AX 10-Q Quarterly Report Dec. 31, 2013

AXOS FINANCIAL, INC.

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10-Q 1 a10-q20131231bofiq2.htm 10-Q 10-Q 2013.12.31 BOFI Q2

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, 2013



¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-51201

BofI HOLDING, INC.

(Exact name of registrant as specified in its charter)



Delaware		33-0867444
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4350 La Jolla Village Drive, Suite 140, San Diego, CA		92122
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (858) 350-6200

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.



Large accelerated filer o	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). ¨ Yes x No

The number of shares outstanding of the Registrant’s common stock on the last practicable date: 14,116,304 shares of common stock, $0.01 par value per share, as of January 30, 2014 .

Table of Contents

B OF I HOLDING, INC.

INDEX



	Page
PART I – FINANCIAL INFORMATION	1

ITEM 1. FINANCIAL STATEMENTS	1
Condensed Consolidated Balance Sheets (unaudited) as of December 31, 2013 and June 30, 2013	1
Condensed Consolidated Statements of Income (unaudited) for the three and six months ended December 31, 2013 and 2012	2
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended December 31, 2013 and 2012	3
Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the six months ended December 31, 2013	4
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2013 and 2012	5
Notes to Condensed Consolidated Financial Statements	6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
SELECTED FINANCIAL DATA	38
RESULTS OF OPERATIONS	40
FINANCIAL CONDITION	47
LIQUIDITY	52
OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS	53
CAPITAL RESOURCES AND REQUIREMENTS	53
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	56

ITEM 4: CONTROLS AND PROCEDURES	56

PART II – OTHER INFORMATION	57

ITEM 1. LEGAL PROCEEDINGS	57

ITEM 1A. RISK FACTORS	57

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	57

ITEM 4. MINE SAFETY DISCLOSURES	57

ITEM 5. OTHER INFORMATION	57

ITEM 6. EXHIBITS	58

SIGNATURES	59

Table of Contents

PART I – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

B OF I HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(Dollars in thousands, except per share data)	December 31, 2013			June 30, 2013
ASSETS
Cash and due from banks	$	128,823		$	196,264
Federal funds sold	3,063			5,430
Total cash and cash equivalents	131,886			201,694
Securities:
Trading	7,546			7,111
Available-for-sale	211,328			185,607
Held-to-maturity fair value $248,797 as of December 2013 and $271,854 as of June 2013	258,955			275,691
Stock of the Federal Home Loan Bank, at cost	35,861			27,750
Loans held for sale, carried at fair value	24,467			36,665
Loans held for sale, lower of cost or fair value	62,895			40,326
Loans - net of allowance for loan losses of $15,200 as of December 2013 and $14,182 as of June 2013	2,777,325			2,256,918
Accrued interest receivable	9,416			9,763
Furniture, equipment and software—net	6,337			6,418
Deferred income tax	24,247			23,555
Cash surrender value of life insurance	5,536			5,445
Other real estate owned and repossessed vehicles	1,254			2,006
Other assets	11,246			11,822
TOTAL ASSETS	$	3,568,299		$	3,090,771

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	117,732		$	81,524
Interest bearing	2,285,357			2,010,475
Total deposits	2,403,089			2,091,999
Securities sold under agreements to repurchase	95,000			110,000
Advances from the Federal Home Loan Bank	729,000			590,417
Subordinated debentures	5,155			5,155
Accrued interest payable	1,582			1,674
Accounts payable and accrued liabilities and other liabilities	22,803			23,264
Total liabilities	3,256,629			2,822,509
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
Preferred stock— $0.01 par value; 1,000,000 shares authorized;
Series A—$10,000 stated value and liquidation preference per share; 515 shares issued and outstanding as of December 2013 and June 2013	5,063			5,063
Common stock—$0.01 par value; 50,000,000 shares authorized; 14,986,263 shares issued and 14,052,446 shares outstanding as of December 2013; 25,000,000 shares authorized; 14,638,229 shares issued and 13,733,325 shares outstanding as of June 2013	150			146
Additional paid-in capital	177,743			156,297
Accumulated other comprehensive income (loss)—net of tax	(12,027		)	(10,800		)
Retained earnings	152,994			127,813
Treasury stock, at cost; 933,817 shares as of December 2013 and 904,904 shares as of June 2013	(12,253		)	(10,257		)
Total stockholders' equity	311,670			268,262
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,568,299		$	3,090,771

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

B OF I 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)	2013			2012			2013			2012
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	34,957		$	28,119		$	65,342		$	53,327
Investments	6,270			5,448			12,231			11,229
Total interest and dividend income	41,227			33,567			77,573			64,556
INTEREST EXPENSE:
Deposits	5,717			5,749			11,322			11,286
Advances from the Federal Home Loan Bank	1,504			1,561			2,867			3,148
Other borrowings	1,179			1,321			2,446			2,701
Total interest expense	8,400			8,631			16,635			17,135
Net interest income	32,827			24,936			60,938			47,421
Provision for loan losses	1,000			1,950			1,500			4,500
Net interest income, after provision for loan losses	31,827			22,986			59,438			42,921
NON-INTEREST INCOME:
Realized gain on sale of mortgage-backed securities	—			—			208			—
Other-than-temporary loss on securities:
Total impairment losses	(1,606		)	(2,873		)	(1,352		)	(5,745		)
Loss recognized in other comprehensive income	733			2,053			(93		)	4,051
Net impairment loss recognized in earnings	(873		)	(820		)	(1,445		)	(1,694		)
Fair value gain on trading securities	(188		)	295			435			897
Total unrealized loss on securities	(1,061		)	(525		)	(1,010		)	(797		)
Prepayment penalty fee income	1,174			513			1,828			715
Gain on sale - other	1,047			—			4,136			—
Mortgage banking income	3,139			5,579			5,125			12,035
Banking service fees and other income	1,244			682			2,233			1,057
Total non-interest income	5,543			6,249			12,520			13,010
NON-INTEREST EXPENSE:
Salaries and related costs	7,960			6,952			15,743			13,321
Professional services	1,242			726			2,921			1,644
Occupancy and equipment	577			477			1,126			984
Data processing and internet	1,321			656			2,506			1,227
Advertising and promotional	1,214			1,116			1,803			1,910
Depreciation and amortization	696			449			1,417			786
Real estate owned and repossessed vehicles	(164		)	15			(95		)	113
FDIC and regulator fees	547			494			1,094			982
Other general and administrative	1,911			1,896			3,305			3,346
Total non-interest expense	15,304			12,781			29,820			24,313
INCOME BEFORE INCOME TAXES	22,066			16,454			42,138			31,618
INCOME TAXES	8,912			6,686			16,802			12,861
NET INCOME	$	13,154		$	9,768		$	25,336		$	18,757
NET INCOME ATTRIBUTABLE TO COMMON STOCK	$	13,077		$	9,436		$	25,181		$	18,348
COMPREHENSIVE INCOME	$	11,317		$	8,946		$	24,109		$	16,653
Basic earnings per share	$	0.92		$	0.71		$	1.77		$	1.44
Diluted earnings per share	$	0.91		$	0.70		$	1.77		$	1.37

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

B OF I HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended						Six Months Ended
	December 31,						December 31,
(Dollars in thousands)	2013			2012			2013			2012
NET INCOME	$	13,154		$	9,768		$	25,336		$	18,757
Other comprehensive income:
Net unrealized gain (loss) from available-for-sale securities	(1,983		)	391			(2,044		)	194
Other-than-temporary impairment on held-to-maturity securities recognized in other comprehensive income	(1,078		)	(1,762		)	—			(3,702		)
Unrealized gain (loss), net of reclassification adjustments, before income tax	(3,061		)	(1,371		)	(2,044		)	(3,508		)
Income tax (expense) benefit related to items of other comprehensive income	1,224			549			817			1,404
Other comprehensive income (loss)	(1,837		)	(822		)	(1,227		)	(2,104		)
Comprehensive income	$	11,317		$	8,946		$	24,109		$	16,653

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

B OF I HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)



	Preferred Stock			Common Stock						Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss, Net of Income Tax			Treasury Stock			Total
				Number of Shares
(Dollars in thousands)	Shares	Amount		Issued	Treasury		Outstanding	Amount
BALANCE — July 1, 2013	515	$	5,063	14,638,229	(904,904	)	13,733,325	$	146	$	156,297	$	127,813		$	(10,800	)	$	(10,257	)	$	268,262
Net income	—	—		—	—		—	—		—		25,336			—			—			25,336
Other comprehensive income	—	—		—	—		—	—		—		—			(1,227		)	—			(1,227		)
Cash dividends on preferred stock	—	—		—	—		—	—		—		(155		)	—			—			(155		)
Issuance of common stock	—	—		235,999	—		235,999	2		16,653		—			—			—			16,655
Stock-based compensation expense	—	—		—	—		—	—		2,075		—			—			—			2,075
Restricted stock grants and tax benefits	—	—		85,455	(28,913	)	56,542	1		1,895		—			—			(1,996		)	(100		)
Stock option exercises and tax benefits	—	—		26,580	—		26,580	1		823		—			—			—			824
BALANCE — December 31, 2013	515	$	5,063	14,986,263	(933,817	)	14,052,446	$	150	$	177,743	$	152,994		$	(12,027	)	$	(12,253	)	$	311,670

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

B OF I HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended
	December 31,
(Dollars in thousands)	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	25,336		$	18,757
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accretion of discounts on securities	(4,302		)	(3,801		)
Net accretion of discounts on loans	(1,181		)	(1,452		)
Stock-based compensation expense	2,075			1,542
Tax benefit from exercise of common stock options and vesting of restricted stock grants	(2,481		)	(413		)
Valuation of financial instruments carried at fair value	(435		)	(897		)
Impairment charge on securities	1,445			1,694
Provision for loan losses	1,500			4,500
Deferred income taxes	126			(548		)
Origination of loans held for sale	(377,254		)	(535,365		)
Unrealized (gain) loss on loans held for sale	134			(860		)
Gain on sales of loans held for sale	(9,395		)	(11,175		)
Proceeds from sale of loans held for sale	398,872			488,925
(Gain) loss on sale of other real estate and foreclosed assets	(233		)	3
Depreciation and amortization of furniture, equipment and software	1,417			786
Net changes in assets and liabilities which provide (use) cash:
Accrued interest receivable	347			(107		)
Other assets	924			6,215
Accrued interest payable	(92		)	29
Accounts payable and accrued liabilities	24			(2,344		)
Net cash provided by (used in) operating activities	36,827			(34,511		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities	(68,033		)	(23,490		)
Proceeds from repayment of securities	59,860			43,661
Purchase of stock of Federal Home Loan Bank	(16,569		)	(7,093		)
Proceeds from redemption of stock of Federal Home Loan Bank	8,458			3,004
Origination of loans	(1,067,741		)	(459,334		)
Origination of mortgage warehouse loans, net	—			(152,362		)
Proceeds from sales of other real estate owned and repossessed assets	1,824			759
Purchases of loans, net of discounts and premiums	—			(1,541		)
Principal repayments on loans	523,009			215,135
Net purchases of furniture, equipment and software	(1,336		)	(2,160		)
Net cash used in investing activities	(560,528		)	(383,421		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	311,090			353,177
Proceeds from Federal Home Loan Bank advances	415,000			176,000
Repayment of Federal Home Loan Bank advances	(276,417		)	(71,000		)
Repayment of other borrowings and securities sold under agreements to repurchase	(15,000		)	(5,000		)
Proceeds from exercise of common stock options	239			21
Proceeds from issuance of common stock	16,655			—
Proceeds from issuance of preferred stock	—			18,552
Tax benefit from exercise of common stock options and vesting of restricted stock grants	2,481			413
Cash dividends on preferred stock	(155		)	(155		)
Net cash provided by financing activities	453,893			472,008
NET CHANGE IN CASH AND CASH EQUIVALENTS	(69,808		)	54,076
CASH AND CASH EQUIVALENTS—Beginning of year	201,694			35,426
CASH AND CASH EQUIVALENTS—End of period	$	131,886		$	89,502
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds	$	16,727		$	17,105
Income taxes paid	$	13,301		$	16,700
Transfers to other real estate owned and repossessed vehicles from loans	$	1,084		$	1,488
Transfers from loans held for investment to loans held for sale	$	31,367		$	541
Transfers from loans held for sale to loans held for investment	$	1,471		$	42,755

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

B OF I HOLDING, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS PERIOD ENDED DECEMBER 31, 2013 AND 2012

(Dollars in thousands, except per share data)

(Unaudited)


1.	BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of BofI Holding, Inc. and its wholly owned subsidiary, BofI Federal Bank (formerly Bank of Internet USA, the “Bank” and collectively with BofI Holding, Inc., the “Company”). All significant intercompany balances 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, 2013 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2013 included in our Annual Report on Form 10-K.

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.


2.	SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Table of Contents

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 generally sells its loans with the servicing released to the buyer. Gains and losses on loan sales are recorded as mortgage banking income, based on the difference between sales proceeds and carrying value. Non-agency loans held for sale are carried at the lower of cost or fair value.

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

There may be times when loans have been classified as held for sale and for some reason cannot be sold. Loans transferred to a long-term-investment classification from held-for-sale are transferred at the lower of cost or market value on the transfer date. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. A loan cannot be classified as a long-term investment unless the Bank has both the ability and the intent to hold the loan for the foreseeable future or until maturity.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level estimated to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is charged against current period operating results and recoveries of loans previously charged-off. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible. Allocations of the allowance may be made for specific loans but the entire allowance is available for any loan that, in management’s judgment, should be charged off. See Note 5 of these financial statement footnotes and the financial statement footnotes for the year ended June 30, 2013 included in our Annual Report on Form 10-K for further information.


3.	FAIR VALUE

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820, 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 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.

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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, 2013 , the Company’s forecast of cash flows for both securities includes actual and forecasted defaults totaling 25.6% of all banks in the collateral pools, compared to 14.1% of the banks actually in default. The expected cash flows reflect the Company’s best estimate of all pool losses which are then applied to the overcollateralization reserve and the subordinated tranches to determine the cash flows. The Company selects a discount rate margin based upon the spread between U.S. Treasury rates and the market rates for active credit grades for financial companies. The discount margin when added to the U.S. Treasury rate determines the discount rate, reflecting primarily market liquidity and interest rate risk since expected credit loss is included in the cash flows. At December 31, 2013 , the Company used a weighted average discount margin of 450 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, 2013 is sensitive to an increase or decrease in the discount rate. An increase in the discount margin of 100 basis points would have reduced the total fair value of the trading securities and decreased net income before income tax by $671 . A decrease in the discount margin of 100 basis points would have increased the total fair value of the trading securities and increased net income before income tax by $1,197 .

Securities—available-for-sale and held-to-maturity . Available-for-sale securities are recorded at fair value and consist of residential mortgage-backed securities ("RMBS") and debt securities issued by U.S. agencies, RMBS issued by non-agencies, collateralized loan obligations, and municipals. Held-to-maturity securities are recorded at amortized cost and consist of RMBS issued by U.S. agencies, RMBS issued by non-agencies, and municipals. Fair value for U.S. agency securities is generally based on quoted market prices of similar securities used to form a dealer quote or a pricing matrix. There continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the availability and reliability of transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. The Company computes Level 3 fair values for each non-agency RMBS in the same manner (as described below) whether available-for-sale or held-to-maturity.

