10-K 1 d226842d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

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

For the fiscal year ended June 30, 2011

 

¨ 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

incorpation 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 Global 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   ¨    No   x

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  ¨    No  x

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.     Yes  x    No  ¨

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 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 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  x   Non-accelerated filer  ¨   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  ¨    No  x

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 Global Market of $15.51 on December 31, 2010 was $134,534,000.

The number of shares of the Registrant’s common stock outstanding as of August 26, 2011 was 10,475,351.

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the period ended June 30, 2011 are incorporated by reference into Part III.

 

 

 

 


Table of Contents

BofI HOLDING, INC.

INDEX

 

 

PART I

     1   

Item 1. Business

     1   

Item 1A. Risk Factors

     23   

Item 1B. Unresolved Staff Comments

     23   

Item 2. Properties

     23   

Item 3. Legal Proceedings

     23   

Item 4. Reserved

     23   

PART II

     24   

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

     24   

Item 6. Selected Financial Data

     27   

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

     28   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     55   

Item 8. Financial Statements and Supplementary Data

     55   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     56   

Item 9A. Controls and Procedures

     56   

Item 9B. Other Information

     56   

PART III

     57   

Item 10. Directors, Executive Officers and Corporate Governance

     57   

Item 11. Executive Compensation

     57   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     57   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     57   

Item 14. Principal Accounting Fees and Services

     57   

PART IV

     58   

Item 15. Exhibits and Financial Statement Schedules

     58   

Signatures

     60   

 


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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and 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:

 

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The prevailing recession currently impacting the United States and worldwide economies;

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Competitive practices in the financial services industries;

 

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Operational and systems risks;

 

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

 

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Economic conditions in certain geographic areas; and

 

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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 herein in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Factors that May Affect Our Performance.”

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,” the “Bank,” or “our bank” are to Bank of Internet USA, our consolidated subsidiary.

 

 


Table of Contents

PART I

 

 

ITEM 1. BUSINESS

Overview

BofI Holding, Inc. is the holding company for Bank of Internet, a nationwide federally-chartered 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 36,000 retail deposit and loan customers across all 50 states. At June 30, 2011, we had total assets of $1,940.1 million, loans of $1,345.1 million, mortgage-backed and other investment securities of $521.4 million, total deposits of $1,340.3 million and borrowings of $442.7 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.

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 centralized low-cost operation adds flexibility to adjust our asset and deposit generation channels providing a competitive advantage.

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, affiliate relationships 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 sell mortgage loans in the secondary market and to purchase mortgage loans and mortgage-backed securities.

Our present goals are to:

 

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Increase our total assets to more than $3.0 billion;

 

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Reduce our annualized efficiency ratio to a level 35% or lower; and

 

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Keep 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 for liquidity and for investment 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:

 

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Single Family Loans. We typically offer or purchase fixed and adjustable rate, conforming and jumbo single family mortgage loans in all 50 states, 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 $5.0 million as of June 30, 2011. We either sell the single family first mortgage loans that we originate to wholesale lending institutions with servicing rights released to the purchaser or we retain the mortgage loan in our portfolio. The Bank elected to significantly decrease or eliminate certain retail single family loan offerings in favor of purchasing loan pools in 2005 through 2008. Since 2008, the Bank has begun originating first mortgages on a retail basis, primarily selling its fixed- rate originations to its correspondents or government sponsored enterprises such as Fannie Mae and Freddie Mac (GSEs). The Bank monitors the market and considers product offerings when spreads adequately compensate the Bank for the associated risk and when loan amounts can be well protected by collateral values.

 

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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 elected to significantly decrease new home equity loans in 2009. 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, 2011 had an average outstanding balance of $25,000 and a largest single loan amount of $214,000. The Bank has also purchased participations in pools of individually-underwritten, seasoned home equity loans. We may increase new home equity loan originations as economic conditions and home values continue to stabilize.

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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, 2011 ranged in amount from approximately $13,000 to $5.9 million and were secured by first liens on properties typically ranging from five to 70 units. Our multifamily portfolio has 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.

 

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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, 2011 ranged in amount from approximately $97,000 to $2.8 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.

 

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Consumer—Recreational Vehicle and Automobile Loans. The Bank originated fixed-rate recreational vehicle (RV) and automobile loans on a direct basis and through dealers. Starting in fiscal 2008, the Bank elected to significantly decrease its RV and automobile loan production. We hold all of the RV and auto loans that we originate and perform the loan servicing directly on these loans. Our RV loans as of June 30, 2011 ranged in amount up to approximately $416,000 with an average outstanding balance of $34,000 and were secured by motor homes or travel trailers.

 

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Other. We provide overdraft lines of credit for our qualifying deposit customers with checking accounts. We make loans to specialty businesses and to individuals secured by residential real estate, residential mortgages and other financial instruments.

