10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended June 30, 2009

OR

 

¨ 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.)

12777 High Bluff Drive, Suite 100

San Diego, CA

  92130
(Address of principal executive offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (858) 350-6200

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class   Name of each exchange on which registered
Common stock, $.01 par value   NASDAQ National Market

Securities registered under Section 12(g) of the Exchange Act: None

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes x No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes x No

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site 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 an post such files).  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 Exchange Act.

 

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

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

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based upon the closing sales price of the common stock on the NASDAQ National Market of $4.75 on December 31, 2008 was $31,065,574.

The number of shares of the Registrant’s common stock outstanding as of August 31, 2009 was 8,082,768.

 

 

 


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the period ended June 30, 2009 are incorporated by reference into Part III.

TABLE OF CONTENTS

 

           PAGE
   PART I   

Item

     

1.

  

Business

   1

1A.

  

Risk Factors

   19

1B.

  

Unresolved Staff Comments

   19

2.

  

Properties

   19

3.

  

Legal Proceedings

   19

4.

  

Submission of Matters to a Vote of Security Holders

   19
   PART II   

5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   20

6.

  

Selected Financial Data

   23

7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   24

7A.

  

Quantitative and Qualitative Disclosures about Market Risk

   45

8.

  

Financial Statements and Supplemental Data

   45

9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   45

9A.

  

Controls and Procedures

   46

9B.

  

Other Information

   46
   PART III   

10.

  

Directors, Executive Officers and Corporate Governance

   47

11.

  

Executive Compensation

   47

12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   47

13.

  

Certain Relationships and Related Transactions, and Director Independence

   47

14.

  

Principal Accountant Fees and Services

   47
   PART IV   

15.

  

Exhibits and Financial Statement Schedules

   48
  

    Signatures

   50

 

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Forward-Looking Statements

This report may contain various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include projections, statements of the plans and objectives of management for future operations, statements of future economic performance, assumptions underlying these statements, and other statements that are not statements of historical facts. Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond the control of BofI Holding, Inc. (BofI). Should one or more of these risks, uncertainties or contingencies materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. Among the key risk factors that may have a direct bearing on BofI’s results of operations and financial condition are:

 

   

the prevailing recession currently impacting the U.S. and world wide economies;

 

   

competitive practices in the financial services industries;

 

   

operational and systems risks;

 

   

general economic and capital market conditions, including fluctuations in interest rates;

 

   

economic conditions in certain geographic areas; and

 

   

the impact of current and future laws, governmental regulations, accounting and other rulings and guidelines affecting the financial services industry in general and BofI operations particularly.

In addition, actual results may differ materially from the results discussed in any forward-looking statements for the reasons, among others, discussed under the heading “Factors that May Affect Our Performance” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7.

References in this report to the “Company,” “us,” “we,” “our,” “BofI Holding,” or “BofI” are all to BofI Holding, Inc. on a consolidated basis. References in this report to “Bank of Internet,” “Bank of Internet USA,” the “Bank,” or “our bank” are to Bank of Internet USA, our consolidated subsidiary.

 

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PART I

Item 1. Business

Overview

BofI Holding, Inc. is the holding company for Bank of Internet USA, a nationwide savings bank operating primarily through the Internet. We provide a variety of consumer and wholesale banking services, focusing on gathering retail deposits over the Internet and originating and purchasing multifamily, single family and home equity mortgage loans and purchasing mortgage-backed securities. We attract and service our customers primarily through the Internet, which affords us low operating expenses and allows us to pass these savings along to our customers in the form of attractive interest rates and low fees on our products.

We operate our Internet-based bank from a single location in San Diego, California, currently serving approximately 27,000 retail deposit and loan customers across all 50 states. At June 30, 2009, we had total assets of $1,302.2 million, loans of $615.5 million, mortgage-backed and other investment securities of $622.2 million, total deposits of $648.5 million and borrowings of $558.1 million. Our deposits consist primarily of interest-bearing checking and savings accounts and time deposits. Our loans are primarily first mortgages secured by multifamily (five or more units) and single family 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 have limited the impact of the current credit problems in the mortgage markets by redirecting our asset gathering from retail online originations to wholesale purchases of loans and mortgage-backed securities with higher credit quality. Our online delivery channels and online advertising can be opened, closed or expanded rapidly allowing us to change product offerings faster and with less cost than many traditional banks. 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.

Our business strategy is to lower the cost of delivering banking products and services by leveraging technology while continuing to grow our assets and deposits to achieve increased economies of scale. We have designed our automated Internet-based banking platform and workflow process to handle traditional banking functions with reduced paperwork and human intervention. Our thrift charter allows us to operate in all 50 states and our online presence allows us increased flexibility to target a large number of loan and deposit customers based on demographics, geography and price. We plan to continue to increase our deposits by attracting new customers with competitive pricing, targeted marketing and new products and services. We plan to continue to increase our originations of single family loans and multifamily loans by attracting new customers through our website and affiliate marketing arrangements. We also plan to continue to purchase pools of high quality single family and multifamily mortgage loans and mortgage-backed securities.

Our present goals are to:

 

   

Increase our total assets to more than $3.0 billion;

   

Improve our annualized efficiency ratio to a level below 30%; and

   

Increase our annualized return on average common stockholder’s equity above 15.0%.

Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available, free of charge, through the Securities and Exchange Commission’s website at www.sec.gov and our website at www.bofiholding.com as soon as reasonably practicable after their filing with the Securities and Exchange Commission. The information contained therein or connected thereto is not incorporated into this Annual Report on Form 10-K. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Lending and Investment Activities

General. We divide our loan acquisition activities into two primary channels: retail and wholesale. Our retail channel originates loans nationwide either directly to consumer or through dealer or broker arrangements. Our wholesale channel purchases closed loans in flow or bulk from a variety of business partners. Our originations, purchases and sales of mortgage loans include both fixed and adjustable interest rate loans. Originations are sourced, underwritten, processed, controlled and tracked primarily through our customized websites and software. We believe that, due to our automated systems, our lending business is scalable, allowing us to handle increasing volumes of loans and enter into new geographic lending markets with only a small increase in personnel, in accordance with our strategy of leveraging technology to lower our operating expenses.

 

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We purchase securities when we conclude that their risk-adjusted returns exceed those of our loan origination or loan purchase opportunities.

Loan Products. Our loans primarily consist of first mortgage loans secured by single family and multifamily properties and, to a lesser extent, commercial properties. We also provide home equity second mortgages, primarily closed end loans and, to a lesser extent, lines of credit. Further details regarding our loan programs are discussed below:

 

   

Single Family Loans. We typically offer or purchase fixed and adjustable rate, single family mortgage loans in all 50 states, both conforming and jumbo loans, although we constantly monitor our geographic reach for risk and are currently not lending in all states. Our largest single family first mortgage loan was $4.1 million as of June 30, 2009. We either sell the single family first mortgage loans that we originate to wholesale lending institutions with servicing rights released to the purchaser or retain the mortgage loan in our portfolio. Several years ago, the Bank elected to significantly decrease or eliminate certain retail single family loan offerings in favor of purchasing loan pools. Recently, the Bank has begun originating first mortgages on a retail basis, primarily selling its originations to its correspondents or government sponsored entities. The Bank plans to monitor the market and expand its product offerings when spreads adequately compensate the Bank for the associated risk of retail originations and home values exhibit a greater degree of stabilization.

 

   

Home Equity Loans. We originate adjustable rate and fixed rate closed end home equity loans secured by second liens on single family residential properties. We also have originated adjustable rate home equity lines of credit. We hold all of the home equity loans that we originate and perform the loan servicing directly on these loans. Our portfolio of home equity loans as of June 30, 2009 had an average outstanding balance of $30,000 and a largest single loan amount of $215,000. We offer closed end home equity loans with fixed interest rates and adjustable rates based on U.S. Treasury security yields. Some of our home equity loans originated have initial fixed rate periods (three, five or seven years) before starting a regular adjustment period (annually), as well as interest rate floors, ceilings and rate change caps. During fiscal 2009, we elected to significantly decrease our online home equity loan offerings.

 

   

Multifamily Loans. We originate and purchase adjustable rate multifamily mortgage loans. We either sell the loans we originate or we retain them for the portfolio and perform the loan servicing directly on these loans. Our multifamily loans as of June 30, 2009 ranged in amount from approximately $22,000 to $4.5 million and were secured by first liens on properties typically ranging from five to 70 units. We offer multifamily loans with interest rates that adjust based on a variety of industry standard indices, including U.S. Treasury security yields, LIBOR and Eleventh District Cost of Funds. Many of our loans originated and purchased typically have initial fixed rate periods (three, five or seven years) before starting a regular adjustment period (annually, semi-annually or monthly) as well as prepayment protection clauses, interest rate floors, ceilings and rate change caps.

 

   

Commercial Real Estate Loans. We purchase and originate commercial real estate loans. We either sell the loans we originate or we retain them for the portfolio. Our commercial real estate loans as of June 30, 2009 ranged in amount from approximately $109,000 to $2.5 million, and were secured by first liens on mixed-use, shopping and retail centers, office buildings and multi-tenant industrial properties. We offer commercial real estate loans with similar terms and interest rates as our multifamily loans.

 

   

Consumer –Recreational Vehicle and Automobile Loans. In March 2007, we began originating fixed rate loans secured by recreational vehicles (RVs) and sourced through a network of RV dealers in 20 states or directly with the consumer. We hold all of the RV loans that we originate and perform the loan servicing directly on these loans. Our RV loans as of June 30, 2009 ranged in amount up to approximately $487,000 with an average outstanding balance of $40,000 and were secured by motor homes or travel trailers. The Bank also originates automobile loans on a direct basis and through a network of dealers. Starting in fiscal 2008, the Bank elected to significantly decrease its RV and automobile loan production.

 

   

Other. We provide overdraft lines of credit for our qualifying deposit customers with checking accounts and we purchase participations in business loans made by other banks.

 

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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio in amounts and percentages by type of loan at the end of each fiscal year-end since June 30, 2005:

 

     At June 30,  
     2009     2008     2007     2006     2005  
     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
     (Dollars in thousands)  

Residential real estate loans:

                    

Single family (one to four units)

   $ 165,405      26.3   $ 165,473      26.2   $ 104,960      20.8   $ 113,242      21.4   $ 62,157      12.9

Home equity

     32,345      5.1     41,977      6.6     18,815      3.8     628      0.1     246      0.1

Multifamily (five units or more)

     326,938      52.0     330,778      52.2     325,880      64.6     402,166      75.9     406,660      84.1

Commercial real estate and land loans

     30,002      4.8     33,731      5.3     11,256      2.2     13,743      2.6     14,181      2.9

Consumer – Recreational vehicle

     50,056      8.0     56,968      9.0     42,327      8.4     —        0.0     —        0.0

Other

     23,872      3.8     4,439      0.7     981      0.2     81      0.0     40      0.0
                                                                      

Total loans held for investment

   $ 628,618      100.0   $ 633,366      100.0   $ 504,219      100.0   $ 529,860      100.0   $ 483,284      100.0
                                        

Allowance for loan losses

     (4,754       (2,710       (1,450       (1,475       (1,415  

Unamortized premiums/ discounts, net of deferred loan fees

     (8,401       757          5,137          5,256          5,003     
                                                  

Net loans held for investment

   $ 615,463        $ 631,413        $ 507,906        $ 533,641        $ 486,872     
                                                  

The following table sets forth the amount of loans maturing in our total loans held for investment at June 30, 2009 based on the contractual terms to maturity:

 

     Term to Contractual Maturity
     Less
Than
Three
Months
   Over Three
Months
Through
One Year
   Over One
Year
Through
Five Years
   Over
Five
Years
   Total
     (Dollars in thousands)

June 30, 2009

   $ 93    $ 470    $ 12,231    $ 615,824    $ 628,618

 

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The following table sets forth the amount of our loans at June 30, 2009 that are due after June 30, 2010 and indicates whether they have fixed or floating or adjustable interest rate loans:

 

     Fixed    Floating or
Adjustable
   Total
     (Dollars in thousands)

Single family (one to four units)

   $ 40,314    $ 125,091    $ 165,405

Home equity

     30,616      1,730      32,346

Multifamily (five units or more)

     35,779      290,730      326,509

Commercial real estate and land

     —        30,002      30,002

Consumer – recreational vehicle

     50,056      —        50,056

Other

     23,737      —        23,737
                    

Total

   $ 180,502    $ 447,553    $ 628,055
                    

Our mortgage loans are secured by properties primarily located in the western United States. The following table shows the largest states and regions ranked by location of these properties at June 30, 2009:

Percent of Loan Principal Secured by Real Estate Located in State

 

State

   Total Real
Estate
Loans
    Single
Family
    Home
Equity
    Multifamily     Commercial
and Land
 

California-south 1

   28.96   23.09   11.38   33.60   29.76

California-north 2

   13.84   22.78   7.79   9.40   19.46

Washington

   9.97   8.23   5.16   10.97   13.83

Texas

   5.89   3.14   —        8.05   3.84

Florida

   4.81   7.00   8.04   3.82   —     

Arizona

   3.80   1.65   6.80   4.94   —     

Colorado

   3.72   2.98   2.35   3.90   7.38

Oregon

   3.66   1.29   1.82   4.69   7.53

New York

   2.55   6.73   4.63   0.25   2.22

All other states

   22.80   23.11   52.03   20.38   15.98
                              
   100.00   100.00   100.00   100.00   100.00
                              

 

(1)

Consists of loans secured by real property in California with zip code ranges from 90000 to 92999.

(2)

Consists of loans secured by real property in California with zip code ranges from 93000 to 96999.

The ratio of the loan amount to the value of the property securing the loan is called the loan-to-value ratio or LTV. The following table shows the LTVs of our loan portfolio on weighted average and median bases at June 30, 2009. The LTVs were calculated by dividing (a) the loan principal balance less principal repayments by (b) the appraisal value of the property securing the loan at the time of the funding or, for certain purchased seasoned loans, an adjusted appraised value based upon an independent review at the time of the purchase.