To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. The Company inputs for each security a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by and decreased by the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from

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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 housing price appreciation. The most updated national unemployment rate announced prior to the end of the period covered by this report (reported in November 2013) was 7% , down from the high of 10% in October 2009. Consensus estimates for unemployment are that the rate will continue to decline. Going forward, the Company is projecting lower monthly default rates. The range of loss severity rates applied to each default used in the Company’s projections at December 31, 2013 are from 1.6% up to 92.8% based upon individual bond historical performance. The default rates and the severities are projected for every non-agency RMBS security held by the Company and will vary monthly based upon the actual performance of the security and the macroeconomic factors discussed above.

To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime” securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally have borrowers with a little lower FICO and a little less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at December 31, 2013 are from 0.4% up to 19.6% 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, 2013 , the Company computed its discount rates as a spread between 247 and 1,007 basis points over the interpolated swap curve with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range.

Loans Held for Sale. Loans held for sale at fair value are primarily single-family and multifamily residential loans. The fair value of loans held for sale is determined by pricing for comparable assets or by existing forward sales commitment prices with investors.

Impaired Loans. Impaired loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or 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 Bank assesses loans individually and identifies impairment when the loan is classified as impaired or been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. The fair value of an impaired loan is determined based on an observable market price or current appraised value of the underlying collateral. The fair value of impaired loans with specific write-offs or allocations of the allowance for loan losses are generally based on recent real estate appraisals or other third-party valuations and analysis of cash flows. These appraisals and analyses may utilize a single valuation approach or a combination of approaches including comparable sales and income approaches. Adjustments are routinely made in the process by the appraisers to adjust for differences between the comparable sales and income data available. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining fair value.

Other Real Estate Owned 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 Banking Derivatives. Level 3 fair values for mortgage banking derivatives are either based upon prices in active secondary markets for identical securities or based on quoted market prices of similar assets used to form a dealer quote or a pricing matrix. If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment. These fair values are then adjusted for items such as fallout and estimated costs to originate the loan.

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

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The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and June 30, 2013 . Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:



	December 31, 2013
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
ASSETS:
Securities—Trading: Collateralized Debt Obligations	$	—	$	—	$	7,546	$	7,546
Securities—Available-for-Sale:
Agency Debt	$	—	$	—	$	—	$	—
Agency RMBS	—		63,365		—		63,365
Non-Agency RMBS	—		—		40,841		40,841
Municipal	—		28,155		—		28,155
Other Debt Securities	—		78,967		—		78,967
Total—Securities—Available-for-Sale	$	—	$	170,487	$	40,841	$	211,328
Loans Held for Sale	$	—	$	24,467	$	—	$	24,467
Other assets - Derivative Instruments	$	—	$	—	$	1,055	$	1,055
LIABILITIES:
Other liabilities - Derivative Instruments	$	—	$	—	$	—	$	—

	June 30, 2013
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

ASSETS:
Securities—Trading: Collateralized Debt Obligations	$	—	$	—	$	7,111	$	7,111
Securities—Available-for-Sale:
Agency Debt	$	—	$	25,063	$	—	$	25,063
Agency RMBS	—		69,882		—		69,882
Non-Agency RMBS	—		—		49,284		49,284
Municipal	—		11,103		—		11,103
Other Debt Securities	—		30,275		—		30,275
Total—Securities—Available-for-Sale	$	—	$	136,323	$	49,284	$	185,607
Loans Held for Sale	$	—	$	36,665	$	—	$	36,665
Other assets - Derivative Instruments	$	—	$	—	$	2,355	$	2,355
LIABILITIES:
Other liabilities - Derivative Instruments	$	—	$	—	$	133	$	133

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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, 2013
(Dollars in thousands)	Securities - Trading: Collateralized Debt Obligations			Securities - Available-for- Sale: Non-Agency RMBS			Derivative Instruments, net			Total
Assets:
Opening Balance	$	7,734		$	44,780		$	322		$	52,836
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	(188		)	—			—			(188		)
Included in earnings—Mortgage banking	—			—			733			733
Included in other comprehensive income	—			(1,362		)	—			(1,362		)
Purchases, issues, sales and settlements:
Purchases	—			—			—			—
Issues	—			—			—			—
Sales	—			—			—			—
Settlements	—			(2,576		)	—			(2,576		)
Other-than-temporary impairment	—			(1		)	—			(1		)
Closing balance	$	7,546		$	40,841		$	1,055		$	49,442

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	(188	)	$	—		$	733		$	545

	For the Six Months Ended
	December 31, 2013
(Dollars in thousands)	Securities - Trading: Collateralized Debt Obligations			Securities - Available-for- Sale: Non-Agency RMBS			Derivative Instruments, net			Total
Assets:
Opening Balance	$	7,111		$	49,284		$	2,222		$	58,617
Transfers into Level 3	—			—			—			—
Transfers out of Level 3	—			—			—			—
Total gains or losses for the period:
Included in earnings—Sale of mortgage-backed securities	—			—			—			—
Included in earnings—Fair value gain (loss) on trading securities	435			—			—			435
Included in earnings—Mortgage banking	—			—			(1,167		)	(1,167		)
Included in other comprehensive income	—			(918		)	—			(918		)
Purchases, issues, sales and settlements:
Purchases	—			—			—			—
Issues	—			—			—			—
Sales	—			—			—			—
Settlements	—			(7,524		)	—			(7,524		)
Other-than-temporary impairment	—			(1		)	—			(1		)
Closing balance	$	7,546		$	40,841		$	1,055		$	49,442

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	435		$	—		$	(1,167	)	$	(732	)

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	For the Three Months Ended
	December 31, 2012
(Dollars in thousands)	Trading Securities: Collateralized Debt Obligations		Securities - Available-for- Sale: Non-Agency RMBS			Derivative Instruments, net			Total
Assets:
Opening Balance	$	6,439	$	75,507		$	1,360		$	83,306
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	296		—			—			296
Included in earnings—Mortgage banking	—		—			104			104
Included in other comprehensive income	—		600			—			600
Purchases, issues, sales and settlements:
Purchases	—		—			—			—
Issues	—		—			—			—
Sales	—		—			—			—
Settlements	—		(6,072		)	—			(6,072		)
Other-than-temporary impairment	—		(152		)	—			(152		)
Closing balance	$	6,735	$	69,883		$	1,464		$	78,082

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	296	$	—		$	104		$	400

	For the Six Months Ended
	December 31, 2012
(Dollars in thousands)	Trading Securities: Collateralized Debt Obligations		Securities - Available-for- Sale: Non-Agency RMBS			Derivative Instruments, net			Total
Assets:
Opening Balance	$	5,838	$	83,127		$	1,585		$	90,550
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	897		—			—			897
Included in earnings—Mortgage banking	—		—			(121		)	(121		)
Included in other comprehensive income	—		(314		)	—			(314		)
Purchases, issues, sales and settlements:
Purchases	—		—			—			—
Issues	—		—			—			—
Sales	—		—			—			—
Settlements	—		(12,778		)	—			(12,778		)
Other-than-temporary impairment	—		(152		)	—			(152		)
Closing balance	$	6,735	$	69,883		$	1,464		$	78,082

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	897	$	—		$	(121	)	$	776

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



	December 31, 2013
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Securities - Trading: Collateralized Debt Obligations	$	7,546	Discounted Cash Flow	Total Projected Defaults, Discount Rate over Treasury	19.4 to 31.1% (25.6%) 4.5 to 4.5% (4.5%)
Securities - Available-for-Sale: Non-agency RMBS	$	40,841	Discounted Cash Flow	Constant Prepayment Rate, Constant Default Rate, Loss Severity, Discount Rate over LIBOR	2.1 to 45.3% (10.9%) 0.4 to 19.6% (6.2%) 1.6 to 92.8% (61.1%) 2.5 to 10.1% (5.9%)
Derivative Instruments, net	$	1,055	Sales Comparison Approach	Projected Sales Profit of Underlying Loans	0.5 to 1.5%



	June 30, 2013
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Securities - Trading: Collateralized Debt Obligations	$	7,111	Discounted Cash Flow	Total Projected Defaults, Discount Rate over Treasury	26.3 to 31.1% (28.5%) 4.5 to 4.5% (4.5%)
Securities - Available-for-Sale: Non-agency RMBS	$	49,284	Discounted Cash Flow	Constant Prepayment Rate, Constant Default Rate, Loss Severity, Discount Rate over LIBOR	2.5 to 55.4% (15.6%) 0.3 to 22.7% (10.3%) 1.6 to 96.2% (59.9%) 2.4 to 7.9% (5.6%)
Derivative Instruments, net	$	2,222	Sales Comparison Approach	Projected Sales Profit of Underlying Loans	0.5 to 1.5%

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

The table below summarizes changes in unrealized gains and losses and interest income recorded in earnings for level 3 trading assets and liabilities that are still held at the periods indicated:



	For the Three Months Ended					For the Six Months Ended
	December 31,					December 31,
(Dollars in thousands)	2013			2012		2013		2012
Interest income on investments	$	57		$	105	$	115	$	137
Fair value adjustment	(188		)	295		435		897
Total	$	(131	)	$	400	$	550	$	1,034

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The table below summarizes assets measured for impairment on a non-recurring basis was as follows:



	December 31, 2013
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Impaired Loans:
Single Family real estate secured:
Mortgage	$	—	$	—	$	10,687	$	10,687
Home Equity	—		—		32		32
Multifamily real estate secured	—		—		4,210		4,210
Commercial real estate secured	—		—		2,090		2,090
Auto and RV secured	—		—		982		982
Total	$	—	$	—	$	18,001	$	18,001
Other real estate owned and repossessed vehicles:
Single Family real estate secured:
Mortgage	$	—	$	—	$	562	$	562
Multifamily real estate secured	—		—		581		581
Auto and RV secured	—		—		111		111
Total	$	—	$	—	$	1,254	$	1,254
HTM Securities - Non-Agency RMBS	$	—	$	—	$	89,934	$	89,934


	June 30, 2013
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance

Impaired Loans:
Single Family real estate secured:
Mortgage	$	—	$	—	$	12,372	$	12,372
Home Equity	—		—		57		57
Multifamily real estate secured	—		—		4,505		4,505
Commercial real estate secured	—		—		3,559		3,559
Auto and RV secured	—		—		1,348		1,348
Total	$	—	$	—	$	21,841	$	21,841
Other real estate owned and foreclosed assets:
Single Family real estate secured:
Mortgage	$	—	$	—	$	567	$	567
Multifamily real estate secured	—		—		1,298		1,298
Auto and RV secured	—		—		141		141
Total	$	—	$	—	$	2,006	$	2,006
HTM Securities - Non-Agency RMBS	$	—	$	—	$	97,193	$	97,193

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 $18,001 , after charge-offs of $257 for the three months ended December 31, 2013 , and charge-offs of $257 for the six months ended December 31, 2013 , and life to date charge-offs of $2,779 . Impaired loans had a related allowance of $423 at December 31, 2013 .

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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 $1,254 after charge-offs of $61 for the three months ended December 31, 2013 . Our other real estate owned and foreclosed assets had a net carrying amount of $2,006 after charge-offs of $152 during the year ended June 30, 2013.

Held-to-maturity securities measured for impairment on a non-recurring basis had a fair value of $89,934 and a carrying amount of $95,837 at December 31, 2013 , after net impairment charges to income of $871 and $1,444 and changes to other comprehensive loss of $1,078 and $0 during the three and six months ended December 31, 2013 , respectively. The Company recognized a net impairment charges to income of $669 and $1,543 and changes in other comprehensive loss of $1,762 and $3,702 for the three and six month periods ended December 31, 2012 , respectively. These held-to-maturity securities are valued using Level 3 inputs.

The Company has elected the fair value option for Agency loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company's policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2013 and June 30, 2013 .

As of December 31, 2013 and June 30, 2013 , the aggregate fair value, contractual balance (including accrued interest), and gain was as follows:



(Dollars in thousands)	December 31, 2013		June 30, 2013
Aggregate fair value	$	24,467	$	36,665
Contractual balance	23,996		36,070
Gain	$	471	$	595

The total amount of gains and losses from changes in fair value included in earnings for the period indicated below for loans held for sale were:



	For the Three Months Ended				For the Six Months Ended
	December 31,				December 31,
(Dollars in thousands)	2013		2012		2013			2012
Interest income	$	195	$	363	$	390		$	794
Change in fair value	327		185		(1,696		)	740
Total	$	522	$	548	$	(1,306	)	$	1,534

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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, 2013
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans:
Single Family real estate secured:
Mortgage	$	10,687	Sales comparison approach	Adjustment for differences between the comparable sales	-81.8 to 34.8% (-0.1%)
Home Equity	$	32	Sales comparison approach	Adjustment for differences between the comparable sales	-17.5 to 55.1% (13.9%)
Multifamily real estate secured	$	4,210	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate	-67.4 to 35.9% (-21.1%)
Commercial real estate secured	$	2,090	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate	-20.5 to 28.8% (4.1%)
Auto and RV secured	$	982	Sales comparison approach	Adjustment for differences between the comparable sales	-19.7 to 87.9% (10.8%)
Other real estate owned:
Single Family real estate secured:
Mortgage	$	562	Sales comparison approach	Adjustment for differences between the comparable sales	-59.2 to 62.8% (-9.4%)
Multifamily real estate secured	$	581	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate	-50.6 to 26.3% (-16.3%)
Auto and RV secured	$	111	Sales comparison approach	Adjustment for differences between the comparable sales	-57.5 to 25.5% (6.0%)
HTM Securities - Non-Agency RMBS	$	89,934	Discounted Cash Flow	Constant Prepayment Rate, Constant Default Rate, Loss Severity, Discount Rate over LIBOR	2.1 to 18.6% (10.9%) 1.1 to 14.8% (6.8%) 3.5 to 75.4% (60.5%) 2.9 to 10.1% (7.2%)

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	June 30, 2013
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans:
Single Family real estate secured:
Mortgage	$	12,372	Sales comparison approach	Adjustment for differences between the comparable sales	-94.4 to 39.8% (-19.1%)
Home Equity	$	57	Sales comparison approach	Adjustment for differences between the comparable sales	-17.5 to 89.6% (22.6%)
Multifamily real estate secured	$	4,505	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate	-79.1 to 35.9% (-21.5%)
Commercial real estate secured	$	3,559	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate	-33.7 to 60.0% (5.8%)
Auto and RV secured	$	1,348	Sales comparison approach	Adjustment for differences between the comparable sales	-5.1 to 46.8% (9.7%)
Other real estate owned:
Single Family real estate secured:
Mortgage	$	567	Sales comparison approach	Adjustment for differences between the comparable sales	-50.6 to 22.6% (-18.7%)
Multifamily real estate secured	$	1,298	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate	-59.2 to 38.6% (-10.6%)
Auto and RV secured	$	141	Sales comparison approach	Adjustment for differences between the comparable sales	-57.5 to 19.9% (-3.4%)
HTM Securities - Non-Agency RMBS	$	97,193	Discounted Cash Flow	Constant Prepayment Rate, Constant Default Rate, Loss Severity, Discount Rate over LIBOR	6.1 to 55.4% (16.6%) 1.5 to 22.5% (12.2%) 3.5 to 74.5% (60.3%) 3.0 to 7.9% (6.8%)

Fair value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments at the periods indicated:



	December 31, 2013
			Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	131,886	$	131,886	$	—	$	—	$	131,886
Securities trading	7,546		—		—		7,546		7,546
Securities available-for-sale	211,328		—		170,487		40,841		211,328
Securities held-to-maturity	258,955		—		52,212		196,585		248,797
Loans held for sale, at fair value	24,467		—		24,467		—		24,467
Loans held for sale, at lower of cost or fair value	62,895		—		—		62,923		62,923
Loans held for investment—net	2,777,325		—		—		2,897,520		2,897,520
Accrued interest receivable	9,416		—		—		9,416		9,416
Financial liabilities:
Time deposits and savings	2,403,089		—		2,420,096		—		2,420,096
Securities sold under agreements to repurchase	95,000		—		100,218		—		100,218
Advances from the Federal Home Loan Bank	729,000		—		734,027		—		734,027
Subordinated debentures and other borrowings	5,155		—		5,554		—		5,554
Accrued interest payable	1,582		—		1,582		—		1,582

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Carrying amount and estimated fair values of financial instruments at period-end were as follows:



	June 30, 2013
	Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	201,694	$	201,694	$	—	$	—	$	201,694
Securities trading	7,111		—		—		7,111		7,111
Securities available-for-sale	185,607		—		136,323		49,284		185,607
Securities held-to-maturity	275,691		—		97,340		174,514		271,854
Loans held for sale, at fair value	36,665		—		36,665		—		36,665
Loans held for sale, at lower of cost or fair value	40,326		—		—		40,424		40,424
Loans held for investment—net	2,256,918		—		—		2,316,802		2,316,802
Accrued interest receivable	9,763		—		—		9,763		9,763
Financial liabilities:
Time deposits and savings	2,091,999		—		2,109,725		—		2,109,725
Securities sold under agreements to repurchase	110,000		—		117,215		—		117,215
Advances from the Federal Home Loan Bank	590,417		—		595,651		—		595,651
Subordinated debentures and other borrowings	5,155		—		5,317		—		5,317
Accrued interest payable	1,674		—		1,674		—		1,674

The methods and assumptions, not previously presented, used to estimate fair value are described as follows: Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits, borrowings or subordinated debt and for variable rate loans, deposits, borrowings or subordinated debt with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities and loans held for sale can be found earlier in this footnote. The carrying amount of 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.