 

 

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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, 2007:

 

    At June 30,  
    2011     2010     2009     2008     2007  
(Dollars in thousands)   Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  

Residential real estate loans:

                   

Single Family (one to four units)

  $ 517,637        38.7   $ 259,790        32.9   $ 165,405        26.3   $ 165,473        26.2   $ 104,960        20.8

Home equity

    36,424        2.7     22,575        2.9     32,345        5.1     41,977        6.6     18,815        3.8

Multifamily (five units or more)

    647,381        48.4     370,469        46.9     326,938        52.0     330,778        52.2     325,880        64.6

Commercial real estate and land loans

    37,985        2.8     33,553        4.3     30,002        4.8     33,731        5.3     11,256        2.2

Consumer—Recreational vehicle

    30,406        2.3     39,842        5.0     50,056        8.0     56,968        9.0     42,327        8.4

Other

    66,582        5.0     62,875        8.0     23,872        3.8     4,439        0.7     981        0.2

Total loans held for investment

    1,336,415        100.0     789,104        100.0     628,618        100.0     633,366        100.0     504,219        100.0

Allowance for loan losses

    (7,419       (5,893       (4,754       (2,710       (1,450  

Unamortized premiums/discounts, net of deferred loan fees

    (3,895       (8,312       (8,401       757          5,137     

Net loans held for investment

  $ 1,325,101              $ 774,899              $ 615,463              $ 631,413              $ 507,906           

The following table sets forth the amount of loans maturing in our total loans held for investment at June 30, 2011 based on the contractual terms to maturity:

 

   

Term to Contractual Maturity

 
(Dollars in thousands)   Less Than
Three
Months
   

Over Three

Months

Through

One Year

    Over One
Year
Through
Five Years
    Over Five
Years
    Total  

June 30, 2011

  $ 3,387      $ 5,418      $ 24,577      $ 1,303,033      $ 1,336,415   

The following table sets forth the amount of our loans at June 30, 2011 that are due after June 30, 2012 and indicates whether they have fixed, floating or adjustable interest rate loans:

 

(Dollars in thousands)   Fixed     Floating or
Adjustable
    Total  

Single family (one to four units)

  $ 75,807      $ 441,583      $ 517,390   

Home equity

    35,119        1,256        36,375   

Multifamily (five units or more)

    41,887        602,343        644,230   

Commercial real estate and land

    6,304        31,681        37,985   

Consumer—recreational vehicle

    30,357        —          30,357   

Other

    61,241        —          61,241   

Total

  $ 250,715      $ 1,076,863      $ 1,327,578   

 

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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, 2011:

 

    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

    45.12     44.42     13.25     48.29     12.39

California-north2

    13.98     14.08     9.30     13.88     16.16

Texas

    4.99     2.31     —          6.50     17.88

Washington

    4.83     3.59     4.96     5.49     10.65

New York

    4.27     6.99     5.23     1.70     10.78

Arizona

    3.08     4.08     8.43     2.33     0.26

Florida

    2.70     2.92     10.70     2.51     0.00

Colorado

    2.27     3.16     1.40     1.44     4.60

Oregon

    1.81     1.32     0.43     1.99     5.79

Illinois

    1.57     1.42     4.37     1.66     0.99

All other states

    15.38     15.71     41.93     14.21     20.50
      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, 2011. 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 Equity1     Multifamily    

Commercial and

Land

 

Weighted Average LTV

    53.79     53.55     52.58     54.43     47.33

Median LTV

    52.92     52.90     58.26     50.02     45.01

 

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.

We believe our weighted average LTV of 53.79%, at origination, for our entire real estate loan portfolio is lower and more conservative than most banks which has resulted, and will continue to result in the future, in lower average loan defaults and write-offs when compared to other banks.

 

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Lending Activities. The following table summarizes the volumes of loans originated, purchased, sold and repaid by loan group for each the last five fiscal years:

 

    For the Fiscal Years Ended June 30,  
(Dollars in thousands)   2011     2010     2009     2008     2007  

Loans Held for Sale:

 

Single family (one to four units):

         

Beginning balance

  $ 5,511      $ 3,190      $ —        $ —        $ —     

Loan originations

    216,868        114,842        83,741        516        7,579   

Loan purchases

    —          —          —          —          —     

Proceeds from sale of loans held for sale

    (206,955     (114,215     (81,932     (518     (7,609

Gains on sales of loans held for sale

    4,337        1,694        1,381        2        30   

Other

    349        —          —          —          —     

Ending balance

  $ 20,110      $ 5,511      $ 3,190      $ —        $ —     

Loans Held for Investment:

         

Single family (one to four units):

         

Beginning balance

  $ 259,790      $ 165,405      $ 165,473      $ 104,960      $ 113,242   

Loan originations

    301,765        12,815        305        —          840   

Loan purchases

    43,440        126,446        22,036        95,667        42,258   

Loans transferred to Held for Sale

    (6,911     —          —          —          —     

Principal repayments

    (77,208     (41,825     (20,012     (34,726     (51,380

Foreclosure and charge-offs

    (3,239     (3,051     (2,397     (428     —     

Ending balance

  $ 517,637      $ 259,790      $ 165,405      $ 165,473      $ 104,960   

Home equity:

         

Beginning balance

  $ 22,575      $ 32,345      $ 41,977      $ 18,815      $ 628   

Loan originations

    —          —          7,363        34,761        19,684   

Loan purchases

    22,013        —          —          —          —     

Loans sold

    —          —          —          —          —     

Principal repayments

    (8,060     (9,653     (16,681     (11,599     (1,497

Foreclosure and charge-offs

    (104     (117     (314     —          —     

Ending balance

  $ 36,424      $ 22,575      $ 32,345      $ 41,977      $ 18,815   

Multifamily (five units or more):

         