 

     Total Real
Estate
Loans
    Single
Family
    Home
Equity 1
    Multifamily     Commercial
and Land
 

Weighted Average LTV

   54.56   57.97   58.19   52.75   51.53

Median LTV

   56.10   60.04   60.67   45.33   48.11

 

(1)

Amounts represent combined loan to value calculated by adding the current balances of both the 1st and 2nd liens of the borrower and dividing that sum by an independent estimated value of the property at the time of origination.

 

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Lending Activities. The following table summarizes the volumes of real estate loans originated, purchased and sold for each fiscal year since 2005:

 

     For the Fiscal Years Ended June 30,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Loans Held for Sale:

  

Single family (one to four units):

          

Beginning balance

   $ —        $ —        $ —        $ 189      $ 435   

Loan originations

     83,741        516        7,579        20,762        19,312   

Loan purchases

     —          —          —          —          —     

Proceeds from sale of loans held for sale

     (81,932     (518     (7,609     (21,059     (19,652

Gains on sales of loans held for sale

     1,381        2        30        108        94   

Other

     —          —          —          —          —     
                                        

Ending balance

   $ 3,190      $ —        $ —        $ —        $ 189   
                                        

Loans Held for Investment:

          

Single family (one to four units):

          

Beginning balance

   $ 165,473      $ 104,960      $ 113,242      $ 62,156      $ 21,588   

Loan originations

     305        —          840        386        3,380   

Loan purchases

     22,036        95,667        42,258        78,778        50,623   

Loans sold

     —          —          —          —          —     

Principal repayments

     (20,012     (34,726     (51,380     (28,078     (13,435

Foreclosure and charge-off

     (2,397     (428     —          —          —     
                                        

Ending balance

   $ 165,405      $ 165,473      $ 104,960      $ 113,242      $ 62,156   
                                        

Home equity:

          

Beginning balance

   $ 41,977      $ 18,815      $ 628      $ 247      $ 165   

Loan originations

     7,363        34,761        19,684        373        —     

Loan purchases

     —          —          —          —          —     

Loans sold

     —          —          —          —          —     

Principal repayments

     (16,681     (11,599     (1,497     8        82   

Other

     (314     —          —          —          —     
                                        

Ending balance

   $ 32,345      $ 41,977      $ 18,815      $ 628      $ 247   
                                        

Multifamily (five units or more):

          

Beginning balance

   $ 330,778      $ 325,880      $ 402,166      $ 406,660      $ 320,971   

Loan originations

     1,750        —          2,484        6,142        36,241   

Loan purchases

     46,439        87,113        750        84,990        108,826   

Loans sold

     —          —          —          —          —     

Principal repayments

     (48,535     (82,115     (79,520     (95,626     (59,378

Foreclosure and charged-off

     (3,494     (100     —          —          —     
                                        

Ending balance

   $ 326,938      $ 330,778      $ 325,880      $ 402,166      $ 406,660   
                                        

Commercial real estate and land:

          

Beginning balance

   $ 33,731      $ 11,256      $ 13,743      $ 14,181      $ 11,659   

Loan originations

     —          85        —          752        5,715   

Loan purchases

     —          24,726        500        —          —     

Loans sold

     —          —          —          —          —     

Principal repayments

     (1,320     (2,336     (2,986     (1,190     (3,193

Other

     (2,409     —          (1     —          —     
                                        

Ending balance

   $ 30,002      $ 33,731      $ 11,256      $ 13,743      $ 14,181   
                                        

Consumer – Recreational vehicle and auto:

          

Beginning balance

   $ 56,968      $ 42,327      $ —        $ —        $ —     

Loan originations

     3,772        25,712        43,485        —          —     

Loan purchases

     —          —          —          —          —     

Loans sold

     —          —          —          —          —     

Principal repayments

     (7,662     (10,617     (1,158     —          —     

Repossession and charge-off

     (3,022     (454     —          —          —     
                                        

Ending balance

   $ 50,056      $ 56,968      $ 42,327      $ —        $ —     
                                        

Other:

          

Beginning balance

   $ 4,439      $ 981      $ 81      $ 40      $ 63   

Loan originations

     19,980        4,330        956        67        26   

Loan purchases

     —          —          —          —          —     

Loans sold

     —          —          —          —          —     

Principal repayments

     (534     (866     (57     (26     (49

Charged-off

     (13     (6     1        —          —     
                                        

Ending balance

   $ 23,872      $ 4,439      $ 981      $ 81      $ 40   
                                        

TOTAL LOANS HELD FOR INVESTMENT

   $ 628,618      $ 633,366      $ 504,219      $ 529,860      $ 483,284   

Allowance for loan losses

     (4,754     (2,710     (1,450     (1,475     (1,415

Unamortized premiums, unaccreted discounts, net of deferred loan fees

     (8,401     757        5,137        5,256        5,003   
                                        

NET LOANS

   $ 615,463      $ 631,413      $ 507,906      $ 533,641      $ 486,872   
                                        

 

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The following table summarizes the amount funded, the number and the size of real estate loans and RV loans originated and purchased for each fiscal year since 2005:

 

     For the Fiscal Years Ended June 30,
     2009    2008    2007    2006    2005
     (Dollars in thousands)

Type of Loan

  

Single family (one to four units):

              

Loans originated:

              

Amount funded

   $ 84,045    $ 516    $ 840    $ 21,147    $ 22,692

Number of loans

     283      2      1      76      83

Average loan size

   $ 297    $ 258    $ 840    $ 278    $ 273

Loans purchased:

              

Amount funded

   $ 22,036    $ 95,667    $ 42,258    $ 78,778    $ 50,623

Number of loans

     89      209      197      240      208

Average loan size

   $ 248    $ 458    $ 215    $ 328    $ 243

Home equity:

              

Loans originated:

              

Amount funded

   $ 7,363    $ 34,761    $ 19,684    $ 373    $ —  

Number of loans

     161      1,027      520      3      —  

Average loan size

   $ 46    $ 34    $ 38    $ 124    $ —  

Loans purchased:

              

Amount funded

   $ —      $ —      $ —      $ —      $ —  

Number of loans

     —        —        —        —        —  

Average loan size

   $ —      $ —      $ —      $ —      $ —  

Multifamily (five or more units):

              

Loans originated:

              

Amount funded

   $ 1,750    $ —      $ 2,484    $ 6,142    $ 36,241

Number of loans

     2      —        5      14      53

Average loan size

   $ 875    $ —      $ 497    $ 439    $ 684

Loans purchased:

              

Amount funded

   $ 46,439    $ 87,113    $ 750    $ 84,990    $ 108,826

Number of loans

     31      81      3      199      152

Average loan size

   $ 1,498    $ 1,075    $ 250    $ 427    $ 716

Commercial real estate and land

              

Loans originated:

              

Amount funded

   $ —      $ 85    $ —      $ 752    $ 5,715

Number of loans

     —        1      —        2      7

Average loan size

   $ —      $ 85    $ —      $ 376    $ 816

Loans purchased:

              

Amount funded

   $ —      $ 24,726    $ 500    $ —      $ —  

Number of loans

     —        20      1      —        —  

Average loan size

   $ —      $ 1,236    $ 500    $ —      $ —  

Consumer – Recreational vehicle and auto:

              

Loans originated:

              

Amount funded

   $ 3,772    $ 25,712    $ 43,485    $ —      $ —  

Number of loans

     130      710      938      —        —  

Average loan size

   $ 29    $ 36    $ 46    $ —      $ —  

Loans purchased:

              

Amount funded

   $ —      $ —      $ —      $ —      $ —  

Number of loans

     —        —        —        —        —  

Average loan size

   $ —      $ —      $ —      $ —      $ —  

Other:

              

Loans originated:

              

Amount funded

   $ —      $ —      $ —      $ —      $ —  

Number of loans

     —        —        —        —        —  

Average loan size

   $ —      $ —      $ —      $ —      $ —  

Loans purchased:

              

Amount funded

   $ 19,980    $ 4,330    $ —      $ —      $ —  

Number of loans

     295      39.00      —        —        —  

Average loan size

   $ 68    $ 111    $ —      $ —      $ —  

Loan Marketing. We market our lending products directly to customers through a variety of channels depending on the product. When we market single family mortgage and home equity loans, we target Internet comparison shoppers generally in all 50 states through the purchase of advertising on search engines, such as Google and Yahoo, and popular product comparison sites, such as Bankrate.com. For home equity loans, we also buy customer leads and loan applications from major lead aggregators and from our marketing affiliates and partners with affinity agreements. Previously, we marketed multifamily loans primarily in five states through Internet search engines and through traditional origination techniques, such as direct mail marketing, personal sales efforts and limited media advertising. More recently, we have increased our multifamily marketing. We expect to use these marketing techniques in the future when the residential mortgage markets stabilize.

 

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Loan Originations. We originate loans through four different origination channels: online retail, online wholesale and direct and indirect.

 

   

Online Retail Loan Origination. We originate single family, home equity and multifamily mortgage loans directly online through our websites, where our customers can review interest rates and loan terms, enter their loan applications and lock in interest rates directly over the Internet. All online loan offerings are accessed though our bank website bankofinternet.com. We maintain and update the rate and other information on this website. We process our first mortgage, home equity loan second mortgage, RV and auto applications through our work flow system and underwrite the loan with our personnel. Our primary website for multifamily loans is apartmentbank.com, which is where customers can obtain loan rates and terms, prequalify loan requests, submit loan applications, communicate with loan officers and monitor loan processing in a secure, online environment. Multifamily loan applications are underwritten and processed internally by our personnel. We designed our multifamily website and underlying software to expedite the origination, processing and management of multifamily loans.

 

   

Online Broker Origination. We have developed a limited number of relationships with independent multifamily loan brokers and we manage these relationships and our wholesale loan pipeline through our “Broker Advantage” website. Through this password-protected website, our approved independent loan brokers can compare programs, terms and pricing on a real time basis and communicate with our staff. We expect to expand this channel in the future.

 

   

Direct Loan Origination. We believe that, particularly in multifamily and commercial mortgage lending, traditional loan originators are needed to achieve our desired origination volume. Our internal software allows the loan originator to have direct online access to our multifamily loan origination system and originate and manage their loan portfolios in a secure online environment from anywhere in the nation. Routine tasks are automated, such as researching loan program and pricing updates; prequalifying loans; submitting loan applications, viewing customer applications, credit histories and other application documents and monitoring the status of loans in process. We expect to expand this channel in the future.

 

   

Indirect Loan Origination. In March 2007, we signed an agreement with a large RV dealer operating in 20 states to source RV loans on new and used RVs sold through the dealer locations. Applications are submitted via facsimile to our office location from each dealer. Dealer proposals are input into our system and reviewed for compliance with pre-established credit standards for RV borrowers. For those loans that meet our requirements, we underwrite and process loans in-house with the assistance of the finance department of the RV dealer. Our approval letters are faxed back to dealers who complete the execution of the customer contract and earn participation fees based upon final contract rates and terms executed by the borrower. During fiscal 2009 we significantly reduced our volume of indirect RV business and we do not expect to increase our originations in the immediate future.

Wholesale Loan Purchases. We purchase selected single family, multifamily and commercial real estate loans from other lenders to supplement and diversify our loan portfolio geographically. We currently purchase loans from a variety of sources including major banks, major securities brokers or dealers, mortgage companies, and investment funds. At June 30, 2009, approximately $298.7 million, or 47.52%, of our loan portfolio was acquired from other lenders who are servicing the loans on our behalf, of which 50.4% were multifamily loans and 49.6% were single family loans.

Loan Servicing. We typically retain servicing rights for all home equity, multifamily, automobile and RV loans that we originate. We typically do not acquire servicing rights on purchased single family and multifamily loans, and we typically release servicing rights to the purchaser when we sell single family loans that we originate.

Loan Underwriting Process and Criteria. We individually underwrite the loans that we originate and all loans that we purchase. Our loan underwriting policies and procedures are written and adopted by our board of directors and our loan committee. Each loan, regardless of how it is originated, must meet underwriting criteria set forth in our lending policies and the requirements of applicable lending regulations of the Office of Thrift Supervision (OTS).

We have designed our loan application and review process so that much of the information that is required to underwrite and evaluate a loan is created electronically during the loan application process. Therefore we can automate many of the mechanical procedures involved in preparing underwriting reports and reduce the need for human interaction, other than in the actual credit decision process. We believe that our systems will allow us to handle increasing volumes of loans with only a small increase in personnel, in accordance with our strategy of leveraging technology to lower our operating expenses.

We perform underwriting directly on all multifamily and commercial loans that we originate and purchase. We rely primarily on the cash flow from the underlying property as the expected source of repayment, but we also endeavor to obtain personal guarantees from all borrowers or substantial principals of the borrower. In evaluating multifamily and commercial loans, we review the value and

 

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condition of the underlying property, as well as the financial condition, credit history and qualifications of the borrower. In evaluating the borrower’s qualifications, we consider primarily the borrower’s other financial resources, experience in owning or managing similar properties and payment history with us or other financial institutions. In evaluating the underlying property, we consider primarily the net operating income of the property before debt service and depreciation, the ratio of net operating income to debt service and the ratio of the loan amount to the appraised value.

We perform underwriting directly on all loans that we originate. In the underwriting process we consider the borrower’s credit score, credit history, documented income, existing and new debt obligations, the value of the collateral, and other internal and external factors.

Lending Limits. As a savings association, we are generally subject to the same lending limit rules applicable to national banks. With limited exceptions, the maximum amount that we may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of our unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. We are additionally authorized to make loans to one borrower, by order of the Director of the OTS, in an amount not to exceed the lesser of $30.0 million or 30% of our unimpaired capital and surplus for the purpose of developing residential housing, if certain specified conditions are met. See “Regulation – Regulation of Bank of Internet USA.”