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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, 2013 and June 30, 2013 were:



	December 31, 2013
	Trading		Available-for-sale									Held-to-maturity
(Dollars in thousands)	Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Carrying Amount		Unrecognized Gains		Unrecognized Losses			Fair Value
Mortgage-backed securities (RMBS):
U.S. agencies ¹	$	—	$	64,516	$	1,208	$	(2,359	)	$	63,365	$	50,437	$	1,775	$	—		$	52,212
Non-agency ²	—		37,746		3,617		(522		)	40,841		172,430		5,015		(19,508		)	157,937
Total mortgage-backed securities	—		102,262		4,825		(2,881		)	104,206		222,867		6,790		(19,508		)	210,149
Other debt securities:
U.S. agencies ¹	—		—		—		—			—		—		—		—			—
Municipal	—		28,678		35		(558		)	28,155		36,088		2,609		(49		)	38,648
Non-agency	7,546		78,371		599		(3		)	78,967		—		—		—			—
Total other debt securities	7,546		107,049		634		(561		)	107,122		36,088		2,609		(49		)	38,648
Total debt securities	$	7,546	$	209,311	$	5,459	$	(3,442	)	$	211,328	$	258,955	$	9,399	$	(19,557	)	$	248,797

	June 30, 2013
	Trading		Available-for-sale									Held-to-maturity
(Dollars in thousands)	Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Carrying Amount		Unrecognized Gains		Unrecognized Losses			Fair Value
Mortgage-backed securities (RMBS):
U.S. agencies ¹	$	—	$	70,517	$	1,143	$	(1,778	)	$	69,882	$	54,825	$	2,386	$	—		$	57,211
Non-agency ²	—		45,271		4,221		(208		)	49,284		184,742		5,758		(15,986		)	174,514
Total mortgage-backed securities	—		115,788		5,364		(1,986		)	119,166		239,567		8,144		(15,986		)	231,725
Other debt securities:
U.S. agencies ¹	—		25,049		14		—			25,063		—		—		—			—
Municipal	—		11,062		41		—			11,103		36,124		4,005		—			40,129
Non-agency	7,111		29,646		630		(1		)	30,275		—		—		—			—
Total other debt securities	7,111		65,757		685		(1		)	66,441		36,124		4,005		—			40,129
Total debt securities	$	7,111	$	181,545	$	6,049	$	(1,987	)	$	185,607	$	275,691	$	12,149	$	(15,986	)	$	271,854

__________________________________


^1.	U.S. government-backed or government sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.


^2.	Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by prime, Alt-A or pay-option ARM mortgages.

The Company’s non-agency RMBS available-for-sale portfolio with a total fair value of $40,841 at December 31, 2013 consists of twenty-four different issues of super senior securities with a fair value of $26,067 ; one senior structured whole loan security with a fair value of $14,678 and three mezzanine z-tranche securities with a fair value of $96 collateralized by seasoned prime and Alt-A first-lien mortgages. The Company acquired its mezzanine z-tranche securities in fiscal 2009 and accounts for them by measuring the excess of cash flows expected at acquisition over the purchase price (accretable yield) and recognizes interest income over the remaining life of the security.

The non-agency RMBS held-to-maturity portfolio with a carrying value of $172,430 at December 31, 2013 consists of 81 different issues of super senior securities totaling $170,349 and one senior-support security with a carrying value of $2,081 . Debt securities with evidence of credit quality deterioration since issuance and for which it is probable at purchase that the Company will be unable to collect all of the par value of the security are accounted for under ASC Topic 310, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("ASC Topic 310"). Under ASC Topic 310, the excess of cash flows expected at acquisition over the purchase price is referred to as the accretable yield and is recognized in interest income over the remaining life of the security. The Company has one senior support security that it acquired at a significant discount that evidenced credit deterioration at acquisition and is accounted for under ASC Topic

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310. 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 and a charge of $680 was recorded for the fiscal 2013 year and a charge of $572 for the six months ended December 31, 2013 was recorded. At December 31, 2013 the security had a remaining contractual par value of zero and amortizable and non-amortizable premium are currently projected to be zero and $2,472 , respectively.

The current face amounts of debt securities available-for-sale and held-to-maturity that were pledged to secure borrowings at December 31, 2013 and June 30, 2013 were $118,901 and $208,826 respectively.

The securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:



	December 31, 2013
	Available-for-sale securities in loss position for															Held-to-maturity securities in loss position for
	Less Than 12 Months					More Than 12 Months					Total					Less Than 12 Months					More Than 12 Months					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
RMBS:
U.S. agencies	$	25,818	$	(2,350	)	$	1,962	$	(9	)	$	27,780	$	(2,359	)	$	—	$	—		$	4	$	—		$	4	$	—
Non-agency	4,528		(43		)	2,127		(479		)	6,655		(522		)	18,260		(1,545		)	68,261		(17,963		)	86,521		(19,508		)
Total RMBS securities	30,346		(2,393		)	4,089		(488		)	34,435		(2,881		)	18,260		(1,545		)	68,265		(17,963		)	86,525		(19,508		)
Other Debt:
U.S. agencies	—		—			—		—			—		—			—		—			—		—			—		—
Municipal Debt	18,420		(558		)	—		—			18,420		(558		)	1,734		(49		)	—		—			1,734		(49		)
Non-agency	3,368		(3		)	—		—			3,368		(3		)	—		—			—		—			—		—
Total Other Debt	21,788		(561		)	—		—			21,788		(561		)	1,734		(49		)	—		—			1,734		(49		)
Total debt securities	$	52,134	$	(2,954	)	$	4,089	$	(488	)	$	56,223	$	(3,442	)	$	19,994	$	(1,594	)	$	68,265	$	(17,963	)	$	88,259	$	(19,557	)

	June 30, 2013
	Available-for-sale securities in loss position for															Held-to-maturity securities in loss position for
	Less Than 12 Months					More Than 12 Months					Total					Less Than 12 Months					More Than 12 Months					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
RMBS:
U.S. agencies	$	27,212	$	(1,714	)	$	4,611	$	(64	)	$	31,823	$	(1,778	)	$	3	$	—		$	5	$	—		$	8	$	—
Non-agency	6,070		(14		)	2,415		(194		)	8,485		(208		)	49,030		(2,517		)	48,009		(13,469		)	97,039		(15,986		)
Total RMBS securities	33,282		(1,728		)	7,026		(258		)	40,308		(1,986		)	49,033		(2,517		)	48,014		(13,469		)	97,047		(15,986		)
Other Debt:
U.S. agencies	—		—			—		—			—		—			—		—			—		—			—		—
Municipal Debt	—		—			—		—			—		—			—		—			—		—			—		—
Non-agency	7,232		(1		)	—		—			7,232		(1		)	—		—			—		—			—		—
Total Other Debt	7,232		(1		)	—		—			7,232		(1		)	—		—			—		—			—		—
Total debt securities	$	40,514	$	(1,729	)	$	7,026	$	(258	)	$	47,540	$	(1,987	)	$	49,033	$	(2,517	)	$	48,014	$	(13,469	)	$	97,047	$	(15,986	)

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There were 28 securities that were in a continuous loss position at December 31, 2013 for a period of more than 12 months. There were 24 securities that were in a continuous loss position at June 30, 2013 for a period of more than 12 months. The following table summarizes amounts of credit loss recognized in the income statement through other-than-temporary impairment charges which reduced non-interest income:



	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
(Dollars in thousands)	2013			2012			2013			2012
Beginning balance	$	(15,909	)	$	(12,709	)	$	(15,336	)	$	(11,835	)
Additions for the amounts related to credit loss for which an other-than-temporary impairment was not previously recognized	—			(295		)	—			(295		)
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized	(873		)	(525		)	(1,446		)	(1,399		)
Ending balance	$	(16,782	)	$	(13,529	)	$	(16,782	)	$	(13,529	)

At December 31, 2013 , 43 non-agency RMBS with a total carrying amount of $98,869 were determined to have cumulative credit losses of $16,782 of which $873 was recognized in earnings during the three months ended December 31, 2013 and $1,446 was recognized in earnings for the six months ended December 31, 2013. This quarter’s other-than-temporary impairment of $873 is related to seven non-agency RMBS with a total carrying amount of $17,818 . The Company measures its non-agency RMBS in an unrecognized loss position at the end of the reporting period for other-than-temporary impairment by comparing the present value of the cash flows currently expected to be collected from the security with its amortized cost basis. If the calculated present value is lower than the amortized cost, the difference is the credit component of an other-than-temporary impairment of its debt securities. The excess of present value over the fair value of the security (if any) is the noncredit component only if the Company does not intend to sell the security and will not be required to sell the security before recovery of its amortized cost basis. The credit component of the other-than-temporary impairment is recorded as a loss in earnings and the noncredit component as a charge to other comprehensive income, net of the related income tax benefit.

To determine the cash flow expected to be collected and to calculate the present value for purposes of testing for other-than-temporary impairment, the Company utilizes the same industry-standard tool and the same cash flows as those calculated for Level 3 fair values as discussed in 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.

During the three and six months ended December 31, 2013 , there were no security sales.

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The Company had recorded unrealized gains and unrealized losses in accumulated other comprehensive loss as follows:



(Dollars in thousands)	December 31, 2013			June 30, 2013
Available-for-sale debt securities—net unrealized gains	$	2,017		$	4,061
Held-to-maturity debt securities—non-credit related	(22,067		)	(22,067		)
Subtotal	(20,050		)	(18,006		)
Tax benefit	8,023			7,206
Net unrealized loss on investment securities in accumulated other comprehensive loss	$	(12,027	)	$	(10,800	)

The expected maturity distribution of the Company’s mortgage-backed securities and the contractual maturity distribution of the Company’s other debt securities classified as available-for-sale and held-to-maturity at December 31, 2013 were:



	December 31, 2013
	Available-for-sale				Held-to-maturity				Trading
(Dollars in thousands)	Amortized Cost		Fair Value		Carrying Amount		Fair Value		Fair Value
RMBS—U.S. agencies ¹ :
Due within one year	$	5,436	$	5,181	$	1,684	$	1,732	$	—
Due one to five years	17,414		16,743		6,454		6,640		—
Due five to ten years	15,276		14,954		7,341		7,556		—
Due after ten years	26,390		26,487		34,958		36,284		—
Total RMBS—U.S. agencies ¹	64,516		63,365		50,437		52,212		—
RMBS—Non-agency:
Due within one year	8,942		9,615		22,766		21,830		—
Due one to five years	18,952		20,615		54,795		51,852		—
Due five to ten years	7,810		8,677		36,694		33,464		—
Due after ten years	2,042		1,934		58,175		50,791		—
Total RMBS—Non-agency	37,746		40,841		172,430		157,937		—
Other debt:
Due within one year	18,690		18,736		—		—		—
Due one to five years	54,894		55,386		—		—		—
Due five to ten years	11,557		11,617		—		—		—
Due after ten years	21,908		21,383		36,088		38,648		7,546
Total other debt	107,049		107,122		36,088		38,648		7,546
Total	$	209,311	$	211,328	$	258,955	$	248,797	$	7,546

__________________________

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

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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, 2013			June 30, 2013
Single family real estate secured:
Mortgage	$	1,418,029		$	1,070,668
Home equity	19,758			22,537
Warehouse and other ¹	260,957			204,878
Multifamily real estate secured	873,619			768,023
Commercial real estate secured	27,665			29,000
Auto and RV secured	16,485			18,530
Factoring	106,494			108,144
Commercial & Industrial	104,895			78,721
Other	495			419
Total gross loans	2,828,397			2,300,920
Allowance for loan losses	(15,200		)	(14,182		)
Unaccreted discounts and loan fees	(35,872		)	(29,820		)
Total net loans	$	2,777,325		$	2,256,918

__________________________________


^1.	The balance of single family warehouse loans was $74,426 at December 31, 2013 and $107,806 at June 30, 2013 . The remainder of the balance is attributable to single family lender finance loans.

Allowance for Loan Losses. The Company’s goal is to maintain the allowance for loan losses (sometimes referred to as the allowance) at a level that is considered to be commensurate with estimated probable incurred credit losses in the portfolio. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. While the Company believes that the allowance for loan losses is adequate at December 31, 2013 , future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio.

Allowance for Loan Loss Disclosures— The assessment of the adequacy of the Company’s allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, change in volume and mix of loans, collateral values and charge-off history.

The Company provides general loan loss reserves for its recreational vehicle ("RV") and auto loans based upon the borrower credit score at the time of origination and the Company’s loss experience to date. The allowance for loan loss for the RV and auto loan portfolio at December 31, 2013 was determined by classifying each outstanding loan according to semi-annually refreshed FICO score and providing loss rates. The Company had $15,503 of RV and auto loan balances subject to general reserves as follows: FICO greater than or equal to 770: $4,082 ; 715 – 769: $4,935 ; 700 – 714: $1,182 ; 660 – 699: $2,595 and less than 660: $2,709 .

The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan and the loan-to-value ratio (LTV) at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each loan by the loan-to-value and applying a loss rates. The LTV groupings for each significant mortgage class are as follows:

The Company had $1,407,342 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $885,370 ; 61% – 70%: $434,800 ; 71% – 80%: $79,180 ; and greater than 80%: $7,992 .

The Company had $869,409 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $427,304 ; 56% – 65%: $263,288 ; 66% – 75%: $169,521 ; 76% – 80%: $7,421 and greater than 80%: $1,875 . The Company divides the LTV analysis into two classes, separating the purchased loans from the loans underwritten directly by the Company. Based on historical performance, the Company concluded that originated multifamily loans require lower estimated loss rates.

The Company had $25,575 of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $16,038 ; 51% – 60%: $6,522 ; 61% – 70%: $2,082 ; and 71% – 80%: $933 .

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 receivables factoring and 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.

