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EX-31.2 - EXHIBIT 31.2 - Axos Financial, Inc.ex3122015123110-qexhibitq2.htm
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EX-31.1 - EXHIBIT 31.1 - Axos Financial, Inc.ex3112015123110-qexhibitq2.htm
EX-32.1 - EXHIBIT 32.1 - Axos Financial, Inc.ex3212015123110-qexhibitq2.htm
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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 December 31, 2015

¨
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  x
 
Accelerated filer  o
 
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: 63,032,258 shares of common stock, $0.01 par value per share, as of January 22, 2016.






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, except per share data)
December 31,
2015
 
June 30,
2015
ASSETS
 
 
 
Cash and due from banks
$
283,448

 
$
222,774

Federal funds sold
983

 
100

Total cash and cash equivalents
284,431

 
222,874

Securities:
 
 
 
Trading
7,706

 
7,832

Available-for-sale
228,389

 
163,361

Held-to-maturity—fair value $215,559 as of December 2015 and $228,323 as of June 2015
215,963

 
225,555

Stock of the Federal Home Loan Bank, at cost
67,419

 
66,270

Loans held for sale, carried at fair value
24,730

 
25,430

Loans held for sale, lower of cost or fair value
65,429

 
77,891

Loans—net of allowance for loan losses of $35,071 as of December 2015 and $28,327 as of June 2015
5,645,272

 
4,928,618

Accrued interest receivable
19,060

 
20,268

Furniture, equipment and software—net
10,435

 
8,551

Deferred income tax
36,025

 
32,955

Cash surrender value of life insurance
5,898

 
5,806

Mortgage servicing rights, carried at fair value
3,475

 
2,098

Other real estate owned and repossessed vehicles
422

 
1,240

Other assets
47,561

 
34,970

TOTAL ASSETS
$
6,662,215

 
$
5,823,719

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
506,558

 
$
309,339

Interest bearing
4,693,408

 
4,142,578

Total deposits
5,199,966

 
4,451,917

Securities sold under agreements to repurchase
35,000

 
35,000

Advances from the Federal Home Loan Bank
758,000

 
753,000

Subordinated debentures
5,155

 
5,155

Accrued interest payable
1,262

 
1,266

Accounts payable and accrued liabilities and other liabilities
49,502

 
43,855

Total liabilities
6,048,885

 
5,290,193

COMMITMENTS AND CONTINGENCIES (Note 8)

 

STOCKHOLDERS’ EQUITY:1
 
 
 
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 December 2015 and June 2015
5,063

 
5,063

Common stock—$0.01 par value; 150,000,000 shares authorized; 64,142,556 shares issued and 63,029,161 shares outstanding as of December 2015; 63,145,364 shares issued and 62,075,004 shares outstanding as of June 30, 2015
641

 
638

Additional paid-in capital
324,925

 
296,035

Accumulated other comprehensive income (loss)—net of tax
(9,043
)
 
(9,399
)
Retained earnings
319,328

 
265,833

Treasury stock, at cost; 1,113,395 shares as of December 2015 and 1,070,360 shares as of June 2015
(27,584
)
 
(24,644
)
Total stockholders’ equity
613,330

 
533,526

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
6,662,215

 
$
5,823,719

1- Common stock amounts have been retroactively restated for all prior periods presented to reflect the four-for-one forward split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015
See accompanying notes to the condensed consolidated financial statements.

1


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share data)
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
70,117

 
$
53,392

 
$
135,195

 
$
102,375

Investments
5,818

 
5,689

 
11,969

 
11,511

Total interest and dividend income
75,935

 
59,081

 
147,164

 
113,886

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
9,709

 
8,262

 
18,732

 
15,506

Advances from the Federal Home Loan Bank
2,626

 
2,281

 
5,278

 
4,461

Other borrowings
429

 
427

 
855

 
933

Total interest expense
12,764

 
10,970

 
24,865

 
20,900

Net interest income
63,171

 
48,111

 
122,299

 
92,986

Provision for loan losses
3,400

 
2,900

 
5,800

 
5,400

Net interest income, after provision for loan losses
59,771

 
45,211

 
116,499

 
87,586

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Realized gain on sale of securities
933

 
587

 
933

 
587

Other-than-temporary loss on securities:
 
 
 
 
 
 
 
Total impairment (losses) gains
(1,037
)
 
(1,075
)
 
(1,779
)
 
(4,647
)
Loss (gain) recognized in other comprehensive income
1,014

 
789

 
1,638

 
3,150

Net impairment loss recognized in earnings
(23
)
 
(286
)
 
(141
)
 
(1,497
)
Fair value gain (loss) on trading securities
(196
)
 
(324
)
 
(126
)
 
(203
)
Total unrealized (loss) gain on securities
(219
)
 
(610
)
 
(267
)
 
(1,700
)
Prepayment penalty fee income
738

 
1,053

 
1,614

 
1,930

Gain on sale – other
5,551

 
1,090

 
9,247

 
2,006

Mortgage banking income
2,909

 
2,937

 
4,787

 
6,000

Banking service fees and other income
6,308

 
1,640

 
9,695

 
3,123

Total non-interest income
16,220

 
6,697

 
26,009

 
11,946

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and related costs
16,440

 
10,764

 
30,762

 
20,461

Professional services
1,270

 
797

 
1,633

 
1,599

Occupancy and equipment
934

 
832

 
1,847

 
1,553

Data processing and internet
2,299

 
1,683

 
4,179

 
3,197

Advertising and promotional
1,597

 
1,449

 
3,225

 
2,755

Depreciation and amortization
998

 
766

 
2,006

 
1,483

Real estate owned and repossessed vehicles
24

 
51

 
(50
)
 
108

FDIC and regulator fees
1,108

 
828

 
2,172

 
1,606

Other general and administrative
2,775

 
1,767

 
4,589

 
3,621

Total non-interest expense
27,445

 
18,937

 
50,363

 
36,383

INCOME BEFORE INCOME TAXES
48,546

 
32,971

 
92,145

 
63,149

INCOME TAXES
20,397

 
13,599

 
38,495

 
25,936

NET INCOME
$
28,149

 
$
19,372

 
$
53,650

 
$
37,213

NET INCOME ATTRIBUTABLE TO COMMON STOCK
$
28,071

 
$
19,294

 
$
53,495

 
$
37,058

COMPREHENSIVE INCOME
$
27,635

 
$
18,537

 
$
54,006

 
$
38,662

Basic earnings per share1
$
0.44

 
$
0.32

 
$
0.84

 
$
0.62

Diluted earnings per share1
$
0.44

 
$
0.32

 
$
0.84

 
$
0.62

1- Per share amounts have been retroactively restated for all prior periods presented to reflect the four-for-one forward split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015
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
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
NET INCOME
$
28,149

 
$
19,372

 
$
53,650

 
$
37,213

Other comprehensive income (loss), net of tax:

 
 
 
 
 
 
 
Net unrealized gain (loss) from available-for-sale securities, net of tax expense (benefit) of $(376) and $(579) for the three months ended December 30, 2015 and 2014, and $(552) and $105 for the six months ended December 31, 2015 and 2014, respectively.

(538
)
 
(867
)
 
(776
)
 
139

Other-than-temporary impairment loss on securities recognized in other comprehensive income, net of tax expense (benefit) of $(401) and $(256) for the three months ended December 31, 2015 and 2014, and $(1,195) and $(1,258) for the six months ended December 31, 2015 and 2014, respectively.


572

 
384

 
1,680

 
1,662

Reclassification of net (gain) loss from available-for-sale securities
included in income, net of tax expense (benefit) of $385 and $235 for the three months ended December 31, 2015 and 2014 and $385 and $235 for the six months ended December 31, 2015 and 2014, respectively.

(548
)
 
(352
)
 
(548
)
 
(352
)
Other comprehensive income (loss)

(514
)
 
(835
)
 
356

 
1,449

Comprehensive income
$
27,635

 
$
18,537

 
$
54,006

 
$
38,662


See accompanying notes to the condensed consolidated financial statements.



3


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital1
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss, Net of Income Tax
 
Treasury
Stock
 
Total
 
 
 
 
Number of Shares
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued1
 
Treasury
 
Outstanding1
 
Amount1
 
BALANCE—June 30, 2015
515

 
$
5,063

 
63,145,364

 
(1,070,360
)
 
62,075,004

 
$
638

 
$
296,035

 
$
265,833

 
$
(9,399
)
 
$
(24,644
)
 
$
533,526

Net income

 

 

 

 

 

 

 
53,650

 

 

 
53,650

Other comprehensive income

 

 

 

 

 

 

 

 
356

 

 
356

Cash dividends on preferred stock

 

 

 

 

 

 

 
(155
)
 

 

 
(155
)
Issuance of common stock

 

 
723,808

 

 
723,808

 
2

 
21,118

 

 

 

 
21,120

Stock-based compensation expense

 

 

 

 

 

 
5,116

 

 

 

 
5,116

Restricted stock grants and tax benefits

 

 
193,384

 
(43,035
)
 
150,349

 
1

 
1,517

 

 

 
(2,940
)
 
(1,422
)
Stock option exercises and tax benefits

 

 
80,000

 

 
80,000

 

 
1,139

 

 

 

 
1,139

BALANCE—December 31, 2015
515

 
$
5,063

 
64,142,556

 
(1,113,395
)
 
63,029,161

 
$
641

 
$
324,925

 
$
319,328

 
$
(9,043
)
 
$
(27,584
)
 
$
613,330


1- Common stock amounts have been retroactively restated for all prior periods presented to reflect the four-for-one forward split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015. The par value per share of common stock remains unchanged at $0.01 per share after the aforementioned forward stock split. As a result, the stated capital attributable to common stock increased proportionately and the additional paid-in capital decreased by the amount by which the stated capital increased.

See accompanying notes to the condensed consolidated financial statements.

4



BOFI HOLDING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Six Months Ended
 
December 31,
(Dollars in thousands)
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
53,650

 
$
37,213

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Accretion of discounts on securities
(2,329
)
 
(2,899
)
Net accretion of discounts on loans
1,636

 
(508
)
Stock-based compensation expense
5,116

 
3,015

Tax benefit from exercise of common stock options and vesting of restricted stock grants
(2,510
)
 
(854
)
Valuation of financial instruments carried at fair value
126

 
204

Net gain on sale of investment securities
(933
)
 
(587
)
Impairment charge on securities
141

 
1,497

Provision for loan losses
5,800

 
5,400

Deferred income taxes
(3,963
)
 
(4,175
)
Origination of loans held for sale
(904,453
)
 
(467,946
)
Unrealized (gain) loss on loans held for sale
(62
)
 
86

Gain on sales of loans held for sale
(14,034
)
 
(8,006
)
Proceeds from sale of loans held for sale
937,049

 
502,520

Change in fair value of mortgage servicing rights
51

 
31

(Gain) loss on sale of other real estate and foreclosed assets
(108
)
 
36

Depreciation and amortization of furniture, equipment and software
2,006

 
1,483

Net changes in assets and liabilities which provide (use) cash:
 
 
 
Accrued interest receivable
1,087

 
(231
)
Other assets
(14,049
)
 
(1,417
)
Accrued interest payable
(4
)
 
(40
)
Accounts payable and accrued liabilities
5,196

 
(2,566
)
Net cash provided by (used in) operating activities
69,413

 
62,256

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities
(96,928
)
 
(1,000
)
Proceeds from sale of available-for-sale mortgage-backed securities
10,069

 

Proceeds from repayment of securities
35,914

 
43,047

Purchase of stock of Federal Home Loan Bank
(68,649
)
 
(11,850
)
Proceeds from redemption of stock of Federal Home Loan Bank
67,500

 
9,628

Origination of loans for portfolio
(1,761,693
)
 
(1,611,283
)
Origination of mortgage warehouse loans, net
(54,327
)
 
(4,325
)
Proceeds from sales of other real estate owned and repossessed assets
1,442

 
79

Purchases of loans, net of discounts and premiums
(384
)
 

Principal repayments on loans
1,086,419

 
816,733

Net purchases of furniture, equipment and software
(3,890
)
 
(2,235
)
Net cash used in investing activities
(784,527
)
 
(761,206
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
748,049

 
963,859

Proceeds from Federal Home Loan Bank advances
524,000

 
258,000

Repayment of Federal Home Loan Bank advances
(519,000
)
 
(498,000
)
Settlement of securities sold under agreements to repurchase

 
(10,000
)
Proceeds from exercise of common stock options
147

 
2

Proceeds from issuance of common stock
21,120

 
38,945

Tax benefit from exercise of common stock options and vesting of restricted stock grants
2,510

 
854

Cash dividends on preferred stock
(155
)
 
(155
)
Net cash provided by financing activities
776,671

 
753,505

NET CHANGE IN CASH AND CASH EQUIVALENTS
61,557

 
54,555

CASH AND CASH EQUIVALENTS—Beginning of year
222,874

 
155,584

CASH AND CASH EQUIVALENTS—End of period
$
284,431

 
$
210,139

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Interest paid on deposits and borrowed funds
$
24,869

 
$
20,874

Income taxes paid
$
37,216

 
$
32,677

Transfers to other real estate owned and repossessed vehicles from loans
$
518

 
$
931

Transfers from loans held for investment to loans held for sale
$
7,985

 
$
30,000

Transfers from loans held for sale to loans held for investment
$
18,846

 
$
7,127


See accompanying notes to the condensed consolidated financial statements.

5


BOFI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2015 AND 2014
(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 (the “Bank” and collectively with BofI Holding, Inc., the “Company”). All significant intercompany balances and transactions 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 six months ended December 31, 2015 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, 2015 included in our Annual Report on Form 10-K.

On November 17, 2015, the Company completed a four-for-one forward stock split in the form of a stock dividend. References made to outstanding shares or per share amounts in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted to reflect this four-for-one stock split. In November, the number of authorized shares of common stock available for issuance was increased from 50,000,000 to 150,000,000 as approved by the Company’s Board of Directors and stockholders.

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 or when the Company elects to account for certain securities 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 premiums or discounts. 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) how to record an impairment by assessing 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.

6


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.
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. U.S government agency (“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 sells its mortgage loans with either servicing released or servicing retained depending upon market pricing. 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, 2015 included in our Annual Report on Form 10-K for further information.

H&R Block Bank Deposit Acquisition. On August 31, 2015, the Bank completed the acquisition of approximately $419 million in deposits consisting of checking, individual retirement savings, and CD accounts from H&R Block Bank and its parent company, H&R Block, Inc. (“H&R Block”). Additionally, the Bank and Emerald Financial Services, LLC (“EFS”), a Delaware limited liability company and wholly-owned subsidiary of H&R Block, entered into the Program Management Agreement, dated August 31, 2015; the Bank and H&R Block, EFS, HRB Participant I, LLC, a Delaware limited liability company and wholly-owned subsidiary of H&R Block, entered into the Emerald Receivables Participation Agreement, dated August 31, 2015; and the Bank and H&R Block entered into the Guaranty Agreement, dated August 31, 2015.  


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. Accounting Standards Codification Topic 820, Fair Value Measurement, 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 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

7


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.

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 December 31, 2015, the Company’s forecast of cash flows for both securities includes actual and forecasted defaults totaling 19.1% of all banks in the collateral pools, compared to 17.3% 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 December 31, 2015, the Company used a weighted average discount margin of 500 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 economic activity, the timing of forecasted defaults and the discount rate applied to cash flows. The fair value of the trading securities at December 31, 2015 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 $786. 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 $906.
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”) issued by U.S. agencies, 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

8


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. For each security, the Company inputs a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of each 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 in the national home price appreciation (“HPA”) index. The largest factors influencing the Company’s modeling of the monthly default rate are unemployment and HPA, as a strong correlation exists. The national unemployment rate announced prior to the end of the period covered by this report (reported for November 2015) was 5.0%, down from the high of 10.0% 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 December 31, 2015 are from 15.0% up to 66.6% 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 lower FICO and 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 December 31, 2015 are from 1.5% up to 20.0% 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 December 31, 2015, the Company computed its discount rates as a spread between 241 and 732 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 residential 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 the collateral pledged. The accrual of interest income has been discontinued for impaired loans. The impaired loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Company assesses loans individually and identifies impairment when the loan is classified as impaired, has 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 internal valuation analyses consistent with the methodology used in real estate appraisals and include other third-party valuations and analysis of cash flows. These appraisals and analyses are updated at least on an annual basis. The Company primarily obtains real estate appraisals and in the rare cases where an appraisal cannot be obtained, the Company performs an internal valuation analysis. These appraisals and analyses may utilize a single valuation approach or a combination of approaches including comparable sales and income approaches. The sales comparison approach uses at least three recent similar property sales to help determine the fair value of the property being appraised. The income approach is calculated by taking the net operating income generated by the collateral property of the rent collected and dividing it by an assumed capitalization rate. Adjustments are routinely made in the process by the appraisers to account for differences between the comparable sales and income data available. When measuring the fair value of the impaired loan based upon the projected sale of the underlying collateral, the Company subtracts the costs expected to be incurred for the transfer of the underlying collateral, which includes items such as sales commissions, delinquent taxes and insurance premiums. 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.

