of trading securities are recognized in earnings as they occur. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Gains and losses on securities sales are based on a comparison of sales proceeds and the amortized cost of the security sold using the specific identification method. Purchases and sales are recognized on the trade date. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized or accreted using the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. The Company’s portfolios of held-to-maturity and available-for-sale securities are reviewed quarterly for other than temporary impairment. In performing this review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) whether the Company intends to sell or it is more likely than not that it will be required to sell a security in an unrealized loss position before the Company recovers the security’s amortized cost. If either of these criteria for (4) is met, the entire difference between amortized cost and fair value is recognized in earnings. Alternatively, if the criteria for (4) is not met, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred purchase premiums and discounts, deferred loan origination fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Premiums and discounts on loans purchased as well as loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method.

Recognition of interest income on all portfolio segments is generally discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.


6


All interest accrued but not received for loans placed on nonaccrual, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans Held for Sale. Agency loans originated and intended for sale in the secondary market are carried at fair value. Net unrealized gains and losses are recognized through the income statement. The Bank generally sells its loans with the servicing released to the buyer. Gains and losses on loan sales are recorded as mortgage banking income, based on the difference between sales proceeds and carrying value. Non-agency loans held for sale are carried at the lower of cost or fair value.

Loans that were originated with the intent and ability to hold for the foreseeable future (loans held in portfolio) but which have been subsequently designated as being held for sale for risk management or liquidity needs are carried at the lower of cost or fair value calculated on an individual loan by loan basis.

There may be times when loans have been classified as held for sale and for some reason cannot be sold. Loans transferred to a long-term-investment classification from held-for-sale are transferred at the lower of cost or market value on the transfer date. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. A loan cannot be classified as a long-term investment unless the Bank has both the ability and the intent to hold the loan for the foreseeable future or until maturity.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level estimated to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is charged against current period operating results and recoveries of loans previously charged-off. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible. Allocations of the allowance may be made for specific loans but the entire allowance is available for any loan that, in management’s judgment, should be charged off. See Note 5 of these financial statement footnotes and the financial statement footnotes for the year ended June 30, 2013 included in our Annual Report on Form 10-K for further information.

3.
FAIR VALUE
    
Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1:
Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 1 assets and liabilities include debt and equity securities that are actively traded in an exchange or over-the-counter market and are highly liquid, such as, among other assets and securities, certain U.S. treasury and other U.S Government and agency mortgage-backed debt.
Level 2:
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include securities with quoted prices that are traded less frequently than exchange-traded instruments and whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models such as discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
    
When available, the Company generally uses quoted market prices to determine fair value, in which case the items are classified in Level 1. In some cases where a market price is available, the Company will make use of acceptable practical expedients (such as matrix pricing) to calculate fair value, in which case the items are classified in Level 2.


7


The Company considers relevant and observable market prices in its valuations where possible. The frequency of transactions, the size of the bid-ask spread and the nature of the participants are some of the factors the Company uses to help determine whether a market is active and orderly or inactive and not orderly. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, credit spreads, housing value forecasts, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure various financial instruments at fair value, including an indication of the level in the fair-value hierarchy in which each instrument is generally classified:
Securities—trading. Trading securities are recorded at fair value. The trading portfolio consists of two different issues of floating-rate debt securities collateralized by pools of bank trust preferred securities. Recent liquidity and economic uncertainty have made the market for collateralized debt obligations less active or inactive. As quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying assets. The Company’s expected cash flows are calculated for each security and include the impact of actual and forecasted bank defaults within each collateral pool as well as structural features of the security’s tranche such as lock outs, subordination and overcollateralization. The forecast of underlying bank defaults in each pool is based upon a quarterly financial update including the trend in non-performing assets, the allowance for loan losses and the underlying bank’s capital ratios. Also a factor is the Company’s loan loss experience in the local economy in which the bank operates. At September 30, 2013, the Company’s forecast of cash flows for both securities includes actual and forecasted defaults totaling 25.60% of all banks in the collateral pools, compared to 14.1% of the banks actually in default. The expected cash flows reflect the Company’s best estimate of all pool losses which are then applied to the overcollateralization reserve and the subordinated tranches to determine the cash flows. The Company selects a discount rate margin based upon the spread between U.S. Treasury rates and the market rates for active credit grades for financial companies. The discount margin when added to the U.S. Treasury rate determines the discount rate, reflecting primarily market liquidity and interest rate risk since expected credit loss is included in the cash flows. At September 30, 2013, the Company used a weighted average discount margin of 425 basis points above U.S. Treasury rates to calculate the net present value of the expected cash flows and the fair value of its trading securities.
The Level 3 fair values determined by the Company for its trading securities rely heavily on management’s assumptions as to the future credit performance of the collateral banks, the impact of the global and regional recession, the timing of forecasted defaults and the discount rate applied to cash flows. The fair value of the trading securities at September 30, 2013 is sensitive to an increase or decrease in the discount rate. An increase in the discount margin of 100 basis points would have reduced the total fair value of the trading securities and decreased net income before income tax by $859. A decrease in the discount margin of 100 basis points would have increased the total fair value of the trading securities and increased net income before income tax by $1,010.
Securities—available-for-sale and held-to-maturity. Available-for-sale securities are recorded at fair value and consist of residential mortgage-backed securities ("RMBS") and debt securities issued by U.S. agencies, RMBS issued by non-agencies, collateralized loan obligations, and municipals. Held-to-maturity securities are recorded at amortized cost and consist of RMBS issued by U.S. agencies, RMBS issued by non-agencies, and municipals. Fair value for U.S. agency securities is generally based on quoted market prices of similar securities used to form a dealer quote or a pricing matrix. There continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the availability and reliability of transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. The Company computes Level 3 fair values for each non-agency RMBS in the same manner (as described below) whether available-for-sale or held-to-maturity.
To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. The Company inputs for each security a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by and decreased by the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (and decreased by) the forecasted decrease or increase

8


in the national home price appreciation ("HPA") index. The largest factors influencing the Company’s modeling of the monthly default rate are unemployment and housing price appreciation. The most updated national unemployment rate announced prior to the end of the period covered by this report (reported in August 2013) was 7.3%, down from the high of 10% in October 2009. Consensus estimates for unemployment are that the rate will continue to decline. Going forward, the Company is projecting lower monthly default rates. The range of loss severity rates applied to each default used in the Company’s projections at September 30, 2013 are from 1.6% up to 91.3% based upon individual bond historical performance. The default rates and the severities are projected for every non-agency RMBS security held by the Company and will vary monthly based upon the actual performance of the security and the macroeconomic factors discussed above.
To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime” securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally have borrowers with a little lower FICO and a little less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at September 30, 2013 are from 0.05% up to 25.3% with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range. The Company applies its discount rates to the projected monthly cash flows which already reflect the full impact of all forecasted losses using the assumptions described above. When calculating present value of the expected cash flows at September 30, 2013, the Company computed its discount rates as a spread between 247 and 863 basis points over the interpolated swap curve with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range.
Loans Held for Sale. Loans held for sale at fair value are primarily single-family and multifamily residential loans. The fair value of loans held for sale is determined, by pricing for comparable assets or by existing forward sales commitment prices with investors.
Impaired Loans. Impaired loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or of the collateral pledged and the accrual of interest income has been discontinued. The impaired loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Bank assesses loans individually and identifies impairment when the loan is classified as impaired or been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. The fair value of an impaired loan is determined based on an observable market price or current appraised value of the underlying collateral. The fair value of impaired loans with specific write-offs or allocations of the allowance for loan losses are generally based on recent real estate appraisals or other third-party valuations and analysis of cash flows. These appraisals and analysis may utilize a single valuation approach or a combination of approaches including comparable sales and income approaches. Adjustments are routinely made in the process by the appraisers to adjust for differences between the comparable sales and income data available. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining fair value.
Other Real Estate Owned. Non-recurring adjustments to certain commercial and residential real estate properties classified as other real estate owned ("OREO") are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Mortgage Banking Derivatives. Level 3 fair values for mortgage banking derivatives are either based upon prices in active secondary markets for identical securities or based on quoted market prices of similar assets used to form a dealer quote or a pricing matrix. If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment. These fair values are then adjusted for items such as fallout and estimated costs to originate the loan.

The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  While management believes the Company's valuation methodologies are appropriate and consistent with or, in some cases, more conservative than other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the relevant reporting date.


9


The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and June 30, 2013. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
September 30, 2013
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Collateralized Debt Obligations
$

 
$

 
$
7,734

 
$
7,734

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency Debt
$

 
$
25,036

 
$

 
$
25,036

Agency RMBS

 
66,780

 

 
66,780

Non-Agency RMBS

 

 
44,780

 
44,780

Municipal

 
28,147

 

 
28,147

Other Debt Securities

 
55,338

 

 
55,338

Total—Securities—Available-for-Sale
$

 
$
175,301

 
$
44,780

 
$
220,081

Loans Held for Sale
$

 
$
19,695

 
$

 
$
19,695

Other assets
$

 
$

 
$
1,058

 
$
1,058

LIABILITIES:
 
 
 
 
 
 
 
Other liabilities
$

 
$

 
$
541

 
$
541

 
 
 
 
 
 
 
 
 
June 30, 2013
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Collateralized Debt Obligations
$

 
$

 
$
7,111

 
$
7,111

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency Debt
$

 
$
25,063

 
$

 
$
25,063

Agency RMBS

 
69,882

 

 
69,882

Non-Agency RMBS

 

 
49,284

 
49,284

Municipal

 
11,103

 

 
11,103

Other Debt Securities

 
30,275

 

 
30,275

Total—Securities—Available-for-Sale
$

 
$
136,323

 
$
49,284

 
$
185,607

Loans Held for Sale
$

 
$
36,665

 
$

 
$
36,665

Other assets
$

 
$

 
$
2,355

 
$
2,355

LIABILITIES:
 
 
 
 
 
 
 
Other liabilities
$

 
$

 
$
133

 
$
133



10


The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
 
 
For the Three Months Ended
 
September 30, 2013
(Dollars in thousands)
Available-for-
Sale Securities:
Non-Agency
RMBS
 
Trading
Securities
Other  Debt Securities:
Non-Agency
 
Derivative Instruments, net
 
Total
Assets:
 
 
 
 
 
 
 
Opening Balance
$
49,284

 
$
7,111

 
$
2,222

 
$
58,617

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Sale of mortgage-back securities

 

 

 

Included in earnings—Fair value gain on trading securities

 
623

 

 
623

Included in earnings—Mortgage banking

 

 
(1,900
)
 
(1,900
)
Included in other comprehensive income
445

 

 

 
445

Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Issues

 

 

 

Sales

 

 

 

Settlements
(4,949
)
 

 

 
(4,949
)
Other than temporary impairment

 

 

 

Closing balance
$
44,780

 
$
7,734

 
$
322

 
$
52,836

 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$

 
$
623

 
$
(1,900
)
 
$
(1,277
)

 
For the Three Months Ended
 
September 30, 2012
(Dollars in thousands)
Available-for-
Sale Securities:
Non-Agency
RMBS
 
Trading
Securities
Other  Debt Securities:
Non-Agency
 
Derivative Instruments, net
 
Total
Assets:
 
 
 
 
 
 
 
Opening Balance
$
83,127

 
$
5,838

 
$
2,368

 
$
91,333

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Sale of mortgage-back securities

 

 

 

Included in earnings—Fair value gain on trading securities

 
601

 

 
601

Included in earnings—Mortgage banking

 

 
651

 
651

Included in other comprehensive income
(914
)
 

 

 
(914
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Issues

 

 

 

Sales

 

 

 

Settlements
(6,706
)
 

 

 
(6,706
)
Other than temporary impairment

 

 

 

Closing balance
$
75,507

 
$
6,439

 
$
3,019

 
$
84,965

 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$

 
$
601

 
$
651

 
$
1,252



11


The table below summarizes the quantitative information about level 3 fair value measurements at the periods indicated:

 
September 30, 2013
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities - Trading
$
7,734

Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
19.4 to 31.1% (25.6%)
4.25 to 4.25% (4.25%)
Securities - Non-agency RMBS
$
44,780

Discounted Cash Flow
Constant Prepayment Rate,
Constant Default Rate,
Loss Severity,
Discount Rate over LIBOR
2.5 to 72.7% (14.5%)
0.5 to 25.3% (8.7%)
1.6 to 91.3% (60.9%)
2.47 to 8.63% (6.12%)
Derivative Instruments, net
$
322

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.5 to 1.5%
 
 
June 30, 2013
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities - Trading
$
7,111

Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
26.3 to 31.1% (28.5%)
4.50 to 4.50% (4.50%)
Securities - Non-agency RMBS
$
49,284

Discounted Cash Flow
Constant Prepayment Rate,
Constant Default Rate,
Loss Severity,
Discount Rate over LIBOR
2.5 to 55.4% (15.6%)
0.3 to 22.7% (10.3%)
1.6 to 96.2% (59.9%)
2.44 to 7.86% (5.60%)
Derivative Instruments, net
$
2,222

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.5 to 1.5%

The significant unobservable inputs used in the fair value measurement of the Company's residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

The table below summarizes changes in unrealized gains and losses and interest income recorded in earnings for level 3 trading assets and liabilities that are still held at the periods indicated:
 
 
For the Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
Interest income on investments
$
58

 
$
32

Fair value adjustment
623

 
602

Total
$
681

 
$
634



12


The table below summarizes assets measured for impairment on a non-recurring basis was as follows:
 
September 30, 2013
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
Impaired Loans:
 
 
 
 
 
 
 
Single Family real estate secured:
 
 
 
 
 
 
 
Mortgage
$

 
$

 
$
11,003

 
$
11,003

Home Equity

 

 
54

 
54

Warehouse and other

 

 

 

Multifamily real estate secured

 

 
4,686

 
4,686

Commercial real estate secured

 

 
3,538

 
3,538

Auto and RV secured

 

 
1,242

 
1,242

Factoring

 

 
56

 
56

Commercial & Industrial

 

 

 

Other

 

 
2

 
2

Total
$

 
$

 
$
20,581

 
$
20,581

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single Family real estate secured:
 
 
 
 
 
 
 
  Mortgage

 

 
907

 
907

Multifamily real estate secured

 

 
1,568

 
1,568

Commercial real estate secured

 

 

 

Auto and RV secured

 

 
87

 
87

Total
$

 
$

 
$
2,562

 
$
2,562

HTM Securities - Non-Agency RMBS
$

 
$

 
$
92,580

 
$
92,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
 
 
 
 
 
 
 
 
Impaired Loans:
 
 
 
 
 
 
 
Single Family real estate secured:
 
 
 
 
 
 
 
Mortgage
$

 
$

 
$
12,372

 
$
12,372

Home Equity

 

 
57

 
57

Multifamily real estate secured

 

 
4,505

 
4,505

Commercial real estate secured

 

 
3,559

 
3,559

Auto and RV secured

 

 
1,348

 
1,348

Total
$

 
$

 
$
21,841

 
$
21,841

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single Family real estate secured:
 
 
 
 
 
 
 
  Mortgage

 

 
567

 
567

Multifamily real estate secured

 

 
1,298

 
1,298

Auto and RV secured

 

 
141

 
141

Total
$

 
$

 
$
2,006

 
$
2,006

HTM Securities - Non-Agency RMBS
$

 
$

 
$
97,193

 
$
97,193


13



Impaired loans measured for impairment on a non-recurring basis using the fair value of the collateral for collateral-dependent loans have a carrying amount of $21,231, after charge-offs of $154 for the three months ended September 30, 2013, and life to date charge-offs of $3,602. Impaired loans had a related allowance of $650 at September 30, 2013.