Beginning balance

  $ 370,469      $ 326,938      $ 330,778      $ 325,880      $ 402,166   

Loan originations

    275,027        21,323        1,750        —          2,484   

Loan purchases

    53,990        58,461        46,439        87,113        750   

Loans sold

    —          —          —          —          —     

Principal repayments

    (43,614     (34,210     (48,535     (82,115     (79,520

Foreclosure and charge-offs

    (8,491     (2,043     (3,494     (100     —     

Ending balance

  $ 647,381      $ 370,469      $ 326,938      $ 330,778      $ 325,880   

Commercial real estate and land:

         

Beginning balance

  $ 33,553      $ 30,002      $ 33,731      $ 11,256      $ 13,743   

Loan originations

    2,547        4,129        —          85        —     

Loan purchases

    5,897        456        —          24,726        500   

Loans sold

    —          —          —          —          —     

Principal repayments

    (4,012     (1,034     (1,320     (2,336     (2,986

Foreclosure and charge-offs

    —          —          (2,409     —          (1

Ending balance

  $ 37,985      $ 33,553      $ 30,002      $ 33,731      $ 11,256   

Consumer—recreational vehicle and auto:

         

Beginning balance

  $ 39,842      $ 50,056      $ 56,968      $ 42,327      $ —     

Loan originations

    —          34        3,772        25,712        43,485   

Loan purchases

    —          —          —          —          —     

Loans sold

    —          —          —          —          —     

Principal repayments

    (4,625     (5,468     (7,662     (10,617     (1,158

Repossession and charge-offs

    (4,811     (4,780     (3,022     (454     —     

Ending balance

  $ 30,406      $ 39,842      $ 50,056      $ 56,968      $ 42,327   

Other:

         

Beginning balance

  $ 62,875      $ 23,872      $ 4,439      $ 981      $ 81   

Loan originations

    29,562        36,401        19,980        4,330        956   

Loan purchases

    —          4,200        —          —          —     

Loans sold

    —          —          —          —          —     

Principal repayments

    (25,829     (1,598     (534     (866     (57

Charge-offs

    (26     —          (13     (6     1   

Ending balance

  $ 66,582      $ 62,875      $ 23,872      $ 4,439      $ 981   

TOTAL LOANS HELD FOR INVESTMENT

  $ 1,336,415      $ 789,104      $ 628,618      $ 633,366      $ 504,219   

Allowance for loan losses

    (7,419     (5,893     (4,754     (2,710     (1,450

Unamortized premiums, unaccreted discounts, net of deferred loan fees

    (3,895     (8,312     (8,401     757        5,137   

NET LOANS

  $ 1,325,101      $ 774,899      $ 615,463      $ 631,413      $ 507,906   

 

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Lending Activities. The following table summarizes the amount funded, the number and the size of real estate loans and RV loans originated and purchased for each of the last five fiscal years:

 

Type of Loan   For the Fiscal Years Ended June 30,  
(Dollars in thousands)   2011     2010     2009     2008     2007  

Single Family (one to four units):

         

Loans originated:

         

Amount funded

  $ 518,633      $ 127,657      $ 84,045      $ 516      $ 840   

Number of loans

    1,104        411        283        2        1   

Average loan size

  $ 470      $ 311      $ 297      $ 258      $ 840   

Loans purchased:

         

Amount funded

  $ 43,440      $ 126,446      $ 22,036      $ 95,667      $ 42,258   

Number of loans

    113        450        89        209        197   

Average loan size

  $ 384      $ 281      $ 248      $ 458      $ 215   

Home equity:

         

Loans originated:

         

Amount funded

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

Number of loans

    —          —          161        1,027        520   

Average loan size

  $ —        $ —        $ 46      $ 34      $ 38   

Loans purchased:

         

Amount funded

  $ 22,013      $ —        $ —        $ —        $ —     

Number of loans

    1        —          —          —          —     

Average loan size

  $ 22,013      $ —        $ —        $ —        $ —     

Multifamily (five or more units):

         

Loans originated:

         

Amount funded

  $ 275,027      $ 21,323      $ 1,750      $ —        $ 2,484   

Number of loans

    300        22        2        —          5   

Average loan size

  $ 917      $ 969      $ 875      $ —        $ 497   

Loans purchased:

         

Amount funded

  $ 53,990      $ 58,461      $ 46,439      $ 87,113      $ 750   

Number of loans

    34        120        31        81        3   

Average loan size

  $ 1,588      $ 487      $ 1,498      $ 1,075      $ 250   

Commercial real estate and land:

         

Loans originated:

         

Amount funded

  $ 2,255      $ 4,129      $ —        $ 85      $ —     

Number of loans

    1        3        —          1        —     

Average loan size

  $ 2,255      $ 1,376      $ —        $ 85      $ —     

Loans purchased:

         

Amount funded

  $ 5,897      $ 456      $ —        $ 24,726      $ 500   

Number of loans

    4        3        —          20        1   

Average loan size

  $ 1,474      $ 152      $ —        $ 1,236      $ 500   

Consumer—recreational vehicle and auto:

         

Loans originated:

         

Amount funded

  $ —        $ 34      $ 3,772      $ 25,712      $ 43,485   

Number of loans

    —          1        130        710        938   

Average loan size

  $ —        $ 34      $ 29      $ 36      $ 46   

Loans purchased:

         

Amount funded

  $ —        $ —        $ —        $ —        $ —     

Number of loans

    —          —          —          —          —     

Average loan size

  $ —        $ —        $ —        $ —        $ —     

 

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Loan Marketing. We market our lending products directly to customers through a variety of channels depending on the product. For our single family mortgage and home equity loans, we target Internet comparison rate shoppers in all 50 states through the purchase of Google Ad comparison rates and popular rate comparison sites such as Bankrate.com. In addition, we purchase customer leads and loan applications from major lead aggregators, and from our marketing affiliates and affinity partner agreements. For our multifamily mortgage loans, we target customers through traditional origination techniques such as direct mail marketing, personal sales efforts and print advertising. Recently, we have increased our direct sales marketing of single family jumbo and multifamily mortgage loans.