9


Other Real Estate Owned and Repossessed Vehicles. 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 estimated 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 Servicing Rights. The Company initially records all mortgage servicing rights (“MSRs”) at fair value and accounts for MSRs at fair value during the life of the MSR, with changes in fair value recorded through current period earnings. Fair value adjustments encompass market-driven valuation changes as well as modeled amortization involving the run-off of value that occurs due to the passage of time as individual loans are paid by borrowers. Market expectations about loan duration, and correspondingly the expected term of future servicing cash flows, may vary from time to time due to changes in expected prepayment activity, especially when interest rates rise or fall. Market expectations of increased loan prepayment speeds may negatively impact the fair value of the single family MSRs. Fair value is also dependent on the discount rate used in calculating present value, which is imputed from observable market activity and market participants and results in Level 3 classification. Management reviews and adjusts the discount rate on an ongoing basis. An increase in the discount rate would reduce the estimated fair value of the MSRs asset.
Mortgage Banking Derivatives. Fair value 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.


10


The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2015 and June 30, 2015. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
December 31, 2015
(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
$

 
$

 
$
7,706

 
$
7,706

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency RMBS
$

 
$
35,114

 
$

 
$
35,114

Non-Agency RMBS

 

 
21,136

 
21,136

Municipal

 
31,013

 

 
31,013

Other Debt Securities

 
141,126

 

 
141,126

Total—Securities—Available-for-Sale
$

 
$
207,253

 
$
21,136

 
$
228,389

Loans Held for Sale
$

 
$
24,730

 
$

 
$
24,730

Mortgage Servicing Rights
$

 
$

 
$
3,475

 
$
3,475

Other assets – Derivative Instruments
$

 
$

 
$
1,062

 
$
1,062

LIABILITIES:
 
 
 
 
 
 
 
   Other liabilities – Derivative Instruments
$

 
$

 
$
31

 
$
31

 
 
 
 
 
 
 
 
 
June 30, 2015
(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
$

 
$

 
$
7,832

 
$
7,832

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency RMBS
$

 
$
43,491

 
$

 
$
43,491

Non-Agency RMBS

 

 
26,633

 
26,633

Municipal

 
22,035

 

 
22,035

Other Debt Securities

 
71,202

 

 
71,202

Total—Securities—Available-for-Sale
$

 
$
136,728

 
$
26,633

 
$
163,361

Loans Held for Sale
$

 
$
25,430

 
$

 
$
25,430

Mortgage Servicing Rights
$

 
$

 
$
2,098

 
$
2,098

Other assets – Derivative Instruments
$

 
$

 
$
2,261

 
$
2,261

LIABILITIES:
 
 
 
 
 
 
 
Other liabilities – Derivative Instruments
$

 
$

 
$

 
$



11


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
 
December 31, 2015
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations

 
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
 
 
Opening balance
$
7,902

 
$
24,993

 
$
2,687

 
$
1,018

 
$
36,600

Transfers into Level 3

 

 

 

 

Transfers out of Level 3

 

 

 

 

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

 
(680
)
 

 

 
(680
)
Included in earnings—Fair value gain (loss) on trading securities
(196
)
 

 

 

 
(196
)
Included in earnings—Mortgage banking income

 

 
95

 
13

 
108

Included in other comprehensive income

 
(715
)
 

 

 
(715
)
Purchases, originations, issues, sales and settlements:
 
 
 
 
 
 
 
 
 
Purchases/originations

 

 
693

 

 
693

Issues

 

 

 

 

Sales

 
(2,089
)
 

 

 
(2,089
)
Settlements

 
(369
)
 

 

 
(369
)
Other-than-temporary impairment

 
(4
)
 

 

 
(4
)
Closing balance
$
7,706

 
$
21,136

 
$
3,475

 
$
1,031

 
$
33,348

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(196
)
 
$
(680
)
 
$
95

 
$
13

 
$
(768
)
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
December 31, 2015
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations
 
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
 
 
Opening Balance
$
7,832

 
$
26,633

 
$
2,098

 
$
2,261

 
$
38,824

Transfers into Level 3

 

 

 

 

Transfers out of Level 3

 

 

 

 

Total gains or losses for the period:
 
 
 
 
 
 
 
 


Included in earnings—Sale of mortgage-backed securities

 
(680
)
 

 

 
(680
)
Included in earnings—Fair value gain (loss) on trading securities
(126
)
 

 

 

 
(126
)
Included in earnings—Mortgage banking income


 

 
(51
)
 
(1,230
)
 
(1,281
)
Included in other comprehensive income

 
(961
)
 

 

 
(961
)
Purchases, originations, issues, sales and settlements:
 
 
 
 
 
 
 
 


Purchases/originations

 

 
1,428

 

 
1,428

Issues

 

 

 

 

Sales

 
(2,089
)
 

 

 
(2,089
)
Settlements

 
(1,728
)
 

 

 
(1,728
)
Other-than-temporary impairment

 
(39
)
 

 

 
(39
)
Closing balance
$
7,706

 
$
21,136

 
$
3,475

 
$
1,031

 
$
33,348

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(126
)
 
$
(680
)
 
$
(51
)
 
$
(1,230
)
 
$
(2,087
)

12


 
For the Three Months Ended
 
December 31, 2014
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations
 
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
 
 
Opening balance
$
8,187

 
$
34,171

 
$
749

 
$
943

 
$
44,050

Transfers into Level 3

 

 

 

 

Transfers out of Level 3

 

 

 

 

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

 

 

 

 

Included in earnings—Fair value gain on trading securities
(325
)
 

 

 

 
(325
)
Included in earnings—Mortgage banking income

 

 
(38
)
 
(284
)
 
(322
)
Included in other comprehensive income

 
(981
)
 

 

 
(981
)
Purchases, originations, issues, sales and settlements:
 
 
 
 
 
 
 
 
 
Purchases/originations

 

 
326

 

 
326

Issues

 

 

 

 

Sales

 

 

 

 

Settlements

 
(1,099
)
 

 

 
(1,099
)
Other-than-temporary impairment

 
(165
)
 

 

 
(165
)
Closing balance
$
7,862

 
$
31,926

 
$
1,037

 
$
659

 
$
41,484

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(325
)
 
$

 
$
(38
)
 
$
(284
)
 
$
(647
)
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
December 31, 2014
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations
 
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
 
 
Opening Balance
$
8,066

 
$
37,409

 
$
562

 
$
875

 
$
46,912

Transfers into Level 3

 

 

 

 

Transfers out of Level 3

 

 

 

 

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

 

 

 

 

Included in earnings—Fair value gain (loss) on trading securities
(204
)
 

 

 

 
(204
)
Included in earnings—Mortgage banking income

 

 
(35
)
 
(216
)
 
(251
)
Included in other comprehensive income

 
(1,119
)
 

 

 
(1,119
)
Purchases, originations, issues, sales and settlements:
 
 
 
 
 
 
 
 
 
Purchases/originations

 

 
510

 

 
510

Issues

 

 

 

 

Sales

 

 

 

 

Settlements

 
(4,150
)
 

 

 
(4,150
)
Other-than-temporary impairment

 
(214
)
 

 

 
(214
)
Closing balance
$
7,862

 
$
31,926

 
$
1,037

 
$
659

 
$
41,484

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(204
)
 
$

 
$
(35
)
 
$
(216
)
 
$
(455
)

13



The table below summarizes the quantitative information about level 3 fair value measurements at the periods indicated:
 
December 31, 2015
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Trading:
Collateralized Debt Obligations
$
7,706

Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
17.1 to 21.1% (19.1%)
5.0 to 5.0% (5.0%)
Securities – Available-for-Sale:
Non-agency RMBS
$
21,136

Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
8.6 to 25.8% (14.7%)
1.5 to 20.0% (6.4%)
32.6 to 66.6% (49.1%)
2.4 to 2.8% (2.7%)
Mortgage Servicing Rights
$
3,475

Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
5.1 to 13.9% (8.1%)
4.0 to 8.3 (7.1)
8.5 to 10.5% (9.6%)
Derivative Instruments, net
$
1,031

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.3 to 0.5% (0.4%)
 
June 30, 2015
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Trading:
Collateralized Debt Obligations
$
7,832

Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
18.8 to 29.8% (24.6%)
4.8 to 4.8% (4.8%)
Securities – Available-for-Sale:
Non-agency RMBS
$
26,633

Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
6.3 to 29.5% (13.0%)
1.5 to 19.6% (5.6%)
37.6 to 66.5% (51.1%)
2.4 to 3.0% (2.9%)
Mortgage Servicing Rights
$
2,098

Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
4.4 to 19.2% (7.7%)
4.3 to 8.3 (7.4)
9.5 to 10.5% (9.7%)
Derivative Instruments, net
$
2,261

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.5 to 1.3% (0.8%)


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
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Interest income on investments
$
60

 
$
56

 
$
117

 
$
112

Fair value adjustment
(195
)
 
(324
)
 
(126
)
 
(203
)
Total
$
(135
)
 
$
(268
)
 
$
(9
)
 
$
(91
)


14


The table below summarizes assets measured for impairment on a non-recurring basis:
 
December 31, 2015
(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
$

 
$

 
$
21,168

 
$
21,168

Home equity

 

 
7

 
7

Multifamily real estate secured

 

 
4,845

 
4,845

Commercial real estate secured

 

 
372

 
372

Auto and RV secured

 

 
300

 
300

Total
$

 
$

 
$
26,692

 
$
26,692

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single family real estate secured
$

 
$

 
$
75

 
$
75

Multifamily real estate secured

 

 
321

 
321

Auto and RV secured

 

 
26

 
26

Total
$

 
$

 
$
422

 
$
422

HTM Securities – Non-Agency RMBS
$

 
$

 
$
84,552

 
$
84,552

 
 
 
 
 
 
 
 
 
June 30, 2015
(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
$

 
$

 
$
23,059

 
$
23,059

Home equity

 

 
9

 
9

Multifamily real estate secured

 

 
5,399

 
5,399

Commercial real estate secured

 

 
2,128

 
2,128

Auto and RV secured

 

 
453

 
453

Total
$

 
$

 
$
31,048

 
$
31,048

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single family real estate secured
$

 
$

 
$
463

 
$
463

Multifamily real estate secured

 

 
762

 
762

Auto and RV secured

 

 
15

 
15

Total
$

 
$

 
$
1,240

 
$
1,240

HTM Securities – Non-Agency RMBS
$

 
$

 
$
88,094

 
$
88,094


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 $26,692, after charge-offs of $104 for the six months ended December 31, 2015, and life to date charge-offs of $4,619. Impaired loans had a related allowance of $279 at December 31, 2015.

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 $422 after charge-offs of $11 for the three months ended December 31, 2015.
Held-to-maturity securities measured for impairment on a non-recurring basis had a fair value of $84,552 and a carrying amount of $85,092 at December 31, 2015, after net impairment charges to income of $102 and an increase to other comprehensive income of $3,496 during the six months ended December 31, 2015. The Company recognized net impairment charges to income

15


of $1,283 and an increase in other comprehensive increase of $2,920 for the six months ended December 31, 2014. 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. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2015 and June 30, 2015.
As of December 31, 2015 and June 30, 2015, the aggregate fair value, contractual balance (including accrued interest), and unrealized gain was as follows:
(Dollars in thousands)
December 31, 2015
 
June 30, 2015
Aggregate fair value
$
24,730

 
$
25,430

Contractual balance
24,239

 
24,886

Unrealized gain
$
491

 
$
544

The total amount of unrealized 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
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Interest income
$
161

 
$
149

 
$
433

 
$
303

Change in fair value
(286
)
 
(152
)
 
(1,292
)
 
(130
)
Total
$
(125
)
 
$
(3
)
 
$
(859
)
 
$
173


16


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:
 
December 31, 2015
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Impaired loans:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
21,168

Sales comparison approach
Adjustment for differences between the comparable sales
-40.6 to 71.1% (18.1%)
Home equity
$
7

Sales comparison approach
Adjustment for differences between the comparable sales
-9.7 to 5.5% (-2.1%)
Multifamily real estate secured
$
4,845

Sales comparison approach, income approach,
Discounted cash flows
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations
-39.5 to 41.8% (-5.8%)
Commercial real estate secured
$
372

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations
-33.0 to -10.7% (-21.9%)
Auto and RV secured
$
300

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 24.7% (10.3%)
Other real estate owned:
 
 
 
 
Single family real estate secured
$
75

Sales comparison approach
Adjustment for differences between the comparable sales
-2.2 to 11.2% (4.5%)
Multifamily real estate secured
$
321

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-36.2 to 4.3% (-20.2%)
Auto and RV secured
$
26

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 20.5% (10.3%)
HTM Securities – Non-Agency RMBS
$
84,552

Discounted cash flow
Constant prepayment rate,
constant default rate,
loss severity,
discount rate over LIBOR
2.5 to 23.9% (10.5%)
1.5 to 10.8% (4.5%)
15.0 to 65.6% (54.2%)
2.8 to 7.3% (5.5%)


17


 
June 30, 2015
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Impaired loans:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
23,059

Sales comparison approach
Adjustment for differences between the comparable sales
-52.5 to 53.7% (3.9%)
Home equity
$
9

Sales comparison approach
Adjustment for differences between the comparable sales
-9.7 to 5.5% (-2.1%)
Multifamily real estate secured
$
5,399

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations
-73.4 to 80.6% (-8.3%)
Commercial real estate secured
$
2,128

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations
-66.5 to 81.1% (-10.3%)
Auto and RV secured
$
453

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 66.2% (10.8%)
Other real estate owned:
 
 
 
 
Single family real estate secured
$
463

Sales comparison approach
Adjustment for differences between the comparable sales
-20.3 to 12.1% (-4.1%)
Multifamily real estate secured
$
762

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations
-37.1 to 48.6% (5.7%)
Auto and RV secured
$
15

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 20.7% (10.3%)
HTM Securities – Non-Agency RMBS
$
88,094

Discounted cash flow
Constant prepayment rate,
constant default rate,
loss severity,
discount rate over LIBOR
5.0 to 43.8% (10.5%)
1.5 to 14.6% (6.7%)
15.0 to 65.5% (54.4%)
3.0 to 6.9% (5.8%)
_____________________ 
1 For impaired loans and other real estate owned the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the property being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.