At June 30, 2009, the Bank’s loans-to-one-borrower limit was $13.6 million, based upon the 15% of unimpaired capital and surplus measurement. At June 30, 2009, no single loan was larger than $4.5 million and our largest single lending relationship had an outstanding balance of $6.1 million.

Loan Quality and Credit Risk. After eight years of operating the Bank, we experienced our first mortgage loan foreclosure and consumer loan charge-off during fiscal 2008. In fiscal 2009, despite an increase in foreclosures and loan charge-offs, we believe that our level of nonperforming loans is significantly below the level of nonperforming loans currently found at most banks. Given the down turn in the mortgage and consumer credit markets and the increase in national unemployment, we expect in the future to have additional loans that default or become nonperforming. Nonperforming assets are defined as nonperforming loans and real estate acquired by foreclosure or deed-in-lieu thereof. Generally, nonperforming loans are defined as nonaccrual loans and loans 90 days or more overdue. Troubled debt restructurings are defined as loans that we have agreed to modify by accepting below market terms either by granting interest rate concessions or by deferring principal or interest payments. Our policy with respect to nonperforming assets is to place such assets on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest will be deducted from interest income. Our general policy is to not accrue interest on loans past due 90 days or more, unless the individual borrower circumstances dictate otherwise.

See Management’s Discussion and Analysis – “Asset Quality and Allowance for Loan Loss” for a history of nonperforming assets and allowance for loan loss.

Securities Portfolio. In addition to loans, we invest available funds in high-grade mortgage-backed securities, fixed income securities and preferred securities of government sponsored entities. From time to time we also invest available funds in term deposits of other financial institutions. Our investment policy, as established by our board of directors, is designed to maintain liquidity and generate a favorable return on investment without incurring undue interest rate risk, credit risk or portfolio asset concentration risk. Under our investment policy, we are currently authorized to invest in agency mortgage-backed obligations issued or fully guaranteed by the United States government, non-agency mortgage-backed obligations, specific federal agency obligations, specific time deposits, negotiable certificates of deposit issued by commercial banks and other insured financial institutions, investment grade corporate debt securities and other specified investments. We also buy and sell securities to facilitate liquidity and to help manage our interest rate risk.

We classify each investment security according to our intent to either hold the security to maturity, to trade the security at fair value or to make the security available for sale. In the last five fiscal years, we have increased our purchases of mortgage-backed securities because we believed the mortgage-backed securities provided better risk adjusted yields than certain single family whole loan originations or whole loan pools. In addition, during fiscal 2008 and 2009, we sold U.S. agency securities and replaced them with better risk adjusted non-agency securities. As a substitute for whole loans, more of our investment securities have been classified as held to maturity during fiscal 2008 and 2009.

 

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The following table sets forth the dollar amount of our securities portfolio by intent at the end of each of the last five fiscal years:

 

      Available for sale    Held to maturity    Trading     

Fiscal year end

   Fair Value    Carrying Amount    Fair Value    Total
     (Dollars in thousands)

June 30, 2009

   $ 265,807    $ 350,898    $ 5,445    $ 622,150

June 30, 2008

     209,119      300,895      —        510,014

June 30, 2007

     296,068      61,902      —        357,970

June 30, 2006

     127,261      12,375      —        139,636

June 30, 2005

     62,766      7,711      —        70,477

The expected maturity distribution of our mortgage-backed securities and the contractual maturity distribution of our other debt securities and the weighted average yield for each range of maturities at June 30, 2009 were:

 

At June 30, 2009    Total Amount     Due Within
One Year
    Due After One but
within Five Years
    Due After Five
but within Ten
Years
    Due After Ten Years  

Available for sale

   Amount    Yield1     Amount    Yield1     Amount    Yield1     Amount    Yield1     Amount    Yield1  
     (Dollars in thousands)  

Mortgage-backed securities (RMBS):

                         

U.S. agencies2

   $ 79,579    4.70   $ 13,432    4.78   $ 26,255    4.79   $ 16,209    4.70   $ 23,683    4.55

Non-agency3

     111,620    10.94     20,353    12.31     63,312    11.69     12,157    9.28     15,798    7.43
                                                                 

Total mortgage-backed securities

   $ 191,199    8.34   $ 33,785    9.32   $ 89,567    9.67   $ 28,366    6.66   $ 39,481    5.70
                                                                 

Other debt securities:

                         

U.S. agencies2

   $ 59,018    0.24   $ 59,018    0.24   $ —      0.00   $ —      0.00   $ —      0.00
                                                                 

Available for sale - amortized cost

   $ 250,217    6.43   $ 92,803    3.54   $ 89,567    9.67   $ 28,366    6.66   $ 39,481    5.70
                                                                 

Available for sale - fair value

   $ 265,807    6.43   $ 96,537    3.54   $ 100,555    9.67   $ 29,868    6.66   $ 38,847    5.70
                                                                 

Held to maturity

                                                       

Mortgage-backed securities (RMBS) :

                         

U.S. agencies2

   $ 18,928    5.27   $ 2,160    5.22   $ 6,926    5.25   $ 4,281    5.35   $ 5,561    5.24

Non-agency3

     331,970    8.76     28,061    11.62     124,365    9.58     49,302    8.42     130,242    7.50
                                                                 

Held to maturity - carrying value

   $ 350,898    8.58   $ 30,221    11.16   $ 131,291    9.35   $ 53,583    8.17   $ 135,803    7.41
                                                                 

Held to maturity - fair value

   $ 344,612    8.58   $ 32,479    11.16   $ 135,705    9.35   $ 53,437    8.17   $ 122,991    7.41
                                                                 

Trading

                                                       

Non-agency - fair value4

   $ 5,445    1.03     —      0.00     —      0.00     —      0.00   $ 5,445    1.03
                                                                 

Total securities

   $ 622,150    7.63   $ 126,758    5.36   $ 231,846    9.49   $ 83,451    7.63   $ 180,095    6.85
                                                                 

 

(1) 

Weighted average yield is based on amortized cost of the securities. Residential mortgage-backed security (RMBS) yields and maturities include impact of expected prepayments and other timing factors such as interest rate forward curve.

(2) 

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

(3) 

Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages . Primarily supersenior securities rated AAA by at least one rating agency and secured by prime, Alt A or pay-option ARM mortgages.

(4) 

Collateralized debt obligations secured by pools of bank trust preferred.

 

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Our securities portfolio of $622.2 million at June 30, 2009 is composed of approximately 25.6% U.S. agency RMBS and other debt securities issued by government sponsored enterprises, primarily Freddie Mac and Fannie Mae; 13.3% Prime private-issue super senior first-lien RMBS; 19.2% Alt-A fixed-rate, private-issue super senior first-lien RMBS; 38.6% Alt-A pay-option ARM, private-issue super senior first-lien MBS and 3.3% other residential mortgage-backed, asset-backed and bank pooled trust preferred securities. We had no commercial mortgage-backed securities (CMBS) or Subprime RMBS at June 30, 2009.

We manage the credit risk of our non-agency RMBS by purchasing those AAA securities which we believe have the most favorable blend of historic credit performance and remaining credit enhancements including subordination, over collateralization, excess spread and purchase discounts. At June 30, 2009, our portfolio of non-agency securities included 113 different RMBS securities of which 101 are currently rated AAA by at least one rating agency. Substantially all of our non-agency RMBS are super senior tranches protected against realized loss by subordinated tranches. The amount of structural subordination available to protect each of our securities (expressed as a percent of the current face value) is known as credit enhancement. At June 30, 2009, the weighted-average credit enhancement in our entire non-agency RMBS portfolio was 39.6%. The credit enhancement levels for our Alt-A fixed rate and Alt-A pay-option ARM portions of the portfolio were 50.1% and 38.9%, respectively. The credit enhancement percent and the rating agency grade (e.g., “AA”) do not consider the additional credit protection available to the Bank (if needed) from its purchase price discounts. The effective credit enhancement at June 30, 2009 of the Alt-A option ARM portfolio increases to a weighted average of 61.5% at our Bank though our Bank of Internet Re-securitization Trust (BIRT) restructuring of these securities and their discounts into a new series of “AAA and AA” securities rated by two nationally recognized rating agencies. The Bank’s non-agency RMBS portfolio has 96.7% of its securities rated AAA or AA. (See Management’s Discussion and Analysis – “Critical Accounting Policies – Securities”).

The following table sets forth changes in our securities portfolio for each fiscal year since 2005:

 

     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Securities at beginning of period1

   $ 510,014      $ 357,970      $ 139,636      $ 70,477      $ 3,665   

Purchases

     310,559        493,183        364,349        100,408        97,695   

Sales

     (95,297     (210,618     (74,346     —          (18,667

Repayments, prepayments and amortization of premium / accretion of discounts

     (97,625     (132,661     (71,706     (29,764     (12,226

Trading securities mark-to-market

     (2,055     —          —          —          —     

Transition impact of adopting SFAS 159

     (3,504     —          —          —          —     

Impairment charged to the income statement

     (1,454     (1,000     —          —          —     

(Decrease) increase in unrealized gains/losses on available-for-sale securities, net of impairment charged

     1,512        3,140        37        (1,485     10   
                                        

Securities at end of period1

   $ 622,150      $ 510,014      $ 357,970      $ 139,636      $ 70,477   
                                        

 

(1) 

Includes trading, available for sale and held to maturity portfolios.

Deposit Products and Services

Deposit Products. We offer a full line of deposit products over the Internet to customers in all 50 states. Our deposit products consist of demand deposits (interest bearing and non-interest bearing), savings accounts and time deposits. Our customers access their funds through ATMs, debit cards, Automated Clearing House funds (electronic transfers) and checks. We also offer the following additional services in connection with our deposit accounts:

 

   

Online Bill Payment Service. Customers can pay their bills online through electronic funds transfer or a written check prepared and sent to the payee.

 

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Online Check Imaging. Online images of cancelled checks and deposit slips are available to customers 24 hours a day. Images of cancelled checks are available real time (at the time the check clears our bank) and may be printed or stored electronically.

 

   

ATM Cards or VISA® Check Cards. Each customer may choose to receive a free ATM card or VISA® check card upon opening an account. Customers can access their accounts at ATMs and any other location worldwide that accept VISA® check cards. We do not charge a fee for ATM/VISA® usage, and we reimburse our customers up to $8 per month for fees imposed by third-party operators of ATM/VISA® locations.

 

   

Overdraft Protection. Overdraft protection, in the form of an overdraft line of credit, is available to all checking account customers who request the protection and qualify.

 

   

Electronic Statements. Statements are produced and imaged automatically each month and may be printed or stored electronically by the customer.

Deposit Marketing. We currently market to deposit customers through targeted, online marketing in all 50 states by purchasing “key word” advertising on Internet search engines, such as Google, and placement on product comparison sites, such as Bankrate.com. We target deposit customers based on demographics, such as age, income, geographic location and other criteria. We also pay for customer leads and applications from our marketing affiliates and partners with affinity agreements.

As part of our deposit marketing strategies, we actively manage deposit interest rates offered on our websites and displayed in our advertisements. Senior management is directly involved in executing overall growth and interest rate guidance established by our asset/liability committee, or ALCO. Within these parameters, management and staff survey our competitors’ interest rates and evaluate consumer demand for various products and our existing deposit mix. They then establish our marketing campaigns accordingly and monitor and adjust our marketing campaigns on an ongoing basis. Within minutes, our management and staff can react to changes in deposit inflows and external events by altering interest rates reflected on our websites and in our advertising. Our external advertising cost per new account was approximately $10.67, $9.60 and $7.51 for fiscal years 2009, 2008 and 2007, respectively.

The number of deposit accounts at June 30, 2009 and at each of June 30, 2008, 2007, 2006, and 2005 is set forth below:

 

     At June 30,
     2009    2008    2007    2006    2005

Checking and savings accounts

   10,685    9,415    8,315    8,195    8,829

Time deposits

   12,757    15,490    17,502    14,303    10,998
                        

Total number of deposit accounts

   23,442    24,905    25,817    22,498    19,827
                        

Deposit Composition. The following table sets forth the dollar amount of deposits by type and weighted average interest rates at June 30, 2009 and at each of June 30, 2008, 2007, 2006 and 2005:

 

     At June 30,  
     2009     2008     2007     2006     2005  
     Amount    Rate1     Amount    Rate1     Amount    Rate1     Amount    Rate 1     Amount    Rate 1  
     (Dollars in thousands)  

Noninterest-bearing

   $ 3,509    —        $ 5,509    —        $ 993    —        $ 1,203    —        $ 8,225    —     

Interest-bearing:

                         

Demand

     59,151    1.22     61,616    3.22     48,575    3.52     35,978    2.79     33,187    1.93

Savings

     192,781    1.94     56,202    3.38     22,840    3.75     28,980    3.58     50,408    2.13

Time deposits:

                         

Under $100

     191,021    4.39     268,747    4.84     298,767    5.06     228,204    4.52     178,566    3.60

$100 or more

     202,062    3.85     178,630    4.91     176,774    5.09     129,839    4.54     90,665    3.54
                                             

Total time deposits

     393,083    4.11     447,377    4.87     475,541    5.07     358,043    4.52     269,231    3.58
                                             

Total interest-bearing

     645,015    3.20     565,195    4.54     546,956    4.88     423,001    4.31     352,826    3.22
                                             

Total deposits

   $ 648,524    3.18   $ 570,704    4.50   $ 547,949    4.87   $ 424,204    4.30   $ 361,051    3.14
                                             

 

(1) 

Based on weighted average stated interest rates at the end of the period.