Other real estate owned and foreclosed assets, which are measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $2,562 after charge-offs of $51 for the three months ended September 30, 2013. Our other real estate owned and foreclosed assets had a net carrying amount of $2,006 after charge-offs of $152 during the year ended June 30, 2013.
Held-to-maturity securities measured for impairment on a non-recurring basis had a fair value of $92,580 and a carrying amount of $99,212 at September 30, 2013, after net impairment charge to income of $572 and changes to other comprehensive loss of $1,078 during the three months ended September 30, 2013. The Company recognized a net impairment charge to income of $874 and changes in other comprehensive loss of $1,998 for the three month periods ended September 30, 2012. These held-to-maturity securities are valued using Level 3 inputs.
The Company has elected the fair value option for Agency loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company's policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of September 30, 2013 and June 30, 2013.
As of September 30, 2013 and June 30, 2012, the aggregate fair value, contractual balance (including accrued interest), and gain was as follows:
(Dollars in thousands)
September 30, 2013
 
June 30, 2013
Aggregate fair value
$
19,695

 
$
36,665

Contractual balance
19,207

 
36,070

Gain
$
488

 
$
595

The total amount of gains and losses from changes in fair value included in earnings for the period indicated below for loans held for sale were:
 
For the Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
Interest income
$
195

 
$
431

Change in fair value
(2,023
)
 
555

Total Change in fair value
$
(1,828
)
 
$
986



14


The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods indicated:
 
September 30, 2013
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
Impaired loans:
 
 
 
 
Single Family real estate secured:
 
 
 
 
Mortgage
$
11,003

Sales comparison approach
Adjustment for differences between the comparable sales
-81.8 to 34.8% (-2.4%)
Home Equity
$
54

Sales comparison approach
Adjustment for differences between the comparable sales
-17.5 to 89.6% (23.3%)
Multifamily real estate secured
$
4,686

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-64.7 to 35.9% (-17.2%)
Commercial real estate secured
$
3,538

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-33.7 to 60.0% (5.8%)
Auto and RV secured
$
1,242

Sales comparison approach
Adjustment for differences between the comparable sales
-19.7 to 46.8% (8.9%)
Other real estate owned:
 
 
 
 
Single Family real estate secured:
 
 
 
 
Mortgage
$
907

Sales comparison approach
Adjustment for differences between the comparable sales
-50.6 to 39.8% (-11.8%)
Multifamily real estate secured
$
1,568

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
     -79.1 to 38.6% (-18.0%)
Auto and RV secured
$
87

Sales comparison approach
Adjustment for differences between the comparable sales
-57.5 to 19.9% (-1.0%)
HTM Securities-Non-Agency MBS
$
92,580

Discounted Cash Flow
Constant Prepayment Rate,
Constant Default Rate,
Loss Severity,
Discount Rate over LIBOR
2.5 to 26.3% (13.8%)
1.5 to 25.3% (9.4%)
3.5 to 74.6% (60.4%)
3.0 to 8.6% (7.4%)

15


 
June 30, 2013
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
Impaired loans:
 
 
 
 
Single Family real estate secured:
 
 
 
 
Mortgage
$
12,372

Sales comparison approach
Adjustment for differences between the comparable sales
-94.4 to 39.8% (-19.1%)
Home Equity
$
57

Sales comparison approach
Adjustment for differences between the comparable sales
-17.5 to 89.6% (22.6%)
Multifamily real estate secured
$
4,505

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-79.1 to 35.9% (-21.5%)
Commercial real estate secured
$
3,559

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-33.7 to 60.0% (5.8%)
Auto and RV secured
$
1,348

Sales comparison approach
Adjustment for differences between the comparable sales
-5.1 to 46.8% (9.68%)
Other real estate owned:
 
 
 
 
Single Family real estate secured:
 
 
 
 
Mortgage
$
567

Sales comparison approach
Adjustment for differences between the comparable sales
-50.6 to 22.6% (-18.7%)
Multifamily real estate secured
$
1,298

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-59.2 to 38.6% (-10.6%)
Auto and RV secured
$
141

Sales comparison approach
Adjustment for differences between the comparable sales
-57.5 to 19.9% (-3.4%)
HTM Securities - Non-Agency MBS
$
97,193

Discounted Cash Flow
Constant Prepayment Rate,
Constant Default Rate,
Loss Severity,
Discount Rate over LIBOR
6.1 to 55.4% (16.6%)
1.5 to 22.5% (12.2%)
3.5 to 74.5% (60.3%)
3.0 to 7.9% (6.8%)
Fair value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at the periods indicated:
 
September 30, 2013
 
 
 
Fair Value
 
 
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
196,983

 
$
196,983

 
$

 
$

 
$
196,983

Securities trading
7,734

 

 

 
7,734

 
7,734

Securities available-for-sale
220,081

 

 
175,301

 
44,780

 
220,081

Securities held-to-maturity
267,670

 

 
54,210

 
204,696

 
258,906

Loans held for sale, at fair value
19,695

 

 
19,695

 

 
19,695

Loans held for sale, at lower of cost or fair value
51,223

 

 

 
51,258

 
51,258

Loans held for investment—net
2,433,001

 

 

 
2,527,287

 
2,527,287

Accrued interest receivable
9,172

 

 

 
9,172

 
9,172

Financial liabilities:
 
 
 
 
 
 
 
 


Time deposits and savings
$
2,192,964

 
$

 
$
2,211,847

 
$

 
$
2,211,847

Securities sold under agreements to repurchase
110,000

 

 
116,399

 

 
116,399

Advances from the Federal Home Loan Bank
656,000

 

 
661,892

 

 
661,892

Subordinated debentures and other borrowings
5,155

 

 
5,304

 

 
5,304

Accrued interest payable
1,655

 

 
1,655

 

 
1,655


16


Carrying amount and estimated fair values of financial instruments at period-end were as follows:
 
June 30, 2013
 
Fair Value
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
201,694

 
$
201,694

 
$

 
$

 
$
201,694

Securities trading
7,111

 

 

 
7,111

 
7,111

Securities available-for-sale
185,607

 

 
136,323

 
49,284

 
185,607

Securities held-to-maturity
275,691

 

 
97,340

 
174,514

 
271,854

Loans held for sale, at fair value
36,665

 

 
36,665

 

 
36,665

Loans held for sale, at lower of cost or fair value
40,326

 

 

 
40,424

 
40,424

Loans held for investment—net
2,256,918

 

 

 
2,316,802

 
2,316,802

Accrued interest receivable
9,763

 

 

 
9,763

 
9,763

Financial liabilities:

 
 
 
 
 
 
 

Time deposits and savings
$
2,091,999

 
$

 
$
2,109,725

 
$

 
$
2,109,725

Securities sold under agreements to repurchase
110,000

 

 
117,215

 

 
117,215

Advances from the Federal Home Loan Bank
590,417

 

 
595,651

 

 
595,651

Subordinated debentures and other borrowings
5,155

 

 
5,317

 

 
5,317

Accrued interest payable
1,674

 

 
1,674

 

 
1,674


The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits, borrowings or subordinated debt and for variable rate loans, deposits, borrowings or subordinated debt with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities and loans held for sale can be found earlier in this footnote. The carrying amount of FHLB Stock approximates the estimated fair value of this investment. The fair value of off-balance sheet items is not considered material.

17


4.
SECURITIES
The amortized cost, carrying amount and fair value for the major categories of securities trading, available-for-sale, and held-to-maturity at September 30, 2013 and June 30, 2013 were: 
 
September 30, 2013
 
Trading
 
Available-for-sale
 
Held-to-maturity
(Dollars in thousands)
Fair
Value
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Carrying
Amount
 
Unrecognized
Gains
 
Unrecognized
Losses
 
Fair
Value
Mortgage-backed securities (RMBS) :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies 1
$

 
$
67,259

 
$
1,227

 
$
(1,706
)
 
$
66,780

 
$
52,071

 
$
2,139

 
$

 
$
54,210

Non-agency 2

 
40,323

 
5,055

 
(598
)
 
44,780

 
179,493

 
4,686

 
(18,248
)
 
165,931

Total mortgage-backed securities

 
107,582

 
6,282

 
(2,304
)
 
111,560

 
231,564

 
6,825

 
(18,248
)
 
220,141

Other debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies 1

 
25,023

 
13

 

 
25,036

 

 

 

 

Municipal

 
28,706

 
73

 
(632
)
 
28,147

 
36,106

 
2,677

 
(18
)
 
38,765

Non-agency
7,734

 
54,770

 
569

 
(1
)
 
55,338

 

 

 

 

Total other debt securities
7,734

 
108,499

 
655

 
(633
)
 
108,521

 
36,106

 
2,677

 
(18
)
 
38,765

Total debt securities
$
7,734

 
$
216,081

 
$
6,937

 
$
(2,937
)
 
$
220,081

 
$
267,670

 
$
9,502

 
$
(18,266
)
 
$
258,906

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
Trading
 
Available-for-sale
 
Held-to-maturity
(Dollars in thousands)
Fair
Value
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Carrying
Amount
 
Unrecognized
Gains
 
Unrecognized
Losses
 
Fair
Value
Mortgage-backed securities (RMBS) :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies 1
$

 
$
70,517

 
$
1,143

 
$
(1,778
)
 
$
69,882

 
$
54,825

 
$
2,386

 
$

 
$
57,211

Non-agency 2

 
45,271

 
4,221

 
(208
)
 
49,284

 
184,742

 
5,758

 
(15,986
)
 
174,514

Total mortgage-backed securities

 
115,788

 
5,364

 
(1,986
)
 
119,166

 
239,567

 
8,144

 
(15,986
)
 
231,725

Other debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies 1

 
25,049

 
14

 

 
25,063

 

 

 

 

Municipal

 
11,062

 
41

 

 
11,103

 
36,124

 
4,005

 

 
40,129

Non-agency
7,111

 
29,646

 
630

 
(1
)
 
30,275

 

 

 

 

Total other debt securities
7,111

 
65,757

 
685

 
(1
)
 
66,441

 
36,124

 
4,005

 

 
40,129

Total debt securities
$
7,111

 
$
181,545

 
$
6,049

 
$
(1,987
)
 
$
185,607

 
$
275,691

 
$
12,149

 
$
(15,986
)
 
$
271,854

 __________________________________
1. 
U.S. government-backed or government sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.
2. 
Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by prime, Alt-A or pay-option ARM mortgages.

The Company’s non-agency RMBS available-for-sale portfolio with a total fair value of $44,780 at September 30, 2013 consists of twenty-four different issues of super senior securities with a fair value of $28,993; one senior structured whole loan securities with a fair value of $15,618 and three mezzanine z-tranche securities with a fair value of $169 collateralized by seasoned prime and Alt-A first-lien mortgages. The Company acquired its mezzanine z-tranche securities in fiscal 2009 and accounts for them by measuring the excess of cash flows expected at acquisition over the purchase price (accretable yield) and recognizes interest income over the remaining life of the security.

The non-agency RMBS held-to-maturity portfolio with a carrying value of $179,493 at September 30, 2013 consists of eighty-one different issues of super senior securities totaling $177,425 and one senior-support security with a carrying value of $2,068. Debt securities with evidence of credit quality deterioration since issuance and for which it is probable at purchase that the Company will be unable to collect all of the par value of the security are accounted for under ASC Topic 310, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("ASC Topic 310"). Under ASC Topic 310, the excess of cash flows expected at acquisition over the purchase price is referred to as the accretable yield and is recognized in interest income over the remaining life of the security. The Company has one senior support security that it acquired at a significant discount that evidenced credit deterioration at acquisition and is accounted for under ASC Topic 310. For a cost of $17,440 the Company acquired the senior support security with a contractual par

18


value of $30,560 and accretable and non-accretable discounts that were projected to be $9,015 and $3,805, respectively. Since acquisition, repayments from the security have been received more rapidly than projected at acquisition, but expected total payments have declined, resulting in a determination that the security was other than temporarily impaired although not credit related and therefore no expenses recorded for the fiscal 2013 year and a charge of $572 for the three months ended September 30, 2013 was recorded. At September 30, 2013 the security had a remaining contractual par value of zero and amortizable and non-amortizable premium are currently projected to be zero and $2,472, respectively.
The current face amounts of debt securities available-for-sale and held-to-maturity that were pledged to secure borrowings at September 30, 2013 and June 30, 2013 were $206,317 and $208,826 respectively.
The securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows: 
 
September 30, 2013
 
Available-for-sale securities in loss position for
 
Held-to-maturity securities in loss position for
 
Less Than
12 Months
 
More Than
12 Months
 
Total
 
Less Than
12 Months
 
More Than
12 Months
 
Total
(Dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies
$
26,869

 
$
(1,682
)
 
$
2,787

 
$
(24
)
 
$
29,656

 
$
(1,706
)
 
$

 
$

 
$
6

 
$

 
$
6

 
$

Non-agency
979

 
(6
)
 
2,019

 
(592
)
 
2,998

 
(598
)
 
42,936

 
(5,061
)
 
51,256

 
(13,187
)
 
94,192

 
(18,248
)
Total RMBS securities
27,848

 
(1,688
)
 
4,806

 
(616
)
 
32,654

 
(2,304
)
 
42,936

 
(5,061
)
 
51,262

 
(13,187
)
 
94,198

 
(18,248
)
Other Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies

 

 

 

 

 

 

 

 

 

 

 

Municipal Debt
24,603

 
(632
)
 

 

 
24,603

 
(632
)
 
1,766

 
(18
)
 