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The following table summarizes activity in the allowance for loan losses by portfolio classes for the periods indicated:



	For the Three Months Ended December 31, 2013
	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, 2013	$	5,418		$	152		$	890		$	3,867		$	995		$	1,295		$	195	$	1,489		$	245		$	14,546
Provision for loan loss	647			(9		)	126			(748		)	653			6			45		514			(234		)	1,000
Charge-offs	(3		)	(12		)	—			(250		)	—			(121		)	—		—			(2		)	(388		)
Recoveries	2			7			—			—			—			26			—		—			7			42
Balance at December 31, 2013	$	6,064		$	138		$	1,016		$	2,869		$	1,648		$	1,206		$	240	$	2,003		$	16		$	15,200


	For the Six Months Ended December 31, 2013
	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, 2013	$	4,812		$	183		$	1,250		$	3,186		$	1,378		$	1,536		$	201	$	1,623		$	13		$	14,182
Provision for loan loss	1,351			(47		)	(234		)	(67		)	270			(210		)	39		380			18			1,500
Charge-offs	(101		)	(12		)	—			(250		)	—			(151		)	—		—			(28		)	(542		)
Recoveries	2			14			—			—			—			31			—		—			13			60
Balance at December 31, 2013	$	6,064		$	138		$	1,016		$	2,869		$	1,648		$	1,206		$	240	$	2,003		$	16		$	15,200



	For the Three Months Ended December 31, 2012
	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, 2012	$	4,666		$	181		$	—		$	2,212		$	603		$	2,145		$	—	$	364		$	—		$	10,171
Provision for loan loss	667			108			—			556			454			(152		)	—		317			—			1,950
Charge-offs	(200		)	(67		)	—			—			(274		)	(308		)	—		—			—			(849		)
Recoveries	9			5			—			143			—			14			—		6			—			177
Balance at December 31, 2012	$	5,142		$	227		$	—		$	2,911		$	783		$	1,699		$	—	$	687		$	—		$	11,449


	For the Six Months Ended December 31, 2012
	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, 2012	$	4,126		$	192		$	—		$	2,558		$	398		$	2,159		$	—	$	203		$	—		$	9,636
Provision for loan loss	1,471			252			—			585			1,565			14			—		613			—			4,500
Charge-offs	(464		)	(233		)	—			(375		)	(1,180		)	(488		)	—		(137		)	—			(2,877		)
Recoveries	9			16			—			143			—			14			—		8			—			190
Balance at December 31, 2012	$	5,142		$	227		$	—		$	2,911		$	783		$	1,699		$	—	$	687		$	—		$	11,449

Table of Contents

The following table presents our loans evaluated individually for impairment by class:



	December 31, 2013
(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:
Purchased	$	6,912		$	1,951		$	4,961		$	(10	)	$	4,951		$	—
Multifamily Real Estate Secured:
Purchased	3,471			816			2,655			6			2,661			—
Auto and RV Secured:
In-house originated	809			562			247			15			262			—

With an allowance recorded:
Single Family Real Estate Secured:
Mortgage:
In-house originated	1,480			7			1,473			(2		)	1,471			5
Purchased	4,262			9			4,253			5			4,258			32
Home Equity:
In-house originated	32			—			32			(2		)	30			—
Multifamily Real Estate Secured:
In-house originated	836			12			824			9			833			1
Purchased	732			1			731			1			732			11
Commercial Real Estate Secured:
In-house originated	2,113			23			2,090			2			2,092			40
Auto and RV Secured:
In-house originated	739			4			735			11			746			334
Total	$	21,386		$	3,385		$	18,001		$	35		$	18,036		$	423
As a % of total gross loans	0.76		%	0.12		%	0.64		%	—		%	0.64		%	0.01		%



	June 30, 2013
(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:
Purchased	$	7,988		$	2,183		$	5,805		$	(8	)	$	5,797		$	—
Home Equity:
In-house originated	91			70			21			—			21			—
Multifamily Real Estate Secured:
Purchased	2,497			594			1,903			6			1,909			—
Commercial Real Estate Secured:
Purchased	2,316			888			1,428			1			1,429			—
Auto and RV Secured:
In-house originated	1,274			831			443			22			465			—

With an allowance recorded:
Single Family Real Estate Secured:
Mortgage:
In-house originated	2,179			—			2,179			4			2,183			4
Purchased	4,388			—			4,388			3			4,391			33
Home Equity:
In-house originated	35			—			35			—			35			—
Multifamily Real Estate Secured:
In-house originated	851			—			851			10			861			107
Purchased	1,752			—			1,752			17			1,769			5
Commercial Real Estate Secured:
Purchased	2,131			—			2,131			1			2,132			411
Auto and RV Secured:
In-house originated	905			—			905			16			921			505
Total	$	26,407		$	4,566		$	21,841		$	72		$	21,913		$	1,065
As a % of total gross loans	1.15		%	0.20		%	0.95		%	—		%	0.95		%	0.05		%

Table of Contents

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:



	December 31, 2013
	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	$	37	$	—		$	—		$	12	$	40		$	334	$	—		$	—		$	—	$	423
Collectively evaluated for impairment	6,027		138			1,016			2,857		1,608			872		240			2,003			16		14,777
Total ending allowance balance	$	6,064	$	138		$	1,016		$	2,869	$	1,648		$	1,206	$	240		$	2,003		$	16	$	15,200
Loans:
Loans individually evaluated for impairment ¹	$	10,687	$	32		$	—		$	4,210	$	2,090		$	982	$	—		$	—		$	—	$	18,001
Loans collectively evaluated for impairment	1,407,342		19,726			260,957			869,409		25,575			15,503		106,494			104,895			495		2,810,396
Principal loan balance	1,418,029		19,758			260,957			873,619		27,665			16,485		106,494			104,895			495		2,828,397
Unaccreted discounts and loan fees	4,333		(9		)	(1,805		)	1,968		(65		)	266		(39,533		)	(1,027		)	—		(35,872		)
Accrued interest receivable	3,136		74			296			2,815		31			83		3			681			—		7,119
Total recorded investment in loans	$	1,425,498	$	19,823		$	259,448		$	878,402	$	27,631		$	16,834	$	66,964		$	104,549		$	495	$	2,799,644

________________

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



	June 30, 2013
	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	$	37	$	—		$	—		$	112	$	411		$	505	$	—		$	—		$	—	$	1,065
Collectively evaluated for impairment	4,775		183			1,250			3,074		967			1,031		201			1,623			13		13,117
Total ending allowance balance	$	4,812	$	183		$	1,250		$	3,186	$	1,378		$	1,536	$	201		$	1,623		$	13	$	14,182
Loans:
Loans individually evaluated for impairment ¹	$	12,372	$	56		$	—		$	4,506	$	3,559		$	1,348	$	—		$	—		$	—	$	21,841
Loans collectively evaluated for impairment	1,058,296		22,481			204,878			763,517		25,441			17,182		108,144			78,721			419		2,279,079
Principal loan balance	1,070,668		22,537			204,878			768,023		29,000			18,530		108,144			78,721			419		2,300,920
Unaccreted discounts and loan fees	1,796		(6		)	(901		)	784		(74		)	332		(31,488		)	(263		)	—		(29,820		)
Accrued interest receivable	3,649		92			216			2,992		88			91		61			833			1		8,023
Total recorded investment in loans	$	1,076,113	$	22,623		$	204,193		$	771,799	$	29,014		$	18,953	$	76,717		$	79,291		$	420	$	2,279,123

________________

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

Table of Contents

Credit Quality Disclosures. Non-performing loans consisted of the following:



(Dollars in thousands)	December 31, 2013			June 30, 2013
Single Family Real Estate Secured:
Mortgage:
In-house originated	$	1,473		$	2,179
Purchased	8,210			9,174
Home Equity:
In-house originated	—			37
Multifamily Real Estate Secured:
In-house originated	824			851
Purchased	3,386			2,031
Commercial Real Estate Secured:
Purchased	2,090			3,559
Total nonaccrual loans secured by real estate	15,983			17,831
Auto and RV Secured	299			472
Total non-performing loans	$	16,282		$	18,303
Non-performing loans to total loans	0.58		%	0.80		%

Approximately 30.11% of our non-performing loans at December 31, 2013 were considered TDRs, compared to 28.86% at June 30, 2013 . Borrowers that make timely payments after TDRs are considered non-performing for at least six months .

Generally, after six months of timely payments, those TDRs are reclassified from the non-performing loan category to the performing loan category and any previously deferred interest income is recognized. Approximately 59.47% of the Bank’s non-performing loans are single family first mortgages already written down to 50.69% in aggregate, of the original appraisal value of the underlying properties. Generally these loans have experienced longer delays completing the foreclosure process due to the poor servicing practices of one of our seller servicers.

The following table provides the outstanding unpaid balance of loans that are performing and non-performing by portfolio class:



	December 31, 2013
	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	$	1,408,346	$	19,758	$	260,957	$	869,409	$	25,575	$	16,186	$	106,494	$	104,895	$	495	$	2,812,115
Non-performing	9,683		—		—		4,210		2,090		299		—		—		—		16,282
Total	$	1,418,029	$	19,758	$	260,957	$	873,619	$	27,665	$	16,485	$	106,494	$	104,895	$	495	$	2,828,397



	June 30, 2013
	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	$	1,059,315	$	22,500	$	204,878	$	765,141	$	25,441	$	18,058	$	108,144	$	78,721	$	419	$	2,282,617
Non-performing	11,353		37		—		2,882		3,559		472		—		—		—		18,303
Total	$	1,070,668	$	22,537	$	204,878	$	768,023	$	29,000	$	18,530	$	108,144	$	78,721	$	419	$	2,300,920

Table of Contents

The Company divides loan balances when determining general loan loss reserves between purchases and originations as follows:



	December 31, 2013
	Single Family Real Estate Secured: Mortgage						Multifamily Real Estate Secured						Commercial Real Estate Secured
(Dollars in thousands)	Origination		Purchase		Total		Origination		Purchase		Total		Origination		Purchase		Total
Performing	$	1,290,796	$	117,550	$	1,408,346	$	699,348	$	170,061	$	869,409	$	6,274	$	19,301	$	25,575
Non-performing	1,473		8,210		9,683		824		3,386		4,210		—		2,090		2,090
Total	$	1,292,269	$	125,760	$	1,418,029	$	700,172	$	173,447	$	873,619	$	6,274	$	21,391	$	27,665



	June 30, 2013
	Single Family Real Estate Secured: Mortgage						Multifamily Real Estate Secured						Commercial Real Estate Secured
(Dollars in thousands)	Origination		Purchase		Total		Origination		Purchase		Total		Origination		Purchase		Total
Performing	$	925,974	$	133,341	$	1,059,315	$	559,163	$	205,978	$	765,141	$	6,627	$	18,814	$	25,441
Non-performing	2,179		9,174		11,353		851		2,031		2,882		—		3,559		3,559
Total	$	928,153	$	142,515	$	1,070,668	$	560,014	$	208,009	$	768,023	$	6,627	$	22,373	$	29,000

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

The Company classifies these loans as performing TDRs temporarily modified as TDR and are included in impaired loans as follows:



	December 31, 2013
	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	$	1,003	$	33	$	—	$	—	$	—	$	683	$	—	$	—	$	—	$	1,719
Non-performing loans	9,683		—		—		4,210		2,090		299		—		—		—		16,282
Total impaired loans	$	10,686	$	33	$	—	$	4,210	$	2,090	$	982	$	—	$	—	$	—	$	18,001

	June 30, 2013
	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	$	1,019	$	20	$	—	$	1,623	$	—	$	876	$	—	$	—	$	—	$	3,538
Non-performing loans	11,353		37		—		2,882		3,559		472		—		—		—		18,303
Total impaired loans	$	12,372	$	57	$	—	$	4,505	$	3,559	$	1,348	$	—	$	—	$	—	$	21,841

Table of Contents

The Company recognizes interest on performing TDRs temporarily modified as TDR, which is shown in conjunction with average balances as follows:




	For the Three Months Ended December 31, 2013
	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	$	10	$	1	$	—	$	—	$	—	$	14	$	—	$	—	$	—	$	25
Average balances of performing TDRs	$	1,006	$	39	$	—	$	543	$	941	$	696	$	—	$	—	$	—	$	3,225
Average balances of impaired loans	$	10,390	$	43	$	—	$	4,417	$	3,046	$	1,049	$	19	$	—	$	1	$	18,965

	For the Three Months Ended December 31, 2012
	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	$	17	$	—	$	—	$	30	$	—	$	20	$	—	$	—	$	—	$	67
Average balances of performing TDRs	$	1,670	$	42	$	—	$	721	$	—	$	1,069	$	—	$	—	$	—	$	3,502
Average balances of impaired loans	$	13,014	$	79	$	—	$	5,084	$	4,005	$	1,941	$	—	$	—	$	—	$	24,123



	For the Six Months Ended December 31, 2013
	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	$	20	$	1	$	—	$	—	$	—	$	28	$	—	$	—	$	—	$	49
Average balances of performing TDRs	$	1,010	$	37	$	—	$	1,084	$	1,180	$	779	$	—	$	—	$	—	$	4,090
Average balances of impaired loans	$	10,855	$	49	$	—	$	4,658	$	3,295	$	1,165	$	19	$	—	$	9	$	20,050

	For the Six Months Ended December 31, 2012
	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	$	33	$	1	$	—	$	59	$	—	$	40	$	—	$	—	$	—	$	133
Average balances of performing TDRs	$	1,500	$	38	$	—	$	498	$	—	$	1,179	$	—	$	—	$	—	$	3,215
Average balances of impaired loans	$	13,596	$	133	$	5,520	$	2,886	$	—	$	2,057	$	—	$	—	$	—	$	24,192

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 a year which then reverted back to fully amortizing.

Table of Contents

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company uses the following definitions for risk ratings.

Pass. Loans classified as pass are well protected by the current net worth and paying capacity of the obligor or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

Special Mention . Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The Company reviews and grades loans following a continuous loan review process, featuring coverage of all loan types and business lines at least quarterly. Continuous reviewing provides more effective risk monitoring because it immediately tests for potential impacts caused by changes in personnel, policy, products or underwriting standards.