 

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The following tables set forth the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated:

 

     2009     2008     2007     2006     2005  
     Average
Balance
   Interest
Expense
   Avg.
Rate
Paid
    Average
Balance
   Interest
Expense
   Avg.
Rate
Paid
    Average
Balance
   Interest
Expense
   Avg.
Rate
Paid
    Average
Balance
   Interest
Expense
   Avg.
Rate
Paid
    Average
Balance
   Interest
Expense
   Avg.
Rate
Paid
 
     (Dollars in thousands)  

Demand

   $ 70,882    $ 1,722    2.43   $ 48,308    $ 1,670    3.46   $ 34,409    $ 1,066    3.10   $ 35,693    $ 962    2.70   $ 28,330    $ 483    1.70

Savings

     115,375      2,865    2.48     28,623      1,056    3.69     25,696      960    3.74     36,595      1,078    2.95     76,842      1,599    2.08

Time deposits

     433,410      19,400    4.48     506,761      25,632    5.06     399,855      19,541    4.89     321,817      12,890    4.01     205,530      6,856    3.34
                                                                                

Total interest-bearing deposits

   $ 619,667    $ 23,987    3.87   $ 583,692    $ 28,358    4.86   $ 459,960    $ 21,567    4.69   $ 394,105    $ 14,930    3.79   $ 310,702    $ 8,938    2.88
                                                                                                    

Total deposits

   $ 623,804    $ 23,987    3.85   $ 585,933    $ 28,358    4.84   $ 461,024    $ 21,567    4.68   $ 398,126    $ 14,930    3.75   $ 315,448    $ 8,938    2.83
                                                                                                    

The following table shows the maturity dates of our certificates of deposit at June 30, 2009, 2008 and 2007:

 

     2009    2008    2007
     (Dollars in thousands)

Within 12 months

   $ 237,920    $ 233,767    $ 258,404

13 to 24 months

     49,796      81,156      100,086

25 to 36 months

     64,743      33,343      44,988

37 to 48 months

     38,559      61,744      15,574

49 months and thereafter

     2,065      37,367      56,489
                    

Total

   $ 393,083    $ 447,377    $ 475,541
                    

The following table shows maturities of our time deposits having principal amounts of $100,000 or more at June 30, 2009, 2008 and 2007:

 

     Term to Maturity
     Within
Three
Months
   Over Three
Months to
Six Months
   Over Six
Months to
One Year
   Over One
Year
   Total

Time deposits with balances of
$100,000 or more at June 30,

     (Dollars in thousands)

2009

   $ 30,256    $ 49,126    $ 57,527    $ 65,153    $ 202,062

2008

   $ 29,916    $ 26,919    $ 34,284    $ 87,511    $ 178,630

2007

   $ 26,795    $ 20,997    $ 42,139    $ 86,843    $ 176,774

Borrowings. In addition to deposits, we have historically funded our asset growth through advances from the Federal Home Loan Bank (FHLB). Our bank can borrow up to 40.0% of its total assets from the FHLB, and borrowings are collateralized by mortgage loans and mortgage-backed securities pledged to the FHLB. At June 30, 2009, the Company had $44.7 million available immediately and an additional $191.2 million available with additional collateral, for advances from the FHLB for terms up to ten years.

At June 30, 2009, we also had a $10.0 million unsecured fed funds purchase line with a bank under which no borrowings were outstanding.

The bank can also borrow from the Federal Reserve Bank of San Francisco (FRB), and borrowings are collateralized by consumer loans and mortgage-backed securities pledged to the FRB. Based on loans and securities pledged at June 30, 2009, we had a total borrowing capacity of approximately $347.1 million, of which $160.0 million was outstanding and $187.1 million was available.

 

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The Company has sold securities under various agreements to repurchase for total proceeds of $130.0 million. The repurchase agreements have fixed interest rates between 3.24% and 4.75% and scheduled maturities between January 2012 and December 2017. Under these agreements, the Company may be required to repay the $130.0 million and repurchase its securities before the scheduled maturity if the issuer requests repayment on scheduled quarterly call dates. The weighted-average remaining contractual maturity period is 5.4 years and the weighted average remaining period before such repurchase agreements could be called is 0.70 of a year.

On December 16, 2004, we completed a transaction in which we formed a trust and issued $5.0 million of trust-preferred securities. The net proceeds from the offering were used to purchase approximately $5.2 million of junior subordinated debentures of our company with a stated maturity date of February 23, 2035. The debentures are the sole assets of the trust. The trust preferred securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indenture. We have the right to redeem the debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indenture plus any accrued but unpaid interest through the redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%, which was 3.06% at June 30, 2009, with interest to be paid quarterly starting in February 2005.

The table below sets forth the amount of our borrowings, the maximum amount of borrowings in each category during any month-end during each reported period, the approximate average amounts outstanding during each reported period and the approximate weighted average interest rate thereon at or for fiscal years ended June 30, 2009, 2008, 2007, 2006, and 2005:

 

     At or For The Fiscal Years Ended June 30,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Advances from the FHLB 1:

  

Average balance outstanding

   $ 333,327      $ 270,022      $ 239,742      $ 193,632      $ 122,166   

Maximum amount outstanding at any month-end during the period

     392,973        398,966        254,216        236,177        172,562   

Balance outstanding at end of period

     262,984        398,966        227,292        236,177        172,562   

Average interest rate at end of period

     3.34     3.77     4.39     4.19     3.49

Average interest rate during period

     3.42     4.23     4.34     3.86     3.45

Securities sold under agreements to repurchase:

          

Average balance outstanding

   $ 130,000      $ 118,497      $ 30,648      $ —        $ —     

Maximum amount outstanding at any month-end during the period

     130,000        130,000        90,000        —          —     

Balance outstanding at end of period

     130,000        130,000        90,000        —          —     

Average interest rate at end of period

     4.32     4.23     4.39     —          —     

Average interest rate during period

     4.36     4.34     4.41     —          —     

Fed Discount Window borrowing

          

Average balance outstanding

   $ 38,524      $ —        $ —        $ —        $ —     

Maximum amount outstanding at any month-end during the period

     160,000        —          —          —          —     

Balance outstanding at end of period

     160,000        —          —          —          —     

Average interest rate at end of period

     0.25     —          —          —          —     

Average interest rate during period

     0.36     —          —          —          —     

Notes payable:

          

Average balance outstanding

   $ —        $ —        $ —        $ —        $ 2,541   

Maximum amount outstanding at any month-end during the period

     —          —          —          —          5,000   

Balance outstanding at end of period

     —          —          —          —          —     

Average interest rate at end of period

     —          —          —          —          —     

Average interest rate during period 2

     —          —          —          —          6.19

Junior subordinated debentures:

          

Average balance outstanding

   $ 5,155      $ 5,155      $ 5,155      $ 5,155      $ 2,782   

Maximum amount outstanding at any month-end during the period

     5,155        5,155        5,155        5,155        5,155   

Balance outstanding at end of period

     5,155        5,155        5,155        5,155        5,155   

Average interest rate at end of period

     3.06     5.04     7.76     7.59     5.68

Average interest rate during period

     4.60     7.16     8.01     7.02     5.47

 

(1)

Advances from the FHLB have been reduced by debt issue costs of $18, $74 and $108 for the fiscal years ended June 30, 2009, 2008 and 2007 respectively.

(2)

Rate excludes impact of write-off of $46,000 in deferred loan costs as a result of prepaying the note payable in March 2005.

 

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Technology

We have purchased, customized and developed software systems to provide products and services to our customers. Most of our key customer interfaces were designed by us specifically to address the needs of an Internet-only bank and its customers. Our website and deposit origination and servicing (DOS) software drive our customer self-service model, reducing the need for human interaction while increasing our overall operating efficiencies. Our DOS software enables us to collect customer data over our websites, which is automatically uploaded into our databases. The DOS databases drive our workflow processes by automatically linking to third-party processors and storing all customer contract and correspondence data, including emails, hard copy images and telephone notes. We intend to continue to improve our systems and implement new systems, with the goal of providing for increased transaction capacity without materially increasing personnel costs.

The following summarizes our current technology resources:

Core Banking Systems. We outsource substantially our entire core banking systems. The outsourcer is responsible for all of our basic core processing applications, including general ledger, loans, deposits, bill pay, ATM networks, electronic fund transfers, item processing and imaging. These outsourced services for our core banking systems are located in California, Texas and Kansas, with a backup location in Branson, Missouri. We use a variety of vendors to provide automated information for our customers, including credit, identity authentication, tax status and property appraisal.

Internet and Origination Systems. We developed software for our website interface with loan and deposit customers, including collection and initial processing of new customer information. We also developed software to manage workflow and fraud control and provide automated interfaces to our outsourced service providers. We host our primary web servers in San Diego, California, and fully control and manage these servers with a staff of technology personnel. Web servers used by our customers to access real time account data are located in Kansas, with a backup location in Texas.

Systems Architecture. Our internally developed software is based on a Microsoft development language and Intel-based hardware. Our outsourced core processing system uses IBM hardware and software. We use a variety of specialized companies to provide hardware and software for firewalls, network routers, intrusion detection, load balancing, data storage and data backup. To aid in disaster recovery, customer access to our websites is supported by a fully redundant network and our servers are “mirrored” so that most hardware failures or software bugs should cause no more than a few minutes of service outage. “Mirroring” means that our server is backed up continuously so that all data is stored in two physical locations.

Security

Because we operate almost exclusively through electronic means, we believe that we must be vigilant in detecting and preventing fraudulent transactions. We have implemented stringent computer security and internal control procedures to reduce our susceptibility to “identity theft,” “hackers,” theft and other types of fraud. We have implemented an automated approach to detecting identity theft that we believe is highly effective, and we have integrated our fraud detection processes into our DOS technology. For example, when opening new deposit accounts, our DOS programs automatically collect customers’ personal and computer identification from our websites, send the data to internal and third-party programs which analyze the data for potential fraud, and quickly provide operating personnel with a summary report for final assessment and decision making during the account-opening process.

We continually evaluate the systems, services and software used in our operations to ensure that they meet high security standards. The following are among the security measures that are currently in place:

 

   

Encrypted Transactions. All banking transactions and other appropriate Internet communications are encrypted so that sensitive information is not transmitted over the Internet in a form that can be read or easily deciphered.

 

   

Secure Log-on. To protect against the possibility of unauthorized downloading of a customer’s password protected files, user identification and passwords are not stored on the Internet or our web server.

 

   

Authenticated Session Integrity. An authenticated user is any user who signs onto our website with a valid user ID and password. To protect against fraudulent bank customers, our server is programmed to alert our core processing vendor of any attempted illegitimate entry so that its staff can quickly investigate and respond to such attempts.

 

   

Physical Security. Our servers and network computers reside in secure facilities. Currently, computer operations supporting our outsourced core banking systems are based in Lenexa, Kansas with backup facilities in Houston, Texas. Only employees with proper photographic identification may enter the primary building. The computer operations are located in a secure area that can be accessed only by using a key card and further password identification. In addition, our marketing and account opening servers reside in a secure third-party location in San Diego, California with a mirror site at our corporate offices. These servers are on a different network separate from our outsourced core back-office processing system and maintain the same level of security services as our outsourced core processing servers in Lenexa, Kansas.

 

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Service Continuity. Our core system outsourcer and our bank provide a fully redundant network. Our server is also “mirrored.” This network and server redundancy is designed to provide reliable access to our bank. However, if existing customers are not able to access their accounts over the Internet, customers retain access to their funds through paper checks, ATM cards, customer service by telephone and an automated telephone response system.

 

   

Monitoring. All customer transactions on our servers produce one or more entries into transaction logs, which we monitor for unusual or fraudulent activity. We are notified and log any attempt to modify a command or request from our websites. Additionally, all financial transactions are logged, and these logs are constantly reviewed for abnormal or unusual activity.

Intellectual Property and Proprietary Rights

We register our various Internet URL addresses with service companies, and work actively with bank regulators to identify potential naming conflicts with competing financial institutions. Policing unauthorized use of proprietary information is difficult and litigation may be necessary to enforce our intellectual property rights.

We own the Internet domain names: bankofinternet.com, bofi.com, apartmentbank.com, seniorbofi.com, myrvbank.com, insurancesales.com, investmentsales.com, bancodeinternet.com and many other similar names. Domain names in the United States and in foreign countries are regulated, and the laws and regulations governing the Internet are continually evolving. Additionally, the relationship between regulations governing domain names and laws protecting intellectual property rights is not entirely clear. As a result, we may in the future be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademark and other intellectual property rights.

Employees

At June 30, 2009, we had 57 full time employees. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We have not experienced any work stoppage and consider our relations with our employees to be good.

Competition

The market for banking and financial services is intensely competitive, and we expect competition to continue to intensify in the future. We believe that competition in our market is based predominantly on price, customer service and brand recognition. Our competitors include:

 

   

large, publicly-traded, Internet-based banks, as well as smaller Internet-based banks;

 

   

“brick and mortar” banks, including those that have implemented websites to facilitate online banking; and

 

   

traditional banking institutions such as thrifts, finance companies, credit unions and mortgage banks.

In real estate lending, we compete against traditional real estate lenders, including large and small savings banks, commercial banks, mortgage bankers and mortgage brokers. Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources and are capable of providing strong price and customer service competition. In order to compete profitably, we may need to reduce the rates we offer on loans and investments and increase the rates we offer on deposits, which actions may adversely affect our overall financial condition and earnings. We may not be able to compete successfully against current and future competitors.

REGULATION

General

Savings and loan holding companies and savings associations are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and not for the benefit of our stockholders. The following information describes aspects of the material laws and regulations applicable to us and our subsidiary, and does not purport to be complete. The discussion is qualified in its entirety by reference to all particular applicable laws and regulations.

Legislation is introduced from time to time in the U.S. Congress that may affect the operations of our company and Bank of Internet USA. In addition, the regulations governing us and Bank of Internet USA may be amended from time to time by the OTS. Any such legislation or regulatory changes in our future could adversely affect Bank of Internet USA. No assurance can be given as to whether or in what form any such changes may occur.

 

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Regulation of BofI Holding, Inc.

General. We are a savings and loan holding company subject to regulatory oversight by the OTS. As such, we are required to register and file reports with the OTS and are subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over us and our subsidiary, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to Bank of Internet USA.