 

 
1,766

 
(18
)
Non- agency
3,633

 
(1
)
 

 

 
3,633

 
(1
)
 

 

 

 

 

 

Total Other Debt
28,236

 
(633
)
 

 

 
28,236

 
(633
)
 
1,766

 
(18
)
 

 

 
1,766

 
(18
)
Total debt securities
$
56,084

 
$
(2,321
)
 
$
4,806

 
$
(616
)
 
$
60,890

 
$
(2,937
)
 
$
44,702

 
$
(5,079
)
 
$
51,262

 
$
(13,187
)
 
$
95,964

 
$
(18,266
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
Available-for-sale securities in loss position for
 
Held-to-maturity securities in loss position for
 
Less Than
12 Months
 
More Than
12 Months
 
Total
 
Less Than
12 Months
 
More Than
12 Months
 
Total
(Dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies
$
27,212

 
$
(1,714
)
 
$
4,611

 
$
(64
)
 
$
31,823

 
$
(1,778
)
 
$
3

 
$

 
$
5

 
$

 
$
8

 
$

Non-agency
6,070

 
(14
)
 
2,415

 
(194
)
 
8,485

 
(208
)
 
49,030

 
(2,517
)
 
48,009

 
(13,469
)
 
97,039

 
(15,986
)
Total RMBS securities
33,282

 
(1,728
)
 
7,026

 
(258
)
 
40,308

 
(1,986
)
 
49,033

 
(2,517
)
 
48,014

 
(13,469
)
 
97,047

 
(15,986
)
Other Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies

 

 

 

 

 

 

 

 

 

 

 

Municipal Debt

 

 

 

 

 

 

 

 

 

 

 

Non-agency
7,232

 
(1
)
 

 

 
7,232

 
(1
)
 

 

 

 

 

 

Total Other Debt
7,232

 
(1
)
 

 

 
7,232

 
(1
)
 

 

 

 

 

 

Total debt securities
$
40,514

 
$
(1,729
)
 
$
7,026

 
$
(258
)
 
$
47,540

 
$
(1,987
)
 
$
49,033

 
$
(2,517
)
 
$
48,014

 
$
(13,469
)
 
$
97,047

 
$
(15,986
)



19


There were 26 securities that were in a continuous loss position at September 30, 2013 for a period of more than 12 months. There were 24 securities that were in a continuous loss position at June 30, 2013 for a period of more than 12 months. The following table summarizes amounts of credit loss recognized in the income statement through other than temporary impairment charges which reduced non-interest income: 
 
For the Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
Beginning balance
$
(15,336
)
 
$
(11,835
)
Additions for the amounts related to credit loss for which an other than temporary impairment was not previously recognized

 

Increases to the amount related to the credit loss for which other than temporary impairment was previously recognized
(572
)
 
(874
)
Ending balance
$
(15,908
)
 
$
(12,709
)

At September 30, 2013, 43 non-agency RMBS with a total carrying amount of $102,902 were determined to have cumulative credit losses of $15,908 of which $572 was recognized in earnings during the three months ended September 30, 2013 and $874 was recognized in earnings for the three months period ended September 30, 2012. This quarter’s other than temporary impairment of $572 is related to one non-agency RMBS with a total carrying amount of $2,068. The Company measures its non-agency RMBS in an unrecognized loss position at the end of the reporting period for other than temporary impairment by comparing the present value of the cash flows currently expected to be collected from the security with its amortized cost basis. If the calculated present value is lower than the amortized cost, the difference is the credit component of an other than temporary impairment of its debt securities. The excess of present value over the fair value of the security (if any) is the noncredit component only if the Company does not intend to sell the security and will not be required to sell the security before recovery of its amortized cost basis. The credit component of the other than temporary impairment is recorded as a loss in earnings and the noncredit component as a charge to other comprehensive income, net of the related income tax benefit.
To determine the cash flow expected to be collected and to calculate the present value for purposes of testing for other-than-temporary impairment, the Company utilizes the same industry-standard tool and the same cash flows as those calculated for Level 3 fair values as discussed in footnote 3. The Company computes cash flows based upon the cash flows from underlying mortgage loan pools. The Company estimates prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. The Company inputs for each security a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by (or decreased by) the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (or decreased by) the forecasted increase or decrease in the national HPA index. The largest factors influencing the Company’s modeling of the monthly default rate is unemployment and housing price appreciation. The most updated unemployment rate announced prior to the end of the period covered by this report (reported in August 2013) was 7.3%, down from the high of 10% in October 2009. Consensus estimates for unemployment are that the rate will continue to decline. The discount rates used to compute the present value of the expected cash flows for purposes of testing for the credit component of the other than temporary impairment are either the implicit rate calculated in each of the Company’s securities at acquisition or the last accounting yield. The Company calculates the implicit rate at acquisition based on the contractual terms of the security, considering scheduled payments (and minimum payments in the case of pay-option ARMs) without prepayment assumptions. Once the discount rate (or discount margin in the case of floating rate securities) is calculated as described above, the discount is used in the industry-standard model to calculate the present value of the cash flows.
During the three months ended September 30, 2013, there were no security sales.
 
 
 
 

20


The Company had recorded unrealized gains and unrealized losses in accumulated other comprehensive loss as follows: 
(Dollars in thousands)
September 30,
2013
 
June 30,
2013
Available-for-sale debt securities—net unrealized gains
$
4,000

 
$
4,061

Held-to-maturity debt securities—non credit related
(20,989
)
 
(22,067
)
Subtotal
(16,989
)
 
(18,006
)
Tax benefit
6,799

 
7,206

Net unrealized loss on investment securities in accumulated other comprehensive loss
$
(10,190
)
 
$
(10,800
)

The expected maturity distribution of the Company’s mortgage-backed securities and the contractual maturity distribution of the Company’s other debt securities classified as available-for-sale and held-to-maturity at September 30, 2013 were: 
 
September 30, 2013
 
Available-for-sale
 
Held-to-maturity
 
Trading
(Dollars in thousands)
Amortized
Cost
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair
Value
RMBS—U.S. agencies1:
 
 
 
 
 
 
 
 
 
Due within one year
$
5,634

 
$
5,456

 
$
1,633

 
$
1,692

 
$

Due one to five years
18,017

 
17,572

 
6,415

 
6,648

 

Due five to ten years
15,840

 
15,674

 
7,601

 
7,878

 

Due after ten years
27,768

 
28,078

 
36,422

 
37,992

 

Total RMBS—U.S. agencies1
67,259

 
66,780

 
52,071

 
54,210

 

RMBS—Non-agency:
 
 
 
 
 
 
 
 
 
Due within one year
9,777

 
10,559

 
26,580

 
25,731

 

Due one to five years
17,343

 
19,219

 
62,409

 
59,059

 

Due five to ten years
6,348

 
7,407

 
39,871

 
36,450

 

Due after ten years
6,855

 
7,595

 
50,633

 
44,691

 

Total RMBS—Non-agency
40,323

 
44,780

 
179,493

 
165,931

 

Other debt:
 
 
 
 
 
 
 
 
 
Due within one year
35,479

 
35,524

 

 

 

Due one to five years
40,935

 
41,368

 

 

 

Due five to ten years
9,677

 
9,746

 

 

 

Due after ten years
22,408

 
21,883

 
36,106

 
38,765

 
7,734

Total other debt
108,499

 
108,521

 
36,106

 
38,765

 
7,734

Total
$
216,081

 
$
220,081

 
$
267,670

 
$
258,906

 
$
7,734

 __________________________
1. RMBS distributions include impact of expected prepayments and other timing factors.


21


5.
LOANS & ALLOWANCE FOR LOAN LOSSES
The following table sets forth the composition of the loan portfolio as of the dates indicated: 
(Dollars in thousands)
September 30, 2013
 
June 30, 2013
Single family real estate secured:
 
 
 
Mortgage
$
1,204,813

 
$
1,070,668

Home equity
21,369

 
22,537

Warehouse and other
216,539

 
204,878

Multifamily real estate secured
805,796

 
768,023

Commercial real estate secured
28,843

 
29,000

Auto and RV secured
17,452

 
18,530

Factoring
91,855

 
108,144

Commercial & Industrial
85,247

 
78,721

Other
8,126

 
419

Total gross loans
2,480,040

 
2,300,920

Allowance for loan losses
(14,546
)
 
(14,182
)
Unaccreted discounts and loan fees
(32,493
)
 
(29,820
)
Net mortgage loans on real estate
$
2,433,001

 
$
2,256,918

 __________________________________
1. 
The balance of single family warehouse was $62,686 at September 30, 2013 and $107,806 at June 30, 2013.

Allowance for Loan Losses. The Company’s goal is to maintain the allowance for loan losses (sometimes referred to as the allowance) at a level that is considered to be commensurate with estimated probable incurred credit losses in the portfolio. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. While the Company believes that the allowance for loan losses is adequate at September 30, 2013, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio.
Allowance for Loan Loss Disclosures—The assessment of the adequacy of the Company’s allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, change in volume and mix of loans, collateral values and charge-off history.
The Company provides general loan loss reserves for its recreational vehicle ("RV") and auto loans based upon the borrower credit score at the time of origination and the Company’s loss experience to date. The allowance for loan loss for the RV and auto loan portfolio at September 30, 2013 was determined by classifying each outstanding loan according to semi-annually refreshed FICO score and providing loss rates. The Company had $16,210 of RV and auto loan balances subject to general reserves as follows: FICO greater than or equal to 770: $4,244; 715 – 769: $5,121; 700 – 714: $1,347; 660 – 699: $2,730 and less than 660: $2,768.
The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan and the loan-to-value ratio (LTV) at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each loan by the loan-to-value and applying a loss rates. The LTV groupings for each significant mortgage class are as follows:
The Company had $1,193,810 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $759,165; 61% – 70%: $359,085; 71% – 80%: $65,582; and greater than 80%: $9,978.
The Company had $801,110 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $354,157; 56% – 65%: $299,615; 66% – 75%: $139,120; 76% – 80%: $6,332 and greater than 80%: $1,886.The Company divides the LTV analysis into two classes, separating the purchased loans from the loans underwritten directly by the Company. Based on historical performance, the Company concluded that originated multifamily loans require lower estimated loss rates.
The Company had $25,305 of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $15,717; 51% – 60%: $6,558; 61% – 70%: $2,087; and 71% – 80%: $943.    
The Company's commercial secured portfolio consists of business loans well-collateralized by residential real estate. The Company's other portfolio consists of receivables factoring for businesses and consumers. The Company allocates its allowance for loan loss for these asset types based on qualitative factors which consider the value of the collateral and the financial position of the issuer of the receivables.


22


The following table summarizes activity in the allowance for loan losses by portfolio classes for the periods indicated: 
 
For the Three Months Ended September 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in Thousands)
Mortgage
 
Home Equity
 
Warehouse & Other
 
Multifamily
 
Commercial Real Estate
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other/Consumer
 
Total
Balance at July 1, 2013
$
4,812

 
$
183

 
$
1,250

 
$
3,186

 
$
1,378

 
$
1,536

 
$
201

 
$
1,623

 
$
13

 
$
14,182

Provision for loan loss
704

 
(38
)
 
(360
)
 
681

 
(383
)
 
(216
)
 
(6
)
 
(134
)
 
252

 
500

Charge-offs
(98
)
 

 

 

 

 
(30
)
 

 

 
(26
)
 
(154
)
Recoveries

 
7

 

 

 

 
5

 

 

 
6

 
18

Balance at September 30, 2012
$
5,418

 
$
152

 
$
890

 
$
3,867

 
$
995

 
$
1,295

 
$
195

 
$
1,489

 
$
245

 
$
14,546

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2012
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in Thousands)
Mortgage
 
Home Equity
 
Warehouse & Other
 
Multifamily
 
Commercial Real Estate
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other/Consumer
 
Total
Balance at July 1, 2012
$
4,030

 
$
192

 
$
108

 
$
2,558

 
$
398

 
$
2,159

 
$
86

 
$
102

 
$
3

 
$
9,636

Provision for loan loss
519

 
144

 
175

 
29

 
1,111

 
166

 
29

 
243

 
134

 
2,550

Charge-offs
(264
)
 
(166
)
 

 
(375
)
 
(906
)
 
(180
)
 

 

 
(137
)
 
(2,028
)
Recoveries

 
11

 

 

 

 

 

 

 
2

 
13

Balance at September 30, 2012
$
4,285

 
$
181

 
$
283

 
$
2,212

 
$
603

 
$
2,145

 
$
115

 
$
345

 
$
2

 
$
10,171










23


The following table presents our loans evaluated individually for impairment by class: 
 
September 30, 2013
(Dollars in thousands)
Unpaid
Principal Balance
 
Charge-off
 
Unpaid Book Balance
 
Accrued Interest /
Origination Fees
 
Recorded Investment
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
$
7,193

 
$
1,909

 
$
5,284

 
$
(7
)
 
$
5,277

 
$

Home Equity:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
90

 
70

 
20

 

 
20

 

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,120

 
531

 
1,589

 
5

 
1,594

 

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,316

 
900

 
1,416

 
1

 
1,417

 

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
1,039

 
694

 
345

 
19

 
364

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
870

 

 
870

 

 
870

 
2

     Purchased
4,849

 

 
4,849

 
5

 
4,854

 
50

Home Equity:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
34

 

 
34

 
(1
)
 
33

 

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
848

 

 
848

 
10

 
858

 
1

     Purchased
2,249

 

 
2,249

 
18

 
2,267

 
228

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,122

 

 
2,122

 
1

 
2,123

 
40

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
897

 

 
897

 
15

 
912

 
329

Factoring:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
56

 

 
56

 
(20
)
 
36

 

Other
2

 

 
2

 

 
2

 

Total
$
24,685

 
$
4,104

 
$
20,581

 
$
46

 
$
20,627

 
$
650

As a % of total gross loans
1.00
%
 
0.17
%
 
0.83
%
 
%
 
0.83
%
 
0.03
%


24


 
June 30, 2013
(Dollars in thousands)
Unpaid Principal Balance
 
Charge-off
 
Unpaid Book Balance
 
Accrued Interest /
Origination Fees
 
Recorded Investment
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
$
7,988

 
$
2,183

 
$
5,805

 
$
(8
)
 
$
5,797

 
$

Home Equity:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
91

 
70

 
21

 

 
21

 

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,497

 
594

 
1,903

 
6

 
1,909

 

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,316

 
888

 
1,428

 
1

 
1,429

 

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
1,274

 
831

 
443

 
22

 
465

 

Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
2,179

 

 
2,179

 
4

 
2,183

 
4

     Purchased
4,388

 