18


Fair value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at December 31, 2015 and June 30, 2015 were as follows:
 
December 31, 2015
 
 
 
Fair Value
 
 
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
284,431

 
$
284,431

 
$

 
$

 
$
284,431

Securities trading
7,706

 

 

 
7,706

 
7,706

Securities available-for-sale
228,389

 

 
207,253

 
21,136

 
228,389

Securities held-to-maturity
215,963

 

 
80,319

 
135,240

 
215,559

Loans held for sale, at fair value
24,730

 

 
24,730

 

 
24,730

Loans held for sale, at lower of cost or fair value
65,429

 

 

 
66,342

 
66,342

Loans held for investment—net
5,645,272

 

 

 
5,808,598

 
5,808,598

Accrued interest receivable
19,060

 

 

 
19,060

 
19,060

Mortgage servicing rights
3,475

 

 

 
3,475

 
3,475

Financial liabilities:
 
 
 
 
 
 
 
 


Time deposits and savings
5,199,966

 

 
4,946,555

 

 
4,946,555

Securities sold under agreements to repurchase
35,000

 

 
36,823

 

 
36,823

Advances from the Federal Home Loan Bank
758,000

 

 
763,247

 

 
763,247

Subordinated debentures
5,155

 

 
5,155

 

 
5,155

Accrued interest payable
1,262

 

 
1,262

 

 
1,262

 
June 30, 2015
 
Fair Value
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
222,874

 
$
222,874

 
$

 
$

 
$
222,874

Securities trading
7,832

 

 

 
7,832

 
7,832

Securities available-for-sale
163,361

 

 
136,728

 
26,633

 
163,361

Securities held-to-maturity
225,555

 

 
83,441

 
144,882

 
228,323

Loans held for sale, at fair value
25,430

 

 
25,430

 

 
25,430

Loans held for sale, at lower of cost or fair value
77,891

 

 

 
77,932

 
77,932

Loans held for investment—net
4,928,618

 

 

 
5,011,596

 
5,011,596

Accrued interest receivable
20,268

 

 

 
20,268

 
20,268

Mortgage servicing rights
2,098

 

 

 
2,098

 
2,098

Financial liabilities:

 
 
 
 
 
 
 

Time deposits and savings
4,451,917

 

 
4,385,034

 

 
4,385,034

Securities sold under agreements to repurchase
35,000

 

 
37,489

 

 
37,489

Advances from the Federal Home Loan Bank
753,000

 

 
757,265

 

 
757,265

Subordinated debentures
5,155

 

 
5,155

 

 
5,155

Accrued interest payable
1,266

 

 
1,266

 

 
1,266


19


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 stock of the Federal Home Loan Bank (“FHLB”) approximates the estimated fair value of this investment. The fair value of off-balance sheet items is not considered material.

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 December 31, 2015 and June 30, 2015 were:
 
December 31, 2015
 
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. agencies1
$

 
$
35,565

 
$
334

 
$
(785
)
 
$
35,114

 
$
39,118

 
$
752

 
$
(1
)
 
$
39,869

Non-agency2

 
19,275

 
1,861

 

 
21,136

 
140,908

 
7,560

 
(13,228
)
 
135,240

Total mortgage-backed securities

 
54,840

 
2,195

 
(785
)
 
56,250

 
180,026

 
8,312

 
(13,229
)
 
175,109

Other debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal

 
30,877

 
222

 
(86
)
 
31,013

 
35,937

 
4,513

 

 
40,450

Non-agency3
7,706

 
141,056

 
912

 
(842
)
 
141,126

 

 

 

 

Total other debt securities
7,706

 
171,933

 
1,134

 
(928
)
 
172,139

 
35,937

 
4,513

 

 
40,450

Total debt securities
$
7,706

 
$
226,773

 
$
3,329

 
$
(1,713
)
 
$
228,389

 
$
215,963

 
$
12,825

 
$
(13,229
)
 
$
215,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
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. agencies1
$

 
$
43,738

 
$
701

 
$
(948
)
 
$
43,491

 
$
41,993

 
$
1,398

 
$

 
$
43,391

Non-agency2

 
23,799

 
2,835

 
(1
)
 
26,633

 
147,586

 
10,045

 
(12,749
)
 
144,882

Total mortgage-backed securities

 
67,537

 
3,536

 
(949
)
 
70,124

 
189,579

 
11,443

 
(12,749
)
 
188,273

Other debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal

 
21,731

 
390

 
(86
)
 
22,035

 
35,976

 
4,074

 

 
40,050

Non-agency3
7,832

 
70,216

 
1,271

 
(285
)
 
71,202

 

 

 

 

Total other debt securities
7,832

 
91,947

 
1,661

 
(371
)
 
93,237

 
35,976

 
4,074

 

 
40,050

Total debt securities
$
7,832

 
$
159,484

 
$
5,197

 
$
(1,320
)
 
$
163,361

 
$
225,555

 
$
15,517

 
$
(12,749
)
 
$
228,323

__________________________________
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.
3.
Senior collateralized loan obligations and asset-backed securities.

The Company’s non-agency RMBS available-for-sale portfolio with a total fair value of $21,136 at December 31, 2015 consists of seventeen different issues of super senior securities with a fair value of $12,766; one senior structured whole loan security with a fair value of $8,349 and two mezzanine z-tranche securities with a fair value of $21 collateralized by seasoned prime and Alt-A first-lien mortgages.

20



The non-agency RMBS held-to-maturity portfolio with a carrying value of $140,908 at December 31, 2015 consists of 76 different issues of super senior securities totaling $138,704 and one senior-support security with a carrying value of $2,204. 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 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC Topic 310-30”). Under ASC Topic 310-30, 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 310-30. For a cost of $17,740 the Company acquired the senior support security with a contractual par 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; however, no charge was recorded for the fiscal 2015 year and no charge was incurred for the six months ended December 31, 2015. At December 31, 2015 the security had a remaining contractual par value of zero dollars and amortizable and non-amortizable premium are currently projected to be zero dollars 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 December 31, 2015 and June 30, 2015 were $40,009 and $39,014 respectively.

21


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:
 
December 31, 2015
 
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
$

 
$

 
$
23,612

 
$
(785
)
 
$
23,612

 
$
(785
)
 
$
149

 
$
(1
)
 
$

 
$

 
$
149

 
$
(1
)
Non-agency

 

 

 

 

 

 
13,664

 
(845
)
 
75,183

 
(12,383
)
 
88,847

 
(13,228
)
Total RMBS securities

 

 
23,612

 
(785
)
 
23,612

 
(785
)
 
13,813

 
(846
)
 
75,183

 
(12,383
)
 
88,996

 
(13,229
)
Other Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal Debt
20,507

 
(86
)
 

 

 
20,507

 
(86
)
 

 

 

 

 

 

Non-agency
68,648

 
(706
)
 
2,276

 
(136
)
 
70,924

 
(842
)
 

 

 

 

 

 

Total Other Debt
89,155

 
(792
)
 
2,276

 
(136
)
 
91,431

 
(928
)
 

 

 

 

 

 

Total debt securities
$
89,155

 
$
(792
)
 
$
25,888

 
$
(921
)
 
$
115,043

 
$
(1,713
)
 
$
13,813

 
$
(846
)
 
$
75,183

 
$
(12,383
)
 
$
88,996

 
$
(13,229
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
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
$
369

 
$
(2
)
 
$
24,974

 
$
(946
)
 
$
25,343

 
$
(948
)
 
$

 
$

 
$

 
$

 
$

 
$

Non-agency
1,275

 
(1
)
 

 

 
1,275

 
(1
)
 
23,450

 
(1,802
)
 
67,090

 
(10,947
)
 
90,540

 
(12,749
)
Total RMBS securities
1,644

 
(3
)
 
24,974

 
(946
)
 
26,618

 
(949
)
 
23,450

 
(1,802
)
 
67,090

 
(10,947
)
 
90,540

 
(12,749
)
Other Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal Debt
1,358

 
(86
)
 

 

 
1,358

 
(86
)
 

 

 

 

 

 

Non-agency
19,100

 
(285
)
 

 

 
19,100

 
(285
)
 

 

 

 

 

 

Total Other Debt
20,458

 
(371
)
 

 

 
20,458

 
(371
)
 

 

 

 

 

 

Total debt securities
$
22,102

 
$
(374
)
 
$
24,974

 
$
(946
)
 
$
47,076

 
$
(1,320
)
 
$
23,450

 
$
(1,802
)
 
$
67,090

 
$
(10,947
)
 
$
90,540

 
$
(12,749
)

There were 38 securities that were in a continuous loss position at December 31, 2015 for a period of more than 12 months. There were 32 securities that were in a continuous loss position at June 30, 2015 for a period of more than 12 months.

22



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
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
(20,621
)
 
$
(19,351
)
 
$
(20,503
)
 
$
(18,139
)
Additions for the amounts related to credit loss for which an other-than-temporary impairment was not previously recognized

 

 
(99
)
 
(39
)
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized
(23
)
 
(285
)
 
(42
)
 
(1,458
)
Credit losses realized for securities sold
116

 

 
116

 

Ending balance
$
(20,528
)
 
$
(19,636
)
 
$
(20,528
)
 
$
(19,636
)

At December 31, 2015, non-agency RMBS with a total carrying amount of $96,249 were determined to have cumulative credit losses of $20,528 of which $23 was recognized in earnings during the three months ended December 31, 2015. This quarter’s other-than-temporary impairment of $23 is related to two non-agency RMBS with a total carrying amount of $1,028. 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 non-credit 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 non-credit 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 Note 3 – Fair Value. 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.
The gross gains and losses realized through earnings upon the sale of available-for-sale securities for the three and six months ended December 31, 2015 were as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Proceeds
$
10,069

 
$
9,614

 
$
10,069

 
$
9,614

Gross realized gains
933

 
587

 
933

 
587

Gross realized losses

 

 

 

   Net realized gain on securities
$
933

 
$
587

 
$
933

 
$
587


23


The Company had recorded unrealized gains and unrealized losses in accumulated other comprehensive loss as follows:
(Dollars in thousands)
December 31,
2015
 
June 30,
2015
Available-for-sale debt securities—net unrealized gains
$
1,616

 
$
3,877

Available-for-sale debt securities—non-credit related losses
(259
)
 
(271
)
Held-to-maturity debt securities—non-credit related losses
(15,100
)
 
(18,597
)
Subtotal
(13,743
)
 
(14,991
)
Tax benefit
4,700

 
5,592

Net unrealized loss on investment securities in accumulated other comprehensive loss
$
(9,043
)
 
$
(9,399
)

The expected maturity distribution including repayments of the Company’s mortgage-backed securities and other debt securities classified as trading, available-for-sale and held-to-maturity at December 31, 2015 were:

December 31, 2015

Trading
 
Available for sale
 
Held-to-maturity
(Dollars in thousands)
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
RMBS—U.S. agencies:
 
 
 
 
 
 
 
 
 
Due within one year
$

 
$
3,532

 
$
3,451

 
$
1,298

 
$
1,346

Due one to five years

 
10,929

 
10,710

 
4,978

 
5,161

Due five to ten years

 
8,693

 
8,576

 
5,654

 
5,851

Due after ten years

 
12,411

 
12,377

 
27,188

 
27,511

Total RMBS—U.S. agencies

 
35,565

 
35,114

 
39,118

 
39,869

RMBS—Non-agency:
 
 
 
 
 
 
 
 
 
Due within one year

 
5,536

 
5,933

 
21,779

 
20,837

Due one to five years

 
9,251

 
10,059

 
47,178

 
45,431

Due five to ten years

 
2,625

 
3,005

 
38,441

 
36,615

Due after ten years

 
1,863

 
2,139

 
33,510

 
32,357

Total RMBS—Non-agency

 
19,275

 
21,136

 
140,908

 
135,240

Other debt:
 
 
 
 
 
 
 
 
 
Due within one year

 
33,822

 
33,760

 
1,014

 
1,137

Due one to five years

 
129,343

 
129,571

 
4,708

 
5,280

Due five to ten years

 
5,050

 
5,066

 
7,391

 
8,292

Due after ten years
7,706

 
3,718

 
3,742

 
22,824

 
25,741

Total other debt
7,706

 
171,933

 
172,139

 
35,937

 
40,450

Total
$
7,706

 
$
226,773

 
$
228,389

 
$
215,963

 
$
215,559



24


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)
December 31, 2015
 
June 30, 2015
Single family real estate secured:
 
 
 
Mortgage
$
3,371,974

 
$
2,980,795

Home equity
3,418

 
3,604

Warehouse and other1
519,564

 
385,413

Multifamily real estate secured
1,202,987

 
1,185,531

Commercial real estate secured
99,938

 
61,403

Auto and RV secured
30,335

 
13,140

Factoring
143,896

 
122,200

Commercial & Industrial
281,826

 
248,584

Other
61,145

 
601

Total gross loans
5,715,083

 
5,001,271

Allowance for loan losses
(35,071
)
 
(28,327
)
Unaccreted discounts and loan fees
(34,740
)
 
(44,326
)
Total net loans
$
5,645,272

 
$
4,928,618

1.
The balance of single family warehouse loans was $176,330 at December 31, 2015 and $122,003 at June 30, 2015. The remainder of the balance is attributable to single family lender finance loans.

Allowance for Loan Losses. We are committed to maintaining 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 December 31, 2015, 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 automobile (“auto”) and recreational vehicle (“RV”) loans based upon the borrower credit score and the Company’s loss experience to date. The allowance for loan loss for the auto and RV loan portfolio at December 31, 2015 was determined by classifying each outstanding loan according to semi-annually refreshed FICO score and providing loss rates. The Company had $30,035 of auto and RV loan balances subject to general reserves as follows: FICO greater than or equal to 770: $8,903; 715 – 769: $11,206; 700 – 714: $3,462; 660 – 699: $4,526 and less than 660: $1,938.
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 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 loans require lower estimated loss rates than purchased loans. 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 rate. The LTV groupings for each significant mortgage class are as follows:
The Company had $3,350,806 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $1,819,843; 61% – 70%: $1,231,936; 71% – 80%: $298,822; and greater than 80%: $205.
The Company had $1,198,142 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $521,999; 56% – 65%: $396,445; 66% – 75%: $265,266; 76% – 80%: $14,432 and greater than 80%: $0.
The Company had $99,566 of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $33,759; 51% – 60%: $23,821; 61% – 70%: $37,257; and 71% – 80%: $4,729.
The Company’s lender finance portfolio consists of business loans well-collateralized by residential real estate. The Company’s commercial & industrial portfolio consists of business loans well-collateralized by business assets. The Company’s other portfolio consists of other consumer loans. 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.


25


The following tables summarize activity in the allowance for loan losses by portfolio classes for the periods indicated:
 
For the Three Months Ended December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other/Consumer
 
Total
Balance at October 1, 2015
$
16,313

 
$
94

 
$
2,057

 
$
4,180

 
$
961

 
$
1,339

 
$
342

 
$
5,663

 
$
129

 
$
31,078

Provision for loan loss
911

 
(60
)
 
586

 
(887
)
 
(895
)
 
532

 
17

 
939

 
2,257

 
3,400

Charge-offs
(61
)
 
(1
)
 

 

 

 
(56
)
 

 

 

 
(118
)
Recoveries
4

 
12

 

 

 
670

 
25

 

 

 

 
711

Balance at December 31, 2015
$
17,167

 
$
45

 
$
2,643

 
$
3,293

 
$
736

 
$
1,840

 
$
359

 
$
6,602

 
$
2,386

 
$
35,071

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2014
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other/Consumer
 
Total
Balance at October 1, 2014
$
9,807

 
$
113

 
$
1,216

 
$
4,022

 
$
965

 
$
1,160

 
$
311

 
$
2,882

 
$
19

 
$
20,495

Provision for loan loss
1,983

 
(19
)
 
369

 
212

 
176

 
(50
)
 
(41
)
 
271

 
(1
)
 
2,900

Charge-offs
(3
)
 

 

 

 
(156
)
 
(75
)
 

 

 

 
(234
)
Recoveries
5

 
3

 

 

 

 
18

 

 

 

 
26

Balance at December 31, 2014
$
11,792

 
$
97

 
$
1,585

 
$
4,234

 
$
985

 
$
1,053

 
$
270

 
$
3,153

 
$
18

 
$
23,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other/Consumer
 
Total
Balance at July 1, 2015
$
13,664

 
$
122

 
$
1,879

 
$
4,363

 
$
1,103

 
$
953

 
$
292

 
$
5,882

 
$
69

 
$
28,327

Provision for loan loss
3,418

 
(96
)
 
764

 
(1,070
)
 
(1,349
)
 
1,029

 
67

 
720

 
2,317

 
5,800

Charge-offs
(77
)
 
(2
)
 

 

 

 
(206
)
 

 

 

 
(285
)
Recoveries
162

 
21

 

 

 
982

 
64

 

 

 

 
1,229

Balance at December 31, 2015
$
17,167

 
$
45

 
$
2,643

 
$
3,293

 
$
736

 
$
1,840

 
$
359

 
$
6,602

 
$
2,386

 
$
35,071

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2014
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Home Equity
 
Warehouse & Other
 
Multifamily Real Estate Secured
 
Commercial Real Estate Secured
 
Auto and RV Secured
 
Factoring
 
Commercial & Industrial
 
Other/Consumer
 
Total
Balance at July 1, 2014
$
7,959

 
$
134

 
$
1,259

 
$
3,785

 
$
1,035

 
$
812

 
$
279

 
$
3,048

 
$
62

 
$
18,373

Provision for loan loss
3,865

 
(43
)
 