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

 

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

 

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Online Broker Origination. We have developed relationships with independent loan brokers and we manage these relationships and our wholesale loan pipeline through our originations systems and websites. 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.

 

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Direct Loan Origination. We believe that, particularly in multifamily and commercial mortgage lending as well as certain jumbo single family 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.

 

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Wholesale Loan Purchases. We purchase selected single family, multifamily, commercial and home equity 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, 2011, approximately $311.0 million, or 23.5%, of our loan portfolio was acquired from other lenders who are servicing the loans on our behalf, of which 46.5% were multifamily loans and 53.5% were single family loans.

 

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Loan Servicing. We typically retain servicing rights for all home equity, multifamily and single family loans that we originate and retain. We may 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.

 

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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 our federal regulators.

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.

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. For all multifamily and commercial loans, 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 condition of the underlying property, as well as the

 

 

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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.

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 any 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 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 of Bank of Internet.”

At June 30, 2011, the Bank’s loans-to-one-borrower limit was $24.4 million, based upon the 15% of unimpaired capital and surplus measurement. At June 30, 2011, no single loan was larger than $5.0 million and our largest single lending relationship had an outstanding balance of $7.6 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. Our loan charge-offs increased in fiscal 2009 and 2010, but declined in fiscal 2011. We believe that our level of nonperforming loans is below the level of nonperforming loans currently found at most banks. The economy and the mortgage and consumer credit markets have shown signs of stabilizing, but unemployment remains high. We expect additional loans to default or become nonperforming and we provide an allowance for estimated loan losses. 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

(TDRs) 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 hold the security to maturity, trade the security at fair value or make the security available for sale. We increased our purchases mortgage-backed securities in fiscal 2005 through 2010 because we believed the mortgage-backed securities provided better risk adjusted yields than certain single family whole loan originations or whole loan pools. During fiscal 2008 and 2009, we sold U.S. agency mortgage-backed securities and replaced them with better risk adjusted non-agency securities.

 

 

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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:

 

Fiscal year end   Available for Sale     Held to maturity     Trading     Total  
(Dollars in thousands)   Fair Value     Carrying Amount     Fair Value         

June 30, 2011

  $ 145,671      $ 370,626      $ 5,053      $ 521,350   

June 30, 2010

    242,430        320,807        4,402        567,639   

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   

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, 2011 were:

 

At June 30, 2011   Total Amount     Due Within One
Year
    Due After One but
within Five Years
    Due After Five but
within Ten Years
   

Due After Ten

Years

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

Available for sale

                   

Mortgage-Backed Securities (RMBS):

                   

U.S. Agency2

  $ 60,212        2.92   $ 2,911        3.14   $ 11,063        3.07   $ 12,894        2.96   $ 33,344        2.83

Non-Agency3

  $ 74,545        5.96   $ 12,509        8.41   $ 33,500        7.38   $ 16,910        5.01   $ 11,626        0.63

Total Mortgage-Backed Securities

  $ 134,757        4.60   $ 15,420        7.41   $ 44,563        6.31   $ 29,804        4.12   $ 44,970        2.26

Available For Sale—Amortized Cost

  $ 134,757        4.60   $ 15,420        7.41   $ 44,563        6.31   $ 29,804        4.12   $ 44,970        2.26

Available For Sale—Fair Value

  $ 145,671        4.60   $ 17,009        7.41   $ 48,721        6.31   $ 32,125        4.12   $ 47,816        2.26

Held to maturity

                   

Mortgage-backed securities (RMBS):

                   

U.S. Agency2

  $ 77,941        3.97   $ 3,961        3.71   $ 13,799        3.72   $ 13,835        3.73   $ 46,346        4.13

Non-Agency3

  $ 246,455        7.70   $ 32,609        9.19   $ 67,286        8.23   $ 44,959        7.37   $ 101,601        7.01

Total Mortgage-Backed Securities

  $ 324,396        6.80   $ 36,570        8.60   $ 81,085        7.46   $ 58,794        6.52   $ 147,947        6.11

Other Debt Securities:

                   

U.S. Agency2

  $ 9,976        2.03   $        0.00   $ 9,976        2.03   $        0.00   $        0.00

Municipal

  $ 36,254        6.15   $        0.00   $        0.00   $ 1,309        6.51   $ 34,945        6.14

Total Other Debt Securities

  $ 46,230        5.26   $        0.00   $ 9,976        2.03   $ 1,309        6.51   $ 34,945        6.14

Held to Maturity—Carrying Value

  $ 370,626        5.95   $ 36,570        8.60   $ 91,061        6.64   $ 60,103        6.37   $ 182,892        4.94

Held to Maturity—Fair Value

  $ 387,286        5.95   $ 39,867        8.60   $ 90,172        6.64   $ 68,110        6.37   $ 189,137        4.94

Trading

                   

Non-Agency—Fair Value4

  $ 5,053        2.05   $        0.00   $        0.00   $        0.00   $ 5,053        2.05

Total securities

  $ 521,350        5.55   $ 53,579        8.22   $ 139,782        6.53   $ 92,228        5.59   $ 235,761        4.34

 

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 Ginny Mae.