 
4,388

 
3

 
4,391

 
33

Home Equity:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
35

 

 
35

 

 
35

 

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
851

 

 
851

 
10

 
861

 
107

     Purchased
1,752

 

 
1,752

 
17

 
1,769

 
5

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,131

 

 
2,131

 
1

 
2,132

 
411

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
905

 

 
905

 
16

 
921

 
505

Total
$
26,407

 
$
4,566

 
$
21,841

 
$
72

 
$
21,913

 
$
1,065

As a % of total gross loans
1.15
%
 
0.20
%
 
0.95
%
 
%
 
0.95
%
 
0.05
%


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method: 
 
September 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Single
Family
 
Home
Equity
 
Warehouse and Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
52

 
$

 
$

 
$
229

 
$
40

 
$
329

 
$

 
$

 
$

 
$
650

Collectively evaluated for impairment
5,366

 
152

 
890

 
3,638

 
955

 
966

 
195

 
1,489

 
245

 
13,896

Total ending allowance balance
$
5,418

 
$
152

 
$
890

 
$
3,867

 
$
995

 
$
1,295

 
$
195

 
$
1,489

 
$
245

 
$
14,546

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment1
$
11,003

 
$
54

 
$

 
$
4,686

 
$
3,538

 
$
1,242

 
$
56

 
$

 
$
2

 
$
20,581

Loans collectively evaluated for impairment
1,193,810

 
21,315

 
216,539

 
801,110

 
25,305

 
16,210

 
91,799

 
85,247

 
8,124

 
2,459,459

Principal loan balance
1,204,813

 
21,369

 
216,539

 
805,796

 
28,843

 
17,452

 
91,855

 
85,247

 
8,126

 
2,480,040

Unaccreted discounts and loan fees
2,867

 
(8
)
 
(1,099
)
 
1,339

 
(70
)
 
295

 
(35,597
)
 
(220
)
 

 
(32,493
)
Accrued interest receivable
3,953

 
84

 
197

 
3,137

 
68

 
91

 
38

 
280

 

 
7,848

Total recorded investment in loans
$
1,211,633

 
$
21,445

 
$
215,637

 
$
810,272

 
$
28,841

 
$
17,838

 
$
56,296

 
$
85,307

 
$
8,126

 
$
2,455,395

________________
1. Loans evaluated for impairment include TDRs that have been performing for more than six months.


25


 
June 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Single
Family
 
Home
Equity
 
Warehouse and Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate
Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
37

 
$

 
$

 
$
112

 
$
411

 
$
505

 
$

 
$

 
$

 
$
1,065

Collectively evaluated for impairment
4,775

 
183

 
1,250

 
3,074

 
967

 
1,031

 
201

 
1,623

 
13

 
13,117

Total ending allowance balance
$
4,812

 
$
183

 
$
1,250

 
$
3,186

 
$
1,378

 
$
1,536

 
$
201

 
$
1,623

 
$
13

 
$
14,182

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment1
$
12,372

 
$
56

 
$

 
$
4,506

 
$
3,559

 
$
1,348

 
$

 
$

 
$

 
$
21,841

Loans collectively evaluated for impairment
1,058,296

 
22,481

 
204,878

 
763,517

 
25,441

 
17,182

 
108,144

 
78,721

 
419

 
2,279,079

Principal loan balance
1,070,668

 
22,537

 
204,878

 
768,023

 
29,000

 
18,530

 
108,144

 
78,721

 
419

 
2,300,920

Unaccreted discounts and loan fees
1,796

 
(6
)
 
(901
)
 
784

 
(74
)
 
332

 
(31,488
)
 
(263
)
 

 
(29,820
)
Accrued interest receivable
3,649

 
92

 
216

 
2,992

 
88

 
91

 
61

 
833

 
1

 
8,023

Total recorded investment in loans
$
1,076,113

 
$
22,623

 
$
204,193

 
$
771,799

 
$
29,014

 
$
18,953

 
$
76,717

 
$
79,291

 
$
420

 
$
2,279,123

________________
1. Loans evaluated for impairment include TDRs that have been performing for more than six months.

Credit Quality Disclosures. Non-performing loans consisted of the following: 
(Dollars in thousands)
September 30,
2013
 
June 30,
2013
Single Family Real Estate Secured:
 
 
 
Mortgage:
 
 
 
In-house originated
$
870

 
$
2,179

Purchased
9,122

 
9,174

Home Equity:
 
 
 
In-house originated
12

 
37

Purchased

 

Warehouse and Other

 

Multifamily Real Estate Secured:
 
 
 
In-house originated
848

 
851

Purchased
2,211

 
2,031

Commercial Real Estate Secured:
 
 
 
In-house originated

 

Purchased
2,122

 
3,559

Total nonaccrual loans secured by real estate
15,185

 
17,831

Auto and RV Secured
402

 
472

Factoring
56

 

Commercial and Industrial

 

Other
2

 

Total non-performing loans
$
15,645

 
$
18,303

Non-performing loans to total loans
0.63
%
 
0.80
%

Approximately 23.95% of our non-performing loans at September 30, 2013 were considered TDRs, compared to 28.86% at June 30, 2013. Borrowers that make timely payments after TDRs are considered non-performing for at least six months.

Generally, after six months of timely payments, those TDRs are reclassified from the non-performing loan category to performing and any previously deferred interest income is recognized. Approximately 63.87% of the Bank’s non-performing loans are single family first

26


mortgages already written down to 52.09% in aggregate, of the original appraisal value of the underlying properties. Generally these loans have experienced longer delays completing the foreclosure process due to the poor servicing practices of one of our seller servicers.
The following table provides the outstanding unpaid balance of loans that are performing and non-performing by portfolio class: 
 
September 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home
Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Performing
$
1,194,821

 
$
21,357

 
$
216,539

 
$
802,737

 
$
26,721

 
$
17,050

 
$
91,799

 
$
85,247

 
$
8,124

 
$
2,464,395

Non-performing
9,992

 
12

 

 
3,059

 
2,122

 
402

 
56

 

 
2

 
15,645

Total
$
1,204,813

 
$
21,369

 
$
216,539

 
$
805,796

 
$
28,843

 
$
17,452

 
$
91,855

 
$
85,247

 
$
8,126

 
$
2,480,040


 
June 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home
Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Performing
$
1,059,315

 
$
22,500

 
$
204,878

 
$
765,141

 
$
25,441

 
$
18,058

 
$
108,144

 
$
78,721

 
$
419

 
$
2,282,617

Non-performing
11,353

 
37

 

 
2,882

 
3,559

 
472

 

 

 

 
18,303

Total
$
1,070,668

 
$
22,537

 
$
204,878

 
$
768,023

 
$
29,000

 
$
18,530

 
$
108,144

 
$
78,721

 
$
419

 
$
2,300,920


The Company divides loan balances when determining general loan loss reserves between purchases and originations as follows:
 
 
September 30, 2013
 
Single Family Real Estate Secured: Mortgage
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
(Dollars in thousands)
Origination
 
Purchase
 
Total
 
Origination
 
Purchase
 
Total
 
Origination
 
Purchase
 
Total
Performing
$
1,071,130

 
$
123,691

 
$
1,194,821

 
$
606,608

 
$
196,129

 
$
802,737

 
$
6,570

 
$
20,151

 
$
26,721

Non-performing
870

 
9,122

 
9,992

 
848

 
2,211

 
3,059

 

 
2,122

 
2,122

Total
$
1,072,000

 
$
132,813

 
$
1,204,813

 
$
607,456

 
$
198,340

 
$
805,796

 
$
6,570

 
$
22,273

 
$
28,843


 
June 30, 2013
 
Single Family Real Estate Secured: Mortgage
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
(Dollars in thousands)
Origination
 
Purchase
 
Total
 
Origination
 
Purchase
 
Total
 
Origination
 
Purchase
 
Total
Performing
$
925,974

 
$
133,341

 
$
1,059,315

 
$
559,163

 
$
205,978

 
$
765,141

 
$
6,627

 
$
18,814

 
$
25,441

Non-performing
2,179

 
9,174

 
11,353

 
851

 
2,031

 
2,882

 

 
3,559

 
3,559

Total
$
928,153

 
$
142,515

 
$
1,070,668

 
$
560,014

 
$
208,009

 
$
768,023

 
$
6,627

 
$
22,373

 
$
29,000


From time to time the Company modifies loan terms temporarily for borrowers who are experiencing financial stress. These loans are performing and accruing and will generally return to the original loan terms after the modification term expires.


27


The Company classifies these loans as performing TDRs that consisted of the following: 
 
September 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home
Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Performing loans temporarily modified as TDR
$
1,011

 
$
42

 
$

 
$
1,627

 
$
1,416

 
$
840

 
$

 
$

 
$

 
$
4,936

Non-performing loans
9,992

 
12

 

 
3,059

 
2,122

 
402

 
56

 

 
2

 
15,645

Total impaired loans
$
11,003

 
$
54

 
$

 
$
4,686

 
$
3,538

 
$
1,242

 
$
56

 
$

 
$
2

 
$
20,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home
Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Performing loans temporarily modified as TDR
$
1,019

 
$
20

 
$

 
$
1,623

 
$

 
$
876

 
$

 
$

 
$

 
$
3,538

Non-performing loans
11,353

 
37

 

 
2,882

 
3,559

 
472

 

 

 

 
18,303

Total impaired loans
$
12,372

 
$
57

 
$

 
$
4,505

 
$
3,559

 
$
1,348

 
$

 
$

 
$

 
$
21,841

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2013
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home
Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Interest income recognized on performing TDRs
$
10

 
$
1

 
$

 
$
30

 
$
20

 
$
17

 
$

 
$

 
$

 
$
78

Average balances of performing TDRs
$
1,014

 
$
35

 
$

 
$
1,626

 
$
1,419

 
$
861

 
$

 
$

 
$

 
$
4,955

Average balances of impaired loans
$
11,320

 
$
55

 
$

 
$
4,898

 
$
3,544

 
$
1,281

 
$
19

 
$

 
$
18

 
$
21,135

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2012
 
Single Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home
Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other
 
Total
Interest income recognized on performing TDRs
$
24

 
$

 
$

 
$
5

 
$
23

 
$
31

 
$

 
$

 
$

 
$
83

Average balances of performing TDRs
$
2,061

 
$
23

 
$

 
$
1,718

 
$
1,712

 
$
1,555

 
$

 
$

 
$

 
$
7,069

Average balances of impaired loans
$
10,048

 
$
113

 
$

 
$
5,936

 
$
2,055

 
$
2,393

 
$

 
$

 
$
4

 
$
20,549

The Company's loan modifications included Single Family, Multifamily and Commercial loans of which included one or a combination of the following: a reduction of the stated interest rate or delinquent property taxes that were paid by the Bank and either repaid by the borrower over a one year period or capitalized and amortized over the remaining life of the loan. The Company's loan modifications also included RV loans in which borrowers were able to make interest-only payments for a period of six months to a year which then reverted back to fully amortizing.


28


Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company uses the following definitions for risk ratings.
Pass. Loans classified as pass are well protected by the current net worth and paying capacity of the obligor or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The Company reviews and grades loans following a continuous loan review process, featuring coverage of all loan types and business lines at least quarterly. Continuous reviewing provides more effective risk monitoring because it immediately tests for potential impacts caused by changes in personnel, policy, products or underwriting standards.

29


The following table presents the composition of our loan portfolio by credit quality indicators:

 
September 30, 2013
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
    In-house originated
$
1,062,503

 
$
4,499

 
$
4,998

 
$

 
$
1,072,000

    Purchased
122,282

 
607

 
9,924

 

 
132,813

Home Equity:
 
 
 
 
 
 
 
 
 
    In-house originated
5,398

 
32

 
74

 

 
5,504

    Purchased
15,865

 

 

 

 
15,865

Warehouse and Other:
 
 
 
 
 
 
 
 
 
    In-house originated
216,539

 

 

 

 
216,539

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
599,426

 
2,198

 
5,832

 

 
607,456

    Purchased
181,834

 
9,095

 
7,411

 

 
198,340

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
6,570

 

 

 

 
6,570

    Purchased
17,066

 
955

 
4,252

 

 
22,273

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
16,423

 
318

 
711

 

 
17,452

Factoring:
 
 
 
 
 
 
 
 
 
    In-house originated
91,799

 

 
56

 

 
91,855

Commercial secured and other:
 
 
 
 
 
 
 
 
 
    In-house originated
84,249

 
998

 

 

 
85,247

Other
8,124

 

 
2

 

 
8,126

Total
$
2,428,078

 
$
18,702

 
$
33,260

 
$

 
$
2,480,040

As a % of total gross loans
97.91
%
 
0.75
%
 
1.34
%
 
%
 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
Mortgage
 
 
 
 
 
 
 
 
 
    In-house originated
$
920,254

 
$
5,371

 
$
2,528

 
$

 
$
928,153

    Purchased
131,213

 
1,323

 
9,979

 

 
142,515

Home Equity
 
 
 
 
 
 
 
 
 
    In-house originated
5,866

 
32

 
56

 

 
5,954

    Purchased
16,583

 

 

 

 
16,583

Warehouse and Other
 
 
 
 
 
 
 
 
 
    In-house originated
204,878

 

 

 

 
204,878

Multifamily Real Estate Secured
 
 
 
 
 
 
 
 
 
    In-house originated
554,924

 
1,358

 
3,625

 
107

 
560,014

    Purchased
193,804

 
8,482

 
5,723

 

 
208,009

Commercial Real Estate Secured
 
 
 
 
 
 
 
 
 
    In-house originated
6,627

 

 

 

 
6,627

    Purchased
17,146

 
951

 
3,865

 
411

 
22,373

Auto and RV Secured
 
 
 
 
 
 
 
 
 
    In-house originated
17,508

 
247

 
775

 

 
18,530

Factoring
 
 
 
 
 
 
 
 
 
    In-house originated
108,144

 

 

 

 
108,144

Commercial secured and other:
 
 
 
 
 
 
 
 
 
    In-house originated
77,721

 
1,000

 

 

 
78,721

Other
417

 
2

 

 

 
419

Total
$
2,255,085

 
$
18,766

 
$
26,551

 
$
518

 
$
2,300,920

As a % of total gross loans
98.01
%
 
0.82
%
 
1.15
%
 
0.02
%
 
100.00
%


30


The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. The Company also evaluates credit quality based on the aging status of its loans. The following table provides the outstanding unpaid balance of loans that are past due 30 days or more by portfolio class as of the period indicated:
 
September 30, 2013
(Dollars in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
In-house originated
$
2,946