Table of Contents

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



	December 31, 2013
(Dollars in thousands)	Pass			Special Mention			Substandard			Doubtful			Total
Single Family Real Estate Secured:
Mortgage:
In-house originated	$	1,290,796		$	—		$	1,473		$	—		$	1,292,269
Purchased	116,047			604			9,109			—			125,760
Home Equity:
In-house originated	4,821			31			103			—			4,955
Purchased	14,803			—			—			—			14,803
Warehouse and other:
In-house originated	260,957			—			—			—			260,957
Multifamily Real Estate Secured:
In-house originated	692,189			2,191			5,792			—			700,172
Purchased	160,531			6,993			5,923			—			173,447
Commercial Real Estate Secured:
In-house originated	6,274			—			—			—			6,274
Purchased	16,225			955			3,497			714			21,391
Auto and RV Secured:
In-house originated	15,583			296			606			—			16,485
Factoring:
In-house originated	106,494			—			—			—			106,494
Commercial & Industrial:
In-house originated	89,555			15,340			—			—			104,895
Other	495			—			—			—			495
Total	$	2,774,770		$	26,410		$	26,503		$	714		$	2,828,397
As a % of total gross loans	98.10		%	0.93		%	0.94		%	0.03		%	100.00		%

	June 30, 2013
(Dollars in thousands)	Pass			Special Mention			Substandard			Doubtful			Total
Single Family Real Estate Secured:
Mortgage:
In-house originated	$	920,254		$	5,371		$	2,528		$	—		$	928,153
Purchased	131,213			1,323			9,979			—			142,515
Home Equity:
In-house originated	5,866			32			56			—			5,954
Purchased	16,583			—			—			—			16,583
Warehouse and other:
In-house originated	204,878			—			—			—			204,878
Multifamily Real Estate Secured:
In-house originated	554,924			1,358			3,625			107			560,014
Purchased	193,804			8,482			5,723			—			208,009
Commercial Real Estate Secured:
In-house originated	6,627			—			—			—			6,627
Purchased	17,146			951			3,865			411			22,373
Auto and RV Secured:
In-house originated	17,508			247			775			—			18,530
Factoring:
In-house originated	108,144			—			—			—			108,144
Commercial & Industrial:
In-house originated	77,721			1,000			—			—			78,721
Other	417			2			—			—			419
Total	$	2,255,085		$	18,766		$	26,551		$	518		$	2,300,920
As a % of total gross loans	98.01		%	0.82		%	1.15		%	0.02		%	100.00		%

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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, 2013
(Dollars in thousands)	30-59 Days Past Due			60-89 Days Past Due			90+ Days Past Due			Total
Single family real estate secured:
Mortgage:
In-house originated	$	2,233		$	—		$	618		$	2,851
Purchased	1,166			570			4,033			5,769
Multifamily real estate secured:
In-house originated	—			2,113			—			2,113
Purchased	—			—			731			731
Commercial real estate secured:
Purchased	713			—			—			713
Auto and RV secured	468			34			119			621
Total	$	4,580		$	2,717		$	5,501		$	12,798
As a % of total gross loans	0.16		%	0.10		%	0.19		%	0.45		%

	June 30, 2013
(Dollars in Thousands)	30-59 Days Past Due			60-89 Days Past Due			90+ Days Past Due			Total
Single family real estate secured:
Mortgage
In-house originated	$	—		$	3,051		$	—		$	3,051
Purchased	1,400			565			7,323			9,288
Home equity
In-house originated	125			32			12			169
Multifamily real estate secured
In-house originated	3,701			—			—			3,701
Purchased	—			60			399			459
Commercial real estate secured
Purchased	316			—			—			316
Auto and RV secured	453			21			177			651
Factoring	112			—			—			112
Commercial and industrial	4,824			—			—			4,824
Total	$	10,931		$	3,729		$	7,911		$	22,571
As a % of total gross loans	0.48		%	0.16		%	0.34		%	0.98		%

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6.	STOCK-BASED COMPENSATION

The Company has two equity incentive plans, the 2004 Stock Incentive Plan (“2004 Plan”) and the 1999 Stock Option Plan (collectively, the "Plans"), which provide for the granting of non-qualified and incentive stock options, restricted stock and restricted stock units, stock appreciation rights and other awards to employees, directors and consultants.

1999 Stock Option Plan . In July 1999, the Company’s Board of Directors approved the 1999 Stock Option Plan ("1999 Plan") and in August 2001, the Company’s shareholders approved an amendment to the 1999 Plan such that 15% of the outstanding shares of the Company would always be available for grants under the 1999 Plan. The 1999 Plan is designed to encourage selected employees and directors to improve operations and increase profits, and to accept or continue employment or association with the Company through participation in the growth in the value of the common stock. The 1999 Plan requires that option exercise prices be not less than fair market value per share of common stock on the option grant date for incentive and non-qualified options. The options issued under the 1999 Plan generally vest in between three and five years. Option expiration dates are established by the plan administrator but may not be later than 10 years after the date of the grant.

In November 2007, the shareholders of the Company approved the termination of the 1999 Plan. No new option awards will be made under the 1999 Plan and the outstanding awards under the 1999 Plan will continue to be subject to the terms and conditions of the 1999 Plan.

2004 Stock Incentive Plan . In October 2004, the Company’s Board of Directors and the stockholders approved the 2004 Plan. In November 2007, the 2004 Plan was amended and approved by the Company’s stockholders. The maximum number of shares of common stock available for issuance under the 2004 Plan is 14.8% of the Company’s outstanding common stock measured from time to time. In addition, the number of shares of the Company’s common stock reserved for issuance will also automatically increase by an additional 1.5% on the first day of each of four fiscal years starting July 1, 2007. At December 31, 2013 , there were a maximum of 2,555,356 shares available for issuance under the limits of the 2004 Plan.

Stock Options . At December 31, 2013 , expense related to stock option grants has been fully recognized.

A summary of stock option activity under the Plans during the periods indicated is presented below:



	Number of Shares		Weighted-Average Exercise Price Per Share
Outstanding - July 1, 2012	190,117		$	8.93
Granted	—		—
Exercised	(27,135	)	9.59
Canceled	(500	)	11.00
Outstanding - June 30, 2013	162,482		$	8.81
Granted	—		—
Exercised	(26,580	)	8.98
Canceled	—		—
Outstanding - December 31, 2013	135,902		$	8.78
Options exercisable - June 30, 2013	162,482		$	8.81
Options exercisable - December 31, 2013	135,902		$	8.78

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The following table summarizes information as concerning currently outstanding and exercisable options:



As of December 31, 2013
Options Outstanding				Options Exercisable
Exercise Prices		Number Outstanding	Weighted-Average Remaining Contractual Life (Years)	Number Exercisable	Weighted- Average Exercise Price
$	7.35	43,850	2.57	43,850	$	7.35
8.50		7,500	1.91	7,500	8.50
9.20		7,500	1.64	7,500	9.20
9.50		65,020	1.57	65,020	9.50
10.00		12,032	0.50	12,032	10.00
$	8.78	135,902	1.82	135,902	$	8.78

The aggregate intrinsic value of options outstanding and options exercisable under the Plans at December 31, 2013 was $9,466 .

Restricted Stock and Restricted Stock Units . Under the 2004 Plan, employees and directors are eligible to receive grants of restricted stock and restricted stock units. The Company determines stock-based compensation expense using the fair value method. The fair value of restricted stock and restricted stock units is equal to the closing sale price of the Company’s common stock on the date of grant.

During the six months ended December 31, 2013 and 2012 , the Company granted 129,141 and 34,524 restricted stock units respectively, to employees and directors. Restricted stock unit awards (“RSUs”) granted during these quarters vest over 3 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, 2013 and 2012 included stock award expense was $1,109 and $834 , with total income tax benefit of $448 and $334 , respectively. For the six months ended December 31, 2013 and 2012 , stock awards expense was $2,075 and $1,542 , with total income tax benefit of $838 and $617 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, 2013 , unrecognized compensation expense related to non-vested awards aggregated to $10,950 and is expected to be recognized in future periods as follows:



(Dollars in thousands)	Stock Award Compensation Expense
For the fiscal year remainder:
2014	$	2,360
2015	4,005
2016	3,254
2017	1,331
Total	$	10,950

The following table presents the status and changes in restricted stock grants for the periods indicated:



	Restricted Stock and Restricted Stock Unit Shares		Weighted-Average Grant-Date Fair Value
Non-vested balance at July 1, 2012	360,662		$	13.20
Granted	181,483		28.83
Vested	(213,355	)	13.32
Cancelled	(30,305	)	18.01
Non-vested balance at June 30, 2013	298,485		$	22.13
Granted	129,141		60.03
Vested	(85,455	)	16.45
Cancelled	(6,096	)	30.93
Non-vested balance at December 31, 2013	336,075		$	37.98

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The total fair value of shares vested for the three and six months ended December 31, 2013 was $1,640 and $5,877 , respectively. The total fair value of shares vested for the three and six months ended December 31, 2012 was $490 and $2,085 , respectively.

2004 Employee Stock Purchase Plan . In October 2004, the Company’s Board of Directors and stockholders approved the 2004 Employee Stock Purchase Plan, which is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code. An aggregate total of 500,000 shares of the Company’s common stock has been reserved for issuance and will be available for purchase under the 2004 Employee Stock Purchase Plan. At December 31, 2013 , there have been no shares issued under the 2004 Employee Stock Purchase Plan.


7.	EARNINGS PER SHARE ("EPS")

Basic EPS excludes dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in the Company's earnings.

The following table presents the calculation of basic and diluted EPS:



	Three Months Ended						Six Months Ended
	December 31,						December 31,
(Dollars in thousands, except per share data)	2013			2012			2013			2012
Earnings Per Common Share
Net income	$	13,154		$	9,768		$	25,336		$	18,757
Preferred stock dividends	(77		)	(332		)	(155		)	(409		)
Net income attributable to common shareholders	$	13,077		$	9,436		$	25,181		$	18,348
Average common shares issued and outstanding	13,934,068			12,820,810			13,853,538			12,322,932
Average unvested RSU shares	341,637			403,802			336,030			384,905
Total qualifying shares	14,275,705			13,224,612			14,189,568			12,707,837
Earnings per common share	$	0.92		$	0.71		$	1.77		$	1.44
Diluted Earnings Per Common Share
Net income attributable to common shareholders	$	13,077		$	9,436		$	25,181		$	18,348
Preferred stock dividends to dilutive convertible preferred	—			254			—			254
Dilutive net income attributable to common shareholders	$	13,077		$	9,690		$	25,181		$	18,602
Average common shares issued and outstanding	14,275,705			13,224,612			14,189,568			12,707,837
Dilutive effect of stock options	74,519			63,771			77,150			68,759
Dilutive effect of convertible preferred stock	—			536,057			—			761,907
Total dilutive common shares issued and outstanding	14,350,224			13,824,440			14,266,718			13,538,503
Diluted earnings per common share	$	0.91		$	0.70		$	1.77		$	1.37


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, 2013 , the Company had commitments to originate $36,497 in fixed rate loans and $88,826 in variable rate loans, totaling an aggregate outstanding principal balance of $125,323 . Our fixed rate loan commitments to originate had rates ranging from 3.38% to 9.29% . At December 31, 2013 , the Company also had commitments to sell $35,246 in fixed rate loans and $3,529 in variable rate loans, totaling an aggregate outstanding principal balance of $38,775 .

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

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


9.	RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has granted related party loans collateralized by real property to officers, directors and their affiliates that are considered to be insiders by regulation. There 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, 2013 , and five refinances of existing loans and one new loan for a net $1,400 granted during the six months ended December 31, 2012 .

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Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items, contractual obligations and capital resources of BofI Holding, Inc. and subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our Annual Report on Form 10-K for the year ended June 30, 2013 , and the interim unaudited condensed consolidated financial statements and notes thereto contained in this report.

Some matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “will,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which we operate and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include economic conditions, changes in the interest rate environment, changes in the competitive marketplace, risks associated with credit quality and other risk factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Our Performance” in our Annual Report on Form 10-K for the year ended June 30, 2013 , which has been filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.

General

Our company, BofI Holding, Inc., is the holding company for BofI Federal Bank, a diversified financial services company with approximately $3.6 billion in assets that provides consumer and business banking products through its branchless, low-cost distribution channels and affinity partners. The Bank has deposit and loan customers nationwide including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. The Bank generates fee income from consumer and business products including fees from loans originated for sale and transaction fees earned from processing payment activity. BofI Holding, Inc.'s common stock is listed on the NASDAQ Global Select Market and is a component of the Russell 3000 Index and the S&P SmallCap 600 Index.

BofI Federal Bank is a federal savings bank wholly-owned by our company and regulated by the Office of the Comptroller of the Currency ("OCC"). The parent company, BofI Holding, Inc., is a unitary savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.

We distribute our deposit products through a wide range of retail distributions channels, and our deposits consist of demand, savings and time deposits accounts. We distribute our loan products through our retail, correspondent and wholesale channels, and the loans we retain are primarily first mortgages secured by single family real property and by multifamily real property. Our mortgage-backed securities consist primarily of mortgage pass-through securities issued by government-sponsored entities and non-agency collateralized mortgage obligations and pass-through mortgage-backed securities issued by private sponsors. We believe our flexibility to adjust our asset generation channels has been a competitive advantage allowing us to avoid markets and products where credit fundamentals are poor.

Critical Accounting Policies

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

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

Use of Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as core earnings. We define net income without the after-tax impact of realized and unrealized securities gains and losses as adjusted earnings ("core earnings"), a non-GAAP measurement, which we believe provides useful information about the Bank's operating performance. 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.

SELECTED FINANCIAL DATA

The following tables set forth certain selected financial data concerning the periods indicated:

B OF I HOLDING, INC. AND SUBSIDIARY

SELECTED CONSOLIDATED FINANCIAL INFORMATION



(Dollars in thousands)	December 31, 2013		June 30, 2013		December 31, 2012
Selected Balance Sheet Data:
Total assets	$	3,568,299	$	3,090,771	$	2,874,322
Loans—net of allowance for loan losses	2,777,325		2,256,918		2,155,306
Loans held for sale, at fair value	24,467		36,665		57,498
Loans held for sale, lower of cost or market	62,895		40,326		39,684
Allowance for loan losses	15,200		14,182		11,449
Securities—trading	7,546		7,111		6,735
Securities—available-for-sale	211,328		185,607		167,167
Securities—held-to-maturity	258,955		275,691		288,452
Total deposits	2,403,089		2,091,999		1,968,265
Securities sold under agreements to repurchase	95,000		110,000		115,000
Advances from the FHLB	729,000		590,417		527,000
Subordinated debentures and other borrowings	5,155		5,155		5,155
Total stockholders’ equity	311,670		268,262		242,613

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B OF I 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)	2013			2012			2013			2012
Selected Income Statement Data:
Interest and dividend income	$	41,227		$	33,567		$	77,573		$	64,556
Interest expense	8,400			8,631			16,635			17,135
Net interest income	32,827			24,936			60,938			47,421
Provision for loan losses	1,000			1,950			1,500			4,500
Net interest income after provision for loan losses	31,827			22,986			59,438			42,921
Non-interest income	5,543			6,249			12,520			13,010
Non-interest expense	15,304			12,781			29,820			24,313
Income before income tax expense	22,066			16,454			42,138			31,618
Income tax expense	8,912			6,686			16,802			12,861
Net income	$	13,154		$	9,768		$	25,336		$	18,757
Net income attributable to common stock	$	13,077		$	9,436		$	25,181		$	18,348
Per Share Data:
Net income:
Basic	$	0.92		$	0.71		$	1.77		$	1.44
Diluted	$	0.91		$	0.70		$	1.77		$	1.37
Book value per common share	$	21.82		$	17.08		$	21.82		$	17.08
Tangible book value per common share	$	21.82		$	17.08		$	21.82		$	17.08
Weighted average number of shares outstanding:
Basic	14,275,705			13,224,612			14,189,568			12,707,837
Diluted	14,350,224			13,824,440			14,266,718			13,538,503
Common shares outstanding at end of period	14,052,446			12,824,195			14,052,446			12,824,195
Common shares issued at end of period	14,986,263			13,665,957			14,986,263			13,665,957
Performance Ratios and Other Data:
Loan originations for investment	$	597,072		$	331,999		$	1,067,741		$	611,696
Loan originations for sale	$	190,558		$	280,569		$	377,254		$	535,365
Loan purchases	$	—		$	—		$	—		$	1,541
Return on average assets	1.58		%	1.45		%	1.60		%	1.45		%
Return on average common stockholders’ equity	17.69		%	17.32		%	17.71		%	17.85		%
Interest rate spread ¹	3.87		%	3.69		%	3.80		%	3.63		%
Net interest margin ²	4.01		%	3.81		%	3.94		%	3.76		%
Efficiency ratio	39.89		%	40.98		%	40.59		%	40.23		%
Capital Ratios:
Equity to assets at end of period	8.73		%	8.44		%	8.73		%	8.44		%
Tier 1 leverage (core) capital to adjusted tangible assets ³	9.01		%	8.52		%	9.01		%	8.52		%
Tier 1 risk-based capital ratio ³	15.03		%	13.95		%	15.03		%	13.95		%
Total risk-based capital ratio ³	15.73		%	14.60		%	15.73		%	14.60		%
Tangible capital to tangible assets ³	9.01		%	8.52		%	9.01		%	8.52		%
Asset Quality Ratios:
Net annualized charge-offs to average loans outstanding	0.05		%	0.13		%	0.04		%	0.28		%
Non-performing loans to total loans	0.58		%	0.95		%	0.58		%	0.95		%
Non-performing assets to total assets	0.49		%	0.79		%	0.49		%	0.79		%
Allowance for loan losses to total loans at end of period	0.54		%	0.52		%	0.54		%	0.52		%
Allowance for loan losses to non-performing loans	93.35		%	54.92		%	93.35		%	54.92		%

_________________________

^1. Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the annualized weighted average

rate paid on interest-bearing liabilities.