3 

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

4 

Collateralized debt obligations secured by pools of bank trust preferred.

Our securities portfolio of $521.4 million at June 30, 2011 is composed of approximately 29.0% U.S. agency residential mortgage-backed securities (RMBS) and other debt securities issued by GSEs, primarily Freddie Mac and Fannie Mae; 3.7% Prime private-issue super senior, first-lien RMBS; 15.5% Alt-A, private-issue super senior, first-lien RMBS; 38.1% Pay-Option ARM, private-issue super senior first-lien RMBS; 7.0% Municipal securities and 6.7% 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, 2011.

 

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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. 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, 2011, the weighted-average credit enhancement in our entire non-agency RMBS portfolio was 39.1%. The credit enhancement levels for our Alt-A and Pay-option ARM portions of the portfolio were 51.9% and 33.1%, 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. We have experienced RMBS personnel monitor the performance and measure the securities for impairment. The rating agency grade does not

completely reflect the probability of impairment. The credit enhancement level when you consider the remaining purchase discount at June 30, 2011 equals 47.7% for approximately 67.5% of our securities that have been downgraded from their respective AAA ratings at acquisition to below investment grade. Substantially all of those securities that were downgraded were included in our Bank of Internet Re-securitization Trust (BIRT) which restructured their discounts into a new series of securities rated by two nationally recognized rating agencies. Approximately 95% of the rated BIRT securities are investment grade and can be pledged by the Bank for liquidity. For financial reporting purposes, the BIRT securities are not reflected in the consolidated financial statements of the Company. The underlying securities in the BIRT Trust are reported in the Company’s consolidated financial statements and the BIRT securities are eliminated in consolidation. See Management’s Discussion and Analysis—“Critical Accounting Policies—Securities.”

 

 

The following table sets forth changes in our securities portfolio for each of the last five fiscal years:

 

(Dollars in thousands)   2011     2010     2009     2008     2007  

Securities at beginning of period1

  $ 567,639      $ 622,150      $ 510,014      $ 357,970      $ 139,636   

Purchases

    284,033        223,754        310,559        493,183        364,349   

Sales

    (14,103     (14,081     (95,297     (210,618     (74,346

Repayments, prepayments and amortization of premium/accretion of discounts

    (306,971     (260,451     (97,625     (132,661     (71,706

Trading securities mark-to-market

    651        (1,039     (2,055              

Transition impact of adopting SFAS 159

                  (3,504              

Impairment charged to the income statement

    (1,541     (6,038     (1,454     (1,000       

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

    (8,358     3,344        1,512        3,140        37   

Securities at end of period1

  $ 521,350      $ 567,639      $ 622,150      $ 510,014      $ 357,970   

 

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 Deposit accounts, Savings accounts and Certificate of Deposit accounts across multiple brands. Our customers access their funds through ATMs, VISA® Debit Cards, Automated Clearing House funds (electronic transfers) and Checks. We also offer the following additional services in connection with our deposit accounts:

 

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Online Banking. Customers can review their account detail, including viewing and printing their online banking statements. Other features of Online Banking are:

 

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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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InterBank Transfer. Customers can transfer money to accounts they own at other financial institutions.

 

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PopMoney. An easy and convenient way for customers to send and receive money from anyone.

 

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My Deposit. A remote deposit solution that enables customers to scan checks from their computer and have the scanned images electronically transmitted for deposit directly to their account.

 

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Mobile Banking. Customers can review account balances, transfer funds and pay bills from the convenience of their mobile phone.

 

 

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  ¡  

Text Message Banking. Customers can view their account balances and transactions as well as transfer fund funds between their accounts and set up alerts using their mobile phone.

 

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FinanceWorks. A new financial management solution that provides customers with a complete and easy way to budget, gain control over their spending and save more during these tough economic times.

 

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Purchase Rewards. Customers can earn cash back from participating merchants simply by using their VISA® Debit Card.

 

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Secure Email. Customers have send and receive secure email without concern for the security of their information.

 

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ATM Cards or VISA® Debit Cards. Each customer may choose to receive a free ATM card or VISA® debit card upon opening an account. Customers can access their accounts at ATMs and any other location worldwide that accept VISA® debit cards.

 

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

Deposit Marketing. We currently market to deposit customers through targeted online marketing in all 50 states by purchasing “keyword” advertising on Internet search engines, such as Google, and placement on product comparison sites, such as Bankrate.com. We target deposit customers based on certain demographics (such as age,

income, and 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 (ALCO). Within these parameters, management and staff survey our competitors’ interest rates and evaluate consumer demand for various products and our existing deposit mix. We 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 $3.80, $4.89 and $10.67 for fiscal years 2011, 2010 and 2009, respectively.