326

 
749

 
106

 
351

 
(9
)
 
105

 
(50
)
 
5,400

Charge-offs
(40
)
 

 

 
(300
)
 
(156
)
 
(146
)
 

 

 

 
(642
)
Recoveries
8

 
6

 

 

 

 
36

 

 

 
6

 
56

Balance at December 31, 2014
$
11,792

 
$
97

 
$
1,585

 
$
4,234

 
$
985

 
$
1,053

 
$
270

 
$
3,153

 
$
18

 
$
23,187







26


The following tables present our loans evaluated individually for impairment by class:
 
December 31, 2015
(Dollars in thousands)
Unpaid
Principal Balance
 
Principal Balance Adjustment
 
Unpaid Book Balance
 
Accrued Interest /
Origination Fees
 
Recorded Investment
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
$
8,989

 
$
699

 
$
8,290

 
$
380

 
$
8,670

 
$

     Purchased
5,924

 
1,961

 
3,963

 
83

 
4,046

 

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,545

 
1,008

 
1,537

 

 
1,537

 

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
629

 
257

 
372

 
21

 
393

 

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
957

 
694

 
263

 
14

 
277

 

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
6,481

 

 
6,481

 
83

 
6,564

 
212

     Purchased
2,434

 

 
2,434

 
3

 
2,437

 
63

Home Equity:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
7

 

 
7

 

 
7

 
1

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
3,308

 

 
3,308

 
58

 
3,366

 
2

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
37

 

 
37

 
2

 
39

 
1

Total
$
31,311

 
$
4,619

 
$
26,692

 
$
644

 
$
27,336

 
$
279

As a % of total gross loans
0.55
%
 
0.08
%
 
0.47
%
 
0.01
%
 
0.48
%
 
%

 
June 30, 2015
(Dollars in thousands)
Unpaid Principal Balance
 
Principal Balance Adjustment
 
Unpaid Book Balance
 
Accrued Interest /
Origination Fees
 
Recorded Investment
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
$
7,000

 
$
657

 
$
6,343

 
$
129

 
$
6,472

 
$

     Purchased
6,318

 
2,083

 
4,235

 
157

 
4,392

 

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
2,569

 
921

 
1,648

 

 
1,648

 

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     Purchased
3,662

 
1,534

 
2,128

 
254

 
2,382

 

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
1,097

 
815

 
282

 
13

 
295

 

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
10,142

 

 
10,142

 

 
10,142

 
214

     Purchased
2,339

 

 
2,339

 
9

 
2,348

 
45

Home Equity:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
9

 

 
9

 

 
9

 
1

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
3,430

 

 
3,430

 
43

 
3,473

 
2

     Purchased
321

 

 
321

 
20

 
341

 
3

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
171

 

 
171

 
4

 
175

 
8

Total
$
37,058

 
$
6,010

 
$
31,048

 
$
629

 
$
31,677

 
$
273

As a % of total gross loans
0.74
%
 
0.12
%
 
0.62
%
 
0.01
%
 
0.63
%
 
0.01
%

27


The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment evaluation method:
 
December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
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
$
275

 
$
1

 
$

 
$
2

 
$

 
$
1

 
$

 
$

 
$

 
$
279

Collectively evaluated for impairment
16,892

 
44

 
2,643

 
3,291

 
736

 
1,839

 
359

 
6,602

 
2,386

 
34,792

Total ending allowance balance
$
17,167

 
$
45

 
$
2,643

 
$
3,293

 
$
736

 
$
1,840

 
$
359

 
$
6,602

 
$
2,386

 
$
35,071

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment1
$
21,168

 
$
7

 
$

 
$
4,845

 
$
372

 
$
300

 
$

 
$

 
$

 
$
26,692

Loans collectively evaluated for impairment
3,350,806

 
3,411

 
519,564

 
1,198,142

 
99,566

 
30,035

 
143,896

 
281,826

 
61,145

 
5,688,391

Principal loan balance
3,371,974

 
3,418

 
519,564

 
1,202,987

 
99,938

 
30,335

 
143,896

 
281,826

 
61,145

 
5,715,083

Unaccreted discounts and loan fees
10,966

 
16

 
(185
)
 
3,773

 
441

 
403

 
(47,015
)
 
(901
)
 
(2,238
)
 
(34,740
)
Accrued interest receivable
8,605

 
7

 
485

 
3,999

 
214

 
108

 
440

 
1,229

 
589

 
15,676

Total recorded investment in loans
$
3,391,545

 
$
3,441

 
$
519,864

 
$
1,210,759

 
$
100,593

 
$
30,846

 
$
97,321

 
$
282,154

 
$
59,496

 
$
5,696,019

________________
1. Loans evaluated for impairment include Troubled Debt Restructurings (“TDRs”) that have been performing for more than six months.

 
June 30, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
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
$
259

 
$
1

 
$

 
$
5

 
$

 
$
8

 
$

 
$

 
$

 
$
273

Collectively evaluated for impairment
13,405

 
121

 
1,879

 
4,358

 
1,103

 
945

 
292

 
5,882

 
69

 
28,054

Total ending allowance balance
$
13,664

 
$
122

 
$
1,879

 
$
4,363

 
$
1,103

 
$
953

 
$
292

 
$
5,882

 
$
69

 
$
28,327

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment1
$
23,059

 
$
9

 
$

 
$
5,399

 
$
2,128

 
$
453

 
$

 
$

 
$

 
$
31,048

Loans collectively evaluated for impairment
2,957,736

 
3,595

 
385,413

 
1,180,132

 
59,275

 
12,687

 
122,200

 
248,584

 
601

 
4,970,223

Principal loan balance
2,980,795

 
3,604

 
385,413

 
1,185,531

 
61,403

 
13,140

 
122,200

 
248,584

 
601

 
5,001,271

Unaccreted discounts and loan fees
10,438

 
11

 
(83
)
 
3,348

 
96

 
149

 
(57,223
)
 
(1,062
)
 

 
(44,326
)
Accrued interest receivable
10,530

 
5

 
306

 
4,862

 
145

 
73

 
477

 
1,159

 

 
17,557

Total recorded investment in loans
$
3,001,763

 
$
3,620

 
$
385,636

 
$
1,193,741

 
$
61,644

 
$
13,362

 
$
65,454

 
$
248,681

 
$
601

 
$
4,974,502

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








28


Credit Quality Disclosures. Non-performing loans consisted of the following as of the dates indicated:
(Dollars in thousands)
December 31,
2015
 
June 30,
2015
Single Family Real Estate Secured:
 
 
 
Mortgage:
 
 
 
In-house originated
$
14,771

 
$
16,485

Purchased
6,183

 
6,357

Home Equity:
 
 
 
In-house originated
7

 
9

Multifamily Real Estate Secured:
 
 
 
In-house originated
3,308

 
3,430

Purchased
1,537

 
1,969

Commercial Real Estate Secured:
 
 
 
Purchased
372

 
2,128

Total non-performing loans secured by real estate
26,178

 
30,378

Auto and RV Secured
300

 
453

Total non-performing loans
$
26,478

 
$
30,831

Non-performing loans to total loans
0.46
%
 
0.62
%

The Company has no loans over 90 days delinquent that are still accruing interest at December 31, 2015. Approximately 79.14% of the Company’s non-performing loans are single family first mortgages already written down to 65.29% in aggregate, of the original appraisal value of the underlying properties.
The following tables present the outstanding unpaid balance of loans that are performing and non-performing by portfolio class:
 
December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
3,351,020

 
$
3,411

 
$
519,564

 
$
1,198,142

 
$
99,566

 
$
30,035

 
$
143,896

 
$
281,826

 
$
61,145

 
$
5,688,605

Non-performing
20,954

 
7

 

 
4,845

 
372

 
300

 

 

 

 
26,478

Total
$
3,371,974

 
$
3,418

 
$
519,564

 
$
1,202,987

 
$
99,938

 
$
30,335

 
$
143,896

 
$
281,826

 
$
61,145

 
$
5,715,083


 
June 30, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
2,957,953

 
$
3,595

 
$
385,413

 
$
1,180,132

 
$
59,275

 
$
12,687

 
$
122,200

 
$
248,584

 
$
601

 
$
4,970,440

Non-performing
22,842

 
9

 

 
5,399

 
2,128

 
453

 

 

 

 
30,831

Total
$
2,980,795

 
$
3,604

 
$
385,413

 
$
1,185,531

 
$
61,403

 
$
13,140

 
$
122,200

 
$
248,584

 
$
601

 
$
5,001,271



29


The Company divides loan balances when determining general loan loss reserves between purchases and originations as follows:
 
December 31, 2015
 
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
$
3,272,701

 
$
78,319

 
$
3,351,020

 
$
1,084,122

 
$
114,020

 
$
1,198,142

 
$
87,310

 
$
12,256

 
$
99,566

Non-performing
14,771

 
6,183

 
20,954

 
3,308

 
1,537

 
4,845

 

 
372

 
372

Total
$
3,287,472

 
$
84,502

 
$
3,371,974

 
$
1,087,430

 
$
115,557

 
$
1,202,987

 
$
87,310

 
$
12,628

 
$
99,938

 
June 30, 2015
 
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
$
2,869,119

 
$
88,834

 
$
2,957,953

 
$
1,048,266

 
$
131,866

 
$
1,180,132

 
$
46,577

 
$
12,698

 
$
59,275

Non-performing
16,485

 
6,357

 
22,842

 
3,430

 
1,969

 
5,399

 

 
2,128

 
2,128

Total
$
2,885,604

 
$
95,191

 
$
2,980,795

 
$
1,051,696

 
$
133,835

 
$
1,185,531

 
$
46,577

 
$
14,826

 
$
61,403


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.

Approximately 12.74% of our non-performing loans at December 31, 2015 were considered TDRs, compared to 16.08% at June 30, 2015. 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 the performing loan category and any previously deferred interest income is recognized.

The Company classifies these loans as performing loans temporarily modified as TDR and are included in impaired loans as follows:
 
December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
214

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
214

Non-performing loans
20,954

 
7

 

 
4,845

 
372

 
300

 

 

 

 
26,478

Total impaired loans
$
21,168

 
$
7

 
$

 
$
4,845

 
$
372

 
$
300

 
$

 
$

 
$

 
$
26,692

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
217

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
217

Non-performing loans
22,842

 
9

 

 
5,399

 
2,128

 
453

 

 

 

 
30,831

Total impaired loans
$
23,059

 
$
9

 
$

 
$
5,399

 
$
2,128

 
$
453

 
$

 
$

 
$

 
$
31,048



30


The Company recognizes interest on performing loans temporarily modified as TDR, which is shown in conjunction with average balances as follows:
 
For the Three Months Ended December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
2

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
2

Average balances of performing TDRs
$
215

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
215

Average balances of impaired loans
$
22,195

 
$
8

 
$

 
$
5,064

 
$
1,045

 
$
321

 
$

 
$

 
$

 
$
28,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2014
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
6

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
6

Average balances of performing TDRs
$
537

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
537

Average balances of impaired loans
$
21,517

 
$
34

 
$

 
$
5,691

 
$
3,242

 
$
460

 
$

 
$

 
$

 
$
30,944

 
For the Six Months Ended December 31, 2015
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
4

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
4

Average balances of performing TDRs
$
215

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
215

Average balances of impaired loans
$
22,483

 
$
8

 
$

 
$
5,176

 
$
1,406

 
$
365

 
$

 
$

 
$

 
$
29,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2014
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
$
12

 
$

 
$

 
$

 
$
20

 
$

 
$

 
$

 
$

 
$
32

Average balances of performing TDRs
$
687

 
$

 
$

 
$

 
$
463

 
$

 
$

 
$

 
$

 
$
1,150

Average balances of impaired loans
$
18,806

 
$
78

 
$

 
$
5,228

 
$
3,620

 
$
485

 
$

 
$

 
$

 
$
28,217

The Company’s loan modifications primarily 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 one year which then reverted back to fully amortizing.

31


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 based on 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.

32


The following table presents the composition of the Company’s loan portfolio by credit quality indicators:
 
December 31, 2015
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
    In-house originated
$
3,253,671

 
$
13,520

 
$
20,281

 
$

 
$
3,287,472

    Purchased
77,909

 
195

 
6,398

 

 
84,502

Home Equity:
 
 
 
 
 
 
 
 
 
    In-house originated
3,393

 
18

 
7

 

 
3,418

Warehouse and other:
 
 
 
 
 
 
 
 
 
    In-house originated
513,864

 
5,700

 

 

 
519,564

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
1,079,226

 
4,036

 
4,168

 

 
1,087,430

    Purchased
110,107

 
2,795

 
2,655

 

 
115,557

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
87,310

 

 

 

 
87,310

    Purchased
9,844

 
2,412

 
372

 

 
12,628

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
29,829

 
161

 
345

 

 
30,335

Factoring:
 
 
 
 
 
 
 
 
 
    In-house originated
143,896

 

 

 

 
143,896

Commercial & Industrial:
 
 
 
 
 
 
 
 
 
    In-house originated
272,153

 
9,673

 

 

 
281,826

Other
61,145

 

 

 

 
61,145

Total
$
5,642,347

 
$
38,510

 
$
34,226

 
$

 
$
5,715,083

As a % of total gross loans
98.7
%
 
0.7
%
 
0.6
%
 
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Single Family Real Estate Secured:
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
    In-house originated
$
2,855,637

 
$
11,256

 
$
18,711

 
$

 
$
2,885,604

    Purchased
87,256

 
216

 
7,719

 

 
95,191

Home Equity:
 
 
 
 
 
 
 
 
 
    In-house originated
3,473

 

 
131

 

 
3,604

Warehouse and other:
 
 
 
 
 
 
 
 
 
    In-house originated
375,588

 
9,825

 

 

 
385,413

Multifamily Real Estate Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
1,036,718

 
10,926

 
4,052

 

 
1,051,696

    Purchased
127,839

 
3,470

 
2,526

 

 
133,835

Commercial Real Estate Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
46,577

 

 

 

 
46,577

    Purchased
9,947

 
2,444

 
2,435

 

 
14,826

Auto and RV Secured:
 
 
 
 
 
 
 
 
 
    In-house originated
12,630

 
19

 
491

 

 
13,140

Factoring:
 
 
 
 
 
 
 
 
 
    In-house originated
122,200

 

 

 

 
122,200

Commercial & Industrial:
 
 
 
 
 
 
 
 
 
    In-house originated
239,415

 
9,169

 

 

 
248,584

Other
601

 

 

 

 
601

Total
$
4,917,881

 
$
47,325

 
$
36,065

 
$

 
$
5,001,271

As a % of total gross loans
98.3
%
 
1.0
%
 
0.7
%
 
%
 
100.0
%

33


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:
 
December 31, 2015
(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
$
3,157

 
$

 
$
13,531

 
$
16,688

Purchased
233

 
367

 
3,015

 
3,615

Home equity:
 
 
 
 
 
 
 
In-house originated
29

 
18

 

 
47

Multifamily real estate secured:
 
 
 
 
 
 
 
In-house originated
243

 

 
791

 
1,034

Commercial real estate secured:
 
 
 
 
 
 
 
Purchased

 
372

 

 
372

Auto and RV secured
346

 
164

 
58

 
568

Total
$
4,008

 
$
921

 
$
17,395

 
$
22,324

As a % of total gross loans
0.07
%
 
0.02
%
 
0.30
%
 
0.39
%
 
 
 
 
 
 
 
 
 
June 30, 2015
(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
$
1,275

 
$
2,876

 
$
11,450

 
$
15,601

Purchased
472

 

 
3,371

 
3,843

Home equity
 
 
 
 
 
 
 
In-house originated
130

 

 

 
130

Multifamily real estate secured
 
 
 
 
 
 
 
In-house originated
244

 

 
791

 
1,035

Purchased

 

 
321

 
321

Commercial real estate secured
 
 
 
 
 
 
 
Purchased
782

 

 
382

 
1,164

Auto and RV secured
 
 
 
 
 
 
 