^2. Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

^3. Reflects regulatory capital ratios of BofI Federal Bank.

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RESULTS OF OPERATIONS

Comparison of the Three and Six Months Ended December 31, 2013 and 2012

For the three months ended December 31, 2013 , we had net income of $13.2 million compared to net income of $9.8 million for the three months ended December 31, 2012 . Net income attributable to common stockholders was $13.1 million or $0.91 per diluted share for the three months ended December 31, 2013 compared to net income attributable to common shareholders of $9.4 million or $0.70 per diluted share for the three months ended December 31, 2012 . For the six months ended December 31, 2013 , we had net income of $25.3 million compared to net income of $18.8 million for the six months ended December 31, 2012 . Net income attributable to common stockholders was $25.2 million or $1.77 per diluted share for the six months ended December 31, 2013 compared to net income attributable to common shareholders of $18.3 million or $1.37 per diluted share for the six months ended December 31, 2012 .

Other key comparisons between our operating results for the three and six months ended December 31, 2013 and 2012 are as follows:

•

Net interest income increased $7.9 million and $13.5 million due to a 25.2% and 22.7% increase in average earning assets in the three and six months ended December 31, 2013 , respectively. These increases were primarily the result of growth in our loan portfolio and a net decrease in the average funding rate of our liabilities. Our net interest margin increased 20 basis points and 18 basis points in the three and six months ended December 31, 2013 compared to December 31, 2012 , respectively. The overall rate on interest earning assets was lower by 10 basis points for both the three and six months ended December 31, 2013 compared to December 31, 2012 , primarily due to a decrease in market interest rates for new loans and borrower repayments of higher rate loans. This reduction on the asset side was more than offset by a 28 basis point and 27 basis point reduction in average rates paid on interest bearing liabilities for the three and six months ending December 31, 2013 compared to December 31, 2012 , respectively. The reduction was primarily due to a shift in the deposit mix towards interest bearing demand and savings accounts and away from time deposits, as well as a decrease in average rates paid on demand and savings accounts of 12 basis points and 13 basis points for the three and six months ended December 31, 2013 compared to December 31, 2012 , respectively.

•

Non-interest income decreased $0.7 million and $0.5 million for the three and six months ended December 31, 2013 compared to the three and six months ended December 31, 2012 , respectively. The decrease in non-interest income for the three months ended December 31, 2013 was the result of a $2.4 million decrease in mortgage banking income, partially offset by an increase of $1.0 million in gain on sale - other, primarily resulting from sales of structured settlements, a $0.6 million increase in banking service fees and other income, and a $0.7 million increase in prepayment penalty fee income. The decreases in non-interest income for the six months ended December 31, 2013 compared to December 31, 2012 was the result of a $6.9 million decrease in mortgage banking income, partially offset by an increase of $4.1 million in gain on sale - other from sales of structured settlements, a $1.2 million increase in banking service fees and other income and a $1.1 million increase in prepayment penalty fee income.

•

Non-interest expense increased $2.5 million and $5.5 million for the three and six months ended December 31, 2013 compared to the three and six months ended December 31, 2012 , respectively. For the three months ended December 31, 2013 compared to the three months ended December 31, 2012 salaries and related expenses increased $1.0 million primarily due to the overall increase in staff, mainly in our loan and deposit areas to support the overall growth of the Bank. Professional fees increased $0.5 million due to new business costs. Data processing and internet were up $0.7 million due to core system updates and increased bank customers. For the six months ended December 31, 2013 compared to the six months ended December 31, 2012 salaries and related expenses increased $2.4 million primarily due to the overall increase in staff, mainly in our loan and deposit areas to support the overall growth of the Bank. Professional fees increased $1.3 million due to new business costs. Data processing and internet were up $1.3 million due to core system updates and increased bank customers.

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Core earnings for the three months ended December 31, 2013 and 2012 , were $13.8 million and $10.1 million , respectively. For the six months ended December 31, 2013 and 2012 core earnings were $25.8 million and $19.2 million , respectively.

Below is a reconciliation of net income to core earnings:



	Three Months Ended						Six Months Ended
	December 31,						December 31,
(Dollars in thousands)	2013			2012			2013			2012
Net Income	$	13,154		$	9,768		$	25,336		$	18,757
Realized securities gains	—			—			(208		)	—
Unrealized securities losses	1,061			525			1,010			797
Tax provision	(429		)	(213		)	(320		)	(324		)
Core earnings	$	13,786		$	10,080		$	25,818		$	19,230

Net Interest Income

Net interest income for the three and six months ended December 31, 2013 totaled $32.8 million and $60.9 million , an increase of 31.6% and 28.5% , compared to net interest income of $24.9 million and $47.4 million for the three and six months ended December 31, 2012 , respectively. The growth of net interest income for both the three and six months ended December 31, 2013 is primarily due to net loan portfolio growth, which increased average earning assets, and due to a net decrease in the average funding rate of our liabilities.

Total interest and dividend income during the three and six months ended December 31, 2013 increased 22.8% to $41.2 million and 20.2% to $77.6 million , respectively, compared to $33.6 million and $64.6 million during the three and six months ended December 31, 2012 , respectively. The increase in interest and dividend income for the three and six months ended December 31, 2013 was primarily attributable to growth in average earning assets from growth in the loan portfolio. The average balance of loans increased 25.4% and 23.6% for the three and six months ended December 31, 2013 compared to the three and six months ended December 31, 2012 , respectively. The increase in interest income on loans was partially offset by lower rates earned on loans and mortgage-backed securities. The loan portfolio yield for the three and six months ended December 31, 2013 each decreased 4 basis points compared to the same 2012 periods, respectively. The total interest-earning assets yield decreased 10 basis points for both the three and six months ended December 31, 2013 compared to the same 2012 periods, respectively. The net growth in average earning assets for the three and six months ended December 31, 2013 was funded largely by increased deposits and to a lesser extent borrowings.

Total interest expense was $8.4 million and $16.6 million for the three and six months ended December 31, 2013 , a decrease of $0.2 million or 2.7% and of $0.5 million or 2.9% as compared with the same periods in 2012 , respectively. The average funding rate for the three and six months ended December 31, 2013 compared to the same 2012 periods decreased by 28 basis points and 27 basis points while average interest-bearing liabilities grew 21.2% and 18.7% , respectively. Contributing to the decrease in the average funding rates were decreases in the average rates for demand and savings deposits of 12 basis points and 13 basis points and FHLB advances of 71 basis points and 56 basis points for the three and six months ended December 31, 2013 compared to the same periods in 2012 , respectively. Net interest margin, defined as annualized net interest income divided by average earning assets, increased by 20 basis points to 4.01% and 18 basis points to 3.94% for the three and six months ended December 31, 2013 , compared with 3.81% and 3.76% for the three and six months ended December 31, 2012 , respectively.

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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, 2013 and 2012 :



	For the three month period ended
	December 31,
	2013						2012
(Dollars in thousands)	Average Balance ²		Interest Income/ Expense		Average Yields Earned/Rates Paid ¹		Average Balance ²		Interest Income/ Expense		Average Yields Earned/Rates Paid ¹
Assets:
Loans ^{3, 4}	$	2,663,793	$	34,957	5.25	%	$	2,124,865	$	28,119	5.29	%
Federal funds sold	—		—		—	%	9,402		9		0.38	%
Interest-earning deposits in other financial institutions	85,896		54		0.25	%	553		—		—	%
Mortgage-backed and other investment securities ⁵	492,871		5,840		4.74	%	461,340		5,309		4.60	%
Stock of the FHLB, at cost	33,932		376		4.43	%	20,217		130		2.57	%
Total interest-earning assets	3,276,492		41,227		5.03	%	2,616,377		33,567		5.13	%
Non-interest-earning assets	60,617						71,649
Total assets	$	3,337,109					$	2,688,026
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings	$	1,299,963	$	2,283	0.70	%	$	818,322	$	1,687	0.82	%
Time deposits	822,471		3,434		1.67	%	1,063,088		4,062		1.53	%
Securities sold under agreements to repurchase	100,544		1,143		4.55	%	115,218		1,283		4.45	%
Advances from the FHLB	669,066		1,504		0.90	%	388,223		1,561		1.61	%
Other borrowings	5,155		36		2.79	%	5,155		38		2.95	%
Total interest-bearing liabilities	2,897,199		8,400		1.16	%	2,390,006		8,631		1.44	%
Non-interest-bearing demand deposits	113,064						43,653
Other non-interest-bearing liabilities	26,159						17,054
Stockholders’ equity	300,687						237,313
Total liabilities and stockholders’ equity	$	3,337,109					$	2,688,026
Net interest income			$	32,827					$	24,936
Interest rate spread ⁶					3.87	%					3.69	%
Net interest margin ⁷					4.01	%					3.81	%

__________________________


^1.	Annualized.


^2.	Average balances are obtained from daily data.


^3.	Loans include loans held for sale, loan premiums and unearned fees.


^4.	Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant. Also, includes $32.4 million and $33.1 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2013 and 2012 three month periods, respectively.


^5.	Includes $5.5 million of municipal securities which are taxed at a reduced rate for both the 2013 and 2012 three month periods, respectively.


^6.	Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.


^7.	Net interest margin represents net interest income as a percentage of average interest-earning assets.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid



	For the six month period ended
	December 31,
	2013						2012
(Dollars in thousands)	Average Balance ²		Interest Income/ Expense		Average Yields Earned/Rates Paid ¹		Average Balance ²		Interest Income/ Expense		Average Yields Earned/Rates Paid ¹
Assets:
Loans ^{3, 4}	$	2,504,630	$	65,342	5.22	%	$	2,025,874	$	53,327	5.26	%
Federal funds sold	—		—		—	%	8,063		12		0.30	%
Interest-earning deposits in other financial institutions	73,073		96		0.26	%	430		—		—	%
Mortgage-backed and other investment securities ^4,5	488,345		11,449		4.69	%	469,476		11,065		4.71	%
Stock of the FHLB, at cost	30,144		686		4.55	%	20,437		152		1.49	%
Total interest-earning assets	3,096,192		77,573		5.01	%	2,524,280		64,556		5.11	%
Non-interest-earning assets	66,361						68,678
Total assets	$	3,162,553					$	2,592,958
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings	$	1,174,717	$	4,060	0.69	%	$	778,947	$	3,175	0.82	%
Time deposits	892,591		7,262		1.63	%	1,011,710		8,111		1.60	%
Securities sold under agreements to repurchase	105,272		2,374		4.51	%	117,609		2,622		4.46	%
Advances from the FHLB	573,310		2,867		1.00	%	403,454		3,148		1.56	%
Other borrowings	5,155		72		2.79	%	5,155		79		3.06	%
Total interest-bearing liabilities	2,751,045		16,635		1.21	%	2,316,875		17,135		1.48	%
Non-interest-bearing demand deposits	97,962						32,735
Other non-interest-bearing liabilities	24,154						17,978
Stockholders’ equity	289,392						225,370
Total liabilities and stockholders’ equity	$	3,162,553					$	2,592,958
Net interest income			$	60,938					$	47,421
Interest rate spread ⁶					3.80	%					3.63	%
Net interest margin ⁷					3.94	%					3.76	%

__________________________


^1.	Annualized.


^2.	Average balances are obtained from daily data.


^3.	Loans include loans held for sale, loan premiums and unearned fees.


^4.	Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant. Also, includes $32.4 million and $33.1 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2013 and 2012 six month periods, respectively.


^5.	Includes $5.5 million of municipal securities which are taxed at a reduced rate for both the 2013 and 2012 six month periods, respectively.


^6.	Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.


^7.	Net interest margin represents net interest income as a percentage of average interest-earning assets.

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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, 2013 and 2012 :



	For the Three Months Ended												For the Six Months Ended
	December 31,												December 31,
	2013 vs 2012												2013 vs 2012
	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	$	7,127		$	(212	)	$	(77	)	$	6,838		$	12,591		$	(405	)	$	(171	)	$	12,015
Federal funds sold	(9		)	(9		)	9			(9		)	(12		)	(12		)	12			(12		)
Interest-earning deposits in other financial institutions	—			—			54			54			—			1			95			96
Mortgage-backed and other investment securities	363			161			7			531			444			(47		)	(13		)	384
Stock of the FHLB, at cost	88			94			64			246			72			313			149			534
	$	7,569		$	34		$	57		$	7,660		$	13,095		$	(150	)	$	72		$	13,017
Increase/(decrease) in interest expense:
Interest-bearing demand and savings	$	987		$	(245	)	$	(146	)	$	596		$	1,623		$	(506	)	$	(232	)	$	885
Time deposits	(920		)	372			(80		)	(628		)	(953		)	152			(48		)	(849		)
Securities sold under agreements to repurchase	(163		)	29			(6		)	(140		)	(275		)	29			(2		)	(248		)
Advances from the FHLB	1,130			(689		)	(498		)	(57		)	1,325			(1,130		)	(476		)	(281		)
Other borrowings	—			(2		)	—			(2		)	—			(7		)	—			(7		)
	$	1,034		$	(535	)	$	(730	)	$	(231	)	$	1,720		$	(1,462	)	$	(758	)	$	(500	)

Provision for Loan Losses

The loan loss provision was $1.0 million for the three months ended December 31, 2013 compared to $2.0 million for the three months ended December 31, 2012 . The loan loss provision was $1.5 million for the six months ended December 31, 2013 compared to $4.5 million for the same period in 2012 . The decrease in the provision for the three and six month periods ended December 31, 2013 is due to a favorable decrease in the loan charge-offs partially offset by 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.”