 
$
5

 
$

 
$
2,951

Purchased
1,243

 

 
6,003

 
7,246

Home equity:
 
 
 
 
 
 
 
In-house originated
32

 
32

 
12

 
76

Multifamily real estate secured:
 
 
 
 
 
 
 
In-house originated
2,116

 

 

 
2,116

Purchased

 
494

 
128

 
622

Auto and RV secured
510

 
125

 
160

 
795

Factoring
151

 

 
56

 
207

Total
$
6,998

 
$
656

 
$
6,359

 
$
14,013

As a % of total gross loans
0.28
%
 
0.03
%
 
0.26
%
 
0.57
%
 
 
 
 
 
 
 
 
 
June 30, 2013
(Dollars in Thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
 
 
 
 
 
 
 
In-house originated
$

 
$
3,051

 
$

 
$
3,051

Purchased
1,400

 
565

 
7,323

 
9,288

Home equity
 
 
 
 
 
 
 
In-house originated
125

 
32

 
12

 
169

Multifamily real estate secured
 
 
 
 
 
 
 
In-house originated
3,701

 

 

 
3,701

Purchased

 
60

 
399

 
459

Commercial real estate secured
 
 
 
 
 
 
 
Purchased
316

 

 

 
316

Auto and RV secured
453

 
21

 
177

 
651

Factoring
112

 

 

 
112

Commercial and industrial
4,824

 

 

 
4,824

Total
$
10,931

 
$
3,729

 
$
7,911

 
$
22,571

As a % of total gross loans
0.48
%
 
0.16
%
 
0.34
%
 
0.98
%


31


6.
STOCK-BASED COMPENSATION
The Company has two equity incentive plans, the 2004 Stock Incentive Plan (“2004 Plan”) and the 1999 Stock Option Plan (collectively, the "Plans"), which provide for the granting of non-qualified and incentive stock options, restricted stock and restricted stock units, stock appreciation rights and other awards to employees, directors and consultants.
1999 Stock Option Plan. In July 1999, the Company’s Board of Directors approved the 1999 Stock Option Plan ("1999 Plan") and in August 2001, the Company’s shareholders approved an amendment to the 1999 Plan such that 15% of the outstanding shares of the Company would always be available for grants under the 1999 Plan. The 1999 Plan is designed to encourage selected employees and directors to improve operations and increase profits, to accept or continue employment or association with the Company through participation in the growth in the value of the common stock. The 1999 Plan requires that option exercise prices be not less than fair market value per share of common stock on the option grant date for incentive and nonqualified options. The options issued under the 1999 Plan generally vest in between three and five years. Option expiration dates are established by the plan administrator but may not be later than 10 years after the date of the grant.
In November 2007, the shareholders of the Company approved the termination of the 1999 Plan. No new option awards will be made under the 1999 Plan and the outstanding awards under the 1999 Plan will continue to be subject to the terms and conditions of the 1999 Plan.
2004 Stock Incentive Plan. In October 2004, the Company’s Board of Directors and the stockholders approved the 2004 Plan. In November 2007, the 2004 Plan was amended and approved by the Company’s stockholders. The maximum number of shares of common stock available for issuance under the 2004 Plan is 14.8% of the Company’s outstanding common stock measured from time to time. In addition, the number of shares of the Company’s common stock reserved for issuance will also automatically increase by an additional 1.5% on the first day of each of four fiscal years starting July 1, 2007. At September 30, 2013, there were a maximum of 2,555,356 shares available for issuance under the limits of the 2004 Plan.
Stock Options. At September 30, 2013, expense related to stock option grants has been fully recognized.
A summary of stock option activity under the Plans during the periods indicated is presented below:
 
 
Number of
Shares
 
Weighted-Average
Exercise Price
Per Share
Outstanding - July 1, 2012
190,117

 
$
8.93

Granted

 

Exercised
(27,135
)
 
9.59

Canceled
(500
)
 
11.00

Outstanding - June 30, 2013
162,482

 
$
8.81

Granted

 

Exercised
(26,080
)
 
9.01

Canceled

 

Outstanding - September 30, 2013
136,402

 
$
8.77

Options exercisable - June 30, 2013
162,482

 
$
8.81

Options exercisable - September 30, 2013
136,402

 
$
8.77



32


The following table summarizes information as concerning currently outstanding and exercisable options:
As of September 30, 2013
Options Outstanding
 
Options Exercisable
Exercise
Prices
 
Number
Outstanding
 
Weighted-Average
Remaining
Contractual Life (Years)
 
Number
Exercisable
 
Weighted-
Average
Exercise Price
$
7.35

 
44,350

 
2.82
 
44,350

 
$
7.35

8.50

 
7,500

 
2.16
 
7,500

 
8.50

9.20

 
7,500

 
1.90
 
7,500

 
9.20

9.50

 
65,020

 
1.82
 
65,020

 
9.50

10.00

 
12,032

 
0.75
 
12,032

 
10.00

$
8.77

 
136,402

 
2.07
 
136,402

 
$
8.77


The aggregate intrinsic value of options outstanding and options exercisable under the Plans at September 30, 2013 was $7,643.
Restricted Stock and Restricted Stock Units. Under the 2004 Plan, employees and directors are eligible to receive grants of restricted stock and restricted stock units. The Company determines stock-based compensation expense using the fair value method. The fair value of restricted stock and restricted stock units is equal to the closing sale price of the Company’s common stock on the date of grant.
During the quarters ended September 30, 2013 and 2012, the Company granted 104,970 and 114,578 restricted stock units respectively, to employees and directors. Restricted stock unit (“RSU”) awards granted during these quarters vest over 3 years, one-third on each anniversary date, except for any RSUs granted to our CEO, vest one-fourth on each fiscal year end.
The Company's income before income taxes and net income for the three months ended September 30, 2013 and 2012 included stock award expense was $966 and $708, with total income tax benefit of $391 and $283, respectively. The Company recognizes compensation expense based upon the grant-date fair value divided by the vesting and the service period between each vesting date. At September 30, 2013, unrecognized compensation expense related to non-vested awards aggregated to $10,581 and is expected to be recognized in future periods as follows:
 
(Dollars in thousands)
Stock Award
Compensation
Expense
For the fiscal year remainder:
 
2014
$
3,216

2015
3,512

2016
2,740

2017
1,113

Total
$
10,581


The following table presents the status and changes in restricted stock grants for the periods indicated:
 
 
Restricted Stock
and Restricted
Stock Unit Shares
 
Weighted-Average
Grant-Date
Fair Value
Non-vested balance at July 1, 2012
360,662

 
$
13.20

Granted
181,483

 
28.83

Vested
(213,355
)
 
13.32

Cancelled
(30,305
)
 
18.01

Non-vested balance at June 30, 2013
298,485

 
$
22.13

Granted
104,970

 
58.21

Vested
(64,931
)
 
14.92

Cancelled
(1,205
)
 
28.29

Non-vested balance at September 30, 2013
337,319

 
$
34.73


33



The total fair value of shares vested for the three months ended September 30, 2013 was $4,237.
2004 Employee Stock Purchase Plan. In October 2004, the Company’s Board of Directors and stockholders approved the 2004 Employee Stock Purchase Plan, which is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code. An aggregate total of 500,000 shares of the Company’s common stock has been reserved for issuance and will be available for purchase under the 2004 Employee Stock Purchase Plan. At September 30, 2013, there have been no shares issued under the 2004 Employee Stock Purchase Plan.

7.
EARNINGS PER SHARE ("EPS")
Basic EPS excludes dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in our earnings.
The following table presents the calculation of basic and diluted EPS:
 
Three Months Ended
 
September 30,
(Dollars in thousands, except per share data)
2013
 
2012
Earnings Per Common Share
 
 
 
Net income
$
12,182

 
$
8,989

Preferred stock dividends
(78
)
 
(77
)
Net income attributable to common shareholders
$
12,104

 
$
8,912

Average common shares issued and outstanding
13,850,909

 
11,825,054

Average unvested Restricted stock grant and RSU shares
330,948

 
366,008

Total qualifying shares
14,181,857

 
12,191,062

Earnings per common share
$
0.85

 
$
0.73

Diluted Earnings Per Common Share
 
 
 
Net income attributable to common shareholders
$
12,104

 
$
8,912

Preferred stock dividends to dilutive convertible preferred

 

Dilutive net income attributable to common shareholders
$
12,104

 
$
8,912

Average common shares issued and outstanding
14,181,857

 
12,191,062

Dilutive effect of Stock Options
79,631

 
74,464

Dilutive effect of convertible preferred stock

 
987,757

Total dilutive common shares issued and outstanding
14,261,488

 
13,253,283

Diluted earnings per common share
$
0.85

 
$
0.67


8.
COMMITMENTS AND CONTINGENCIES

Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At September 30, 2013, the Company had commitments to originate $51.4 million in fixed rate loans and $64.6 million in variable rate loans, totaling an aggregate outstanding principal balance of $115.9 million. Our fixed rate commitments to originate had rates ranging from 3.00% to 9.10%. At September 30, 2013, the Company also had commitments to sell $41.8 million in fixed rate loans and $2.7 million in variable rate loans, totaling an aggregate outstanding principal balance of $44.6 million.
Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment

34


amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

9.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted related party loans collateralized by real property to officers, directors and their affiliates that are considered to be insiders by regulation. There was one new related party loan granted under the provisions of the employee loan program during the three months ended September 30, 2013, and no refinances of existing loans or new loans granted during the three months ended September 30, 2012.


35


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items, contractual obligations and capital resources of BofI Holding, Inc. and subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our Annual Report on Form 10-K for the year ended June 30, 2013, and the interim unaudited condensed consolidated financial statements and notes thereto contained in this report.
Some matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “will,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which we operate and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include economic conditions, changes in the interest rate environment, changes in the competitive marketplace, risks associated with credit quality and other risk factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Our Performance” in our Annual Report on Form 10-K for the year ended June 30, 2013, which has been filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.
General
    
Our company, BofI Holding, Inc., is the holding company for BofI Federal Bank, a diversified financial services company with approximately $3.3 billion in assets that provides consumer and business banking products through its branchless, low-cost distribution channels and affinity partners. The Bank has deposit and loan customers nationwide including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. The Bank generates fee income from consumer and business products including fees from loans originated for sale and transaction fees earned from processing payment activity. BofI Holding, Inc.'s common stock is listed on the NASDAQ Global Select Market and is a component of the Russell 3000 Index.

BofI Federal Bank is a federal savings bank wholly-owned by our company and regulated by the Office of the Comptroller of the Currency ("OCC"). The parent company, BofI Holding, Inc., is a unitary savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.
We distribute our deposit products through a wide range of retail distributions channels, and our deposits consist of demand, savings and time deposits accounts. We distribute our loan products through our retail, correspondent and wholesale channels, and the loans we retain are primarily first mortgages secured by single family real property and by multifamily real property. Our mortgage-backed securities consist primarily of mortgage pass-through securities issued by government-sponsored entities and non-agency collateralized mortgage obligations and pass-through mortgage-backed securities issued by private sponsors. We believe our flexibility to adjust our asset generation channels has been a competitive advantage allowing us to avoid markets and products where credit fundamentals are poor.

Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

36


Our significant accounting policies and practices are described in greater detail in Note 1 to our June 30, 2013 audited consolidated financial statements and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year end June 30, 2013.

Use of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as core earnings. Core earnings exclude realized and unrealized gains and losses associated with our securities portfolios. Excluding these gains and losses provides investors with an understanding of our Bank's core lending and mortgage banking business. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious as their use of such measures. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of its business and performance, these non-GAAP measures should not be consider in isolation, or as a substitute for GAAP basis financial measures.

SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data concerning the periods indicated:
BofI HOLDING, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
(Dollars in thousands)
September 30,
2013
 
June 30,
2013
 
September 30,
2012
Selected Balance Sheet Data:
 
 
 
 
 
Total assets
$
3,284,182

 
$
3,090,771

 
$
2,617,319

Loans—net of allowance for loan losses
2,433,001

 
2,256,918

 
1,912,999

Loans held for sale, at fair value
19,695

 
36,665

 
52,433

Loans held for sale, lower of cost or market
51,223

 
40,326

 
69,567

Allowance for loan losses
14,546

 
14,182

 
10,171

Securities—trading
7,734

 
7,111

 
6,439

Securities—available-for-sale
220,081

 
185,607

 
160,378

Securities—held-to-maturity
267,670

 
275,691

 
300,039

Total deposits
2,192,964

 
2,091,999

 
1,852,971

Securities sold under agreements to repurchase
110,000

 
110,000

 
120,000

Advances from the FHLB
656,000

 
590,417

 
404,000

Subordinated debentures and other borrowings
5,155

 
5,155

 
5,155

Total stockholders’ equity
282,617

 
268,262

 
214,706


37


BofI HOLDING, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION

 
At or for the Three Months Ended
 
September 30,
(Dollars in thousands, except per share data)
2013
 
2012
Selected Income Statement Data:
 
 
 
Interest and dividend income
$
36,346

 
$
30,989

Interest expense
8,236

 
8,504

Net interest income
28,110

 
22,485

Provision for loan losses
500

 
2,550

Net interest income after provision for loan losses
27,610

 
19,935

Non-interest income
6,976

 
6,761

Non-interest expense
14,514

 
11,532

Income before income tax expense
20,072

 
15,164

Income tax expense
7,890

 
6,175

Net income
$
12,182

 
$
8,989

Net income attributable to common stock
$
12,104

 
$
8,912

Per Share Data:
 
 
 
Net income:
 
 
 
Basic
$
0.85

 
$
0.73

Diluted
$
0.85

 
$
0.67

Book value per common share
$
20.11

 
$
16.36

Tangible book value per common share
$
20.11

 
$
16.36

Weighted average number of shares outstanding:
 
 
 
Basic
14,181,857

 
12,191,062

Diluted
14,261,488

 
13,253,283

Common shares outstanding at end of period
13,803,247

 
12,813,171

Common shares issued at end of period
14,729,240

 
13,647,741

Performance Ratios and Other Data:
 
 
 
Loan originations for investment
$
470,669

 
$
279,697

Loan originations for sale
$
186,696

 
$
254,796

Loan purchases
$

 
$
1,541

Return on average assets
1.63
%
 
1.44
%
Return on average common stockholders’ equity
17.73
%
 
18.46
%
Interest rate spread1
3.73
%
 
3.58
%
Net interest margin2
3.86
%
 
3.70
%
Efficiency ratio
41.37
%
 
39.43
%
Capital Ratios:
 
 
 
Equity to assets at end of period
8.61
%
 
8.20
%
Tier 1 leverage (core) capital to adjusted tangible assets3
8.50
%
 
8.20
%
Tier 1 risk-based capital ratio3
14.65
%
 
12.83
%
Total risk-based capital ratio3
15.41
%
 
13.44
%
Tangible capital to tangible assets3
8.50
%
 
8.20
%
Asset Quality Ratios:
 
 
 
Net annualized charge-offs to average loans outstanding
0.02
%
 
0.42
%
Non-performing loans to total loans
0.63
%
 
1.07
%
Non-performing assets to total assets
0.55
%
 
0.82
%
Allowance for loan losses to total loans at end of period
0.59
%
 
0.53
%
Allowance for loan losses to non-performing loans
92.98
%
 
48.96
%
_________________________
1. Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the annualized weighted average
rate paid on interest-bearing liabilities.
2. Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
3. Reflects regulatory capital ratios of BofI Federal Bank.