In-house originated
271

 
125

 
67

 
463

Total
$
3,174

 
$
3,001

 
$
16,382

 
$
22,557

As a % of total gross loans
0.06
%
 
0.06
%
 
0.33
%
 
0.45
%


34


6.
EQUITY AND STOCK-BASED COMPENSATION
On October 22, 2015, the stockholders of the Company approved and in November 2015 the Company’s Board of Directors adopted an amendment to the Company’s certificate of incorporation (the “Amendment”) to increase the number of authorized shares of common stock available for issuance from 50,000,000 to 150,000,000 shares. The purpose for the Amendment was to accommodate a forward stock split through a stock dividend whereby each share of common stock would effectively be split into four shares of common stock (the “Stock Split”). On October 26, 2015, the Board of Directors approved the Stock Split. The Company issued a dividend of three shares of common stock for every one share issued and outstanding as of November 6, 2015. The dividend was paid on November 17, 2015, and BOFI common stock began trading on a split-adjusted basis on November 18, 2015. Common stock share, per-share, option and restricted stock unit amounts for all comparative periods provided have been retroactively adjusted to reflect the effects of the Stock Split. 
The Company has two equity incentive plans, the 2014 Stock Incentive Plan (“2014 Plan”) and the 2004 Stock Incentive Plan (“2004 Plan” and 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. The Plans are designed to encourage selected employees and directors to improve operations and increase profits, and to accept or continue employment or association with the Company through participation in the growth in the value of the common stock. The Plans require that option exercise prices be not less than fair market value per share of common stock on the option grant date for incentive and non-qualified options. The options issued under the Plans generally vest in between three and five years. Option expiration dates are established by the Plans’ administrator but may not be later than 10 years after the date of the grant.
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. With the stockholders approving the 2014 Plan in October 2014, no further awards will be made under the 2004 Plan and the 2004 Plan will remain in effect only so long as awards made thereunder remain outstanding.
2014 Stock Incentive Plan. In September and October 2014, the Company’s Board of Directors and stockholders approved the 2014 Plan, respectively. The maximum number of shares of common stock available for issuance under the 2014 Plan is 3,680,000.
Stock Options. At December 31, 2015 and at June 30, 2015, all 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—June 30, 2014
427,800

 
$
2.18

Granted

 

Exercised
(345,400
)
 
2.26

Canceled

 

Outstanding—June 30, 2015
82,400

 
$
1.84

Granted

 

Exercised
(80,000
)
 
1.84

Canceled

 

Outstanding—December 31, 2015
2,400

 
$
1.84

Options exercisable—June 30, 2014
427,800

 
$
2.18

Options exercisable—June 30, 2015
82,400

 
$
1.84

Options exercisable—December 31, 2015
2,400

 
$
1.84



35


The following table summarizes information on currently outstanding and exercisable options:
As of December 31, 2015
Options Outstanding
 
Options Exercisable
Exercise
Prices
 
Number
Outstanding
 
Weighted-Average
Remaining
Contractual Life (Years)
 
Number
Exercisable
 
Weighted-
Average
Exercise Price
$
1.84

 
2,400

 
0.57
 
2,400

 
$
0.57


The aggregate intrinsic value of options outstanding and options exercisable under the Plans at December 31, 2015 was $46 and $46, respectively.
Restricted Stock and Restricted Stock Units. 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 six months ended December 31, 2015 and 2014, the Company granted 614,721 and 630,424 restricted stock units, to employees and directors, respectively. Restricted stock unit awards (“RSUs”) granted during these quarters vest over three years, one-third on each anniversary date, except for any RSUs granted to our CEO, which vest one-fourth on each fiscal year end.
The Company’s income before income taxes and net income for the three months ended December 31, 2015 and December 31, 2014 included stock award expense of $2,858 and $1,696, with total income tax benefit of $1,201 and $700, respectively. For the six months ended December 31, 2015 and December 31, 2014 stock award expense was $5,116 and $3,015, with total income tax benefit of $2,137 and $1,239, 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 December 31, 2015, unrecognized compensation expense related to non-vested awards aggregated to $27,995 and is expected to be recognized in future periods as follows:
(Dollars in thousands)
Stock Award
Compensation
Expense
For the fiscal year remainder:
 
2016
$
6,352

2017
10,983

2018
7,745

2019
2,915

Total
$
27,995


The following table presents the status and changes in restricted stock unit grants for the periods indicated:
 
Restricted
Stock Unit Shares
 
Weighted-Average
Grant-Date
Fair Value
Non-vested balance at June 30, 2014
945,756

 
$
10.29

Granted
775,836

 
19.99

Vested
(519,400
)
 
10.11

Canceled
(67,104
)
 
14.13

Non-vested balance at June 30, 2015
1,135,088

 
$
17.01

Granted
614,721

 
26.62

Vested
(253,727
)
 
13.71

Canceled
(39,419
)
 
19.72

Non-vested balance at December 31, 2015
1,456,663

 
$
21.38

The total fair value of shares vested for the three and six months ended December 31, 2015 was $1,655 and $7,147. The total fair value of shares vested for the three and six months ended December 31, 2014 was $1,395 and $4,935.


36


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 the Company’s earnings.
The following table presents the calculation of basic and diluted EPS as adjusted to reflect the effects of the Stock Split:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Earnings Per Common Share1
 
 
 
 
 
 
 
Net income
$
28,149

 
$
19,372

 
$
53,650

 
$
37,213

Preferred stock dividends
(78
)
 
(78
)
 
(155
)
 
(155
)
Net income attributable to common shareholders
$
28,071

 
$
19,294

 
$
53,495

 
$
37,058

Average common shares issued and outstanding
62,999,335

 
59,566,176

 
62,741,596

 
58,805,820

Average unvested RSU shares
1,431,998

 
1,253,072

 
1,309,243

 
1,177,356

Total qualifying shares
64,431,333

 
60,819,248

 
64,050,839

 
59,983,176

Earnings per common share
$
0.44

 
$
0.32

 
$
0.84

 
$
0.62

Diluted Earnings Per Common Share1
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
28,071

 
$
19,294

 
$
53,495

 
$
37,058

Dilutive net income attributable to common shareholders
$
28,071

 
$
19,294

 
$
53,495

 
$
37,058

Average common shares issued and outstanding
64,431,333

 
60,819,248

 
64,050,839

 
59,983,176

Dilutive effect of stock options
1,323

 
235,020

 
10,982

 
235,216

Total dilutive common shares issued and outstanding
64,432,656

 
61,054,268

 
64,061,821

 
60,218,392

Diluted earnings per common share
$
0.44

 
$
0.32

 
$
0.84

 
$
0.62

1. Share and per share amounts have been retroactively restated for all prior periods presented to reflect the four-for-one forward split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015

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 December 31, 2015, the Company had commitments to originate $62,647 in fixed rate loans and $162,288 in variable rate loans, totaling an aggregate outstanding principal balance of $224,935. Our fixed rate loan commitments to originate had rates ranging from 3.00% to 8.06%. At December 31, 2015, the Company also had commitments to sell $60,304 in fixed rate loans and $2,498 in variable rate loans, totaling an aggregate outstanding principal balance of $62,802.
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 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.
Litigation. On October 15, 2015, a complaint (the “Golden Complaint”) was filed against the Company, its Chief Executive Officer and its Chief Financial Officer under the case name Golden v. BofI Holding, Inc., et al, in the United States District Court, Southern District of California, on behalf of the named plaintiff and a putative, but as yet uncertified, class. On November 3, 2015, a second complaint (the “Hazan Complaint”) was filed against the Company, its Chief Executive Officer and its Chief Financial Officer under the case name Hazan v. BofI Holding, Inc., et al, also in the United States District Court, Southern District of California, and also on behalf of the named plaintiff and a putative, but as yet uncertified, class (the Golden Complaint and the Hazan Complaint, collectively, the “Class Action Complaints”) The Class Action Complaints allege that the defendants violated

37


Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, based upon allegations made in a complaint in a wrongful termination of employment lawsuit (the “Employment Matter”) filed against BofI Federal Bank, a wholly-owned subsidiary of the Company, by a former employee. The Company disputes the allegations advanced by the plaintiff in the Employment Matter, as well as the plaintiff’s perception of the underlying factual circumstances, and is vigorously defending that lawsuit. The Class Action Complaints seek monetary damages and other relief on behalf of all class members. The Company and the other named defendants dispute the allegations raised in the Class Action Complaints and are vigorously defending these lawsuits.
In December, 2015, two separate shareholder derivative actions were filed, purportedly on behalf of the Company. The first action, Calcaterra v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on December 3, 2015. The second action, Dow v. Micheletti, et al, was filed in the San Diego County Superior Court on December 16, 2015. An additional action, DeYoung v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 22, 2016. Each of these three actions names the Company as a nominal defendant, and certain of its officers and directors as defendants. Each complaint sets forth allegations of breaches of their fiduciary duties, gross mismanagement, abuse of control, and unjust enrichment against the defendant officers and directors. The plaintiffs seek damages in unspecified amounts on the Company’s behalf from the officer and director defendants, certain corporate governance actions, and an award of their costs and attorney’s fees. The Defendants dispute these allegations and intend to vigorously defend these actions.

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 were no new related party loans granted under the provisions of the employee loan program and no refinances of existing loans during the six months ended December 31, 2015, and no new loans and no refinances of existing loans during the six months ended December 31, 2014.

38


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 (the “Company”). 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, 2015, 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 the outcome and effects of pending class action litigation recently filed against the Company, 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 “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2015, which has been filed with the Securities and Exchange Commission and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended December 31, 2015. 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 is the holding company for BofI Federal Bank (the “Bank”), a diversified financial services company with approximately $6.7 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 2000® Index and the S&P SmallCap 600® Index.

Our Bank is a federal savings bank wholly-owned by our Company and regulated by the Office of the Comptroller of the Currency (“OCC”). Our Company 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 distribution 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.
Mergers and Acquisitions

From time to time we undertake acquisitions or similar transactions consistent with the Bank’s operating and growth strategies. During the six months ended December 31, 2015, there was one transaction, which is discussed below.

H&R Block Bank Deposit Acquisition

On August 31, 2015, our Bank completed the acquisition of approximately $419 million in deposits consisting of checking, individual retirement savings, and CD accounts from H&R Block Bank and its parent company, H&R Block, Inc. (“H&R Block”). In connection with the closing of this transaction: (i) our Bank and Emerald Financial Services, LLC, a Delaware limited liability company and wholly-owned subsidiary of H&R Block (“EFS”), entered into the Program Management Agreement, dated August 31,

39


2015 (the “PMA”); (ii) our Bank and H&R Block, EFS, HRB Participant I, LLC, a Delaware limited liability company and wholly-owned subsidiary of H&R Block, entered into the Emerald Receivables Participation Agreement, dated August 31, 2015; and (iii) our Bank and H&R Block entered into the Guaranty Agreement, dated August 31, 2015.  
Four-for-One Forward Split of Common Stock
On October 22, 2015, our stockholders approved and in November 2015 our Board of Directors adopted an amendment to the our certificate of incorporation (the “Amendment”) to increase the number of authorized shares of common stock available for issuance from 50,000,000 to 150,000,000 shares. The purpose for the Amendment was to accommodate a forward stock split through a stock dividend whereby each share of common stock would effectively be split into four shares of common stock (the “Stock Split”). On October 26, 2015, our Board of Directors approved the Stock Split. We issued a dividend of three shares of common stock for every one share issued and outstanding as of November 6, 2015. The dividend was paid on November 17, 2015, and BOFI common stock began trading on a split-adjusted basis on November 18, 2015. Common stock share and per-share amounts for all comparative periods provided have been retroactively adjusted to reflect the effects of the Stock Split.
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.
Our significant accounting policies and practices are described in greater detail in Note 1 to our June 30, 2015 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, 2015.
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 adjusted earnings. We define net income without the after-tax impact of realized and unrealized securities gains and losses as adjusted earnings (“adjusted earnings”), a non-GAAP measurement, which we believe provides useful information about the Bank’s operating performance. Excluding the securities 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 considered in isolation, or as a substitute for GAAP basis financial measures.

40


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)
December 31,
2015
 
June 30,
2015
Selected Balance Sheet Data:
 
 
 
Total assets
$
6,662,215

 
$
5,823,719

Loans—net of allowance for loan losses
5,645,272

 
4,928,618

Loans held for sale, at fair value
24,730

 
25,430

Loans held for sale, lower of cost or fair value
65,429

 
77,891

Allowance for loan losses
35,071

 
28,327

Securities—trading
7,706

 
7,832

Securities—available-for-sale
228,389

 
163,361

Securities—held-to-maturity
215,963

 
225,555

Total deposits
5,199,966

 
4,451,917

Securities sold under agreements to repurchase
35,000

 
35,000

Advances from the FHLB
758,000

 
753,000

Subordinated debentures
5,155

 
5,155

Total stockholders’ equity
613,330

 
533,526

 
 
 
 
Capital Ratios:
 
 
 
Equity to assets at end of period
9.21
%
 
9.16
%
BofI Holding, Inc:
 
 
 
Tier 1 leverage (core) capital to adjusted average assets
9.75
%
 
9.59
%
Common equity tier 1 capital (to risk-weighted assets)
14.86
%
 
14.98
%
Tier 1 capital (to risk-weighted assets)
14.98
%
 
15.12
%
Total capital (to risk-weighted assets)
15.83
%
 
15.91
%
BofI Federal Bank:
 
 
 
Tier 1 leverage (core) capital to adjusted average assets
9.34
%
 
9.25
%
Common equity tier 1 capital (to risk-weighted assets)
14.36
%
 
14.58
%
Tier 1 capital (to risk-weighted assets)
14.36
%
 
14.58
%
Total capital (to risk-weighted assets)
15.20
%
 
15.38
%




41


BOFI HOLDING, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION

 
At or for the Three Months Ended
 
At or for the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Selected Income Statement Data:
 
 
 
 
 
 
 
Interest and dividend income
$
75,935

 
$
59,081

 
$
147,164

 
$
113,886

Interest expense
12,764

 
10,970

 
24,865

 
20,900

Net interest income
63,171

 
48,111

 
122,299

 
92,986

Provision for loan losses
3,400

 
2,900

 
5,800

 
5,400

Net interest income after provision for loan losses
59,771

 
45,211

 
116,499

 
87,586

Non-interest income
16,220

 
6,697

 
26,009

 
11,946

Non-interest expense
27,445

 
18,937

 
50,363

 
36,383

Income before income tax expense
48,546

 
32,971

 
92,145

 
63,149

Income tax expense
20,397

 
13,599

 
38,495

 
25,936

Net income
$
28,149

 
$
19,372

 
$
53,650

 
$
37,213

Net income attributable to common stock
$
28,071

 
$
19,294

 
$
53,495

 
$
37,058

 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
Basic1
$
0.44

 
$
0.32

 
$
0.84

 
$
0.62

Diluted1
$
0.44

 
$
0.32

 
$
0.84

 
$
0.62

Book value per common share1
$
9.65

 
$
7.41

 
$
9.65

 
$
7.41

Tangible book value per common share1
$
9.60

 
$
7.40

 
$
9.60

 
$
7.40

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic1
64,431,333

 
60,819,248

 
64,050,839

 
59,983,176

Diluted1
64,432,656

 
61,054,268

 
64,061,821

 
60,218,392

Common shares outstanding at end of period1
63,029,161

 
60,087,036

 
63,029,161

 
60,087,036

Common shares issued at end of period1
64,142,556

 
61,080,390

 
64,142,556

 
61,080,390

 
 
 
 
 
 
 
 
Performance Ratios and Other Data:
 
 
 
 
 
 
 
Loan originations for investment
$
990,948

 
$
802,550

 
$
1,816,020

 
$
1,615,608

Loan originations for sale
$
632,162

 
$
276,316

 
$
904,453

 
$
467,946

Loan purchases
$
384

 
$

 
$
384

 
$

Return on average assets
1.77
 %
 
1.53
%
 
1.73
 %
 
1.55
%
Return on average common stockholders’ equity
18.81
 %
 
19.08
%
 
18.55
 %
 
18.85
%
Interest rate spread2
3.96
 %
 
3.72
%
 
3.92
 %
 
3.78
%
Net interest margin3
4.10
 %
 
3.85
%
 
4.07
 %
 
3.91
%
Efficiency ratio
34.57
 %
 
34.55
%
 
33.96
 %
 
34.67
%
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
Net annualized charge-offs to average loans
(0.04
)%
 
0.02
%
 
(0.04
)%
 
0.03
%
Non-performing loans to total loans
0.46
 %
 
0.80
%
 
0.46
 %
 
0.80
%
Non-performing assets to total assets
0.40
 %
 
0.69
%
 
0.40
 %
 
0.69
%
Allowance for loan losses to total loans at end of period
0.61
 %
 
0.53
%
 
0.61
 %
 
0.53
%
Allowance for loan losses to non-performing loans
132.45
 %
 
66.45
%
 
132.45
 %
 
66.45
%
_________________________
1.  
Share and per share amounts have been retroactively restated for all prior periods presented to reflect the four-for-one split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015
2. 
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
3. 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.