Activities Restrictions. Our activities, other than through Bank of Internet USA or any other SAIF-insured savings association we may hold in the future, are subject to restrictions applicable to bank holding companies. Bank holding companies are prohibited, subject to certain exceptions, from engaging in any business or activity other than a business or activity that the Federal Reserve Board has determined to be closely related to banking. The Federal Reserve Board has by regulation determined that specified activities satisfy this closely-related-to-banking standard. We currently do not engage in any activities that fall under this standard.

Regulation of Bank of Internet USA

General. As a federally chartered, FDIC-insured savings association, Bank of Internet USA is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments of Bank of Internet USA must comply with various statutory and regulatory requirements. Bank of Internet USA is also subject to reserve requirements promulgated by the Federal Reserve Board. The OTS, together with the FDIC, regularly examines Bank of Internet USA and prepares reports for Bank of Internet USA’s board of directors on any deficiencies found in the operations of Bank of Internet USA. The relationship between Bank of Internet USA and depositors and borrowers is also regulated by federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of mortgage documents utilized by Bank of Internet USA.

Bank of Internet USA must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into specified transactions such as mergers with or acquisitions of other financial institutions, raising capital or issuing trust preferred securities. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the FDIC insurance funds and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress, could have a material adverse effect on Bank of Internet USA and our operations.

Insurance of Deposit Accounts. On October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, which temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective immediately upon the President’s signature. The legislation provided that the basic deposit insurance limit will return to $100,000 after December 31, 2009. On May 20, 2009, President Barack Obama signed the Helping Families Save Their Homes Act, which extends the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 per depositor through December 31, 2013. This extension of the temporary $250,000 coverage limit became effective immediately upon the President’s signature. The legislation provides that the SMDIA will return to $100,000 on January 1, 2014.

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program to strengthen confidence and encourage liquidity in the banking system. The new program will (1) guarantee newly issued senior unsecured debt of eligible institutions, including FDIC-insured banks and thrifts, as well as certain holding companies, and (2) provide full deposit insurance coverage for non-interest bearing deposit transaction accounts in FDIC-insured institutions, regardless of the dollar amount. All eligible entities are covered under the program unless they opt out of one or both parts of the program – either the debt guarantee component and/or the transaction account guarantee component.

As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC based on the risk a particular institution poses to its deposit insurance fund. Because the FDIC’s deposit insurance fund fell below prescribed levels in 2008, the FDIC has announced increased premiums for all insured depository institutions, including the Bank, in order to begin recapitalizing the fund. Insurance assessments ranged from 0.12% to 0.50% of total deposits for the first calendar quarter 2009 assessment; this resulted in an additional expense of $120,000 for the quarter ended March 31, 2009. Effective April 1, 2009, insurance assessments ranged from 0.07% to 0.78%, resulting in additional expense of $233,400 for the quarter ended June 30, 2009. Insurance assessments depend on an institution’s risk classification, which is based on an institution’s capital group, supervisory subgroup assignment and other factors. The FDIC may terminate insurance of deposits upon a finding that Bank of Internet USA has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS.

 

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In addition, under a proposed rule, the FDIC indicated its plans to impose a 20 basis point emergency assessment on insured depository institutions to be paid on September 30, 2009, based on deposits at June 30, 2009. FDIC representatives subsequently indicated the amount of this special assessment could decrease if certain events transpire. The proposed rule would also authorize the FDIC to impose an additional emergency assessment of up to 10 basis points after June 30, 2009, if necessary to maintain public confidence in federal deposit insurance. At June 30, 2009, we estimated this special assessment to be $605,000.

Regulatory Capital Requirements and Prompt Corrective Action. The prompt corrective action regulation of the OTS requires mandatory actions and authorizes other discretionary actions to be taken by the OTS against a savings association that falls within undercapitalized capital categories specified in the regulation.

Under the regulation, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written agreement, order, capital directive, prompt corrective action directive or other individual requirement by the OTS to maintain a specific capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1” and is not experiencing or anticipating significant growth). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At June 30, 2009, Bank of Internet USA met the capital requirements of a “well capitalized” institution under applicable OTS regulations.

In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC, but are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll-over brokered deposits.

If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with restrictions applicable to significantly undercapitalized institutions. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized without the express permission of the institution’s primary regulator.

OTS capital regulations also require savings associations to meet three additional capital standards:

 

   

tangible capital equal to at least 1.5% of total adjusted assets;

 

   

leverage capital (core capital) equal to 4.0% of total adjusted assets; and

 

   

risk-based capital equal to 8.0% of total risk-weighted assets.

These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels greater than those provided in the regulations may be established by the OTS for individual savings associations upon a determination that the savings association’s capital is or may become inadequate in view of its circumstances. Bank of Internet USA is not subject to any such individual minimum regulatory capital requirement and our regulatory capital exceeded all minimum regulatory capital requirements as of June 30, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Loans-to-One-Borrower Limitations. Savings associations generally are subject to the lending limits applicable to national banks. With limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings associations are additionally authorized to make loans to one borrower by order of the Director of the OTS, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and surplus for the purpose of developing residential housing, if the following specified conditions are met:

 

   

the purchase price of each single family dwelling in the development does not exceed $500,000;

 

   

the savings association is in compliance with its fully phased-in capital requirements;

 

   

the loans comply with applicable loan-to-value requirements; and

 

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the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus.

Qualified Thrift Lender Test. Savings associations must meet a qualified thrift lender, or QTL, test. This test may be met either by maintaining a specified level of portfolio assets in qualified thrift investments as specified by the Home Owners’ Loan Act (“HOLA”), or by meeting the definition of a “domestic building and loan association” under the Internal Revenue Code of 1986, as amended, or the Code. Qualified thrift investments are primarily residential mortgage loans and related investments, including mortgage related securities. Portfolio assets generally mean total assets less specified liquid assets, goodwill and other intangible assets and the value of property used in the conduct of Bank of Internet USA’s business. The required percentage of qualified thrift investments under the HOLA is 65% of portfolio assets. An association must be in compliance with the QTL test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. At June 30, 2009, Bank of Internet USA was in compliance with its QTL requirement and met the definition of a domestic building and loan association.

Liquidity Standard. Savings associations are required to maintain sufficient liquidity to ensure safe and sound operations.

Affiliate Transactions. Transactions between a savings association and its affiliates are quantitatively and qualitatively restricted pursuant to OTS regulations. Affiliates of a savings association include, among other entities, the savings association’s holding company and companies that are under common control with the savings association. In general, a savings association or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates. In addition, a savings association and its subsidiaries may engage in certain covered transactions and other specified transactions with affiliates only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The OTS regulations generally exclude all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Federal Reserve Board decides to treat these subsidiaries as affiliates. The regulations also require savings associations to make and retain records that reflect affiliate transactions in reasonable detail and provide that specified classes of savings associations may be required to give the OTS prior notice of affiliate transactions.

Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings associations, like cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. Under these regulations, a savings association may, in circumstances described in those regulations:

 

   

be required to file an application and await approval from the OTS before it makes a capital distribution;

 

   

be required to file a notice 30 days before the capital distribution; or

 

   

be permitted to make the capital distribution without notice or application to the OTS.

Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities and the denial of applications. In addition, an institution’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in the OTS, other federal regulatory agencies or the Department of Justice taking enforcement actions against the institution.

Federal Home Loan Bank System. Bank of Internet USA is a member of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the board of directors of the individual FHLB. As an FHLB member, Bank of Internet USA is required to own capital stock in an FHLB in specified amounts based on either its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year or its outstanding advances from the FHLB.

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At June 30, 2009, Bank of Internet USA was in compliance with these requirements.

Activities of Subsidiaries. A savings association seeking to: establish a new subsidiary, acquire control of an existing company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in compliance with regulations and orders of the OTS. The OTS has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OTS determines to pose a serious threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking practices.

 

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Item 1A. Risk Factors

See Management’s Discussion and Analysis of Financial Condition and Results of Operations—“Factors that May Affect Our Performance.”

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal executive offices, which also serve as our bank’s main office and branch, are located at 12777 High Bluff Drive, Suite 100, San Diego, California 92130, and our telephone number is (858) 350-6200. This facility occupies a total of approximately 12,300 square feet under a lease that expires October 31, 2012.

Item 3. Legal Proceedings

We may from time to time become a party to legal proceedings arising in the ordinary course of our business. We are not currently a party to any material legal proceedings, lawsuit or claim.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable because the Company is not a large accelerated filer or an accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock began trading on the NASDAQ National Market on March 15, 2005 under the symbol “BOFI.” There were 8,082,768 shares of common stock outstanding held by approximately 800 registered owners as of August 31, 2009. The following table sets forth, for the calendar quarters indicated, the range of high and low sales prices for the common stock of BofI Holding, Inc. for each quarter during the last two fiscal years. Sales prices represent actual sales of which our management has knowledge. The transfer agent and registrar of our common stock is Computershare.

 

     BofI Holding, Inc.
Common Stock
     High    Low

Quarter ended:

     

June 30, 2007

   $ 7.67    $ 6.95

September 30, 2007

   $ 7.75    $ 7.06

December 31, 2007

   $ 7.24    $ 7.00

March 31, 2008

   $ 7.15    $ 5.50

June 30, 2008

   $ 8.04    $ 5.57

September 30, 2008

   $ 7.89    $ 5.60

December 31, 2008

   $ 6.00    $ 3.40

March 31, 2009

   $ 5.50    $ 4.20

June 30, 2009

   $ 7.49    $ 5.34

Dividends

Our board of directors has never declared or paid any cash dividends on our common stock and does not expect to do so for the foreseeable future.

The holders of record of our Series A preferred stock, which was issued in 2003 and 2004, are entitled to receive dividends at the rate of six percent (6%) of the stated value per share of $10,000 per share per year. The holders of record of our Series B preferred stock are entitled to receive dividends at the rate of eight percent (8%) of the stated value per share of $1,000 per share per year. Dividends on the Series A and Series B preferred stock accrue and are payable quarterly. Dividends on the preferred stock must be paid prior and in preference to any declaration or payment of any distribution on any outstanding shares of junior stock, including our common stock.

Other than dividends to be paid on our preferred stock, we currently intend to retain any earnings to finance the growth and development of our business. Our ability to pay dividends, should our board of directors elect to do so, depends largely upon the ability of our bank to declare and pay dividends to us as our principal source of revenue is dividends paid to us by our bank. Future dividends will depend primarily upon our earnings, financial condition and need for funds, as well as government policies and regulations applicable to us and our bank that limit the amount that may be paid as dividends without prior approval.

Issuer Purchases of Equity Securities

Stock Repurchases. On June 30, 2005, our board of directors approved a common stock buyback program to purchase up to 5% of BofI outstanding common shares. The buyback program became effective on August 23, 2005 with no termination date. Prior to July 1, 2008, a total of 319,500 shares of BofI were purchased under the June 2005 buyback program. On November 21, 2008 the board of directors approved an expansion of our common stock buyback program to purchase up to an additional 500,000 shares of our 8.3 million outstanding common shares if and when the opportunity arises. The increased authorization was effective immediately with no termination date. The program authorizes BofI to buy back common stock at its discretion, subject to market conditions. During the fiscal year ended June 30, 2009, a total of 276,200 shares of BofI common stock were purchased under this program.

Net Settlement of Restricted Stock Awards. Effective November 2007, the stockholders of the Company approved an amendment to the 2004 Stock Incentive Plan, which among other changes, permitted net settlement of restricted stock awards for purposes of payment of a grantee’s income tax obligation. During the fiscal year ended June 30, 2009, there were 18,830 restricted stock award shares which were retained by the Company and converted to cash at the average rate of $6.03 per share to fund the grantee’s income tax obligations.

 

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The following table sets forth our market repurchases of BofI common stock and the BofI common shares retained in connection with net settlement of restricted stock awards from July 1, 2007 to June 30, 2009.

 

PERIOD

   Number of
Shares
Purchased
   Average
Price paid
per share
   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

           

Beginning Balance at July 1, 2006:

   163,500    $ 8.10    163,500    251,491   

Fiscal Year Ended June 30, 2007

           

July 1, 2006 to July 31, 2006

   —        —      163,500    251,491   

August 1, 2006 to August 31, 2006

   60,000      7.12    223,500    191,491   

September 1, 2006 to September 30, 2006

   45,500      7.04    269,000    145,991   

October 1, 2006 to November 30, 2006

   —        —      269,000    145,991   

December 1, 2006 to December 31, 2006

   40,000      6.98    309,000    105,991   

January 1, 2007 to April 30, 2007

   —        —      309,000    105,991   

May 1, 2007 to May 31, 2007

   10,500      7.23    319,500    95,491   

June 1, 2007 to June 30, 2007

   —        —      319,500    95,491   

Fiscal Year Ended June 30, 2008

           

July 1, 2007 to June 30, 2008

   —        —      319,500    95,491   

Fiscal Year Ended June 30, 2009

           

July 1, 2008 to September 30, 2008

   —        —      319,500    95,491   

October 1, 2008 to October 31, 2008

   5,000      4.76    324,500    90,491   

November 1, 2008 to November 30, 2008

   80,200      3.92    404,700    510,291  1 

December 1, 2008 to December 31, 2008

   191,000      3.36    595,700    319,291   

January 1, 2009 to June 30, 2009

   —        —      595,700    319,291   

Ending Balance at June 30, 2009

   595,700    $ 5.72    595,700    319,291   

Stock Retained in Net Settlement

           

July 1, 2007 to June 30, 2008

   8,777         

July 1, 2008 to June 30, 2009

   18,830         
             

Total Treasury Shares at June 30, 2009

   623,307         
             

 

(1) - In November 2008, BofI announced an addition of 500,000 shares to be purchased under its buyback plan, increasing maximum number to 510,291.