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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)	2013			2012			Inc (Dec)			2013			2012			Inc (Dec)
Realized gain on securities:
Sale of mortgage-backed securities	$	—		$	—		$	—		$	208		$	—		$	208
Total realized gain on securities	—			—			—			208			—			208
Other-than-temporary loss on securities:
Total impairment losses	$	(1,606	)	$	(2,873	)	$	1,267		$	(1,352	)	$	(5,745	)	$	4,393
Loss recognized in other comprehensive loss	733			2,053			(1,320		)	(93		)	4,051			(4,144		)
Net impairment loss recognized in earnings	(873		)	(820		)	(53		)	(1,445		)	(1,694		)	249
Fair value gain on trading securities	(188		)	295			(483		)	435			897			(462		)
Total unrealized loss on securities	(1,061		)	(525		)	(536		)	(1,010		)	(797		)	(213		)
Prepayment penalty fee income	1,174			513			661			1,828			715			1,113
Gain on sale - other	1,047			—			1,047			4,136			—			4,136
Mortgage banking income	3,139			5,579			(2,440		)	5,125			12,035			(6,910		)
Banking service fees and other income	1,244			682			562			2,233			1,057			1,176
Total non-interest income	$	5,543		$	6,249		$	(706	)	$	12,520		$	13,010		$	(490	)

Non-interest income decreased $0.7 million to $5.5 million for the three months ended December 31, 2013 . The decrease was primarily the result of a decline of $2.4 million in mortgage banking income as long-term interest rates increased and the number of loans eligible for refinancing dropped. An additional contributing factor to the decrease in non-interest income was an unrealized loss of $0.5 million in securities. The decrease was partially offset by a $1.0 million increase in gain on sale - other, primarily resulting from sales of structured settlements, a $0.7 million increase in prepayment penalty fee income and a $0.6 million increase in banking service fees and other income due primarily to prepaid card sponsorships. Non-interest income decreased $0.5 million to $12.5 million for the six months ended December 31, 2013 . The decrease was primarily the result of a decline of $6.9 million in mortgage banking income as interest rates increased and the number of loans eligible for refinancing dropped. The decrease in non-interest income was partially offset by a $4.1 million increase in gain on sale - other, primarily resulting from sales of structured settlements. Other contributions to partially offset the decrease in non-interest income were a $1.1 million increase in prepayment penalty fee income and a $1.2 million increase in banking service fees and other income due primarily to prepaid card sponsorships added in fiscal 2014.

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)	2013			2012		Inc (Dec)			2013			2012		Inc (Dec)
Salaries and related costs	$	7,960		$	6,952	$	1,008		$	15,743		$	13,321	$	2,422
Professional services	1,242			726		516			2,921			1,644		1,277
Occupancy and equipment	577			477		100			1,126			984		142
Data processing and internet	1,321			656		665			2,506			1,227		1,279
Advertising and promotional	1,214			1,116		98			1,803			1,910		(107		)
Depreciation and amortization	696			449		247			1,417			786		631
Real estate owned and repossessed vehicles	(164		)	15		(179		)	(95		)	113		(208		)
FDIC and regulator fees	547			494		53			1,094			982		112
Other general and administrative	1,911			1,896		15			3,305			3,346		(41		)
Total non-interest expenses	$	15,304		$	12,781	$	2,523		$	29,820		$	24,313	$	5,507

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Non-interest expense, which is comprised primarily of compensation, data processing and internet expenses, occupancy, advertising and promotional and other operating expenses, was $15.3 million for the three months ended December 31, 2013 , up from $12.8 million for the three months ended December 31, 2012 . The increase in compensation expense for the three months ended December 31, 2013 is primarily due to the expansion of the Banks' staffing for lending products, strategic partnerships, business banking and regulatory compliance. Non-interest expense was $29.8 million for the six months ended December 31, 2013 , up from $24.3 million for the six months ended December 31, 2012 . The increase in compensation expense for the six months ended December 31, 2013 is primarily due to the expansion of the Banks' staffing for lending products, strategic partnerships, business banking and regulatory compliance.

Total salaries and related costs increased $1.0 million to $8.0 million for the quarter ended December 31, 2013 compared to $7.0 million for the quarter ended December 31, 2012 due to increased staffing levels to support growth in deposit and lending activities. Total salaries and related costs increased $2.4 million to $15.7 million for the six months ended December 31, 2013 compared to $13.3 million for the six months ended December 31, 2012 due to increased staffing levels to support growth in deposit and lending activities. Our staff increased to 323 from 283, or 14.1% between December 31, 2013 and 2012, respectively.

Professional services, which include accounting and legal fees, increased $0.5 million and $1.3 million for the three and six months ended December 31, 2013 , compared to the three and six month periods last year, respectively. The increases were primarily due to legal fees related to acquisition contracts and business expansion costs.

Advertising and promotional expense increased $0.1 million for the three months ended December 31, 2013 , compared to the three months ended December 31, 2012 . The increase was primarily due to an increase in marketing expenses aimed at increasing deposits. Advertising and promotional expense decreased $0.1 million for the six months ended December 31, 2013 , compared to the six months ended December 31, 2012 . The decrease was primarily due to declines in online, email and direct leads expense primarily related to Agency mortgage banking.

Data processing and internet expense increased $0.7 million and $1.3 million for the three and six months ended December 31, 2013 , compared to the three and six month periods last year, respectively. The increase was primarily due to growth in the number of customer accounts and enhancements to the Bank's core processing system.

The cost of our Federal Deposit Insurance Corporation ("FDIC”) and OCC standard regulatory charges increased $0.1 million and $0.1 million for the three and six months ended December 31, 2013 , compared to the three and six month periods last year, respectively. The increase was due to the overall growth of the Bank's liabilities. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.

Other general and administrative expense had insignificant changes for the three and six months ended December 31, 2013 , compared to the three and six month periods last year.

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, 2013 and 2012 were 40.39% and 40.63% , respectively. Our effective income tax rates for the six months ended December 31, 2013 and 2012 were 39.87% and 40.68% , respectively. The reduction in the tax rates is the result of changes in state tax allocations.

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FINANCIAL CONDITION

Balance Sheet Analysis

Our total assets increased $477.5 million, or 15.5% , to $3,568.3 million, as of December 31, 2013 , up from $3,090.8 million at June 30, 2013 . The increase in total assets was primarily due to an increase of $520.4 million in net loans held for investment. Total liabilities increased $434.1 million, primarily due to an increase in deposits of $311.1 million and an increase in borrowings from the FHLB of $138.6 million.

Loans

Net loans held for investment increased 23.1% to $2,777.3 million at December 31, 2013 from $2,256.9 million at June 30, 2013 . The increase in the loan portfolio was primarily due to loan originations and purchases of $1,067.7 million , partially offset by loan repayments of $523.0 million and net transfers to our held for sale portfolio of $29.9 million during the six months ended December 31, 2013 .

The following table sets forth the composition of the loan portfolio as of the dates indicated:



	December 31, 2013					June 30, 2013
(Dollars in thousands)	Amount			Percent		Amount			Percent
Single family real estate secured:
Mortgage	$	1,418,029		50.13	%	$	1,070,668		46.53	%
Home equity	19,758			0.70	%	22,537			0.98	%
Warehouse and other	260,957			9.22	%	204,878			8.90	%
Multifamily real estate secured	873,619			30.89	%	768,023			33.38	%
Commercial real estate secured	27,665			0.98	%	29,000			1.26	%
Auto and RV secured	16,485			0.58	%	18,530			0.81	%
Factoring	106,494			3.77	%	108,144			4.70	%
Commercial & Industrial	104,895			3.71	%	78,721			3.42	%
Other	495			0.02	%	419			0.02	%
Total gross loans	2,828,397			100.00	%	2,300,920			100.00	%
Allowance for loan losses	(15,200		)			(14,182		)
Unaccreted discounts and loan fees	(35,872		)			(29,820		)
Net mortgage loans on real estate	$	2,777,325				$	2,256,918

The Bank originates and purchases mortgage loans with terms that may include repayments that are less than the repayments for fully amortizing loans, including interest only loans, option adjustable-rate mortgages, and other loan types that permit payments that may be smaller than interest accruals. The Bank's lending guidelines for interest only loans are adjusted for the increased credit risk associated with these loans by requiring borrowers with such loans to borrow at LTVs that are lower than standard amortizing ARM loans and by calculating debt to income ratios for qualifying borrowers based upon a fully amortizing payment, not the interest only payment. The Company's Internal Asset Review Committee monitors and performs reviews of interest only loans. Adverse trends reflected in the Company's delinquency statistics, grading and classification of interest only loans would be reported to management and the Board of Directors. As of December 31, 2013 , the Company had $419.5 million of interest only mortgage loans and $6.8 million of option adjustable-rate mortgage loans. Through December 31, 2013 , the net amount of deferred interest on these loan types was not material to the financial position or operating results of the Company.

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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, 2013 , our non-performing loans totaled $16.3 million , or 0.58% of total gross loans and our total non-performing assets totaled $17.5 million , or 0.49% of total assets.

Non-performing loans and foreclosed assets or “non-performing assets” consisted of the following as of the dates indicated:



(Dollars in thousands)	December 31, 2013			June 30, 2013			Inc (Dec)
Non-performing assets:
Non-accrual loans:
Single family real estate secured:
Mortgage	$	9,683		$	11,353		$	(1,670	)
Home equity	—			37			(37		)
Multifamily real estate secured	4,210			2,882			1,328
Commercial real estate secured	2,090			3,559			(1,469		)
Total non-performing loans secured by real estate	15,983			17,831			(1,848		)
Auto and RV secured	299			472			(173		)
Total non-performing loans	16,282			18,303			(2,021		)
Foreclosed real estate	1,143			1,865			(722		)
Repossessed—vehicles	111			141			(30		)
Total non-performing assets	$	17,536		$	20,309		$	(2,773	)
Total non-performing loans as a percentage of total loans	0.58		%	0.80		%	(0.22		)%
Total non-performing assets as a percentage of total assets	0.49		%	0.66		%	(0.17		)%

Total non-performing assets decreased from $20.3 million at June 30, 2013 to $17.5 million at December 31, 2013 . As a percentage of total assets, non-performing assets decreased from 0.66% at June 30, 2013 to 0.49% at December 31, 2013 . The non-performing assets decrease of approximately $2.8 million , was primarily the result of the removal of a single family loan and commercial real estate loans offset by a net increase in the multifamily segment of our portfolio.

A troubled debt restructuring is a concession made to a borrower experiencing financial difficulties, typically permanent or temporary modifications of principal and interest payments or an extension of maturity dates. When a loan is delinquent and classified as a troubled debt restructuring no interest is accrued until the borrower demonstrates over time (typically six months) that it can make payments. When a loan is considered a troubled debt restructuring and is on nonaccrual, it is considered non-performing and included in the table above. The Bank had performing troubled debt restructurings on mortgage loans and RV loans with outstanding balances totaling $1.7 million at December 31, 2013 and $3.5 million at June 30, 2013 .

Allowance for Loan Losses

We are committed to maintaining the allowance for loan losses at a level that is considered to be commensurate with estimated and known risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, our management performs an ongoing assessment of the risks inherent in the portfolio. While we believe that the allowance for loan losses is adequate at December 31, 2013 , future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio.

The assessment of the adequacy of our allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, change in volume and mix of loans, collateral values and charge-off history.

We provide general loan loss reserves for our RV and auto loans based upon the borrower credit score at the time of origination and the Company’s loss experience to date. The allowance for loan loss for the RV and auto loan portfolio at December 31, 2013 was determined by classifying each outstanding loan according to the semi-annually refreshed FICO score and providing loss rates. The Company had $15,503 (dollars in thousands) of RV and auto loan balances subject to general reserves as follows: FICO greater than or equal to 770: $4,082 ; 715 – 769: $4,935 ; 700 – 714: $1,182 ; 660 – 699: $2,595 and less than 660: $2,709 .

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We experienced increased charge-offs of RV loans in fiscal 2007 through 2011, due to the nationwide recession. Our portfolio of RV loans is expected to decrease in the future because the Bank ceased originating RV loans in fiscal 2009.

The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan and the loan-to-value ratio ("LTV") at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each loan by the loan-to-value and applying quantitative and qualitative loss rates. The LTV groupings for each significant mortgage class are as follows (dollars in thousands):

The weighted average LTV percentage for our entire real estate loan portfolio was 55% at December 31, 2013 . We believe that this percentage is lower and more conservative than most banks, which results in lower average mortgage loan charge-offs when compared to many other comparable banks.

While we anticipate that such level of charge-offs will continue into the future, given the uncertainties surrounding the improvement of the U.S. economy, we may experience an increase in the relative amount of charge-offs and we may be required to increase our loan loss provisions in the future to provide a larger loss allowance for one or more of our loan types.

The following table summarizes impaired loans as of:



(Dollars in thousands)	December 31, 2013		June 30, 2013
Non-performing loans—90+ days past due plus other non-accrual loans	$	11,379	$	13,020
Troubled debt restructuring loans—non-accrual	4,903		5,283
Troubled debt restructuring loans—performing	1,719		3,538
Total impaired loans	$	18,001	$	21,841

The following table reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:



	December 31, 2013				June 30, 2013
(Dollars in thousands)	Amount of Allowance		Allocation as a % of Allowance		Amount of Allowance		Allocation as a % of Allowance
Single family real estate secured:
Mortgage	6,064		39.89	%	4,812		33.93	%
Home equity	138		0.91	%	183		1.29	%
Warehouse and other	1,016		6.68	%	1,250		8.81	%
Multifamily real estate secured	2,869		18.88	%	3,186		22.47	%
Commercial real estate secured	1,648		10.84	%	1,378		9.72	%
Auto and RV secured	1,206		7.93	%	1,536		10.83	%
Factoring	240		1.58	%	201		1.42	%
Commercial & Industrial	2,003		13.18	%	1,623		11.44	%
Other	16		0.11	%	13		0.09	%
Total	$	15,200	100.00	%	$	14,182	100.00	%

The loan loss provision was $1.0 million and $2.0 million for the three months ended December 31, 2013 and December 31, 2012 , respectively. The loan loss provision was $1.5 million and $4.5 million for the six months ended December 31, 2013 and December 31, 2012 , respectively. The decrease for both periods in the loan loss provision was the result of lower charge-offs and improvements in non-performing loans and delinquencies. We believe that the lower average LTV in the Bank’s mortgage loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable

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banks. Our general loan loss reserves are based upon historical losses and expected future trends. The resolution of the Bank’s existing REO and non-performing loans should not have a significant adverse impact on our operating results.

Investment Securities

Total investment securities were $477.8 million as of December 31, 2013 , compared with $468.4 million at June 30, 2013 . During the six months ended December 31, 2013 , we purchased $68.0 million in Municipal debt securities and received principal repayments of approximately $40.3 million in our available-for-sale portfolio. In our held-to-maturity portfolio, we received principal repayments of $19.6 million with the balance of the change attributable to accretion and other activities. We currently classify agency mortgage-backed and debt securities as held-to-maturity or available-for-sale at the time of purchase based upon small issue size and based on issue features, such as callable terms.

Deposits

Deposits increased a net $ 311.1 million , or 14.9% , to $ 2,403.1 million at December 31, 2013 , from $2,092.0 million at June 30, 2013 . Our deposit growth was the result of a 100.3% increase in interest-bearing demand accounts and an 24.3% increase in savings accounts. Our deposit growth was strengthened by our acquisition of approximately $173 million in deposits from Principal Bank, including $142 million in checking, savings and money market accounts and $31 million in time deposit accounts. Increases in business banking customers resulted in higher demand and savings account business, which replaced maturing time deposits during the six months ended December 31, 2013 .

The following table sets forth the composition of the deposit portfolio as of the dates indicated:



	December 31, 2013				June 30, 2013
(Dollars in thousands)	Amount		Rate ¹		Amount		Rate ¹
Non-interest bearing	$	117,732	—	%	$	81,524	—	%
Interest bearing:
Demand	624,041		0.56	%	311,539		0.50	%
Savings	797,402		0.70	%	641,534		0.67	%
Total demand and savings	1,421,443		0.64	%	953,073		0.61	%
Time deposits:
Under $100,000	134,202		1.29	%	183,754		1.36	%
$100,000 or more	729,712		1.78	%	873,648		1.52	%
Total time deposits ²	863,914		1.71	%	1,057,402		1.50	%
Total interest bearing	2,285,357		1.04	%	2,010,475		1.08	%
Total deposits	$	2,403,089	0.99	%	$	2,091,999	1.04	%

______________________________

^1. Based on weighted-average stated interest rates at end of period.