42


RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 2015 and 2014
For the three months ended December 31, 2015, we had net income of $28.1 million compared to net income of $19.4 million for the three months ended December 31, 2014. Net income attributable to common stockholders was $28.1 million or $0.44 per diluted share for the three months ended December 31, 2015 compared to net income attributable to common shareholders of $19.3 million or $0.32 per diluted share for the three months ended December 31, 2014. For the six months ended December 31, 2015, we had net income of $53.7 million compared to net income of $37.2 million for the six months ended December 31, 2014. Net income attributable to common stockholders was $53.5 million or $0.84 per diluted share for the six months ended December 31, 2015 compared to net income attributable to common shareholders of $37.1 million or $0.62 per diluted share for the six months ended December 31, 2014.

Other key comparisons between our operating results for the three and six months ended December 31, 2015 and 2014 are as follows:

Net interest income increased $15.1 million and $29.3 million due to a 23.1% and 26.5% increase in average earning assets in the three and six months ended December 31, 2015, respectively. These increases were primarily the result of growth in our loan portfolio, a net increase in the average yield earned on our assets and a net decrease in the average funding rate of our liabilities. Our net interest margin increased 25 and 16 basis points in the three and six months ended December 31, 2015 compared to December 31, 2014. The overall rate on interest earning assets was higher by 20 basis points and 10 basis points for the three and six months ended December 31, 2015 compared to December 31, 2014, respectively, primarily due to an increase in market interest rates for new loans and our H&R Block-branded loan product. This increase on the asset side was complimented by a 4 basis point reduction in average rates paid on interest-bearing liabilities for the three and six months ended December 31, 2015 compared to December 31, 2014, respectively. The increase in lower rate demand and savings deposits was the primary reason for the decrease in average rates paid for the three and six months ended December 31, 2015 compared to December 31, 2014, respectively.

Non-interest income increased $9.5 million and $14.1 million for the three and six months ended December 31, 2015 compared to the three and six months ended December 31, 2014, respectively. The $9.5 million increase in non-interest income for the three months ended December 31, 2015, was the result of an increase in banking service fees and other income of $4.7 million primarily, from H&R Block-branded products and service fee income, an increase of $4.5 million in other income and gain on sale – other, a reduction of $0.4 million in unrealized losses on securities, and an increase in realized gain on the sale of securities of $0.3 million, partially offset by a decrease of $0.3 million in prepayment penalty fee income. The $14.1 million increase in non-interest income for the six months ended December 31, 2015, was the result of an increase of $7.2 million in other income and gain on sale – other, an increase banking service fees and other income of $6.6 million primarily from H&R Block-branded products and service fee income, a reduction of $1.4 million in unrealized losses on securities, and an increase in realized gain on the sale of securities of $0.3 million, partially offset by a decrease of $1.2 million in mortgage banking income and a decrease of $0.3 million in prepayment penalty fee income.

Non-interest expense increased $8.5 million and $14.0 million for the three and six months ended December 31, 2015 compared to the three and six months ended December 31, 2014, respectively. For the three months ended December 31, 2015 compared to the three months ended December 31, 2014 salaries and related expenses increased $5.7 million primarily due to the overall increase in staff to support the overall growth of the Bank. Data processing and internet expense increased $0.6 million due to core system updates and increased bank customers. Other general and administrative costs increased by $1.0 million primarily attributable to expenses in support of H&R Block-branded products and services. For the six months ended December 31, 2015 compared to the six months ended December 31, 2014 salaries and related expenses increased $10.3 million primarily due to the overall increase in staff to support the overall growth of the Bank. Data processing and internet expense increased $1.0 million due to core system updates and increased bank customers. Other general and administrative costs increased by $1.0 million primarily attributable to expenses in support of H&R Block-branded products and services.


43


Non-GAAP adjusted earnings for the three months ended December 31, 2015 and 2014 were $27.7 million and $19.4 million, respectively. For the six months ended December 31, 2015 and 2014 non-GAAP adjusted earnings were $53.3 million and $37.9 million, respectively.

Below is a reconciliation of net income to non-GAAP adjusted earnings:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Net Income
$
28,149

 
$
19,372

 
$
53,650

 
$
37,213

Realized securities losses (gains)
(933
)
 
(587
)
 
(933
)
 
(587
)
Unrealized securities losses (gains)
219

 
610

 
267

 
1,700

Tax (provision) benefit
300

 
(9
)
 
278

 
(457
)
Non-GAAP adjusted earnings
$
27,735

 
$
19,386

 
$
53,262

 
$
37,869

Net Interest Income
Net interest income for the three and six months ended December 31, 2015 totaled $63.2 million and $122.3 million, an increase of 31.3% and 31.5%, compared to net interest income of $48.1 million and $93.0 million for the three and six months ended December 31, 2014. The growth of net interest income for both the three and six months ended December 31, 2015 is primarily due to net loan portfolio growth combined with a net increase in the average yield earned on our assets and a net decrease in the average funding rate of our liabilities.
Total interest and dividend income during the three and six months ended December 31, 2015 increased 28.53% to $75.9 million and and 29.2% to $147.2 million, respectively, compared to $59.1 million and $113.9 million during the three and six months ended December 31, 2014. The increase in interest and dividend income for the three and six months ended December 31, 2015 was primarily attributable to growth in average earning assets. The growth in the loan portfolio combined with a net increase in the average yield earned on loans, primarily attributable to our H&R Block-branded loan product. The average balance of loans increased 26.2% and 30.3% for the three and six months ended December 31, 2015 compared to the three and six months ended December 31, 2014. The increase in interest income on loans was partially offset by lower balances and lower rates earned on securities.
Total interest expense was $12.8 million and $24.9 million for the three and six months ended December 31, 2015, an increase of $1.8 million or 16.4% and of $4.0 million or 19.0% as compared with the three and six months ended December 31, 2014, respectively. The average funding rate for the three and six months ended December 31, 2015 compared to the same 2014 periods decreased by 4 basis points while average interest-bearing liabilities grew 20.4% and 24.0%, respectively. The decrease in the average funding rates for the three and six months ended December 31, 2015 compared to the same period in 2014, was primarily driven by increases in non-interest bearing deposits and lower rate demand and savings deposits partially offset by higher rates on time deposits.
Net interest margin, defined as annualized net interest income divided by average earning assets, increased by 25 basis points to 4.10% and by 16 basis points to 4.07% for the three and six months ended December 31, 2015, respectively. The increases in net interest margin were primarily the result of the above discussed increases in the average yield on loans, which were more than the declines in the average yield on securities and the declines in the overall cost of funds.

44


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 December 31, 2015 and 2014:
 
For the Three Months Ended
 
December 31,
 
2015
 
2014
(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
$
5,460,764

 
$
70,117

 
5.14
%
 
$
4,327,757

 
$
53,392

 
4.93
%
Interest-earning deposits in other financial institutions
201,799

 
186

 
0.37
%
 
184,363

 
121

 
0.26
%
Mortgage-backed and other investment securities
428,270

 
4,274

 
3.99
%
 
440,834

 
4,704

 
4.27
%
Stock of the FHLB, at cost
65,111

 
1,358

 
8.34
%
 
47,805

 
864

 
7.23
%
Total interest-earning assets
6,155,944

 
75,935

 
4.93
%
 
5,000,759

 
59,081

 
4.73
%
Non-interest-earning assets
218,511

 
 
 
 
 
65,174

 
 
 
 
Total assets
$
6,374,455

 
 
 
 
 
$
5,065,933

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
3,582,481

 
$
5,577

 
0.62
%
 
$
2,704,220

 
$
4,935

 
0.73
%
Time deposits
777,262

 
4,132

 
2.13
%
 
779,693

 
3,327

 
1.71
%
Securities sold under agreements to repurchase
35,000

 
392

 
4.48
%
 
35,000

 
391

 
4.47
%
Advances from the FHLB
842,174

 
2,626

 
1.25
%
 
828,106

 
2,281

 
1.10
%
Subordinated debentures
5,155

 
37

 
2.87
%
 
5,155

 
36

 
2.79
%
Total interest-bearing liabilities
5,242,072

 
12,764

 
0.97
%
 
4,352,174

 
10,970

 
1.01
%
Non-interest-bearing demand deposits
481,282

 
 
 
 
 
243,289

 
 
 
 
Other non-interest-bearing liabilities
49,128

 
 
 
 
 
60,851

 
 
 
 
Stockholders’ equity
601,973

 
 
 
 
 
409,619

 
 
 
 
Total liabilities and stockholders’ equity
$
6,374,455

 
 
 
 
 
$
5,065,933

 
 
 
 
Net interest income
 
 
$
63,171

 
 
 
 
 
$
48,111

 
 
Interest rate spread5
 
 
 
 
3.96
%
 
 
 
 
 
3.72
%
Net interest margin6
 
 
 
 
4.10
%
 
 
 
 
 
3.85
%
 __________________________
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 $31.1 million and $31.8 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2015 and 2014 three-month periods, respectively.
5. 
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.
6. 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.





45


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 six months ended December 31, 2015 and 2014:

 
For the Six Months Ended
 
December 31,
 
2015
 
2014
(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
$
5,323,515

 
$
135,195

 
5.08
%
 
$
4,086,378

 
$
102,375

 
5.01
%
Interest-earning deposits in other financial institutions
217,980

 
328

 
0.30
%
 
169,491

 
209

 
0.25
%
Mortgage-backed and other investment securities4
409,918

 
8,387

 
4.09
%
 
451,958

 
9,551

 
4.23
%
Stock of the FHLB, at cost
64,336

 
3,254

 
10.12
%
 
45,946

 
1,751

 
7.62
%
Total interest-earning assets
6,015,749

 
147,164

 
4.89
%
 
4,753,773

 
113,886

 
4.79
%
Non-interest-earning assets
176,466

 
 
 
 
 
62,922

 
 
 
 
Total assets
$
6,192,215

 
 
 
 
 
$
4,816,695

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
3,399,845

 
$
10,739

 
0.63
%
 
$
2,471,811

 
$
8,977

 
0.73
%
Time deposits
782,096

 
7,993

 
2.04
%
 
764,069

 
6,529

 
1.71
%
Securities sold under agreements to repurchase
35,000

 
781

 
4.46
%
 
37,893

 
861

 
4.54
%
Advances from the FHLB
909,457

 
5,278

 
1.16
%
 
860,102

 
4,461

 
1.04
%
Subordinated debentures

5,155

 
74

 
2.87
%
 
5,155

 
72

 
2.79
%
Total interest-bearing liabilities
5,131,553

 
24,865

 
0.97
%
 
4,139,030

 
20,900

 
1.01
%
Non-interest-bearing demand deposits
426,128

 
 
 
 
 
229,734

 
 
 
 
Other non-interest-bearing liabilities
52,759

 
 
 
 
 
49,694

 
 
 
 
Stockholders’ equity
581,775

 
 
 
 
 
398,237

 
 
 
 
Total liabilities and stockholders’ equity
$
6,192,215

 
 
 
 
 
$
4,816,695

 
 
 
 
Net interest income
 
 
$
122,299

 
 
 
 
 
$
92,986

 
 
Interest rate spread5
 
 
 
 
3.92
%
 
 
 
 
 
3.78
%
Net interest margin6
 
 
 
 
4.07
%
 
 
 
 
 
3.91
%
 __________________________
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 $31.2 million and $31.9 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2015 and 2014 six-month periods, respectively.
5. 
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.
6. 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.


46


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 and six months ended December 31, 2015 and 2014:

 
For the Three Months Ended
 
For the Six Months Ended
 
December 31, 2015
 
December 31, 2015
 
2015 vs 2014
 
2015 vs 2014
 
Increase (Decrease) Due to
 
Increase (Decrease) Due to
(Dollars in thousands)
Volume
 
Rate
 
Rate/Volume
 
Total
Increase
(Decrease)
 
Volume
 
Rate
 
Rate/Volume
 
Total
Increase
(Decrease)
Increase/(decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
13,964

 
$
2,272

 
$
489

 
$
16,725

 
$
30,990

 
$
1,430

 
$
400

 
$
32,820

Interest-earning deposits in other financial institutions
11

 
51

 
3

 
65

 
61

 
42

 
16

 
119

Mortgage-backed and other investment securities
(134
)
 
(309
)
 
13

 
(430
)
 
(889
)
 
(316
)
 
41

 
(1,164
)
Stock of the FHLB, at cost
313

 
133

 
48

 
494

 
701

 
574

 
228

 
1,503

 
$
14,154

 
$
2,147

 
$
553

 
$
16,854

 
$
30,863

 
$
1,730

 
$
685

 
$
33,278

Increase/(decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
1,603

 
$
(744
)
 
$
(217
)
 
$
642

 
$
3,387

 
$
(1,236
)
 
$
(389
)
 
$
1,762

Time deposits
(10
)
 
819

 
(4
)
 
805

 
154

 
1,261

 
49

 
1,464

Securities sold under agreements to repurchase

 
1

 

 
1

 
(66
)
 
(15
)
 
1

 
(80
)
Advances from the FHLB
39

 
311

 
(5
)
 
345

 
257

 
516

 
44

 
817

Subordinated debentures


 
1

 

 
1

 

 
2

 

 
2

 
$
1,632

 
$
388

 
$
(226
)
 
$
1,794

 
$
3,732

 
$
528

 
$
(295
)
 
$
3,965


Provision for Loan Losses
The loan loss provision was $3.4 million for the three months ended December 31, 2015 compared to $2.9 million for the three months ended December 31, 2014. The loan loss provision was $5.8 million for the six months ended December 31, 2015 compared to $5.4 million for the six months ended December 31, 2015. The increase in the provision for the three and six months ended December 31, 2015 is primarily due to additions 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.”

47


Non-Interest Income
The following table sets forth information regarding our non-interest income for the periods shown: 
 
For the Three Months Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
Inc (Dec)
 
2015
 
2014
 
Inc (Dec)
Realized gain on securities:
 
 
 
 
 
 
 
 
 
 
 
Sale of securities
$
933

 
$
587

 
$
346

 
$
933

 
$
587

 
$
346

Total realized gain on securities
933

 
587

 
346

 
933

 
587

 
346

Other-than-temporary loss on securities:
 
 
 
 
 
 
 
 
 
 
 
Total impairment losses
$
(1,037
)
 
$
(1,075
)
 
$
38

 
$
(1,779
)
 
$
(4,647
)
 
$
2,868

Loss recognized in other comprehensive loss
1,014

 
789

 
225

 
1,638

 
3,150

 
(1,512
)
Net impairment loss recognized in earnings
(23
)
 
(286
)
 
263

 
(141
)
 
(1,497
)
 
1,356

Fair value gain on trading securities
(196
)
 
(324
)
 
128

 
(126
)
 
(203
)
 
77

Total unrealized loss on securities
(219
)
 
(610
)
 
391

 
(267
)
 
(1,700
)
 
1,433

Prepayment penalty fee income
738

 
1,053

 
(315
)
 
1,614

 
1,930

 
(316
)
Gain on sale – other
5,551

 
1,090

 
4,461

 
9,247

 
2,006

 
7,241

Mortgage banking income
2,909

 
2,937

 
(28
)
 
4,787

 
6,000

 
(1,213
)
Banking service fees and other income
6,308

 
1,640

 
4,668

 
9,695

 
3,123

 
6,572

Total non-interest income
$
16,220

 
$
6,697

 
$
9,523

 
$
26,009

 
$
11,946

 
$
14,063


Non-interest income increased $9.5 million to $16.2 million for the three months ended December 31, 2015. The increase was primarily the result of a $4.7 million increase in banking service fees due to H&R Block-branded products and service fee income, a $4.5 million increase in gain on sale – other primarily from sales of H&R Block-branded products and structured settlements and a decrease in unrealized loss on securities of $0.4 million. Non-interest income increased $14.1 million to $26.0 million for the six months ended December 31, 2015. The increase was primarily the result of a $7.2 million increase in gain on sale – other primarily from sales of H&R Block-branded products and structured settlements, a $6.6 million increase in banking service fees due to H&R Block-branded products and service fee income, a decrease in unrealized loss on securities of $1.4 million partially offset by a decrease in mortgage banking income of $1.2 million.
Included in gain on sale – other are sales of correspondent loans that are collateralized by non-mortgage assets and sales of structured settlement annuity receivables. We engage in the wholesale and retail purchase of state lottery prize and structured settlement annuity payments. These payments are high credit quality deferred payment receivables having a state lottery commission or investment grade (top two tiers) insurance company payor. The Bank originates contracts for the retail purchase of such payments and classifies these under the heading of Factoring in the loan portfolio. Factoring yields are typically higher than mortgage loan rates. Typically, the gain received upon sale of these payment streams is greater than the gain received from an equivalent amount of mortgage loan sales. Since 2013, pools of structured settlement receivables have been originated for sale depending upon management’s assessment of interest rate risk, liquidity, and offers containing favorable terms and are classified on our balance sheet as loans held for sale.