 

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Table of Contents

Sale of Unregistered Securities

In June 2008 the Company commenced a private offering of a newly created series of its preferred stock designated “Series B – 8% Cumulative Convertible Nonparticipating Perpetual Preferred Stock (the “Series B preferred stock”). The Series B preferred stock has a liquidation preference of $1,000 per share over shares of common stock. In the event of liquidation, the Series B preferred stock ranks pari passu with the Series A preferred stock. The Series B preferred stock is entitled to cumulative dividends at a rate of 8.0% per annum when and as declared by the Company’s board of directors quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. Each share of Series B preferred stock is immediately convertible at the option of the holder into 111 shares of the Company’s common stock, par value $0.01 per share common stock, which is equivalent to a conversion price of $9.00 per share of common stock. Under certain circumstances specified in the certificate of designation governing the Series B preferred stock, the Company may require holders of Series B preferred stock to convert their shares into common stock. Generally, the Series B preferred stock has no voting rights and may be redeemed by the Company at a 5% premium starting in June of 2011, a 3% premium starting in June 2012 or a 2% premium anytime after June 2013.

During the fiscal year ended June 30, 2009, the Company received gross proceeds of $1,040,000 from the issuance of 1,040 shares of Series B preferred stock at a $1,000 face value, less issuance costs of $23,000. The Company declared dividends to holders of its Series B preferred stock totaling $380,000 for the fiscal year ended June 30, 2009.

Equity Compensation Plan Information

The following table provides information regarding the aggregate number of securities to be issued under all of our stock options and equity based compensation plans upon exercise of outstanding options, warrants and other rights and their weighted-average exercise prices as of June 30, 2009. There were no securities issued under equity compensation plans not approved by security holders.

 

Plan Category

   Number of
securities to be
issued upon
exercise of
outstanding
options and units
granted
   Weighted-average
exercise price of
outstanding options

and units granted
   Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflecting in column
(a))

Equity compensation plans approved by security holders

   908,709    $ 7.18    909,065

Equity compensation plans not approved by security holders

   —        —      N/A
                

Total

   908,709    $ 7.18    909,065
                

 

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Item 6. Selected Financial Data

The following selected consolidated financial information should be read in conjunction with “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and footnotes included elsewhere in this Form 10-K.

 

     At or for the Fiscal Years Ended June 30,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands, except per share amounts)  

Selected Balance Sheet Data:

          

Total assets

   $ 1,302,208      $ 1,194,245      $ 947,163      $ 737,835      $ 609,508   

Loans, net of allowance for loan losses

     615,463        631,413        507,906        533,641        486,872   

Loans held for sale

     3,190        —          —          —          189   

Allowance for loan losses

     4,754        2,710        1,450        1,475        1,415   

Securities – trading

     5,445        —          —          —          —     

Securities – available for sale

     265,807        209,119        296,068        127,261        62,766   

Securities – held to maturity

     350,898        300,895        61,902        12,375        7,711   

Total deposits

     648,524        570,704        547,949        424,204        361,051   

Securities sold under agreements to repurchase

     130,000        130,000        90,000        —          —     

Advances from the FHLB

     262,984        398,966        227,292        236,177        172,562   

FRB Discount Window and junior subordinated debentures

     165,155        5,155        5,155        5,155        5,155   

Total stockholders’ equity

     88,939        83,082        72,750        70,246        68,650   

Selected Income Statement Data:

          

Interest and dividend income

   $ 77,778      $ 63,301      $ 44,586      $ 32,713      $ 22,481   

Interest expense

     41,419        45,281        33,738        22,758        13,512   
                                        

Net interest income

     36,359        18,020        10,848        9,955        8,969   

Provision (benefit) for loan losses

     4,730        2,226        (25     60        370   
                                        

Net interest income after provision for loan losses

     31,629        15,794        10,873        9,895        8,599   

Noninterest income (loss)

     (6,687     1,379        1,180        1,342        907   

Noninterest expense

     12,894        10,162        6,450        5,789        4,745   
                                        

Income before income tax expense

     12,048        7,011        5,603        5,448        4,761   

Income tax expense

     4,906        2,815        2,284        2,182        1,892   
                                        

Net income

   $ 7,142      $ 4,196      $ 3,319      $ 3,266      $ 2,869   
                                        

Net income attributable to common stock

   $ 6,452      $ 3,884      $ 3,007      $ 2,906      $ 2,464   
                                        

Per Share Data:

          

Net income:

          

Basic

   $ 0.79      $ 0.47      $ 0.36      $ 0.35      $ 0.43   

Diluted

   $ 0.78      $ 0.46      $ 0.36      $ 0.34      $ 0.40   

Book value per common share

   $ 9.79      $ 8.95      $ 8.19      $ 7.77      $ 7.47   

Tangible book value per common share

   $ 9.79      $ 8.95      $ 8.19      $ 7.77      $ 7.47   

Weighted average number of common shares outstanding:

          

Basic

     8,131,654        8,261,100        8,283,098        8,340,973        5,696,984   

Diluted

     8,724,528        8,375,550        8,405,215        8,516,278        6,190,312   

Common shares outstanding at end of period

     8,082,768        8,299,563        8,267,590        8,380,725        8,299,823   

Performance Ratios and Other Data:

          

Loan originations for investment

   $ 33,170      $ 64,888      $ 67,449      $ 7,720      $ 45,362   

Loan originations for sale

     83,741        516        7,579        20,762        19,312   

Loan purchases

     57,410        205,067        44,976        165,906        163,384   

Return on average assets

     0.59     0.40     0.41     0.49     0.59

Return on average common stockholders’ equity

     8.79     5.41     4.50     4.56     6.73

Interest rate spread 1

     2.83     1.40     0.98     1.12     1.61

Net interest margin 2

     3.04     1.72     1.36     1.51     1.87

Efficiency ratio 3

     43.46     52.40     53.60     51.24     48.05

Capital Ratios:

          

Equity to assets at end of period

     6.83     6.96     7.68     9.52     11.26

Tier 1 leverage (core) capital to adjusted tangible assets 4

     6.98     7.09     7.90     8.91     9.02

Tier 1 risk-based capital ratio 4

     14.86     13.95     14.76     15.25     14.08

Total risk-based capital ratio 4

     15.64     14.40     15.05     15.59     14.45

Tangible capital to tangible assets 4

     6.98     7.09     7.90     8.91     9.02

Asset Quality Ratios:

          

Net charge-offs to average loans outstanding

     0.43     0.18     —          —          —     

Nonperforming loans to total loans

     0.45     0.66     0.05     —          —     

Nonperforming assets to total assets

     0.65     0.39     —          —          —     

Allowance for loan losses to total loans held for investment at end of period

     0.77     0.43     0.28     0.28     0.29

Allowance for loan losses to nonperforming loans

     167.39     65.29     541.04     —          —     

 

(1)

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.

(2)

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

(3)

Efficiency ratio represents noninterest expense as a percentage of the aggregate of net interest income and noninterest income.

(4)

Reflects regulatory capital ratios of Bank of Internet USA only.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements due to various important factors, including those set forth under “Factors that May Affect Our Performance” and elsewhere in this Form 10-K. The following discussion and analysis should be read together with the “Selected Financial Data” and consolidated financial statements, including the related notes included elsewhere in this Form 10-K.

Overview

Our company, BofI Holding, Inc., is the holding company for Bank of Internet USA, a consumer-focused, nationwide savings bank operating primarily over the Internet. We generate retail deposits in all 50 states and originate loans for our customers directly through our websites, including www.bankofinternet.com, www.bofi.com and www.apartmentbank.com. We are a unitary savings and loan holding company and, along with Bank of Internet USA, are subject to primary federal regulation by the OTS.

Net income for the fiscal year ended June 30, 2009 was $7.1 million, or $0.78 per diluted share, as compared to $4.2 million, or $0.46 per diluted share, in fiscal 2008 and $3.3 million, or $0.36 per diluted share, in 2007. Growth in our interest earning assets, particularly our loans and investment securities, has been the primary driver of the increase in net income. Higher interest earning assets caused net interest income (interest income from loans and investments minus interest expense from deposits and borrowings) to grow to $36.4 million for the fiscal year ended June 30, 2009 compared to $18.0 million for fiscal 2008 and $10.8 million for 2007.

During the fiscal year ended June 30, 2009, our net interest margin (net interest income divided by average interest earning assets) increased 132 basis points to 3.04% compared to 1.72% for the fiscal year ended June 30, 2008. The improvement in our net interest margin was due to decreases in the cost of our deposits and borrowings and increases in the yields of our loans and securities. During fiscal 2009, we benefited from declines in U.S. Treasury interest rates generally due to actions taken by the Federal Reserve to lower the discount rate, which reduced our interest expense on deposits and borrowings. As a result of the nationwide housing downturn and the disruptions in the mortgage markets, credit spreads on mortgage loans and mortgage securities increased allowing us to purchase higher yielding loans and mortgage-backed securities during fiscal 2009. We also sold lower yielding agency mortgage-backed securities and replaced them with higher yielding non-agency securities.

Total assets at June 30, 2009 were $1,302.2 million as compared to $1,194.2 million at June 30, 2008 and $947.2 million at June 30, 2007. Assets grew $108.0 million or 9.0% during the last fiscal year primarily due to the purchase of mortgage-backed securities and mortgage loan pools. These investments were funded with growth in deposits, and borrowings from the FRB discount Window. Assets grew $247.0 million or 26.1% in fiscal 2008 primarily due to the purchase of mortgage-backed securities and mortgage loan pools, and the origination of RV and home equity loans. These investments were funded with growth in deposits, advances from the FHLB, and borrowings from securities sold under agreements to repurchase.

On September 7, 2008, the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that the FHFA was putting Fannie Mae and Freddie Mac under conservatorship and giving management control to their regulator, the FHFA. The U.S. Treasury also announced that dividends on Fannie Mae and Freddie Mac common and preferred stock were eliminated. Based upon the government announcement, we sold our investment in Fannie Mae Preferred stock on September 8, 2008 at a significant loss. The book value of our Fannie Mae preferred stock investment was $9.1 million at June 30, 2008 and the loss realized after the sale in the first quarter of fiscal 2009 was $7.9 million pretax or approximately $4.7 million after tax.

Our future performance will also depend on many factors, including changes in interest rates, competition for deposits and quality loans, the credit performance of our assets, regulatory actions and our ability to improve operating efficiencies. (See “Factors that May Affect our Performance”).

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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Table of Contents

Securities. Currently, we classify securities as either trading, available for sale or held to maturity. Trading securities are those securities for which we have elected fair value accounting in accordance with SFAS No. 159. Trading securities are recorded at fair value with changes in fair value recorded in earnings each period. Securities available for sale are reported at estimated fair value, with unrealized gains and losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted prices in active markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. To determine the performance of the underlying mortgage loan pools, we consider where appropriate borrower 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. We input for each security our projections of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by (and decreased by) the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (and decreased by) the forecasted decrease or increase in the national home price appreciation (HPA) index. To determine the discount rates used to compute the present value of the expected cash flows for these non-agency MBS securities, we separate the securities by the borrower characteristics in the underlying pool. For example, non-agency RMBS “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). In this example, we calculate separate discount rates for prime, Alt-A and Pay-option ARM non-agency MBS securities using market-participant assumptions for risk, capital and return on equity.

Securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Amortization of purchase premiums and accretion of discounts on securities are recorded as yield adjustments on such securities using the effective interest method. The specific identification method is used for purposes of determining cost in computing realized gains and losses on investment securities sold.

At each reporting date, we monitor our available for sale and held to maturity securities for other-than-temporary impairment. The Company adopted the FASB issued Staff Position (FSP) No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2) as of April 1, 2009. In accordance with FSP FAS 115-2, the Company measures its debt securities in an unrealized 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 difference between the present value and the fair value of the security (if any) is the noncredit component of the impairment, 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 is recorded as a charge to other comprehensive income, net of the related income tax benefit.

For non-agency RMBS we determine the cash flow expected to be collected and calculate the present value for purposes of testing for other-than-temporary impairment, by utilizing the same industry-standard tool and the same cash flows as those calculated for fair values (discussed above). We compute cash flows based upon the underlying mortgage loan pools and our estimates of prepayments, defaults, and loss severities. We input our projections for the underlying mortgages for the remaining life of the security to determine the expected cash flows. 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 different from those used to calculate fair value and are either the implicit rate calculated in each of our securities at acquisition (as prescribed by FASB 114 Accounting by Creditors for Impairment of a Loan) or the last accounting yield (as prescribed in EITF 99-20). For securities recorded under FASB 115, we calculate 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. We use this discount rate in the industry-standard model to calculate the present value of the cash flows for purposes of measuring the credit component of an other-than-temporary impairment of our debt securities.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level estimated to provide for probable 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.

 

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Under the allowance for loan loss policy, impairment calculations are determined based on general portfolio data for general reserves and loan level data for specific reserves. Specific loans are evaluated for impairment and are generally classified as nonperforming or in foreclosure when they are 90 days or more delinquent. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if repayment of the loan is expected primarily from the sale of collateral.

General loan loss reserves are calculated by grouping each loan by collateral type and by grouping the loan-to-value ratios of each loan within the collateral type. An estimated allowance rate for each loan-to-value group within each type of loan is multiplied by the total principal amount in the group to calculate the required general reserve attributable to that group. Management uses an allowance rate that provides a larger loss allowance for loans with greater loan-to-value ratios. Specific reserves are calculated when an internal asset review of a loan identifies a significant adverse change in the financial position of the borrower or the value of the collateral. The specific reserve is based on discounted cash flows, observable market prices or the estimated value of underlying collateral.