38


RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2013 and 2012
For the three months ended September 30, 2013, we had net income of $12.2 million compared to net income of $9.0 million for the three months ended September 30, 2012. Net income attributable to common stockholders was $12.1 million or $0.85 per diluted share for the three months ended September 30, 2013 compared to net income attributable to common shareholders of $8.9 million or $0.67 per diluted share for the three months ended September 30, 2012.

Other key comparisons between our operating results for the three months ended September 30, 2013 and 2012 are:

Net interest income increased $5.6 million in the quarter ended September 30, 2013 due to a 19.9%, increase in average earning assets primarily from the growth in our loan portfolio, and a net decrease in the average funding rate of our liabilities. Our net interest margin increased 16 basis points in the quarter ended September 30, 2013 compared to September 30, 2012. The overall rate on interest earning assets was lower by 11 basis points for the three months ended September 30, 2013 compared to September 30, 2012, primarily due to a decrease in market interest rates for new loans and borrower repayments of higher rate loans. This reduction on the asset side was more than offset by a 26 basis point reduction in average rates paid on interest bearing liabilities for the three months ending September 30, 2013 compared to September 30, 2012. The reduction was primarily due to a shift in the deposit mix towards interest bearing demand and savings accounts and away from time deposits, as well as a decrease in average rates paid on demand and savings accounts of 12 basis points.

Non-interest income increased $0.2 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increase in non-interest income for the quarter was the result of a $3.1 million increase in gain on sale - other primarily resulting from sales of structured settlements, a $0.6 million increase in banking service fees and other income, a $0.5 million increase in prepayment penalty fee income, and a combined $0.5 million increase in gains on securities, partially offset by a $4.5 million decrease in mortgage banking income.

Non-interest expense increased $3.0 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. For the three months ended September 30, 2013 compared to the three months ended September 30, 2012 salaries and related expenses increased $1.4 million primarily due to the overall increase in staff, mainly in our loan and deposit areas to support the overall growth of the Bank. Professional fees increased $0.8 million due to acquisition contracts and new business costs, data processing and internet were up $0.6 million due to core system updates and increased bank customers.

We define net income without the after-tax impact of realized and unrealized securities gains and losses as adjusted earnings ("core earnings"), a non-GAAP measurement, which we believe provides useful information about the Bank's operating performance. Core earnings for the three months ended September 30, 2013 and 2012, were $12.0 million and $9.2 million, respectively.
  
Below is a reconciliation of net income to core earnings:
 
Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
Net Income
$
12,182

 
$
8,989

Realized securities gains
(208
)
 

Unrealized securities losses
(51
)
 
272

Tax provision
102

 
(111
)
Core Earnings
$
12,025

 
$
9,150

Net Interest Income
Net interest income for the quarter ended September 30, 2013 totaled $28.1 million, an increase of 25.0%, compared to net interest income of $22.5 million for the quarter ended September 30, 2012. The growth of net interest income is primarily due to net loan portfolio growth which increased average earning assets and due to a net decrease in the average funding rate of our liabilities.
Total interest and dividend income during the three months ended September 30, 2013 increased 17.3% to $36.3 million compared to $31.0 million during the three months ended September 30, 2012. The increase in interest and dividend income for

39


the 2013 quarter was attributable primarily to growth in average earning assets from growth in the loan portfolio. The average balance of loans increased 21.7% for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increase in interest income on loans was partially offset by lower rates earned on loans and mortgage-backed securities. The loan portfolio yield for the quarter ended September 30, 2013 decreased 5 basis points and the total interest-earning assets yield decreased 11 basis points from the 2012 period. The net growth in average earning assets for the 2013 quarter was funded largely by increased deposits and to a lesser extent borrowings.
Total interest expense was $8.2 million for the three months ended September 30, 2013, a decrease of $0.3 million or 3.2% as compared with the same period in 2012. The average funding rate decreased by 26 basis points while average interest-bearing liabilities grew 16.1%. Contributing to the decrease in the average funding rates were decreases in the average rates for time deposits of 10 basis points, FHLB advances of 38 basis points and demand and savings accounts of 12 basis points for the three months ended September 30, 2013 compared to the period in 2012. Net interest margin, defined as annualized net interest income divided by average earning assets, increased by 16 basis points to 3.86% for the quarter ended September 30, 2013, compared with 3.70% for the quarter ended September 30, 2012.

40


Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the three months ended September 30, 2013 and 2012: 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three month period ended
 
September 30,
 
2013
 
2012
(Dollars in thousands)
Average
Balance2
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid1
 
Average
Balance2
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid1
Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans3, 4
$
2,345,467

 
$
30,385

 
5.18
%
 
$
1,926,883

 
$
25,208

 
5.23
%
Federal funds sold

 

 
%
 
6,724

 
3

 
0.18
%
Interest-earning deposits in other financial institutions
60,250

 
42

 
0.28
%
 
307

 

 
%
Mortgage-backed and other investment securities4,5
483,819

 
5,609

 
4.64
%
 
477,612

 
5,756

 
4.82
%
Stock of the FHLB, at cost
26,356

 
310

 
4.70
%
 
20,657

 
22

 
0.43
%
Total interest-earning assets
2,915,892

 
36,346

 
4.99
%
 
2,432,183

 
30,989

 
5.10
%
Non-interest-earning assets
72,105

 
 
 
 
 
65,707

 
 
 
 
Total assets
$
2,987,997

 
 
 
 
 
$
2,497,890

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
1,049,471

 
$
1,777

 
0.68
%
 
$
739,572

 
$
1,488

 
0.80
%
Time deposits
962,711

 
3,828

 
1.59
%
 
960,332

 
4,049

 
1.69
%
Securities sold under agreements to repurchase
110,000

 
1,232

 
4.48
%
 
120,000

 
1,339

 
4.46
%
Advances from the FHLB
477,554

 
1,363

 
1.14
%
 
418,685

 
1,587

 
1.52
%
Other borrowings
5,155

 
36

 
2.79
%
 
5,155

 
41

 
3.18
%
Total interest-bearing liabilities
2,604,891

 
8,236

 
1.26
%
 
2,243,744

 
8,504

 
1.52
%
Non-interest-bearing demand deposits
82,860

 
 
 
 
 
21,817

 
 
 
 
Other non-interest-bearing liabilities
22,149

 
 
 
 
 
18,902

 
 
 
 
Stockholders’ equity
278,097

 
 
 
 
 
213,427

 
 
 
 
Total liabilities and stockholders’ equity
$
2,987,997

 
 
 
 
 
$
2,497,890

 
 
 
 
Net interest income
 
 
$
28,110

 
 
 
 
 
$
22,485

 
 
Interest rate spread6
 
 
 
 
3.73
%
 
 
 
 
 
3.58
%
Net interest margin7
 
 
 
 
3.86
%
 
 
 
 
 
3.70
%
 __________________________
1.
Annualized.
2.
Average balances are obtained from daily data.
3.
Loans include loans held for sale, loan premiums and unearned fees.
4.
Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant. Also, includes $32.6 million and $33.3 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2013 and 2012 three month periods, respectively.
5.
Includes $5.5 million of municipal securities which are taxed at a reduced rate for both the 2013 and 2012 three month periods, respectively.

41


6.
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
7.
Net interest margin represents net interest income as a percentage of average interest-earning assets.

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume) for the three months ended September 30, 2013 and 2012:

 
For the Three Months Ended
 
September 30,
 
2013 vs 2012
 
Increase (Decrease) Due to
(Dollars in thousands)
Volume
 
Rate
 
Rate/Volume
 
Total
Increase
(Decrease)
Increase/(decrease) in interest income:
 
 
 
 
 
 
 
Loans
$
5,473

 
$
(241
)
 
$
(55
)
 
$
5,177

Federal funds sold
(3
)
 
(3
)
 
3

 
(3
)
Interest-earning deposits in other financial institutions

 

 
42

 
42

Mortgage-backed and other investment securities
75

 
(215
)
 
(7
)
 
(147
)
Stock of the FHLB, at cost
6

 
221

 
61

 
288

 
$
5,551

 
$
(238
)
 
$
44

 
$
5,357

Increase/(decrease) in interest expense:
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
620

 
$
(222
)
 
$
(109
)
 
$
289

Time deposits
10

 
(240
)
 
9

 
(221
)
Securities sold under agreements to repurchase
(112
)
 
6

 
(1
)
 
(107
)
Advances from the FHLB
224

 
(398
)
 
(50
)
 
(224
)
Other borrowings

 
(5
)
 

 
(5
)
 
$
742

 
$
(859
)
 
$
(151
)
 
$
(268
)

Provision for Loan Losses
The loan loss provision was $0.5 million compared to $2.6 million for the three months ended September 30, 2013 and September 30, 2012. The decrease in the provision for the three month period ended September 30, 2013 is due to a favorable decrease in the loan charge-offs partially offset by addition to the allowance for growth of the loan portfolio. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on the factors discussed under “Financial Condition-Asset Quality and Allowance for Loan Losses.”

42


Non-Interest Income
The following table sets forth information regarding our non-interest income for the periods shown: 
 
For the Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
 
Inc (Dec)
Realized gain on securities:
 
 
 
 
 
Sale of mortgage-backed securities
$
208

 
$

 
$
208

Total realized gain on securities
208

 

 
208

Other than temporary loss on securities:
 
 
 
 
 
Total impairment losses
$
253

 
$
(2,872
)
 
$
3,125

Loss recognized in other comprehensive loss
(825
)
 
1,998

 
(2,823
)
Net impairment loss recognized in earnings
(572
)
 
(874
)
 
302

Fair value gain on trading securities
623

 
602

 
21

Total unrealized loss on securities
51

 
(272
)
 
323

Prepayment penalty fee income
654

 
202

 
452

Mortgage banking income
1,986

 
6,456

 
(4,470
)
Gain on sale - other
3,089

 

 
3,089

Banking service fees and other income
988

 
375

 
613

Total non-interest income
$
6,976

 
$
6,761

 
$
215


Non-interest income increased $0.2 million to $7.0 million for the three months ended September 30, 2013. The increase was primarily the result of a $3.1 million increase in gain on sale - other, primarily resulting from sales of structured settlements. A decline of $4.5 million in mortgage banking income tempered the increase in non-interest income as interest rates ticked up and the number of loans eligible for rate reductions dropped. Other contributions to the increase were a $0.5 million net positive change in securities gains, a $0.5 million increase in prepayment penalty fee income and a $0.6 million increase in banking service fees and other income due primarily to prepaid card sponsorships added in 2013.
Non-Interest Expense
The following table sets forth information regarding our non-interest expense for the periods shown: 
 
For the Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
 
Inc (Dec)
Salaries and related costs
$
7,782

 
$
6,369

 
$
1,413

Professional services
1,680

 
918

 
762

Occupancy and equipment
549

 
507

 
42

Data processing and internet
1,185

 
571

 
614

Advertising and promotional
589

 
794

 
(205
)
Depreciation and amortization
721

 
337

 
384

Real estate owned and repossessed vehicles
69

 
98

 
(29
)
FDIC and regulator fees
547

 
488

 
59

Other general and administrative
1,392

 
1,450

 
(58
)
Total non-interest expenses
$
14,514

 
$
11,532

 
$
2,982


Non-interest expense, which is comprised primarily of compensation, data processing and internet expenses, occupancy, advertising and promotional and other operating expenses, was $14.5 million for the three months ended September 30, 2013, up from $11.5 million for the three months ended September 30, 2012. The increase in compensation expense for the three months ended September 30, 2013 is primarily due to the expansion of the Banks' staffing for lending products, strategic partnerships, business banking and regulatory compliance.

43


Total salaries and related costs increased $1.4 million to $7.8 million for the quarter ended September 30, 2013 compared to $6.4 million for the quarter ended September 30, 2012 due to increased staffing levels to support growth in deposit and lending activities. Our staff increased to 320 from 261, or 22.6% between the quarters ended September 30, 2013 and 2012, respectively.
Professional services, which include accounting and legal fees, increased $0.8 million for the three months ended September 30, 2013, compared to the same period last year. The increases were primarily due to legal fees related to acquisition contracts and business expansion costs.
Advertising and promotional expense decreased $0.2 million for the three months periods ended September 30, 2013, compared to the same period ended September 30, 2012. The decrease was primarily due to declines in online, email and direct leads expense primarily related to Agency mortgage banking.
Data processing and internet expense increased $0.6 million for the three months ended September 30, 2013, compared to the same period last year. The increase was primarily due to growth in the number of customer accounts and enhancements to the Bank's core processing system.
The cost of our Federal Deposit Insurance Corporation or “FDIC” and "OCC" standard regulatory charges increased $0.1 million for the three months ended September 30, 2013, compared to the same period last year. The increase was due to the overall growth of the Bank's liabilities. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.
Other general and administrative expense decreased $0.1 million for the three months ended September 30, 2013, compared to the same period last year, due to a decrease in loan origination expense.
Provision for Income Taxes
Our effective income tax rates (income tax provision divided by net income before income tax) for the three months ended September 30, 2013 and 2012 were 39.31% and 40.72%, respectively. The reduction in the tax rate is the result of changes in state tax allocations.