48


Non-Interest Expense
The following table sets forth information regarding our non-interest expense for the periods shown:
 
For the Three Months Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2015
 
2014
 
Inc (Dec)
 
2015
 
2014
 
Inc (Dec)
Salaries and related costs
$
16,440

 
$
10,764

 
$
5,676

 
$
30,762

 
$
20,461

 
$
10,301

Professional services
1,270

 
797

 
473

 
1,633

 
1,599

 
34

Occupancy and equipment
934

 
832

 
102

 
1,847

 
1,553

 
294

Data processing and internet
2,299

 
1,683

 
616

 
4,179

 
3,197

 
982

Advertising and promotional
1,597

 
1,449

 
148

 
3,225

 
2,755

 
470

Depreciation and amortization
998

 
766

 
232

 
2,006

 
1,483

 
523

Real estate owned and repossessed vehicles
24

 
51

 
(27
)
 
(50
)
 
108

 
(158
)
FDIC and regulator fees
1,108

 
828

 
280

 
2,172

 
1,606

 
566

Other general and administrative
2,775

 
1,767

 
1,008

 
4,589

 
3,621

 
968

Total non-interest expenses
$
27,445

 
$
18,937

 
$
8,508

 
$
50,363

 
$
36,383

 
$
13,980


Non-interest expense, which is comprised primarily of compensation, data processing and internet expenses, occupancy, advertising and promotional and other operating expenses, was $27.4 million for the three months ended December 31, 2015, up from $18.9 million for the three months ended December 31, 2014. Non-interest expense was $50.4 million for the six months ended December 31, 2015, up from $36.4 million for the six months ended December 31, 2014. The increase in compensation expense for the three and six months ended December 31, 2015 was primarily due to the expansion of the Bank’s staffing for lending products, business banking and regulatory compliance.
Total salaries and related costs increased $5.7 million to $16.4 million for the three months ended December 31, 2015 compared to $10.8 million for the three months ended December 31, 2014 due to increased staffing levels to support growth in deposit and lending activities. Total salaries and related costs increased $10.3 million to $30.8 million for the six months ended December 31, 2015 compared to $20.5 million for the six months ended December 31, 2014 due to increased staffing levels to support growth in deposit and lending activities. Our staff increased to 534 from 430, or 24.2% between December 31, 2015 and 2014, respectively.
Professional services, which include accounting and legal fees, increased $0.5 million and flat for the three and six months ended December 31, 2015, compared to the three and six month periods last year. Professional services for the three months ended December 31, 2015 increased due to a higher volume of legal fees compared to December 31, 2014.
Advertising and promotional expense increased $0.1 million and $0.5 million for the three and six months ended December 31, 2015, compared to the three and six months ended December 31, 2014. The increases were primarily due to online, email and direct leads marketing expenses.
Data processing and internet expense increased $0.6 million and $1.0 million for the three and six months ended December 31, 2015, compared to the three and six month period ended December 31, 2014, respectively. The increases were 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 (“FDIC”) and OCC standard regulatory charges increased $0.3 million and $0.6 million for the three and six months ended December 31, 2015, compared to the three and six month period last year. The increases were 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 costs increased by $1.0 million and $1.0 million for the three and six months ended December 31, 2015, compared to the three and six month period ended December 31, 2014, respectively. The increases were primarily due to expenses supporting H&R Block-branded products and services.
Provision for Income Taxes
Our effective income tax rates (income tax provision divided by net income before income tax) for the three months ended December 31, 2015 and 2014 were 42.02% and 41.25%, respectively. Our effective income tax rates (income tax provision divided by net income before income tax) for the six months ended December 31, 2015 and 2014 were 41.78% and 41.07%, respectively. The changes in the tax rates are primarily the result of changes in state tax allocations.

49



FINANCIAL CONDITION
Balance Sheet Analysis
Our total assets increased $838.5 million, or 14.4%, to $6,662.2 million, as of December 31, 2015, up from $5,823.7 million at June 30, 2015. The increase in total assets was primarily due to an increase of $716.7 million in net loans held for investment. Total liabilities increased $758.7 million, primarily from growth in deposits of $748.0 million.
Loans
Net loans held for investment increased 14.5% to $5,645.3 million at December 31, 2015 from $4,928.6 million at June 30, 2015. The increase in the loan portfolio was primarily due to loan originations and purchases of $1,816.4 million, partially offset by loan repayments and other adjustments of $1,099.7 million during the six months ended December 31, 2015.
The following table sets forth the composition of the loan portfolio as of the dates indicated:
 
December 31, 2015
 
June 30, 2015
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$
3,371,974

 
59.1
%
 
$
2,980,795

 
59.6
%
Home equity
3,418

 
0.1
%
 
3,604

 
0.1
%
Warehouse and other
519,564

 
9.1
%
 
385,413

 
7.7
%
Multifamily real estate secured
1,202,987

 
21.0
%
 
1,185,531

 
23.7
%
Commercial real estate secured
99,938

 
1.7
%
 
61,403

 
1.2
%
Auto and RV secured
30,335

 
0.5
%
 
13,140

 
0.3
%
Factoring
143,896

 
2.5
%
 
122,200

 
2.4
%
Commercial & Industrial
281,826

 
4.9
%
 
248,584

 
5.0
%
Other
61,145

 
1.1
%
 
601

 
%
Total gross loans
5,715,083

 
100.0
%
 
5,001,271

 
100.0
%
Allowance for loan losses
(35,071
)
 
 
 
(28,327
)
 
 
Unaccreted discounts and loan fees
(34,740
)
 
 
 
(44,326
)
 
 
Total net loans
$
5,645,272

 
 
 
$
4,928,618

 
 

The Bank originates some interest only loans with terms that include repayments that are less than the repayments for fully amortizing loans. Also, the Bank previously purchased option adjustable-rate mortgage (“ARM”) loans 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 Bank 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 December 31, 2015, the Company had $778.6 million of interest only mortgage loans and $3.1 million of option adjustable-rate mortgage loans. Through December 31, 2015, the net amount of deferred interest on these loan types was not material to the financial position or operating results of the Company.

50


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 December 31, 2015, our non-performing loans totaled $26.5 million, or 0.46% of total gross loans and our non-performing loans and foreclosed assets or “non-performing assets” totaled $26.9 million, or 0.40% of total assets.
Non-performing assets consisted of the following as of the dates indicated:
(Dollars in thousands)
December 31, 2015
 
June 30, 2015
 
Inc (Dec)
Non-performing assets:
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
Mortgage
$
20,954

 
$
22,842

 
$
(1,888
)
Home equity
7

 
9

 
(2
)
Multifamily real estate secured
4,845

 
5,399

 
(554
)
Commercial real estate secured
372

 
2,128

 
(1,756
)
Total non-performing loans secured by real estate
26,178

 
30,378

 
(4,200
)
Auto and RV secured
300

 
453

 
(153
)
Total non-performing loans
26,478

 
30,831

 
(4,353
)
Foreclosed real estate
396

 
1,225

 
(829
)
Repossessed—Auto and RV
26

 
15

 
11

Total non-performing assets
$
26,900

 
$
32,071

 
$
(5,171
)
Total non-performing loans as a percentage of total loans
0.46
%
 
0.62
%
 
(0.16
)%
Total non-performing assets as a percentage of total assets
0.40
%
 
0.55
%
 
(0.15
)%

Total non-performing assets decreased from $32.1 million at June 30, 2015 to $26.9 million at December 31, 2015. As a percentage of total assets, non-performing assets decreased from 0.55% at June 30, 2015 to 0.40% at December 31, 2015. The
non-performing assets decrease of approximately $5.2 million, was primarily the result of decreases in non-performing single family real estate secured mortgage loans, commercial real estate secured loans and foreclosed real estate assets.
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 with outstanding balances totaling $0.2 million at December 31, 2015 and $0.2 million at June 30, 2015.
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 December 31, 2015, 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 auto and RV 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 auto and RV loan portfolio at December 31, 2015 was determined by classifying each outstanding loan according to the semi-annually refreshed FICO score and providing loss rates. The Company had $30.0 million of auto and RV loan balances subject to general reserves as follows: FICO greater than or equal to 770: $8.9 million; 715 – 769: $11.2 million; 700 – 714: $3.5 million; 660 – 699: $4.5 million and less than 660: $1.9 million.

51


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:
The Company had $3,350.8 million of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $1,819.8 million; 61% – 70%: $1,231.9 million; 71% – 80%: $298.8 million; greater than 80%: $0.2 million.
The Company had $1,198.1 million of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $522.0 million; 56% – 65%: $396.4 million; 66% – 75%: $265.3 million; 76% – 80%: $14.4 million and greater than 80%: $0.0 million.
The Company had $99.6 million of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $33.8 million; 51% – 60%: $23.8 million; 61% – 70%: $37.3 million; and 71% – 80%: $4.7 million.
The weighted average LTV percentage for our entire real estate loan portfolio was 56% at December 31, 2015. 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)
December 31, 2015
 
June 30, 2015
Non-performing loans—90+ days past due plus other non-accrual loans
$
23,103

 
$
25,873

Troubled debt restructuring loans—non-accrual
3,375

 
4,958

Troubled debt restructuring loans—performing
214

 
217

Total impaired loans
$
26,692

 
$
31,048


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:
 
December 31, 2015
 
June 30, 2015
(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
$
17,167

 
49.0
%
 
$
13,664

 
48.3
%
Home equity
45

 
0.1
%
 
122

 
0.4
%
Warehouse and other
2,643

 
7.5
%
 
1,879

 
6.6
%
Multifamily real estate secured
3,293

 
9.4
%
 
4,363

 
15.4
%
Commercial real estate secured
736

 
2.1
%
 
1,103

 
3.9
%
Auto and RV secured
1,840

 
5.2
%
 
953

 
3.4
%
Factoring
359

 
1.0
%
 
292

 
1.0
%
Commercial & Industrial
6,602

 
18.9
%
 
5,882

 
20.8
%
Other
2,386

 
6.8
%
 
69

 
0.2
%
Total
$
35,071

 
100.0
%
 
$
28,327

 
100.0
%
The loan loss provision was $3.4 million and $2.9 million for the three months ended December 31, 2015 and December 31, 2014, respectively. The loan loss provision was $5.8 million and $5.4 million for the six months ended December 31, 2015 and December 31, 2014, respectively. The increase for the three and six months ended December 31, 2015 in the loan loss provision was primarily the result of growth in the loan portfolio. 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

52


banks. Our general loan loss reserves are based upon historical losses and expected future trends. The resolution of the Bank’s existing other real estate owned and non-performing loans should not have a significant adverse impact on our operating results.
Investment Securities
Total investment securities were $452.1 million as of December 31, 2015, compared with $396.7 million at June 30, 2015. During the six months ended December 31, 2015, we purchased twenty debt securities for $96.9 million, sold $10.1 million of available for sale securities, and received principal repayments of approximately $15.6 million in our available-for-sale portfolio. In our held-to-maturity portfolio, we received principal repayments of $16.1 million. The remainder of the change for both the available-for-sale and held-to-maturity portfolios is 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 issue size and based on issue features, such as callable terms.
Deposits
Deposits increased a net $748.1 million, or 16.8%, to $5,200.0 million at December 31, 2015, from $4,451.9 million at June 30, 2015. Our deposit growth was the result of a 28.9% increase in savings accounts and a 63.8% increase in non-interest bearing accounts. The addition of deposits from our H&R Block Bank deposit acquisition and our organic growth resulted in higher savings account business and non-interest bearing account business during the six months ended December 31, 2015.
The following table sets forth the composition of the deposit portfolio as of the dates indicated:
 
December 31, 2015
 
June 30, 2015
(Dollars in thousands)
Amount
 
Rate1
 
Amount
 
Rate1
Non-interest bearing
$
506,558

 
%
 
$
309,339

 
%
Interest-bearing:
 
 
 
 
 
 
 
Demand
1,067,138

 
0.49
%
 
1,224,308

 
0.48
%
Savings
2,740,864

 
0.60
%
 
2,126,792

 
0.67
%
Total interest-bearing demand and savings
3,808,002

 
0.57
%
 
3,351,100

 
0.60
%
Time deposits:
 
 
 
 
 
 
 
Under $100,000
59,982

 
1.25
%
 
70,369

 
1.26
%
$100,000 or more2
825,424

 
1.93
%
 
721,109

 
2.06
%
Total time deposits
885,406

 
1.88
%
 
791,478

 
1.99
%
Total interest bearing2
4,693,408

 
0.81
%
 
4,142,578

 
0.87
%
Total deposits
$
5,199,966

 
0.73
%
 
$
4,451,917

 
0.81
%
______________________________
1. Based on weighted-average stated interest rates at end of period.
2. The total interest-bearing includes brokered deposits of $1,137.3 million and $661.9 million as of December 31, 2015 and June 30, 2015, respectively, of which $550.2 million and $356.3 million, respectively, are time deposits classified as $100,000 or more.

The following table sets forth the number of deposit accounts by type as of the date indicated:
 
December 31, 2015
 
June 30, 2015
 
December 31, 2014
Non-interest bearing, prepaid and other
1,854,594

 
501,565
 
296,306

Checking and savings accounts
294,980

 
31,461
 
24,615

Time deposits
4,511

 
5,515
 
6,428

Total number of deposit accounts
2,154,085

 
538,541
 
327,349


The net increase of 1,353,029 of non-interest bearing, prepaid and other accounts and 263,519 interest-bearing checking and savings accounts for the six months ended December 31, 2015 was primarily the result of our acquisition of accounts from H&R Block Bank and new H&R Block branded products.


53


Borrowings
The following table sets forth the composition of our borrowings and the interest rates at the dates indicated:
 
 
December 31, 2015
 
June 30, 2015
 
December 31, 2014
(Dollars in thousands)
 
Balance
 
Weighted Average Rate
 
Balance
 
Weighted Average Rate
 
Balance
 
Weighted Average Rate
Repurchase agreements
 
$
35,000

 
4.38
%
 
$
35,000

 
4.38
%
 
$
35,000

 
4.38
%
FHLB Advances
 
758,000

 
1.45
%
 
753,000

 
1.36
%
 
670,000

 
1.39
%
Subordinated debentures
 
5,155

 
2.78
%
 
5,155

 
2.68
%
 
5,155

 
2.63
%
Total borrowings
 
$
798,155

 
1.59
%
 
$
793,155

 
1.50
%
 
$
710,155

 
1.54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost of borrowings during the quarter
 
1.38
%
 
 
 
1.89
%
 
 
 
1.25
%
 
 
Borrowings as a percent of total assets
 
12.0
%
 
 
 
13.6
%
 
 
 
13.7
%
 
 

At December 31, 2015, total borrowings amounted to $798.2 million, up $5.0 million, or 0.6%, from June 30, 2015 and up $88.0 million or 12.4% from December 31, 2014. Total borrowings represented 12.0% of total assets and had a weighted-average cost of 1.38% at December 31, 2015, compared with 13.6% of total assets at a weighted-average cost of 1.89% at June 30, 2015 and 13.7% of total assets at a weighted-average cost of 1.25% at December 31, 2014.
We have sold securities under various agreements to repurchase for total proceeds of $35.0 million. The repurchase agreements have interest rates between 3.75% and 4.75% and scheduled maturities between April 2017 and December 2017. Under these agreements, we may be required to repay the $35.0 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 1.60 years and the weighted average remaining period before such repurchase agreements could be called is 0.14 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 December 31, 2015, a total of $5.0 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 $5.0 million in putable advances is 2.07 years and the weighted average remaining period before such advances could be put to us is 0.07 years.
Stockholders’ Equity
Stockholders’ equity increased $79.8 million to $613.3 million at December 31, 2015 compared to $533.5 million at June 30, 2015. The increase was the result of our net income for the six months ended December 31, 2015 of $53.7 million, sale of common stock of $21.1 million, vesting and issuance of RSUs and exercise of stock options of $4.8 million, a $0.4 million unrealized gain in other comprehensive income, net of tax, less a reduction of $0.2 million for dividends declared on preferred stock.