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

The following tables set forth, for the periods indicated, 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 Fiscal Years Ended June 30,  
     2009     2008     2007  
     Average
Balance1
   Interest
Income/
Expense
   Average
Yields
Earned/
Rates
Paid
    Average
Balance1
   Interest
Income/
Expense
   Average
Yields
Earned/
Rates
Paid
    Average
Balance1
   Interest
Income/
Expense
   Average
Yields
Earned /
Rates
Paid
 
     (Dollars in thousands)  

Assets:

                        

Loans 2, 3

   $ 635,780    $ 41,782    6.57   $ 550,307    $ 33,499    6.09   $ 512,599    $ 29,370    5.73

Federal funds sold

     4,008      34    0.85     23,147      1,013    4.38     11,755      614    5.22

Interest-earning deposits in other financial institutions

     442      15    3.39     7,821      457    5.84     14,333      791    5.52

Mortgage-backed and other investment securities 4

     535,918      35,753    6.67     451,846      27,524    6.09     249,128      13,164    5.28

Stock of the FHLB, at cost

     19,036      194    1.02     14,205      808    5.69     12,084      647    5.35
                                                

Total interest-earning assets

     1,195,184      77,778    6.51     1,047,326      63,301    6.04     799,899      44,586    5.57

Noninterest-earning assets

     24,930           14,681           11,738      
                                    

Total assets

   $ 1,220,114         $ 1,062,007         $ 811,637      
                                    

Liabilities and Stockholders’ Equity:

                        

Interest-bearing demand and savings

   $ 186,309    $ 4,583    2.46   $ 76,028    $ 2,726    3.59   $ 60,007    $ 2,025    3.37

Time deposits

     433,410      19,400    4.48     506,761      25,632    5.06     399,855      19,542    4.89

Securities sold under agreements to repurchase

     130,000      5,677    4.37     118,497      5,137    4.34     30,648      1,352    4.41

Advances from the FHLB

     333,327      11,385    3.42     270,022      11,417    4.23     239,742      10,406    4.34

Other borrowings

     43,679      374    0.86     5,155      369    7.16     5,155      413    8.01
                                                

Total interest-bearing liabilities

     1,126,725      41,419    3.68     976,463      45,281    4.64     735,407      33,738    4.59
                                    

Noninterest-bearing demand deposits

     4,170           3,144           1,052      

Other noninterest-bearing liabilities

     6,014           5,553           3,219      

Stockholders’ equity

     83,205           76,847           71,959      
                                    

Total liabilities and stockholders’ equity

   $ 1,220,114         $ 1,062,007         $ 811,637      
                                    

Net interest income

      $ 36,359         $ 18,020         $ 10,848   
                                    

Interest rate spread 5

         2.83         1.40         0.98

Net interest margin 6

         3.04         1.72         1.36

 

(1)

Average balances are obtained from daily data.

(2)

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

(3)

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.

(4)

All investments are taxable.

(5)

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

(6)

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

 

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Results of Operations

Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth in our assets and increases in our net interest margin. Our net interest income is reduced by our estimate of loss provisions for our impaired loans. We also earn non-interest income primarily from mortgage banking activities, prepayment fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of investment securities. The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased from 44 full time employees at June 30, 2008 to 57 full time equivalent employees at June 30, 2009. We are subject to federal and state income taxes, and our effective tax rates were 40.72%, 40.15% and 40.80% for the fiscal years ended June 30, 2009, 2008, and 2007, respectively. Other factors that affect our results of operations include expenses relating to occupancy, data processing and other miscellaneous expenses.

Comparison of the Fiscal Year Ended June 30, 2009 and June 30, 2008

Net Interest Income. Net interest income totaled $36.4 million for the fiscal year ended June 30, 2009 compared to $18.0 million for the fiscal year ended June 30, 2008. 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 fiscal year ended June 30, 2009 compared to the fiscal year ended June 30, 2008:

 

     Fiscal Year Ended June 30, 2009 vs. 2008
Increase (Decrease) Due to
 
     Volume     Rate     Rate/Volume     Total
Increase
(Decrease)
 
     (Dollars in thousands)  

Increase/(decrease) in interest income:

        

Loans

   $ 5,203      $ 2,656      $ 424      $ 8,283   

Federal funds sold

     (838     (816     675        (979

Interest-earning deposits in other financial institutions

     (431     (192     181        (442

Mortgage-backed and other investment securities

     5,121        2,614        494        8,229   

Stock of the FHLB, at cost

     275        (663     (226     (614
                                
   $ 9,330      $ 3,599      $ 1,548      $ 14,477   
                                

Increase/(decrease) in interest expense:

        

Interest-bearing demand and savings

   $ 3,954      $ (856   $ (1,241   $ 1,857   

Time deposits

     (3,710     (2,929     407        (6,232

Securities sold under agreements to repurchase

     499        41        —          540   

Advances from the FHLB

     2,677        (2,182     (527     (32

Other borrowings

     2,758        (325     (2,428     5   
                                
   $ 6,178      $ (6,251   $ (3,789   $ (3,862
                                

Interest Income. Interest income for the year ended June 30, 2009 totaled $77.8 million, an increase of $14.5 million, or 22.9%, compared to $63.3 million in interest income for the year ended June 30, 2008 primarily due to interest-earning asset growth. Average interest-earning assets for the year ended June 30, 2009 increased by $147.9 million compared to the year ended June 30, 2008 due to the purchase of mortgage-backed and investment securities which increased $84.1 million during the year ended June 30, 2009 compared to 2008. Also increasing by $85.5 million was the average balance of the loan portfolio, primarily the result of our purchase of pools of multifamily and single family loans. Average interest earning balances associated with our stock of the FHLB increased by $4.8 million in the year ended June 30, 2009 compared to the year ended June 30, 2008 because our required minimum investment increased, in line with our increased advances from the FHLB. Unlike fiscal 2008, the FHLB only paid us a dividend in the first quarter of our 2009 fiscal year. For the year ended June 30, 2009, the growth in average balances contributed additional interest income of $9.3 million, and the average rate increase resulted in a net $3.6 million increase in interest income. The average yield earned on our interest-earning assets increased to 6.51% for the year ended June 30, 2009, up from 6.04% for the same period in 2008 due primarily to the nationwide housing downturn and the disruptions in the mortgage markets which allowed us to acquire new loans and mortgage-backed securities at higher yields.

 

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Interest Expense. Interest expense totaled $41.4 million for the year ended June 30, 2009; a decrease of $3.9 million, compared to $45.3 million in interest expense during the year ended June 30, 2008. Average interest-bearing balances for the year ended June 30, 2009 increased $150.3 million compared to the same period in 2008, due to higher average deposits per customer account and additional borrowings from the FHLB and FRB. The average interest-bearing balances of advances from the FHLB and the FRB discount window increased $63.3 million and $38.5 million because we elected to fund our asset growth with more short term advances and borrowings to help lower our cost of funds as our interest rate exposure was minimal. For the year ended June 30, 2009, the growth in the average balance of interest bearing liabilities resulted in additional interest expense of $6.2 million, and decreases in interest rates resulted in a net decrease of $6.3 million in interest expense. The average rate paid on all of our interest-bearing liabilities decreased to 3.68% for the year ended June 30, 2009 from 4.64% for the year ended June 30, 2008. The maturity of higher-rate term deposits caused the average term deposit rates to decrease to 4.48% in fiscal 2009 from 5.06% in fiscal 2008. The new low-rate short-term FHLB advances added during fiscal 2009 caused the average FHLB advance rate to decrease to 3.42% in fiscal 2009 from 4.23% in fiscal 2008. These rate changes in fiscal 2009 were accompanied by a decrease in the weighted average rate paid on interest-bearing demand and savings accounts, which decreased to 2.46% from 3.59% as a result of declines in market interest rates which also caused our average time deposit rates to decrease by 58 basis points between fiscal 2009 and 2008. The average rate paid or other borrowings including short-term FRB discount window borrowings decreased to 0.86% in fiscal 2009 from 7.16% in fiscal 2008. During fiscal 2009, we benefited from declines in U.S. Treasury interest rates due to actions taken by the Federal Reserve to lower the discount rate, which reduced our interest rates on deposits and borrowings.

Provision for Loan Losses. Provision for loan losses was $4.7 million for the year ended June 30, 2009 and $2.2 million for fiscal 2008. The provisions were made to maintain our allowance for loan losses at levels which management believed to be adequate. 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, loss history and changes in the volume and mix of loans and collateral values.

See “Asset Quality and Allowance for Loan Loss” for discussion of our allowance for loan loss and the related loss provisions.

Noninterest Income. The following table sets forth information regarding our noninterest income for the periods shown:

 

     For the Fiscal Year
Ended June 30,
 
     2009     2008  
     (Dollars in thousands)  

Realized gain (loss) on securities:

    

Sale of FNMA preferred stock

   $ (7,902   $ —     

Sale of mortgage-backed securities

     2,816        1,711   
                

Total realized gain (loss) on securities

     (5,086     1,711   
                

Unrealized loss on securities:

    

Total impairment losses

     (13,831     (1,000

Loss recognized in other comprehensive loss

     12,377        —     
                

Net impairment loss recognized in earnings

     (1,454     (1,000

Fair value loss on trading securities

     (2,055     —     
                

Total unrealized loss on securities

     (3,509     (1,000
                

Prepayment penalty fee income

     64        287   

Mortgage banking income

     1,381        2   

Banking service fees and other income

     463        379   
                

Total non-interest income (loss)

   $ (6,687   $ 1,379   
                

Noninterest loss totaled $6.7 million for the year ended June 30, 2009 compared to income of $1.4 million for the same period in 2008. The decrease of $6.8 million in realized gain (loss) on securities in fiscal 2009 was the result of the realized loss from the sale of our Fannie Mae preferred stock investment of $7.9 million off set by an increased gain on sale of securities of $1.1 million. The increase of $2.5 million in unrealized loss on securities in fiscal 2009 was the result of a net increase of $454,000 in loss due to Other-Than-Temporary Impairments (OTTI) loss and a fair value decline of $2.1 million on securities recorded at fair value. Other activity included in total non-interest income (loss) is the increase in mortgage banking income of $1.3 million due to an increased focus on originating single family loans for sale. The lower prepayment penalty income of $223,000 in fiscal 2009 was generally the result of fewer new multifamily loans and the expiration of penalties on seasoned multifamily loans.

 

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Noninterest Expense. The following table sets forth information regarding our noninterest expense for the periods shown:

 

     For the Fiscal Year
Ended June 30,
     2009    2008
     (Dollars in thousands)

Salaries, employee benefits and stock-based compensation

   $ 5,579    $ 5,426

Professional services

     1,419      654

Occupancy and equipment

     442      373

Data processing and internet

     796      656

Advertising and promotional

     560      750

Depreciation and amortization

     171      132

FDIC and OTS regulatory fees

     1,658      744

Other general and administrative

     2,269      1,427
             

Total noninterest expenses

   $ 12,894    $ 10,162
             

Noninterest expense totaled $12.9 million for the fiscal year ended June 30, 2009, an increase of $2.7 million compared to fiscal 2008. Salaries, employee benefits and stock-based compensation increased $505,000, excluding the one-time charges of $352,000 in fiscal 2008 related to the change in employment agreement for the Bank president. The increase in compensation was primarily due to increased staffing which grew to 57 employees at June 30, 2009, up from 44 at the end of fiscal 2008, primarily due to growth in our lending businesses.

Professional services, which include accounting and legal fees, increased $765,000 in fiscal 2009 compared to 2008. The increase in professional services was primarily due to contract underwriters used in connection with loan pool purchases, set-up of first mortgage and multifamily loan products, legal and ratings fees due to the re-securitization of our non-agency mortgage backed securities and legal fees on loan collection and foreclosure matters.

Data processing and Internet expenses increased $140,000 in fiscal 2009 compared to fiscal 2008 due to increases in service bureau charges associated with new deposit and loan customers. Advertising and promotion expense decreased $190,000, primarily due to decreased activity for home equity loans offset by an increase in activity for first mortgages. FDIC and OTS regulatory fees increased $914,000 due to higher standard rates in the second half of our fiscal year, along with deposit and asset growth in the Bank, and the FDIC special assessment on assets at the quarter ended June 30, 2009. Other general and administrative costs increased in fiscal 2009 mainly due to increases in REO and repossessed RV losses and collection expenses of $667,000, loan expenses up $71,000, and deposit expense up $82,000 compared to fiscal 2008.

Income Tax Expense. Income tax expense was $4.9 million for the fiscal year ended June 30, 2009 compared to $2.8 million for fiscal 2008. Our effective tax rates were 40.72% and 40.15% for the fiscal year ended June 30, 2009 and 2008, respectively. The increase in the effective tax rate is primarily due to lower relative non-taxable income in fiscal 2009.

 

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Table of Contents

Comparison of the Fiscal Year Ended June 30, 2008 and June 30, 2007

Net Interest Income. Net interest income totaled $18.0 million for the fiscal year ended June 30, 2008 compared to $10.8 million for the fiscal year ended June 30, 2007. 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 fiscal year ended June 30, 2008 compared to the fiscal year ended June 30, 2007:

 

     Fiscal Year Ended June 30, 2008 vs. 2007  
     Increase (Decrease) Due to  
     Volume     Rate     Rate/Volume     Total
Increase
(Decrease)
 
     (Dollars in thousands)  

Increase/(decrease) in interest income:

        

Loans

   $ 2,161      $ 1,845      $ 123      $ 4,129   

Federal funds sold

     595        (99     (97     399   

Interest-earning deposits in other financial institutions

     (359     46        (21     (334

Mortgage-backed and other investment securities

     10,704        2,018        1,638        14,360   

Stock of the FHLB, at cost

     113        41        7        161   
                                
   $ 13,214      $ 3,851      $ 1,650      $ 18,715   
                                

Increase/(decrease) in interest expense:

        

Interest-bearing demand and savings

   $ 540      $ 132      $ 29      $ 701   

Time deposits

     5,228        680        182        6,090   

Securities sold under agreements to repurchase

     3,874        (21     (68     3,785   

Advances from the FHLB

     1,314        (264     (39     1,011   

Other borrowings

     —          (44     —          (44
                                
   $ 10,956      $ 483      $ 104      $ 11,543   
                                

Interest Income. Interest income for the year ended June 30, 2008 totaled $63.3 million, an increase of $18.7 million, or 41.9%, compared to $44.6 million in interest income for the year ended June 30, 2007 primarily due to interest-earning asset growth. Average interest-earning assets for the year ended June 30, 2008 increased by $247.4 million compared to the year ended June 30, 2007 due to the purchase of mortgage-backed and investment securities which increased $202.7 million during the year ended June 30, 2008 compared to 2007. Also increasing by $37.7 million was the average balance of the loan portfolio, primarily the result of our purchase of pools of multifamily and single family loans and the originations of RV and home equity loans. Average interest earning balances associated with our stock of the FHLB increased by $2.1 million in the year ended June 30, 2008 compared to the year ended June 30, 2007 because our required minimum investment increased, in line with our increased advances from the FHLB. For the year ended June 30, 2008, the growth in average balances contributed additional interest income of $13.2 million, and the average rate increase resulted in a net $3.9 million increase in interest income. The average yield earned on our interest-earning assets increased to 6.04% for the year ended June 30, 2008, up from 5.57% for the same period in 2007 due primarily to the higher yields on our loan portfolio and our mortgage-backed securities portfolio.