 

 

The number of deposit accounts at the end of each of the last five fiscal years is set forth below:

 

    At June 30,  
     2011     2010     2009     2008     2007  

Checking and savings accounts

    16,105        17,192        10,685        9,415        8,315   

Time deposits

    16,793        10,554        12,757        15,490        17,502   

Total number of deposit accounts

    32,898        27,746        23,442        24,905        25,817   

Deposit Composition. The following table sets forth the dollar amount of deposits by type and weighted average interest rates at the end of each of the last five fiscal years:

    At June 30,  
    2011     2010     2009     2008     2007  
(Dollars in thousands)   Amount     Rate1     Amount     Rate1     Amount     Rate1     Amount     Rate1     Amount     Rate1  

Noninterest-bearing

  $ 7,369             $ 5,441             $ 3,509             $ 5,509             $ 993          

Interest-bearing:

                   

Demand

    76,793        0.75     63,962        0.85     59,151        1.22     61,616        3.22     48,575        3.52

Savings

    268,384        0.93     358,293        0.91     192,781        1.94     56,202        3.38     22,840        3.75

Time deposits:

                   

Under $100

    337,937        2.24     200,859        3.23     191,021        4.39     268,747        4.84     298,767        5.06

$100 or more

    649,842        2.15     339,625        2.95     202,062        3.85     178,630        4.91     176,774        5.09

Total time deposits

    987,779        2.18     540,484        3.05     393,083        4.11     447,377        4.87     475,541        5.07

Total interest-bearing

    1,332,956        1.85     962,739        2.11     645,015        3.20     565,195        4.54     546,956        4.88

Total deposits

  $ 1,340,325        1.84   $ 968,180        2.10   $ 648,524        3.18   $ 570,704        4.50   $ 547,949        4.87

 

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, the interest expense and the average rate paid on each type of deposit for the last five fiscal years ending June 30:

 

    2011     2010     2009  
(Dollars in thousands)   Average
Balance
    Interest
Expense
    Avg. Rate
Paid
    Average
Balance
    Interest
Expense
    Avg. Rate
Paid
    Average
Balance
    Interest
Expense
    Avg. Rate
Paid
 

Demand

  $ 61,181      $ 488        0.80   $ 57,779      $ 595        1.03   $ 70,882      $ 1,722        2.43

Savings

    283,783        2,508        0.92     389,526        5,779        1.48     115,427        2,861        2.48

Time deposits

    776,638        19,280        2.48     413,999        14,880        3.59     433,410        19,400        4.48

Total interest-bearing deposits

  $ 1,121,602      $ 22,276        2.01   $ 861,304      $ 21,254        2.47   $ 619,719      $ 23,983        3.87

Total deposits

  $ 1,127,415      $ 22,276        2.00   $ 866,837      $ 21,254        2.45   $ 623,889      $ 23,983        3.84

 

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

Demand

  $ 47,405      $ 1,670        3.52   $ 34,409      $ 1,066        3.10

Savings

    28,623        1,056        3.69     25,696        960        3.74

Time deposits

    506,761        25,632        5.06     399,855        19,541        4.89

Total interest-bearing deposits

  $ 582,789      $ 28,358        4.87   $ 459,960      $ 21,567        4.69

Total deposits

  $ 585,933      $ 28,358        4.84   $ 461,024      $ 21,567        4.68

The following table shows the maturity dates of our certificates of deposit at the end of each of the last five fiscal years, June 30:

 

(Dollars in thousands)   2011     2010     2009     2008     2007  

Within 12 months

  $ 568,827      $ 259,026      $ 237,920      $ 233,767      $ 258,404   

13 to 24 months

    184,029        106,733        49,796        81,156        100,086   

25 to 36 months

    66,541        52,174        64,743        33,343        44,988   

37 to 48 months

    33,500        11,922        38,559        61,744        15,574   

49 months and thereafter

    134,882        110,629        2,065        37,367        56,489   

Total

  $ 987,779      $ 540,484      $ 393,083      $ 447,377      $ 475,541   

The following table shows maturities of our time deposits having principal amounts of $100,000 or more at the end of each of the last five fiscal years:

 

    Term to Maturity        
(Dollars in thousands)   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,

 

2011

  $ 41,322      $ 144,907      $ 161,940      $ 301,673      $ 649,842   

2010

  $ 13,213      $ 84,823      $ 48,624      $ 192,965      $ 339,625   

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, 2011, the

Company had $139.7 million available immediately and an additional $250.9 million available with additional collateral, for advances from the FHLB for terms up to ten years.

The Bank has federal funds lines of credit with two major banks totaling $20.0 million. At June 30, 2011, the Bank had an outstanding balance of $2.5 million.

 

 

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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, 2011, we had a total borrowing capacity of approximately $112.5 million, none of which was outstanding. The Bank has additional unencumbered collateral that could be pledged to the FRB Discount Window to increase borrowing liquidity.

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. Pursuant to these agreements, under certain conditions, 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. As of June 30, 2011, the

weighted-average remaining contractual maturity period was 3.36 years and the weighted average remaining period before such repurchase agreements could be called was 0.26 years.

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 2.66% at June 30, 2011, and is paid quarterly.