LIQUIDITY

Cash flow information is as follows:
 
For the Six Months Ended
 
December 31,
(Dollars in thousands)
2015
 
2014
Operating Activities
$
69,413

 
$
62,256

Investing Activities
$
(784,527
)
 
$
(761,206
)
Financing Activities
$
776,671

 
$
753,505

During the six months ended December 31, 2015, we had net cash inflows from operating activities of $69.4 million compared to inflows of $62.3 million for the six months ended December 31, 2014. Net operating cash inflows and outflows fluctuate primarily due to the timing of originations of loans held for sale and proceeds from loan sales.
Net cash outflows from investing activities totaled $784.5 million for the six months ended December 31, 2015, while outflows totaled $761.2 million for the same period in fiscal year 2015. The increase was primarily due to purchases of investment securities in the fiscal 2016 period compared to the same period in the prior year.

54


Our net cash provided by financing activities totaled $776.7 million for the six months ended December 31, 2015, and $753.5 million for the six months ended December 31, 2014. Net cash provided by financing activities increased primarily from increased net borrowings from FHLB for the six months ended December 31, 2015 compared to December 31, 2014.
During the six months ended December 31, 2015, 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 December 31, 2015, the Company had $1,731.5 million available immediately and reflects a fully collateralized position. At December 31, 2015, we also had two unsecured federal funds purchase lines with two different banks totaling $35.0 million, 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 December 31, 2015, the Bank did not have any borrowings outstanding and the amount available from this source was $7.1 million. The credit line is collateralized by consumer loans and mortgage-backed securities.
In an effort to expand the Bank’s liquidity options, we have issued brokered deposits of $1,137.3 million at December 31, 2015. 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 February 23, 2015, we entered into an ATM Equity Distribution Agreement with FBR Capital Markets & Co., Sterne, Agee & Leach, Inc. and Raymond James & Associates, Inc. (the “2015 Distribution Agents”) pursuant to which we may issue and sell through the 2015 Distribution Agents from time to time shares of our common stock in at the market offerings with an aggregate offering price of up to $50.0 million (the “2015 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 NASDAQ 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 2015 Distribution Agents under the Distribution Agreement will not exceed 2.5% of the gross sales price of the shares sold under the agreement. We have also agreed to reimburse the 2015 Distribution Agents for up to $75,000 in their expenses through September 30, 2015 and up to $25,000 thereafter and have provided the 2015 Distribution Agents with customary indemnification rights.
In February 2015, we commenced sales of common stock through the 2015 ATM Offering. The details of the shares of common stock sold through the 2015 ATM Offering through December 31, 2015 are as follows (dollars in thousands, except per share data):
Distribution Agent
Month
Weighted Average Per Share Price1
Number of
Shares Sold1
Net Proceeds
Compensation to Distribution Agent
FBR Capital Markets & Co.
February 2015
$
22.68

40,000

$
884

$
23

FBR Capital Markets & Co.
March 2015
$
23.38

518,528

$
11,818

$
303

FBR Capital Markets & Co.
April 2015
$
23.10

265,088

$
5,971

$
153

FBR Capital Markets & Co.
May 2015
$
23.69

122,800

$
2,837

$
73

FBR Capital Markets & Co.
June 2015
$
24.69

251,592

$
6,057

$
155

FBR Capital Markets & Co.
July 2015
$
27.37

280,000

$
7,471

$
192

FBR Capital Markets & Co.
August 2015
$
32.81

40,000

$
1,279

$
33

FBR Capital Markets & Co.
September 2015
$
30.99

240,000

$
7,252

$
186

FBR Capital Markets & Co.
October 2015
$
32.43

163,808

$
5,181

$
132

1- Amounts have been retroactively restated for all prior periods presented to reflect the four-for-one forward split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015
As of December 31, 2015, the total gross sales were $50 million, which completes the 2015 ATM offering.

OFF-BALANCE SHEET COMMITMENTS
At December 31, 2015, we had commitments to originate loans with an aggregate outstanding principal balance of $224.9 million, and commitments to sell loans with an aggregate outstanding principal balance of $62.8 million. We have no commitments to purchase loans, investment securities or any other unused lines of credit.


55


CONTRACTUAL OBLIGATIONS
We enter 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 December 31, 2015 totaled $404.0 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. However, based on past experience we believe 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 December 31, 2015
 
 
 
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
$
844,302

 
$
374,663

 
$
225,202

 
$
134,106

 
$
110,331

Time deposits2
978,970

 
418,938

 
101,094

 
96,451

 
362,487

Operating lease obligations3
16,678

 
3,357

 
7,357

 
5,964

 

Total
$
1,839,950

 
$
796,958

 
$
333,653

 
$
236,521

 
$
472,818

________________________________
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 December 31, 2015.
2. 
Amounts include principal and interest due to recipient.
3. 
Payments are for leases of real property.

CAPITAL RESOURCES AND REQUIREMENTS
Our Company and Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. Failure by our Company or 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. The Federal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our Bank. The following tables present regulatory capital information for our Company and Bank. Information presented for December 31, 2015, reflects the Basel III capital requirements that became effective January 1, 2015 for both our Company and Bank. Under these capital requirements and the regulatory framework for prompt corrective action, our Company and Bank must meet specific capital guidelines that involve quantitative measures of our Company and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our Company’s and 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 Company and Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require our Company and Bank maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. At December 31, 2015, our Company and Bank met all the capital adequacy requirements to which they were subject. At December 31, 2015, our Company and Bank were “well capitalized” under the regulatory framework for prompt corrective action. To be “well capitalized,” our Company and Bank must maintain minimum leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. Management believes that no conditions or events have occurred since December 31, 2015 that would materially adversely change the Company’s and Bank’s capital classifications. From time to time, we may need to raise additional capital to support our Company’s and Bank’s further growth and to maintain their “well capitalized” status.

56


The Bank’s capital amounts, capital ratios and capital requirements under Basel III were as follows:
 
Bofi Holding, Inc.
 
Bofi Federal Bank
 
“Well 
Capitalized”
Ratio
 
Minimum Capital
Ratio
(Dollars in thousands)
December 31, 2015
 
June 30,
2015
 
December 31, 2015
 
June 30,
2015
 
Regulatory Capital:
 
 
 
 
 
 
 
 
 
 
 
Tier 1
$
622,371

 
$
542,924

 
$
595,540

 
$
522,891

 
 
 
 
Common equity tier 1
$
617,308

 
$
537,861

 
$
595,540

 
$
522,891

 
 
 
 
Total capital (to risk-weighted assets)
$
657,545

 
$
571,251

 
$
630,714

 
$
551,218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Average adjusted
$
6,383,498

 
$
5,660,097

 
$
6,374,284

 
$
5,654,199

 
 
 
 
Total risk-weighted
$
4,154,059

 
$
3,591,432

 
$
4,148,652

 
$
3,585,149

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Regulatory Capital Ratios:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage (core) capital to adjusted average assets
9.75
%
 
9.59
%
 
9.34
%
 
9.25
%
 
5.00
%
 
4.00
%
Common equity tier 1 capital (to risk-weighted assets)
14.86
%
 
14.98
%
 
14.36
%
 
14.58
%
 
6.50
%
 
4.50
%
Tier 1 capital (to risk-weighted assets)
14.98
%
 
15.12
%
 
14.36
%
 
14.58
%
 
8.00
%
 
6.00
%
Total capital (to risk-weighted assets)
15.83
%
 
15.91
%
 
15.20
%
 
15.38
%
 
10.00
%
 
8.00
%

Beginning January 1, 2016, Basel III implements a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer will be exclusively composed of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. Commencing January 1, 2016, our Company and Bank will be expected to comply with the capital conservation buffer requirement, which will increase the three risk-based capital ratios by 0.625% each year through 2019, at which point, the common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums will be 7.0%, 8.5% and 10.5%, respectively. If the capital conservation buffer were in effect at December 31, 2015, our Company and Bank would exceed the requirement.
In connection with the approval of the acquisition of the H&R Block Bank deposits on September 1, 2015, the Bank executed a letter agreement with the OCC to maintain its Tier 1 leverage capital ratio at a minimum of 8.50% for the quarters ended in June, September and December and a minimum of 8.00% for the quarter ended in March, subject to certain adjustments.

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.

57


The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at December 31, 2015 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period:
 
Term to Repricing, Repayment, or Maturity at
 
December 31, 2015
(Dollars in thousands)
Six Months or Less
 
Over Six
Months Through
One Year
 
Over One
Year Through
Five Years
 
Over Five
Years
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
284,431

 
$

 
$

 
$

 
$
284,431

Securities1
356,758

 
15,165

 
43,990

 
36,145

 
452,058

Stock of the FHLB, at cost
67,419

 

 

 

 
67,419

Loans—net of allowance for loan loss
1,249,987

 
617,423

 
3,625,264

 
152,598

 
5,645,272

Loans held for sale
90,159

 

 

 

 
90,159

Total interest-earning assets
2,048,754

 
632,588

 
3,669,254

 
188,743

 
6,539,339

Non-interest earning assets



 

 

 
122,876

Total assets
$
2,048,754

 
$
632,588

 
$
3,669,254

 
$
188,743

 
$
6,662,215

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
1,335,241

 
$
2,876,732

 
$
152,059

 
$
329,376

 
$
4,693,408

Securities sold under agreements to repurchase

 

 
35,000

 

 
35,000

Advances from the FHLB
278,000

 
85,000

 
297,500

 
97,500

 
758,000

Subordinated debentures
5,155

 

 

 

 
5,155

Total interest-bearing liabilities
1,618,396

 
2,961,732

 
484,559

 
426,876

 
5,491,563

Other non-interest-bearing liabilities

 

 

 

 
557,322

Stockholders’ equity

 

 

 

 
613,330

Total liabilities and equity
$
1,618,396

 
$
2,961,732

 
$
484,559

 
$
426,876

 
$
6,662,215

Net interest rate sensitivity gap
$
430,358

 
$
(2,329,144
)
 
$
3,184,695

 
$
(238,133
)
 
$
1,047,776

Cumulative gap
$
430,358

 
$
(1,898,786
)
 
$
1,285,909

 
$
1,047,776

 
$
1,047,776

Net interest rate sensitivity gap—as a % of total interest earning assets
6.58
%
 
(35.62
)%
 
48.70
%
 
(3.64
)%
 
16.02
%
Cumulative gap—as % of total interest earning assets
6.58
%
 
(29.04
)%
 
19.66
%
 
16.02
 %
 
16.02
%
1.  
Comprised of agency and non-agency mortgage-backed securities, municipal securities and other non-agency debt securities, which are classified as held-to-maturity, available-for-sale and trading.
The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2015 on the basis of contractual maturities, adjusted for anticipated prepayments of principal and scheduled rate adjustments. The loan and securities prepayment rates reflected herein are based on historical experience. For the non-maturity deposit liabilities, we use decay rates and rate adjustments based upon our historical experience. Actual repayments of these instruments could vary substantially if future experience differs from our historic experience.
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 or deposit or loan maturity preferences.

58


The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest rates for the future 1-12 months and 13-24 months’ time periods. For purposes of modeling net interest income sensitivity the Bank assumes no growth in the balance sheet other than for retained earnings:
 
As of December 31, 2015
 
First 12 Months
 
Next 12 Months
(Dollars in thousands)
Net Interest Income
 
Percentage Change from Base
 
Net Interest Income
 
Percentage Change from Base
Up 200 basis points
$
268,826

 
3.0
 %
 
$
247,481

 
(3.9
)%
Base
261,057

 
 %
 
257,398

 
 %
Down 200 basis points
248,295

 
(4.9
)%
 
233,872

 
(9.2
)%
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 December 31, 2015
(Dollars in thousands)
Net
Present Value
 
Percentage Change from Base
 
Net
Present
Value as a
Percentage
of Assets
Up 300 basis points
$
653,660

 
(15.6
)%
 
10.3
%
Up 200 basis points
707,602

 
(8.6
)%
 
10.8
%
Up 100 basis points
753,811

 
(2.7
)%
 
11.2
%
Base
774,580

 
 %
 
11.3
%
Down 100 basis points
739,808

 
(4.5
)%
 
10.6
%

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 December 31, 2015 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

59


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.

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PART II—OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
The information set forth in Note 8 – “Commitments And Contingencies” to the Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference.
In addition, from time to time we may be a party to other claims or litigation that arise 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. None of such matters are expected to have a material adverse effect on the Company’s financial condition, results of operations or business.

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 Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2015. 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. The following supplements the risk factors in our Annual Report on Form 10-K referenced above:

We have been named as a party to purported class action and derivative action lawsuits, and we may be named in additional litigation, all of which could require significant management time and attention and result in significant legal expenses. An unfavorable outcome in one or more of these lawsuits could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As described in detail in Note 8 – “Commitments And Contingencies” to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, purported class action lawsuits have been filed in the United States District Court, Southern District of California, alleging, among other things, that our company, Chief Executive Officer and Chief Financial Officer violated the federal securities laws by failing to disclose the wrongful conduct that is alleged in a former employee complaint, and that as a result the Company’s statements regarding its internal controls, and portions of its financial statements, were false and misleading. Derivative lawsuits have also been filed against out management arising from the same events, alleging breach of fiduciary duty, mismanagement, abuse of control and unjust enrichment. Regardless of the merits, the expense of defending such litigation may have a substantial impact if our insurance carriers fail to cover the full cost of the litigation, and the time required to defend the actions could divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. An unfavorable outcome in such litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows.



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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 December 31, 2015. 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 December 31, 2015
 
 
 
 
 
 
 
October 1, 2015 to December 31, 2015

 
$

 

 
319,291

Balance at December 31, 2015
595,700

 
$
5.72

 
595,700

 
319,291

Stock Retained in Net Settlement
 
 
 
 
 
 
 
Beginning Balance at October 1, 2015
493,422

 
 
 
 
 
 
October 1, 2015 to December 31, 2015
24,273

 
 
 
 
 
 
Ending Balance at December 31, 2015
517,695

 
 
 
 
 
 
Total Treasury Shares at December 31, 2015
1,113,395

 
 
 
 
 
 


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.    MINE SAFETY DISCLOSURES
None.

ITEM 5.    OTHER INFORMATION
None.


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ITEM 6.
EXHIBITS

Exhibit
Number
Description
 
Incorporated By Reference to
 
 
 
 
10.1
Certificate of Amendment of Certificate of Incorporation of BofI Holding, Inc.
 
Exhibit 3.1 to Form 8-K filed on November 6, 2015.
 
 
 
 
31.1
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
 
 
 
 
31.2
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
 
 
 
 
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
 
Filed herewith.
 
 
 
 
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
 
Filed herewith.
 
 
 
 
101.INS
XBRL Instance Document
 
Filed herewith.
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
Filed herewith.
 
 
 
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
Filed herewith.
 
 
 
 
101.LAB
XBRL Taxonomy Label Linkbase Document
 
Filed herewith.
 
 
 
 
101.PRE
XBRL Taxonomy Presentation Linkbase Document
 
Filed herewith.
 
 
 
 
101.DEF
XBRL Taxonomy Definition Document
 
Filed herewith.
 
 
 
 




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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:
January 28, 2016
 
By:    
 
/s/ Gregory Garrabrants
 
 
 
 
 
Gregory Garrabrants
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Dated:
January 28, 2016
 
By:    
 
/s/ Andrew J. Micheletti
 
 
 
 
 
Andrew J. Micheletti
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 

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