44


FINANCIAL CONDITION
Balance Sheet Analysis
Our total assets increased $193.4 million, or 6.3%, to $3,284.2 million, as of September 30, 2013, up from $3,090.8 million at June 30, 2013. The increase in total assets was primarily due to an increase of $176.1 million in net loans held for investment. Total liabilities increased $179.1 million, primarily due to an increase in deposits of $101.0 million and an increase in borrowings from the Federal Home Loan Bank of San Francisco (the “FHLB”) of $65.6 million.
Loans
Net loans held for investment increased 7.8% to $2,433.0 million at September 30, 2013 from $2,256.9 million at June 30, 2013. The increase in the loan portfolio was due to loan originations and purchases of $470.7 million, offset by loan repayments of $265.2 million, net transfers to our held for sale portfolio of $31.0 million and a net increase in the allowance of $0.4 million during the three months ended September 30, 2013.
The following table sets forth the composition of the loan portfolio as of the dates indicated:
 
September 30, 2013
 
June 30, 2013
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$
1,204,813

 
48.59
%
 
$
1,070,668

 
46.53
%
Home equity
21,369

 
0.86
%
 
22,537

 
0.98
%
Warehouse and other
216,539

 
8.73
%
 
204,878

 
8.90
%
Multifamily real estate secured
805,796

 
32.49
%
 
768,023

 
33.38
%
Commercial real estate secured
28,843

 
1.16
%
 
29,000

 
1.26
%
Auto and RV secured
17,452

 
0.70
%
 
18,530

 
0.81
%
Factoring
91,855

 
3.70
%
 
108,144

 
4.70
%
Commercial & Industrial
85,247

 
3.44
%
 
78,721

 
3.42
%
Other
8,126

 
0.33
%
 
419

 
0.02
%
Total gross loans
2,480,040

 
100.00
%
 
2,300,920

 
100.00
%
Allowance for loan losses
(14,546
)
 
 
 
(14,182
)
 
 
Unaccreted discounts and loan fees
(32,493
)
 
 
 
(29,820
)
 
 
Net mortgage loans on real estate
$
2,433,001

 
 
 
$
2,256,918

 
 
 
The Bank originates and purchases mortgage loans with terms that may include repayments that are less than the repayments for fully amortizing loans, including interest only loans, option adjustable-rate mortgages, and other loan types that permit payments that may be smaller than interest accruals. The Bank's lending guidelines for interest only loans are adjusted for the increased credit risk associated with these loans by requiring borrowers with such loans to borrow at LTVs that are lower than standard amortizing ARM loans and by calculating debt to income ratios for qualifying borrowers based upon a fully amortizing payment, not the interest only payment. The Company's Internal Asset Review Committee monitors and performs reviews of interest only loans. Adverse trends reflected in the Company's delinquency statistics, grading and classification of interest only loans would be reported to management and the Board of Directors. As of September 30, 2013, the Company had $377.6 million of interest only mortgage loans and $6.9 million of option adjustable-rate mortgage loans. Through September 30, 2013, the net amount of deferred interest on these loan types was not material to the financial position or operating results of the Company.

45


Asset Quality and Allowance for Loan Loss
Non-performing Assets
Non-performing loans are comprised of loans past due 90 days or more on nonaccrual status and other nonaccrual loans. Non-performing assets include non-performing loans plus other real estate owned and repossessed vehicles. At September 30, 2013, our non-performing loans totaled $15.6 million, or 0.63% of total gross loans and our total non-performing assets totaled $18.2 million, or 0.55% of total assets.
Non-performing loans and foreclosed assets or “non-performing assets” consisted of the following as of the dates indicated:
(Dollars in thousands)
September 30, 2013
 
June 30, 2013
 
Inc (Dec)
Non-performing assets:
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
Mortgage
$
9,992

 
$
11,353

 
$
(1,361
)
Home equity
12

 
37

 
(25
)
Multifamily real estate secured
3,059

 
2,882

 
177

Commercial real estate secured
2,122

 
3,559

 
(1,437
)
Total non-performing loans secured by real estate
15,185

 
17,831

 
(2,646
)
Auto and RV secured
402

 
472

 
(70
)
Factoring
56

 

 
56

Other
2

 

 
2

Total non-performing loans
15,645

 
18,303

 
(2,658
)
Foreclosed real estate
2,475

 
1,865

 
610

Repossessed—vehicles
87

 
141

 
(54
)
Total non-performing assets
$
18,207

 
$
20,309

 
$
(2,102
)
Total non-performing loans as a percentage of total loans
0.63
%
 
0.80
%
 
(0.17
)%
Total non-performing assets as a percentage of total assets
0.55
%
 
0.66
%
 
(0.11
)%

Total non-performing assets decreased from $20.3 million at June 30, 2013 to $18.2 million at September 30, 2013. As a percentage of total assets, non-performing assets decreased from 0.66% at June 30, 2013 to 0.55% at September 30, 2013. The non-performing assets decrease of approximately $2.1 million, was primarily the result of certain single family and commercial real estate loans offset by a net increase in the multifamily segment of our portfolio.
 
A troubled debt restructuring is a concession made to a borrower experiencing financial difficulties, typically permanent or temporary modifications of principal and interest payments or an extension of maturity dates. When a loan is delinquent and classified as a troubled debt restructuring no interest is accrued until the borrower demonstrates over time (typically six months) that it can make payments. When a loan is considered a troubled debt restructuring and is on nonaccrual, it is considered non-performing and included in the table above. The Bank had performing troubled debt restructurings on mortgage loans and RV loans with outstanding balances totaling $4.9 million at September 30, 2013 and $3.5 million at June 30, 2013.
Allowance for Loan Losses
We are committed to maintaining the allowance for loan losses at a level that is considered to be commensurate with estimated and known risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, our management performs an ongoing assessment of the risks inherent in the portfolio. While we believe that the allowance for loan losses is adequate at September 30, 2013, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio.
The assessment of the adequacy of our allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, change in volume and mix of loans, collateral values and charge-off history.
We provide general loan loss reserves for our RV and auto loans based upon the borrower credit score at the time of origination and the Company’s loss experience to date. The allowance for loan loss for the RV and auto loan portfolio at September 30, 2013 was determined by classifying each outstanding loan according to the semi-annually refreshed FICO score and providing loss rates. The Company had $16,210 (dollars in thousands) of RV and auto loan balances subject to general reserves as follows: FICO greater than or equal to 770: $4,244; 715 – 769: $5,121; 700 -714: $1,347; 660 – 699: $2,730 and less than 660: $2,768.

46


We experienced increased charge-offs of RV loans in fiscal 2007 through 2011, due to the nationwide recession. Our portfolio of RV loans is expected to decrease in the future because the Bank ceased originating RV loans in fiscal 2009.
The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan and the loan-to-value ratio (LTV) at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each loan by the loan-to-value and applying quantitative and qualitative loss rates. The LTV groupings for each significant mortgage class are as follows (dollars in thousands):
The Company had $1,193,810 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $759,165; 61% – 70%: $359,085; 71% – 80%: $65,582; greater than 80%: $9,978.
The Company had $801,110 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $354,157; 56% – 65%: $299,615; 66% – 75%: $139,120; 76% – 80%: $6,332 and greater than 80%: $1,886.
The Company had $25,305 of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $15,717; 51% – 60%: $6,558; 61% – 70%: $2,087; and 71% – 80%: $943.
The weighted average LTV percentage for our entire real estate loan portfolio was 55% at September 30, 2013. We believe that this percentage is lower and more conservative than most banks, which results in lower average mortgage loan charge-offs when compared to many other comparable banks.
While we anticipate that such level of charge-offs will continue into the future, given the uncertainties surrounding the improvement of the U.S. economy, we may experience an increase in the relative amount of charge-offs and we may be required to increase our loan loss provisions in the future to provide a larger loss allowance for one or more of our loan types.
The following table summarizes impaired loans as of: 
(Dollars in thousands)
September 30, 2013
 
June 30, 2013
Non-performing loans—90+ days past due plus other non-accrual loans
$
11,898

 
$
13,020

Troubled debt restructuring loans—non-accrual
3,747

 
5,283

Troubled debt restructuring loans—performing
4,936

 
3,538

Total impaired loans
$
20,581

 
$
21,841

                                                                                                       
The following table reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:
 
September 30, 2013
 
June 30, 2013
(Dollars in thousands)
Amount
of
Allowance
 
Allocation
as a % of
Allowance
 
Amount
of
Allowance
 
Allocation
as a % of
Allowance
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
5,418

 
37.26
%
 
4,812

 
33.93
%
Home equity
152

 
1.04
%
 
183

 
1.29
%
Warehouse and other
890

 
6.12
%
 
1,250

 
8.81
%
Multifamily real estate secured
3,867

 
26.58
%
 
3,186

 
22.47
%
Commercial real estate secured
995

 
6.84
%
 
1,378

 
9.72
%
Auto and RV secured
1,295

 
8.90
%
 
1,536

 
10.83
%
Factoring
195

 
1.34
%
 
201

 
1.42
%
Commercial & Industrial
1,489

 
10.24
%
 
1,623

 
11.44
%
Other
245

 
1.68
%
 
13

 
0.09
%
Total
$
14,546

 
100.00
%
 
$
14,182

 
100.00
%
The loan loss provision was $0.5 million and $2.6 million for the quarters ended September 30, 2013 and September 30, 2012, respectively. The decrease in the loan loss provision was the result of lower charge-offs and improvements in non-performing loans and delinquencies. We believe that the lower average LTV in the Bank’s mortgage loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable banks. Our general loan loss reserves are based upon historical losses and expected future trends. The resolution of the Bank’s existing REO and non-performing loans should not have a significant adverse impact on our operating results.

47


Investment Securities
Total investment securities were $495.5 million as of September 30, 2013, compared with $468.4 million at June 30, 2013. During the three months ended September 30, 2013, we purchased $43.2 million in Municipal debt, had received principal repayments of approximately $8.7 million in our available-for-sale portfolio. In our held-to-maturity portfolio, we received principal repayments of $10.9 million with the balance of the change attributable to accretion and other activities. We currently classify agency mortgage-backed and debt securities as held-to-maturity or available-for-sale at the time of purchase based upon small issue size and based on issue features, such as callable terms.
Deposits
Deposits increased a net $101.0 million, or 4.8%, to $2,193.0 million at September 30, 2013, from $2,092.0 million at June 30, 2013. Our deposit growth composition was the result of a 50.2% increase in interest-bearing demand accounts and an 16.9% increase in savings accounts as a result of our acquisition of approximately $173 million in deposits from Principal Bank, including $142 million in checking, savings and money market accounts and $31 million in time deposit accounts, and increased promotion and competitive pricing of savings accounts partially offset by a decline in our time deposits during the three months ended September 30, 2013.
The following table sets forth the composition of the deposit portfolio as of the dates indicated:
 
September 30, 2013
 
June 30, 2013
(Dollars in thousands)
Amount
 
Rate1
 
Amount
 
Rate1
Non-interest bearing
$
92,900

 
%
 
$
81,524

 
%
Interest bearing:
 
 
 
 
 
 
 
Demand
468,028

 
0.51
%
 
311,539

 
0.50
%
Savings
749,771

 
0.67
%
 
641,534

 
0.67
%
Total demand and savings
1,217,799

 
0.60
%
 
953,073

 
0.61
%
Time deposits:
 
 
 
 
 
 
 
Under $100,000
163,449

 
1.33
%
 
183,754

 
1.36
%
$100,000 or more
718,816

 
1.63
%
 
873,648

 
1.52
%
Total time deposits2
882,265

 
1.58
%
 
1,057,402

 
1.50
%
Total interest bearing
2,100,064

 
1.01
%
 
2,010,475

 
1.08
%
Total deposits
$
2,192,964

 
0.97
%
 
$
2,091,999

 
1.04
%
______________________________
1. Based on weighted-average stated interest rates at end of period.
2. The total includes brokered deposits of $446.5 million and $435.6 million as of September 30, 2013 and June 30, 2013, respectively, of which $294.7 million and $283.5 million, respectively, are time deposits.

The following table sets forth the number of deposit accounts by type as of the date indicated:
 
September 30, 2013
 
June 30, 2013
 
September 30, 2012
Checking and savings accounts
30,938

 
23,569
 
21,308
Time deposits
10,005

 
11,103
 
12,004
Total number of deposit accounts
40,943

 
34,672
 
33,312




48


Borrowings

The following table sets forth the composition of our borrowings as of the dates indicated:
 
 
September 30, 2013
 
June 30, 2013
 
September 30, 2012
(Dollars in thousands)
 
Balance
 
Weighted Average Rate
 
Balance
 
Weighted Average Rate
 
Balance
 
Weighted Average Rate
Repurchase agreements
 
$
110,000

 
4.40
%
 
$
110,000

 
4.40
%
 
$
120,000

 
4.34
%
FHLB Advances
 
656,000

 
0.85
%
 
590,417

 
0.92
%
 
404,000

 
1.57
%
Subordinated debentures and other borrowings
 
5,155

 
2.66
%
 
5,155

 
2.67
%
 
5,155

 
2.86
%
 
 
$
771,155

 
1.37
%
 
$
705,572

 
1.48
%
 
$
529,155

 
2.21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost of borrowings during the quarter
 
1.77
%
 
 
 
1.83
%
 
 
 
2.18
%
 
 
Borrowings as a percent of total assets
 
23.48
%
 
 
 
22.83
%
 
 
 
20.22
%
 
 

At September 30, 2013, total borrowings amounted to $771.2 million, up from $705.6 million or 9.30% from June 30, 2013 and up $242.0 million or 45.73% from September 30, 2012. Total borrowings represented 23.48% of total assets and had a weighted average cost of 1.77% at September 30, 2013, compared with 22.83% of total assets at a weighted average cost of 1.83% at June 30, 2013 and 20.22% of total assets at a weighted average cost of 2.18% at September 30, 2012.
We have sold securities under various agreements to repurchase for total proceeds of $110.0 million. The repurchase agreements have interest rates between 3.75% and 4.75% and scheduled maturities between November 2013 and December 2017. Under these agreements, we may be required to repay the $110.0 million and repurchase our securities before the scheduled maturity if the issuer requests repayment on scheduled quarterly call dates. The weighted-average remaining contractual maturity period is 1.45 years and the weighted average remaining period before such repurchase agreements could be called is 0.12 years.
We regularly use advances from the FHLB to manage our interest rate risk and, to a lesser extent, manage our liquidity position. Generally, FHLB advances with terms between three and ten years have been used to fund the purchase of single family and multifamily mortgages and to provide us with interest rate risk protection should rates rise. At September 30, 2013, a total of $15.0 million of FHLB advances include agreements that allow the FHLB, at its option, to put the advances back to us after specified dates. The weighted-average remaining contractual maturity period of the $15.0 million in putable advances is 2.25 years and the weighted average remaining period before such advances could be put to us is 0.16 years.
Stockholders’ Equity
Stockholders’ equity increased $14.4 million to $282.6 million at September 30, 2013 compared to $268.3 million at June 30, 2013. The increase was the result of our net income for the three months ended September 30, 2013 of $12.2 million, vesting and issuance of RSU's and exercise of stock options of $1.8 million, a $0.6 million unrealized gain in other comprehensive income, net of tax and a reduction of $0.1 million in dividends declared on preferred stock.