^2. The total includes brokered deposits of $444.3 million and $435.6 million as of December 31, 2013 and June 30, 2013 , respectively, of which $291.3 million and $283.5 million , respectively, are time deposits.

The following table sets forth the number of deposit accounts by type as of the date indicated:



	December 31, 2013	June 30, 2013	December 31, 2012
Checking and savings accounts	30,222	23,569	23,028
Time deposits	8,869	11,103	12,168
Total number of deposit accounts	39,091	34,672	35,196

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Borrowings

The following table sets forth the composition of our borrowings as of the dates indicated:



	December 31, 2013					June 30, 2013					December 31, 2012
(Dollars in thousands)	Balance			Weighted Average Rate		Balance			Weighted Average Rate		Balance			Weighted Average Rate
Repurchase agreements	$	95,000		4.43	%	$	110,000		4.40	%	$	115,000		4.35	%
FHLB Advances	729,000			1.12	%	590,417			0.92	%	527,000			1.22	%
Subordinated debentures and other borrowings	5,155			2.64	%	5,155			2.67	%	5,155			2.83	%
Total Borrowings	$	829,155		1.51	%	$	705,572		1.48	%	$	647,155		1.79	%

Weighted average cost of borrowings during the quarter	1.39		%			1.83		%			2.24		%
Borrowings as a percent of total assets	23.24		%			22.83		%			22.52		%

At December 31, 2013 , total borrowings amounted to $829.2 million , up from $705.6 million or 17.52% from June 30, 2013 and up $182.0 million or 28.12% from December 31, 2012 . Total borrowings represented 23.24% of total assets and had a weighted average cost of 1.39% at December 31, 2013 , compared with 22.83% of total assets at a weighted average cost of 1.83% at June 30, 2013 and 22.52% of total assets at a weighted average cost of 2.24% at December 31, 2012 .

We have sold securities under various agreements to repurchase for total proceeds of $95.0 million . The repurchase agreements have interest rates between 3.75% and 4.75% and scheduled maturities between January 2014 and December 2017. Under these agreements, we may be required to repay the $95.0 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 1.51 years and the weighted average remaining period before such repurchase agreements could be called is 0.12 years.

We regularly use advances from the FHLB to manage our interest rate risk and, to a lesser extent, manage our liquidity position. Generally, FHLB advances with terms between three and ten years have been used to fund the purchase of single family and multifamily mortgages and to provide us with interest rate risk protection should rates rise. At December 31, 2013 , a total of $15.0 million of FHLB advances include agreements that allow the FHLB, at its option, to put the advances back to us after specified dates. The weighted-average remaining contractual maturity period of the $15.0 million in putable advances is 2.00 years and the weighted average remaining period before such advances could be put to us is 0.15 years.

Stockholders’ Equity

Stockholders’ equity increased $43.4 million to $311.7 million at December 31, 2013 compared to $268.3 million at June 30, 2013 . The increase was the result of our net income for the six months ended December 31, 2013 of $25.3 million , sale of common stock of $16.7 million , vesting and issuance of RSU's and exercise of stock options of $2.8 million , less a $1.2 million unrealized loss in other comprehensive income, net of tax, and a reduction of $0.2 million for dividends declared on preferred stock.

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LIQUIDITY

Cash flow information is as follows:



	For the Six Months Ended
	December 31,
(Dollars in thousands)	2013			2012
Operating Activities	$	36,827		$	(34,511	)
Investing Activities	$	(560,528	)	$	(383,421	)
Financing Activities	$	453,893		$	472,008

During the six months ended December 31, 2013 , we had net cash inflows from operating activities of $36.8 million compared to outflows of $34.5 million for the six months ended December 31, 2012 . Net operating cash inflows and outflows fluctuate due to the timing of mortgage loan originations and proceeds from loan sales.

Net cash outflows from investing activities totaled $560.5 million for the six months ended December 31, 2013 , while outflows totaled $383.4 million for the same period in fiscal year 2013 . The increase was primarily due to higher loan originations, which were only partially offset by increased repayments of loans, in the 2014 period compared to the same period in the prior year.

Our net cash provided by financing activities totaled $453.9 million for the six months ended December 31, 2013 , while inflows totaled $472.0 million for the six months ended December 31, 2012 . Net cash provided by financing activities increased primarily from a net increase in FHLB advances for the six months ended December 31, 2013 compared to December 31, 2012 . During the six months ended December 31, 2013 , the Bank could borrow up to 40.0% of its total assets from the FHLB. Borrowings are collateralized by the pledge of certain mortgage loans and investment securities to the FHLB. At December 31, 2013 , the Company had $664.0 million available immediately and is in a fully collateralized position. At December 31, 2013 , we also had two $10.0 million unsecured federal funds purchase lines with two different banks, under which no borrowings were outstanding.

The Bank has the ability to borrow short-term from the Federal Reserve Bank of San Francisco Discount Window. At December 31, 2013 , the Bank did not have any borrowings outstanding and the amount available from this source was $21.7 million . The credit line is collateralized by consumer loans and mortgage-backed securities.

In an effort to expand our Bank’s liquidity options, we have issued brokered deposits, with $444.3 million outstanding at December 31, 2013 . We believe our liquidity sources to be stable and adequate for our anticipated needs and contingencies. We believe we have the ability to increase our level of deposits and borrowings to address our liquidity needs for the foreseeable future.

AT-THE-MARKET OFFERING

On March 11, 2013, we entered into an At-the-Market (ATM) Equity Distribution Agreement with each of Raymond James & Associates, Inc., JMP Securities LLC, Liquidnet, Inc., and Sandler O'Neill + Partners L.P. (the “Distribution Agents”) pursuant to which we may issue and sell through the Distribution Agents from time to time shares of our common stock in at the market offerings with an aggregate offering price of up to $50,000,000 (the “ATM Offering”). The sales of shares of our common stock under the Equity Distribution Agreement are to be made in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on the NASADAQ Global Select Market (the principal existing trading market for our common stock), or sales made through a market maker or any other trading market for our common stock, or (with our prior consent) in privately negotiated transactions at negotiated prices. The aggregate compensation payable to the Distribution Agents under the Distribution Agreement is 2.5% of the gross sales price of the shares sold under the agreement. We have also agreed to reimburse the Distribution Agents for up to $125,000 in their expenses and have provided the Distribution Agents with customary indemnification rights.

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In fiscal year 2013, we commenced sales of common stock through the ATM Offering. The details of the shares of common stock sold through the ATM Offering through December 31, 2013 are as follows (dollars in thousands, except per share data, per share price is net of commissions):



Distribution Agent	Month	Weighted Average Per Share Price		Number of Shares Sold	Net Proceeds		Compensation to Distribution Agent
Raymond James & Associates	March 2013	$	35.25	200,000	$	6,874	$	176
Raymond James & Associates	October 2013	$	68.76	49,580	$	3,409	$	87
Raymond James & Associates	November 2013	$	70.56	147,820	$	10,431	$	267
Raymond James & Associates	December 2013	$	77.32	38,599	$	2,984	$	77

As of December 31, 2013, the total gross sales we completed and the remaining sales we have available under the ATM Offering were $24,306,000 and $25,694,000, respectively.

OFF-BALANCE SHEET COMMITMENTS

At December 31, 2013 , we had commitments to originate loans with an aggregate outstanding principal balance of $125.3 million , and commitments to sell loans with an aggregate outstanding principal balance of $38.8 million . We have no commitments to purchase loans, investment securities or any other unused lines of credit.

CONTRACTUAL OBLIGATIONS

The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs. Our time deposits due within one year of December 31, 2013 totaled $396.7 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, 2013
			Payments Due by Period ¹
(Dollars in thousands)	Total		Less Than One Year		One To Three Years		Three To Five Years		More Than Five Years
Long-term debt obligations ²	$	874,264	$	446,169	$	146,630	$	155,444	$	126,021
Time deposits ²	877,531		402,382		225,819		63,586		185,744
Operating lease obligations ³	13,859		2,001		4,006		4,344		3,508
Total	$	1,765,654	$	850,552	$	376,455	$	223,374	$	315,273

________________________________


^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, 2013 .


^2.	Amounts include principal and interest due to recipient.


^3.	Payments are for leases of real property.

CAPITAL RESOURCES AND REQUIREMENTS

BofI Federal Bank is subject to various regulatory capital requirements set by the federal banking agencies. Failure by our Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our Bank must meet specific capital guidelines that involve quantitative measures of our Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

Quantitative measures established by regulation require our Bank to maintain certain minimum capital amounts and ratios. Regulations of the OCC require our Bank to maintain minimum ratios of tangible capital to tangible assets of 1.5%, core capital to tangible assets of 4.0% and total risk-based capital to risk-weighted assets of 8.0%. At December 31, 2013 , our Bank met all the capital adequacy requirements to which it was subject. At December 31, 2013 , our Bank was “well capitalized” under the regulatory framework for prompt corrective action. To be “well capitalized,” our Bank must maintain minimum leverage, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.0% and 10.0%, respectively. Management believes that no conditions or events have occurred since December 31, 2013 that management believes would materially adversely change the Bank’s capital classification. From time to time, we may need to raise additional capital to support our Bank’s further growth and to maintain its “well capitalized” status.

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The Bank’s capital amounts, capital ratios and capital requirements were as follows:



	As of December 31, 2013
	Actual				For Capital Adequacy Purposes				To be “Well Capitalized” Under Prompt Corrective Action Regulations
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 leverage (core) capital to adjusted tangible assets		$322,750	9.01	%		$143,366	4.00	%		$179,207	5.00	%
Tier 1 capital (to risk-weighted assets)	322,750		15.03	%	N/A		N/A		128,877		6.00	%
Total capital (to risk-weighted assets)	337,950		15.73	%	171,387		8.00	%	214,796		10.00	%
Tangible capital (to tangible assets)	322,750		9.01	%	53,762		1.50	%	N/A		N/A

	As of June 30, 2013
	Actual				For Capital Adequacy Purposes				To be “Well Capitalized” Under Prompt Corrective Action Regulations
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 leverage (core) capital to adjusted tangible assets		$268,103	8.63	%		$124,277	4.00	%		$155,346	5.00	%
Tier 1 capital (to risk-weighted assets)	268,103		14.52	%	N/A		N/A		110,813		6.00	%
Total capital (to risk-weighted assets)	282,285		15.28	%	147,751		8.00	%	184,689		10.00	%
Tangible capital (to tangible assets)	268,103		8.63	%	46,604		1.50	%	N/A		N/A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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The following table sets forth the interest rate sensitivity of our assets and liabilities at December 31, 2013 :



	Term to Repricing, Repayment, or Maturity at
	December 31, 2013
(Dollars in thousands)	One Year or Less			Over One Year Through Five Years			Over Five Years			Total
Interest-earning assets:
Cash and cash equivalents	$	131,886		$	—		$	—		$	131,886
Securities ¹	284,787			15,718			177,324			477,829
Stock of the FHLB, at cost	35,861			—			—			35,861
Loans—net of allowance for loan loss ²	409,689			1,798,490			569,146			2,777,325
Loans held for sale	87,362			—			—			87,362
Total interest-earning assets	949,585			1,814,208			746,470			3,510,263
Non-interest earning assets	—			—			—			58,036
Total assets	$	949,585		$	1,814,208		$	746,470		$	3,568,299
Interest-bearing liabilities:
Interest-bearing deposits ³	$	1,818,173		$	284,284		$	182,900		$	2,285,357
Securities sold under agreements to repurchase	60,000			35,000			—			95,000
Advances from the FHLB ⁴	374,000			290,000			65,000			729,000
Other borrowed funds	5,155			—			—			5,155
Total interest-bearing liabilities	2,257,328			609,284			247,900			3,114,512
Other non-interest-bearing liabilities	—			—			—			142,117
Stockholders’ equity	—			—			—			311,670
Total liabilities and equity	$	2,257,328		$	609,284		$	247,900		$	3,568,299
Net interest rate sensitivity gap	$	(1,307,743	)	$	1,204,924		$	498,570		$	395,751
Cumulative gap	$	(1,307,743	)	$	(102,819	)	$	395,751		$	395,751
Net interest rate sensitivity gap—as a % of interest earning assets	(137.72		)%	66.42		%	66.79		%	11.27		%
Cumulative gap—as % of cumulative interest earning assets	(137.72		)%	(3.72		)%	11.27		%	11.27		%

________________________

^1. Comprised of U.S. government securities and mortgage-backed securities, which are classified as held-to-maturity, available-for-sale and trading. The table reflects contractual re-pricing dates.

^2. The table reflects either contractual re-pricing dates or maturities.

^3. The table assumes that the principal balances for demand deposit and savings accounts will re-price in the first year.

^4. The table reflects either contractual repricing dates or maturities and does not estimate prepayments or puts.

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Although “gap” analysis is a useful measurement device available to management in determining the existence of interest rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment.

We attempt to measure the effect market interest rate changes will have on the net present value of assets and liabilities, which is defined as market value of equity. The market value of equity for these purposes is not intended to refer to the trading pricing of our common stock. We analyze the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves. For rising interest rate scenarios, the industry market interest rate forecast was increased by 100, 200 and 300 basis points.

The following table indicates the sensitivity of market value of equity to the interest rate movement described above:



	As of December 31, 2013
(Dollars in thousands)	Net Present Value		Percentage Change from Base		Net Present Value as a Percentage of Assets
Up 300 basis points	$	267,278	(34.8	)%	7.83	%
Up 200 basis points	331,284		(19.2	)%	9.39	%
Up 100 basis points	388,060		(5.4	)%	10.69	%
Base	410,248		—	%	11.05	%
Down 100 basis points	445,133		8.5	%	11.81	%
Down 200 basis points	446,566		8.9	%	11.75	%

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, 2013 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Management, including the Company's Chief Executive Officer and Chief Financial Officer, does not expect that the Company's internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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PART II—OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

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


ITEM 1A.	RISK FACTORS

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


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth our market repurchases of BofI common stock and the BofI common shares retained in connection with net settlement of restricted stock awards during the six months ended December 31, 2013 . Purchases made relate to the stock repurchase plan of 414,991 shares that was originally approved by the Company’s Board of Directors on July 5, 2005, plus an additional 500,000 shares approved on November 20, 2008. Stock repurchased under this plan will be held as treasury shares.



Period	Number of Shares Purchased	Average Price Paid Per Shares		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
Stock Repurchases
Quarter Ended December 31, 2013
October 1, 2013 to December 31, 2013	—	$	—	—	319,291
Balance at December 31, 2013	595,700	$	5.72	595,700	319,291
Stock Retained in Net Settlement
Beginning Balance at July 1, 2013	309,204
July 1, 2013 to July 31, 2013	1,076
August 1, 2013 to August 31, 2013	18,696
September 1, 2013 to September 30, 2013	1,317
October 1, 2013 to October 31, 2013	25
November 1, 2013 to November 30, 2013	—
December 1, 2013 to December 31, 2013	7,799
Ending Balance at December 31, 2013	338,117
Total Treasury Shares at December 31, 2013	933,817

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		Document

3.1		Certificate of Amendment of Certificate of Incorporation of BofI Holding, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on October 28, 2013)

31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instant Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.LAB		XBRL Taxonomy Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

101.DEF		XBRL Taxonomy Definition Document

Table of Contents

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:	February 5, 2014	By:	/s/ Gregory Garrabrants
			Gregory Garrabrants President and Chief Executive Officer (Principal Executive Officer)

Dated:	February 5, 2014	By:	/s/ Andrew J. Micheletti
			Andrew J. Micheletti Executive Vice President and Chief Financial Officer (Principal Financial Officer)

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risks Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

AX 10-Q Quarter ended Dec. 31, 2013