 

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 the last five fiscal years:

 

    At or For The Fiscal Years Ended June 30,  
(Dollars in thousands)   2011     2010     2009     2008     2007  

Advances from the FHLB1:

         

Average balance outstanding

  $ 226,005      $ 199,288      $ 333,327      $ 270,022      $ 239,742   

Maximum amount outstanding at any month-end during the period

    309,000        225,988        392,973        398,966        254,216   

Balance outstanding at end of period

    305,000        182,999        262,984        398,966        227,292   

Average interest rate at end of period

    2.07     3.59     3.34     3.77     4.39

Average interest rate during period

    2.77     3.88     3.42     4.23     4.34

Securities sold under agreements to repurchase:

         

Average balance outstanding

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

Maximum amount outstanding at any month-end during the period

    130,000        130,000        130,000        130,000        90,000   

Balance outstanding at end of period

    130,000        130,000        130,000        130,000        90,000   

Average interest rate at end of period

    4.35     4.35     4.32     4.23     4.39

Average interest rate during period

    4.41     4.40     4.37     4.34     4.41

Federal Reserve Discount Window borrowing

         

Average balance outstanding

  $      $ 38,986      $ 38,524      $      $   

Maximum amount outstanding at any month-end during the period

           140,000        160,000                 

Balance outstanding at end of period

                  160,000                 

Average interest rate at end of period

               0.25              

Average interest rate during period

           0.25     0.36              

Junior subordinated debentures:

         

Average balance outstanding

  $ 5,155      $ 5,155      $ 5,155      $ 5,155      $ 5,155   

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

    2.66     2.88     3.06     5.04     7.76

Average interest rate during period

    2.85     2.91     4.60     7.16     8.01

 

1 

Advances from the FHLB have been reduced by debt issue costs of $1, $15, $18, $74 and $108 for the fiscal years ended June 30, 2011, 2010, 2009, 2008 and 2007, respectively.

 

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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.

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.

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 certain Internet domain 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, 2011, we had 173 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 satisfactory.

COMPETITION

The market for banking and financial services is intensely competitive, and we expect competition to continue to intensify in the future. The Bank attracts deposits through the Internet. Competition for those deposits comes from other banks, savings institutions, and credit unions. The Bank competes for these deposits by offering superior service and a variety of deposit accounts at competitive rates.

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 (such as BofI) and savings associations (such as Bank of Internet) are extensively regulated under both federal and state law. The regulation of savings and loan holding companies and savings associations 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. The information below does not purport to be complete and is qualified in its entirety by reference to all applicable laws and regulations.

 

 

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Legislation, regulations and rules regarding the regulation of savings and loan holding companies and savings associations that may affect our or Bank of Internet’s operations are introduced from time to time by the U.S. government and its various agencies. In addition, the rules and regulations currently governing us and Bank of Internet may be amended from time to time. Any such legislation, regulatory changes or amendments in the future could adversely affect us or Bank of Internet. No assurance can be given as to whether, or in what form, any such changes may occur.

THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This comprehensive financial reform and consumer protection act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. In addition, as described below, the Dodd-Frank Act changed the jurisdictions of existing bank regulatory agencies and in particular transferred the regulation of federal savings and loan associations. Effective July 21, 2011 the Office of Thrift Supervision (OTS) was abolished and its supervision of savings and loan associations (such as Bank of Internet) was transferred to the Office of the Comptroller of the Currency (OCC), and its supervision of savings and loan holding companies (such as BofI) was transferred to the Board of Governors of the Federal Reserve System (Fed Board). A summary of the significant aspects of the Dodd-Frank Act that may affect BofI and Bank of Internet are set forth in the following sections under the headings ”REGULATION OF BOFI HOLDING, INC.” and “REGULATION OF BANK OF INTERNET.”

The Dodd-Frank Act addressed a broad range of financial regulatory reform issues and, in addition to the provisions thereof discussed below, the Dodd-Frank Act contained the following provisions, among others:

 

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A new independent consumer financial protection bureau was established within the Federal Reserve System, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions (less than $10 billion in assets), like Bank of Internet, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

 

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The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding

   

companies to serve as a source of strength for their depository institution subsidiaries. Historically, unlike bank holding companies, savings and loan holding companies were not subject to regulatory consolidated capital requirements or been subjected formally to the “source-of-strength” doctrine.

 

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Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules.

 

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The current prohibition on payment of interest on demand deposits of Regulation Q of the Fed Board was repealed, effective July 21, 2011.

 

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With respect to federal preemption of state law, state law is preempted only if it would have a discriminatory effect on a federal savings association or is preempted by any other federal law. The OCC must make a preemption determination on a case-by-case basis with respect to a particular state law or other state law with substantively equivalent terms.

 

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Deposit insurance is permanently increased to $250,000 and unlimited deposit insurance for non-interest bearing transaction accounts extended through December 31, 2012.

 

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The calculation of the deposit insurance assessment base will equal the depository institution’s total assets minus the sum of its average tangible equity during the assessment period.

 

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The minimum reserve ratio of the Depository Insurance Fund, the fund backing up federally-insured deposits (the “DIF”) increased to 1.35 percent of estimated annual insured deposits or assessment base. However, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

 

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The Securities and Exchange Commission is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors.

 

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Public companies will be required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.

 

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A separate, non-binding shareholder vote will be required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.

 

 

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¡  

The Securities and Exchange Commission is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors.

 

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Public companies will be required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.

 

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A separate, non-binding shareholder vote will be required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.

 

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Securities exchanges will be required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant.

 

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Stock exchanges, which does not include the OTC Bulletin Board, will be prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information.

Disclosure in annual proxy materials will be required concerning the relationship between the executive compensation paid and the financial performance of the issuer.

 

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Companies must now disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees.

 

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The so-called Volcker Rule prohibits banking entities from engaging in proprietary trading or acquiring or retaining any equity, partnership or other ownership interest in or sponsoring a hedge fund or private equity fund. Nonbank financial companies that so engage in such activities will be subjected to additional capital requirements and limitations on its activities.