49


LIQUIDITY

Cash flow information is as follows:
 
For the Three Months Ended
 
September 30,
(Dollars in thousands)
2013
 
2012
Operating Activities
$
59,988

 
$
(32,339
)
Investing Activities
$
(233,211
)
 
$
(179,882
)
Financing Activities
$
168,512

 
$
220,139

During the three months ended September 30, 2013, we had net cash inflows from operating activities of $60.0 million compared to outflows of $32.3 million for the for the three months ended September 30, 2012. Net operating cash inflows and outflows fluctuate due to the timing of mortgage loan originations and sales.
Net cash outflows from investing activities totaled $233.2 million for the three months ended September 30, 2013, while outflows totaled $179.9 million for the same period in 2013. The increase was primarily due to higher loan originations which were only partially offset by increased repayments of loans in the 2014 period compared to the same period in the prior year.
Our net cash provided by financing activities totaled $168.5 million for the three months ended September 30, 2013, while inflows totaled $220.1 million for the three months ended September 30, 2012. Net cash provided by financing activities increased primarily from growth in deposits and a net increase in FHLB advances for the three months ended September 30, 2013 compared to September 30, 2012. During the three months ended September 30, 2013, the Bank could borrow up to 40.0% of its total assets from the FHLB. Borrowings are collateralized by the pledge of certain mortgage loans and investment securities to the FHLB. At September 30, 2013, the Company had $542.1 million available immediately and an additional $37.4 million available with additional collateral. At September 30, 2013, we also had two $10.0 million unsecured federal funds purchase lines with two different banks under which no borrowings were outstanding.
The Bank has the ability to borrow short-term from the Federal Reserve Bank of San Francisco Discount Window. At September 30, 2013, the Bank did not have any borrowings outstanding and the amount available from this source was $24.9 million. The credit line is collateralized by consumer loans and mortgage-backed securities.
In an effort to expand our Bank’s liquidity options, we have issued brokered deposits, with $446.5 million outstanding at September 30, 2013. We believe our liquidity sources to be stable and adequate for our anticipated needs and contingencies. We believe we have the ability to increase our level of deposits and borrowings to address our liquidity needs for the foreseeable future.

AT-THE-MARKET OFFERING

On March 11, 2013, we entered into an At-the-Market (ATM) Equity Distribution Agreement with each of Raymond James & Associates, Inc., JMP Securities LLC, Liquidnet, Inc., and Sandler O'Neill + Partners L.P. (the “Distribution Agents”) pursuant to which we may issue and sell through the Distribution Agents from time to time shares of our common stock in at the market offerings with an aggregate offering price of up to $50,000,000 (the “ATM Offering”). The sales of shares of our common stock under the Equity Distribution Agreement are to be made in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on the NASADAQ Global Select Market (the principal existing trading market for our common stock), or sales made through a market maker or any other trading market for our common stock, or (with our prior consent) in privately negotiated transactions at negotiated prices. The aggregate compensation payable to the Distribution Agents under the Distribution Agreement is 2.5% of the gross sales price of the shares sold under the agreement. We have also agreed to reimburse the Distribution Agents for up to $125,000 in their expenses and have provided the Distribution Agents with customary indemnification rights.
In fiscal year 2013, we commenced sales of common stock through the ATM Offering. There were no sales through the ATM Offering during the quarter ended September 30, 2013. The details of the shares of common stock sold through the ATM Offering through September 30, 2013 are as follows:
Distribution Agent
Month
Per Share Price and Number of Shares Sold
Net Proceeds
Compensation to Distribution Agent
Raymond James & Associates
March 2013
$
35.25

200,000

$
6,874

$
176

As of September 30, 2013, the total gross sales we completed and the remaining sales we have available under the ATM Offering were $7,050,000 and $42,950,000, respectively.

50



OFF-BALANCE SHEET COMMITMENTS
At September 30, 2013, we had commitments to originate loans with an aggregate outstanding principal balance of $115.9 million, and commitments to sell loans with an aggregate outstanding principal balance of $44.6 million. We have no commitments to purchase loans, investment securities or any other unused lines of credit.

CONTRACTUAL OBLIGATIONS
The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs. Our time deposits due within one year of September 30, 2013 totaled $440.8 million. We believe the large percentage of time deposits that mature within one year reflects customers’ hesitancy to invest their funds long term. If these maturing deposits do not remain with us, we may be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on deposits and borrowings than we currently pay on time deposits maturing within one year. We believe, however, based on past experience, a significant portion of our time deposits will remain with us. We believe we have the ability to attract and retain deposits by adjusting interest rates offered.
The following table presents certain of our contractual obligations as of the period indicated: 
 
As of September 30, 2013
 
 
 
Payments Due by Period1
(Dollars in thousands)
Total
 
Less Than One Year
 
One To Three Years
 
Three To Five Years
 
More Than Five Years
Long-term debt obligations2
$
801,644

 
$
570,656

 
$
70,279

 
$
106,060

 
$
54,649

Time deposits2
894,151

 
445,439

 
192,030

 
70,753

 
185,929

Operating lease obligations3
14,424

 
1,998

 
3,983

 
4,292

 
4,151

Total
$
1,710,219

 
$
1,018,093

 
$
266,292

 
$
181,105

 
$
244,729

________________________________
1. 
Our contractual obligations include long-term debt, time deposits and operating leases as shown. We had no capitalized leases or material commitments for capital expenditures at September 30, 2013.
2. 
Amounts include principal and interest due to recipient.
3. 
Payments are for a lease of real property.
 
CAPITAL RESOURCES AND REQUIREMENTS
BofI Federal Bank is subject to various regulatory capital requirements set by the federal banking agencies. Failure by our Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our Bank must meet specific capital guidelines that involve quantitative measures of our Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.
Quantitative measures established by regulation require our Bank to maintain certain minimum capital amounts and ratios. Regulations of the OCC require our Bank to maintain minimum ratios of tangible capital to tangible assets of 1.5%, core capital to tangible assets of 4.0% and total risk-based capital to risk-weighted assets of 8.0%. At September 30, 2013, our Bank met all the capital adequacy requirements to which it was subject. At September 30, 2013, our Bank was “well capitalized” under the regulatory framework for prompt corrective action. To be “well capitalized,” our Bank must maintain minimum leverage, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.0% and 10.0%, respectively. Management believes that no conditions or events have occurred since September 30, 2013 that management believes would materially adversely change the Bank’s capital classification. From time to time, we may need to raise additional capital to support our Bank’s further growth and to maintain its “well capitalized” status.




51


The Bank’s capital amounts, capital ratios and capital requirements were as follows: 
 
As of September 30, 2013
 
Actual
 
For Capital Adequacy
Purposes
 
To be “Well Capitalized”
Under Prompt Corrective
Action Regulations
(Dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Tier 1 leverage (core) capital to adjusted tangible assets

$280,391

 
8.50
%
 

$131,957

 
4.00
%
 

$164,946

 
5.00
%
Tier 1 capital (to risk-weighted assets)
280,391

 
14.65
%
 
N/A

 
N/A

 
114,835

 
6.00
%
Total capital (to risk-weighted assets)
294,937

 
15.41
%
 
153,114

 
8.00
%
 
191,392

 
10.00
%
Tangible capital (to tangible assets)
280,391

 
8.50
%
 
49,484

 
1.50
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2013
 
Actual
 
For Capital Adequacy
Purposes
 
To be “Well Capitalized”
Under Prompt Corrective
Action Regulations
(Dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Tier 1 leverage (core) capital to adjusted tangible assets

$268,103

 
8.63
%
 

$124,277

 
4.00
%
 

$155,346

 
5.00
%
Tier 1 capital (to risk-weighted assets)
268,103

 
14.52
%
 
N/A

 
N/A

 
110,813

 
6.00
%
Total capital (to risk-weighted assets)
282,285

 
15.28
%
 
147,751

 
8.00
%
 
184,689

 
10.00
%
Tangible capital (to tangible assets)
268,103

 
8.63
%
 
46,604

 
1.50
%
 
N/A

 
N/A


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature or contractually re-price within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would cause the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities. During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets reprice at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income.

52


The following table sets forth the interest rate sensitivity of our assets and liabilities at September 30, 2013: 
 
Term to Repricing, Repayment, or Maturity at
 
September 30, 2013
(Dollars in thousands)
One Year
or Less
 
Over One
Year Through
Five Years
 
Over Five
Years
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
196,983

 
$

 
$

 
$
196,983

Securities1
301,170

 
16,894

 
177,421

 
495,485

Stock of the FHLB, at cost
30,832

 

 

 
30,832

Loans—net of allowance for loan loss2
339,497

 
1,564,182

 
529,322

 
2,433,001

Loans held for sale
71,188

 

 

 
71,188

Total interest-earning assets
939,670

 
1,581,076

 
706,743

 
3,227,489

Non-interest earning assets

 

 

 
56,693

Total assets
$
939,670

 
$
1,581,076

 
$
706,743

 
$
3,284,182

Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits3
$
1,658,604

 
$
257,813

 
$
183,647

 
$
2,100,064

Securities sold under agreements to repurchase
75,000

 
35,000

 

 
110,000

Advances from the FHLB4
486,000

 
125,000

 
45,000

 
656,000

Other borrowed funds
5,155

 

 

 
5,155

Total interest-bearing liabilities
2,224,759

 
417,813

 
228,647

 
2,871,219

Other non-interest-bearing liabilities

 

 

 
130,346

Stockholders’ equity

 

 

 
282,617

Total liabilities and equity
$
2,224,759

 
$
417,813

 
$
228,647

 
$
3,284,182

Net interest rate sensitivity gap
$
(1,285,089
)
 
$
1,163,263

 
$
478,096

 
$
356,270

Cumulative gap
$
(1,285,089
)
 
$
(121,826
)
 
$
356,270

 
$
356,270

Net interest rate sensitivity gap—as a % of interest earning assets
(136.76
)%
 
73.57
 %
 
67.65
%
 
11.04
%
Cumulative gap—as % of cumulative interest earning assets
(136.76
)%
 
(4.83
)%
 
11.04
%
 
11.04
%
________________________
1. Comprised of U.S. government securities and mortgage-backed securities, which are classified as held-to-maturity, available-for-sale and trading. The table reflects contractual re-pricing dates.
2. The table reflects either contractual re-pricing dates or maturities.
3. The table assumes that the principal balances for demand deposit and savings accounts will re-price in the first year.
4. The table reflects either contractual repricing dates or maturities and does not estimate prepayments or puts.

53


Although “gap” analysis is a useful measurement device available to management in determining the existence of interest rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment.
We attempt to measure the effect market interest rate changes will have on the net present value of assets and liabilities, which is defined as market value of equity. The market value of equity for these purposes is not intended to refer to the trading pricing of our common stock. We analyze the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves. For rising interest rate scenarios, the industry market interest rate forecast was increased by 100, 200 and 300 basis points.
The following table indicates the sensitivity of market value of equity to the interest rate movement described above: 
 
As of September 30, 2013
(Dollars in thousands)
Net
Present Value
 
Percentage Change from Base
 
Net
Present
Value as a
Percentage
of Assets
Up 300 basis points
$
226,997

 
(38.6
)%
 
7.24
%
Up 200 basis points
277,264

 
(25.0
)%
 
8.58
%
Up 100 basis points
328,915

 
(11.0
)%
 
9.89
%
Base
369,537

 
 %
 
10.86
%
Down 100 basis points
385,116

 
4.2
 %
 
11.15
%
Down 200 basis points
388,321

 
5.1
 %
 
11.16
%

The computation of the prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of interest rates, asset prepayments, runoffs in deposits and changes in repricing levels of deposits to general market rates, and should not be relied upon as indicative of actual results. Furthermore, these computations do not take into account any actions that we may undertake in response to future changes in interest rates.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4.
CONTROLS AND PROCEDURES
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
    
Management, including the Company's Chief Executive Officer and Chief Financial Officer, does not expect that the Company's internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

54


PART II—OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
We are not involved in any material legal proceedings. From time to time we may be a party to a claim or litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank.

ITEM 1A.
RISK FACTORS
We face a variety of risks that are inherent in our business and our industry. These risks are described in more detail under “MD&A - Factors That May Affect Our Performance," in our Annual Report on Form 10-K for the year ended June 30, 2013. We encourage you to read these factors in their entirety. Moreover, other factors may also exist that we cannot anticipate or that we currently do not consider to be significant based on information that is currently available.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth our market repurchases of BofI common stock and the BofI common shares retained in connection with net settlement of restricted stock awards during the three months ended September 30, 2013. Purchases made relate to the stock repurchase plan of 414,991 shares that was originally approved by the Company’s Board of Directors on July 5, 2005, plus an additional 500,000 shares approved on November 20, 2008. Stock repurchased under this plan will be held as treasury shares.
Period
Number
of Shares
Purchased
 
Average Price
Paid Per Shares
 
Total Number of
Shares
Purchased as Part of Publicly  Announced
Plans or Programs
 
Maximum
Number of
Shares that May
Yet be Purchased
Under the Plans
or Programs
Stock Repurchases
 
 
 
 
 
 
 
Quarter Ended September 30, 2013

 
 
 
 
 
 
 
July 1, 2013 to September 30, 2013

 
$

 

 
319,291

Balance at September 30, 2013
595,700

 
$
5.72

 
595,700

 
319,291

Stock Retained in Net Settlement
 
 
 
 
 
 
 
Beginning Balance at July 1, 2013
309,204

 
 
 
 
 
 
July 1, 2013 to July 31, 2013
1,076

 
 
 
 
 
 
August 1, 2013 to August 31, 2013
18,696

 
 
 
 
 
 
September 1, 2013 to September 30, 2013
1,317

 
 
 
 
 
 
Ending Balance at September 30, 2013
330,293

 
 
 
 
 
 
Total Treasury Shares at September 30, 2013
925,993

 
 
 
 
 
 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.    MINE SAFETY DISCLOSURES
None.

ITEM 5.    OTHER INFORMATION
None.


55


ITEM 6.
EXHIBITS
 
Exhibit
 
Document
 
 
 
31.1
 
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instant Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Definition Document
 
 
 






56


SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
BofI Holding, Inc.
 
 
 
 
 
 
Dated:
November 5, 2013
 
By:    
 
/s/ Gregory Garrabrants
 
 
 
 
 
Gregory Garrabrants
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Dated:
November 5, 2013
 
By:    
 
/s/ Andrew J. Micheletti
 
 
 
 
 
Andrew J. Micheletti Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 

57