Interest Expense. Interest expense totaled $45.3 million for the year ended June 30, 2008; an increase of $11.6 million, compared to $33.7 million in interest expense during the year ended June 30, 2007. Average interest-bearing balances for the year ended June 30, 2008 increased $241.1 million compared to the same period in 2007, due to higher deposit totals from increased customer accounts and additional borrowings from the FHLB. The average interest-bearing balances of advances from the FHLB increased $30.3 million as primarily short term advances were added to replace time deposits. Our addition of short-term fixed rate borrowings is a part of our strategy to manage our interest rate risk. For the year ended June 30, 2008, the growth in the average balance of interest bearing liabilities resulted in additional interest expense of $11.0 million, and increases in interest rates resulted in a net increase of $0.5 million in interest expense. The average rate paid on all of our interest-bearing liabilities increased to 4.64% for the year ended June 30, 2008 from 4.59% for the year ended June 30, 2007. The maturity of lower-rate term deposits and the addition of new term deposits in the first half of the year at higher rates caused the average term deposit rates to increase to 5.06% in fiscal 2008 from 4.89% in fiscal 2007. New lower rate FHLB advances added during the last half of fiscal 2008 caused the average FHLB advance rate to decrease to 4.23% in fiscal 2008 from 4.34% in fiscal 2007. These rate changes in fiscal 2008 were accompanied by an increase in the weighted average rate paid on interest-bearing demand and savings accounts, which increased to 3.59% from 3.37%, and the average rate paid on other borrowings that decreased to 7.16% in fiscal 2008 from 8.01% in fiscal 2007. The increase in the rate paid on checking and savings was due to competitive increases in our rates for money market savings accounts and interest-bearing checking accounts. Our average rate on term deposits increased 17 basis points between fiscal 2008 and 2007.

 

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Table of Contents

Provision for Loan Losses. Provision for loan losses was $2.2 million for the year ended June 30, 2008 and a benefit of $25,000 for fiscal 2007. The provisions were made to maintain our allowance for loan losses at levels which management believed to be adequate. 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, loss history and changes in the volume and mix of loans and collateral values.

See “Asset Quality and Allowance for Loan Loss” for discussion of our allowance for loan loss and the related loss provisions.

Noninterest Income. The following table sets forth information regarding our noninterest income for the periods shown.

 

     For the Fiscal Year
Ended June 30,
     2008     2007
     (Dollars in thousands)

Realized gain (loss) on securities:

    

Sale of mortgage-backed securities

   $ 1,711      $ 403
              

Total realized gain (loss) on securities

     1,711        403
              

Unrealized loss on securities:

    

Total impairment losses

     (1,000     —  

Loss recognized in other comprehensive loss

     —          —  
              

Net impairment loss recognized in earnings

     (1,000     —  

Fair value loss on trading securities

     —          —  
              

Total unrealized loss on securities

     (1,000     —  
              

Prepayment penalty fee income

     287        399

Mortgage banking income

     2        93

Banking service fees and other income

     379        285
              

Total non-interest income (loss)

   $ 1,379      $ 1,180
              

Noninterest income totaled $1.4 million for the year ended June 30, 2008 compared to $1.2 million for the same period in 2007. The increase of $199,000 in fiscal 2008 was primarily due to an increase in gain on sale of securities of $308,000, offset by the lower prepayment penalty income of $112,000 and lower mortgage banking income of $91,000. Lower prepayment penalty income in fiscal 2008 was generally the result of fewer new multifamily loans and the expiration of penalties on seasoned multifamily loans. Mortgage banking income decreased due to a reduction in the number of single family and multifamily loans originated for sale.

The increase in gains on sales of securities for fiscal 2008 was partially offset by an Other-than-temporary impairment charge on an investment in Fannie Mae preferred stock. The net gain on sale of mortgage-backed securities for fiscal 2008 increased to $1.7 million compared to $0.4 million realized in fiscal 2007. The increased net gain was the result of our strategy to sell lower yielding government agency mortgage-backed securities and reinvest the proceeds in higher yielding whole loan pool purchases and non-agency AAA mortgage-backed securities. An Other-than- temporary-impairment charge of $1.0 million partially offset the realized gains and was recorded as of June 30, 2008 as a result of the decline in the market value of our $10.1 million investment in Fannie Mae (FNMA) 8 1/4% Series S “FNMA Preferred” stock. Subsequent to June 30, 2008, the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that the FHFA was putting Fannie Mae and Freddie Mac under conservatorship and giving management control to their regulator, the FHFA. The U.S. Treasury also announced that dividends on the FNMA Preferred stock were eliminated. Based upon the government announcement of the conservatorship and the elimination of dividends on FNMA Preferred, the Bank sold on September 8, 2008 its entire position in FNMA Preferred at a realized loss of an additional $7.9 million or approximately $4.7 million after income tax.

 

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Noninterest Expense. The following table sets forth information regarding our noninterest expense for the periods shown:

 

     For the Fiscal Year
Ended June 30,
     2008    2007
     (Dollars in thousands)

Salaries, employee benefits and stock-based compensation

   $ 5,426    $ 2,993

Professional services

     654      537

Occupancy and equipment

     373      363

Data processing and internet

     656      586

Advertising and promotional

     750      584

Depreciation and amortization

     132      88

FDIC and OTS regulatory fees

     744      238

Other general and administrative

     1,427      1,061
             

Total noninterest expenses

   $ 10,162    $ 6,450
             

Noninterest expense totaled $10.2 million for the year ended June 30, 2008, an increase of $3.7 million compared to fiscal 2007. Salaries, employee benefits and stock-based compensation increased $2.4 million during fiscal 2008 due primarily to the addition of staffing for RV and home equity loan products and the addition of our new CEO. Included in the $2.4 million increases was $675,000 of one-time expense related to the new CEO and a contract amendment of the former CEO. Professional services increased $117,000 in fiscal 2008 compared to 2007 generally due to an increase in professional, legal services and consulting fees associated with Bank pool purchases and product development. Data processing and Internet expenses increased $70,000 in fiscal 2008 compared to fiscal 2007 due to increases in service bureau charges associated with new deposit and loan customers and additional software for investment securities. Advertising and promotion expense increased $166,000, primarily due to increased activity for our new home equity loan products. FDIC and OTS regulatory fees increased $506,000 due to higher standard assessment rates and due to the deposit and asset growth of the Bank. Other general and administrative costs increased in fiscal 2008 mainly due increases in loan expenses of $173,000 compared to fiscal 2007.

Income Tax Expense. Income tax expense was $2.8 million for the year ended June 30, 2008 compared to $2.3 million for fiscal 2007. Our effective tax rates were 40.15% and 40.8% for the year ended June 30, 2008 and 2007, respectively. The decrease in the effective tax rate is primarily due to higher level of non-taxable dividend income.

Comparison of Financial Condition at June 30, 2009 and June 30, 2008

Total assets increased by $108.0 million, or 9.0%, to $1,302.2 million at June 30, 2009 from $1,194.2 million at June 30, 2008. The increase in total assets resulted primarily from purchases of non-agency AAA mortgage-backed securities net of sales of securities and repays, resulting in increases in mortgage-backed securities of $112.1 million. The loan portfolio decreased by $15.9 million due to principal repayments, partially offset by new loans acquired in pool purchases and originations. Total liabilities increased by $102.1 million, or 9.2%, to $1,213.3 million at June 30, 2009 from $1,111.2 million at June 30, 2008. The increase in total liabilities resulted primarily from growth in savings and time deposits of $79.8 million and short-term borrowings of $24.0 million.

Stockholders’ equity increased by $5.8 million, or 7.0%, to $88.9 million at June 30, 2009 from $83.1 million at June 30, 2008. The increase was the result of $7.1 million in net income and the issuance of Series B preferred stock of $1.0 million, the increase in comprehensive income of $0.9 million, partially offset by a $2.1 million cumulative effect charge for our election to adopt SFAS 159 for investments in trust preferred collateralized debt and a charge for acquisition of treasury stock of $1.1 million.

 

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Asset Quality and Allowance for Loan Loss

Nonperforming Assets. Nonperforming loans and foreclosed assets or “nonperforming assets” consisted of the following:

 

     June 30,
     2009     2008     2007     2006    2005
     (Dollars in thousands)

Nonperforming assets:

           

Non-accrual loans:

           

Loans secured by real estate:

           

Single family

   $ 1,502      $ 1,793      $ 221      $ —      $ —  

Home equity loans

     9        —          —          —        —  

Multifamily

     1,171        —          —          —        —  

Commercial

     —          2,358        —          —        —  
                                     

Total nonaccrual loans secured by real estate

     2,682        4,151        221        —        —  

RV / Auto

     158        —          7        —        —  

Other

     —          —          —          —        —  
                                     

Total nonperforming loans

     2,840        4,151        228        —        —  

Foreclosed real estate

     5,334        219        —          —        —  

Repossessed – vehicles

     317        262        —          —        —  
                                     

Total nonperforming assets

   $ 8,491      $ 4,632      $ 228      $ —      $ —  
                                     

Total nonperforming loans as a percentage of total loans

     0.45     0.66     0.05     —        —  
                                     

Total nonperforming assets as a percentage of total assets

     0.65     0.39     0.02     —        —  
                                     

Our nonperforming assets increased $3.9 million to $8.5 million or 0.65% of assets at June 30, 2009 compared to $4.6 million or 0.39% of assets at June 30, 2008. The increase in nonperforming assets was due to an increase in foreclosed real estate and repossessed RVs of $5.2 million, partially offset by a decrease in nonperforming loans of $1.3 million. The decrease in nonperforming loans was due primarily to one commercial mortgage loan for $2.4 million, which was foreclosed, became REO and was partially sold leaving $1.4 million in foreclosed real estate at June 30, 2009.

The $1.5 million in single family nonperforming loans represents nine loans in five states ranging in amounts from $275,000 to $35,000, and the $1.8 million in single family nonperforming loans represents six loans in four states ranging in amounts from $399,000 to $97,000 for years ended June 30, 2009 and June 30, 2008, respectively. The Bank has already taken FAS 114 impairment charge-offs of $496,000 (included in 2009 and 2008 charge-offs) on the nonperforming single family loans at June 30, 2009. The nonperforming home equity amount of $9,000 represents one loan at June 30, 2009.

Foreclosed real estate of $5.3 million at June 30, 2009 represents four single family homes, two multifamily properties and one commercial property, compared with one single family mortgage in foreclosure at June 30, 2008. All foreclosed real estate is shown at fair value. The $158,000 in nonperforming RV / automobile loans represents four RV’s ranging in amounts from $85,000 to $12,000 at June 30, 2009. Repossessed vehicles of $317,000 represents eleven RV’s with fair values ranging in amounts from $69,000 to $ 8,000 at June 30, 2009, compared to $262,000 representing seven loans ranging in amounts from $85,000 to $7,000 at June 30, 2008.

If residential housing values continue to decline and nationwide unemployment continues to increase, we are likely to experience continued growth in the level of our nonperforming loans and foreclosed and repossessed RVs in future periods. No reserve for impairment was allocated to any of the nonperforming loans.

Allowance for Loan Losses. We maintain an allowance for loan losses in an amount that we believe is sufficient to provide adequate protection against probable incurred losses in our loan portfolio. We evaluate quarterly the adequacy of the allowance based upon reviews of individual loans, recent loss experience, current economic conditions, risk characteristics of the various categories of loans and other pertinent factors. The evaluation is inherently subjective, as it 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. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible and increased by recoveries of loans previously charged off.

 

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Table of Contents

Under our allowance for loan loss policy, impairment calculations are determined based on general portfolio data for general reserves and loan level data. Specific loans are evaluated for impairment and are generally classified as nonperforming or in foreclosure if they are 90 days or more delinquent. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors that we consider in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if repayment of the loan is expected from the sale of collateral.

General loan loss reserves are calculated by grouping each loan by collateral type and by grouping the loan-to-value ratios of each loan within the collateral type. An estimated impairment rate for each loan-to-value group within each type of loan is multiplied by the total principal amount in the group to calculate the required general reserve attributable to that group. We use an allowance rate that provides a larger loss allowance for loans with greater loan-to-value ratios, measured at the time the loan was funded. The internal asset review committee of our board of directors reviews and approves the bank’s calculation methodology. Specific reserves are to be calculated when an internal asset review of a loan identifies a significant adverse change in the financial position of the borrower or the value of the collateral. The specific reserve is based on discounted cash flows, observable market prices or the estimated value of underlying collateral.

The following table sets forth the changes in our allowance for loan losses, by loan type, from July 1, 2004 through June 30, 2009:

 

     Single
Family
    Home
Equity
    Multi- family     Commercial
Real Estate
and Land
    RV / Auto     Consumer     Total     Total
Allowance as a
% of Total Loans
 
     (Dollars in thousands)  

Balance at July 1, 2004

   $ 42      $ —        $ 962