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Title VII of the Dodd-Frank Act is dedicated to the regulation of derivative transactions, including “swap” transactions. The most significant elements of this title are mandatory clearing requirements and the transfer of most swap transactions from banks to a bank affiliate.

 

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A Financial Stability Oversight Council (“FSOC”) is created with jurisdiction to oversee threats to the financial stability of the United States and, in appropriate circumstances, to intervene in various ways. For example, the FSOC may require nonbank financial companies and bank holding companies to submit periodic financial and other reports for the purpose of assessing the extent to which a financial activity or financial market in which the company participates, or the company itself, poses a threat to the financial stability of the United States.

 

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Businesses that package residential mortgage loans into asset-backed securities must retain a certain amount of credit risk of the mortgages they package. There are restrictions on the ability of the packager to hedge the risk retained and disclosure and monitoring requirements with respect to asset quality.

 

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Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

Because the implementation of many of these provisions and the other provisions of the Dodd-Frank Act, including those described in the following sections, are still subject to the proposal and/or adoption of final regulations, and because there has not been substantial experience with the application of those regulations that have been promulgated, the full effect of the provisions of the Dodd-Frank Act and its resulting rules and regulations on our operations, financial condition and future plans can not be assessed at this time. For additional discussion of the impact of this 2010 law, see “Factors that May Affect Our Performance—Risks Relating to Our Industry.”

REGULATION OF BOFI HOLDING, INC.

General. BofI is a unitary savings and loan holding company under the Home Owner’s Loan Act (“HOLA”), subject to regulatory oversight by the Fed Board. Prior to July 21, 2011 (the “Transfer Date”), the first anniversary date of the Dodd-Frank Act, BofI was subject to oversight and regulation by the OTS. Among other things, the Dodd-Frank Act transferred the supervision of savings and loan holding companies and their non-depository subsidiaries under HOLA from the OTS to the Fed Board. As of the Transfer Date, the OTS was abolished. The Dodd-Frank Act further provided that all regulations, guidelines and other advisory materials issued by the OTS on or before the Transfer Date

 

 

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with respect to savings and loan holding companies and their non-depository subsidiaries remained enforceable until terminated, superseded or otherwise changed by the Fed Board. Many aspects of the Dodd-Frank Act are subject to future rulemaking that will be promulgated and take effect over the course of the next several years, making it difficult to anticipate the overall impact the Dodd-Frank Act will have on our business, financial condition and results of operations.

In light of the transfer of supervision from the OTS to the Fed Board, on the Transfer Date the Fed Board published (i) a supervisory letter describing the approach it will use initially in supervising savings and loan holding companies and (ii) a notice requesting comments on its proposal regarding the continuing enforcement of regulations governing savings and loan holding companies previously issued by the OTS. The following is a brief overview of the expected enforcement of OTS regulations by the Fed Board:

 

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In general, the OTS’ regulations for the supervision of holding companies of savings and loan associations will continue to be enforced by the Fed Board, including regulations pertaining to acquisitions of savings associations, permissible activities, prohibited service by certain individuals, and investigative and formal examination proceedings. OTS regulations that reference the regulation of both savings associations and savings and loan holding companies will only be enforced by the Fed Board with respect to savings and loan holding companies.

 

¡  

Leverage capital requirements and risk based capital requirements applicable to depository institutions will be extended to savings and loan holding companies like BofI.

 

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BofI will continue to be required to register and file reports disclosing its financial condition under OTS regulations, but it will now file those reports with the Fed Board rather than the OTS. However, in February 2011 the Fed Board published for comment a proposal to change periodic financial reporting by savings and loan holding companies to be consistent with reporting for bank holding companies and such proposal is still pending. We anticipate that such proposal will be adopted in some form in the foreseeable future.

 

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The Fed Board will have enforcement authority over BofI and any of our subsidiaries to the same extent as the OTS, including the ability to restrict or prohibit activities that are determined to be a serious risk to Bank of Internet.

 

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The Fed Board has stated that it intends to enforce the substantive provisions of the OTS’ acquisition regulations, including the requirement to file applications and the factors for reviewing such applications.

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The Fed Board has stated that it intends to replace OTS regulations governing the processing of acquisitions and other types of analogous applications submitted by bank holding companies, including filing and notice requirements and hearing procedures, with its own provisions with respect to such matters.

 

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The Fed Board will eliminate the OTS procedures for determining “control” of savings and loan holding companies, including the “rebuttal of control” factors and process, certification of ownership and rebuttal agreement, and instead apply the Fed Board’s change in bank control regulations to savings and loan holding companies. The Fed Board will also substitute its current practices and policies applicable to bank holding companies when reviewing investments in and relationships with savings and loan holding companies, including the Board's policy statement on non-controlling equity investments in banks and bank holding companies. Although the Fed Board has stated that it will not revisit previous determinations by the OTS, it does foresee proposing rules to update and streamline regulations pertaining to control determinations for both bank holding companies and savings and loan holding companies.

The Fed Board expects to continue its review of OTS regulations and to consider substantive and procedural amendments. Inasmuch as we cannot predict with certainty the substance of any amendments that may be proposed by the Fed Board, what the final amendments, if any, will contain and when such amendments may become effective, is difficult to predict the overall impact of any such amendments on our business, financial condition and results of operations is also difficult to predict. In the meantime we expect to continue to operate under what are in effect the OTS’ regulations. As used herein, references to Fed Board regulations applicable to savings and loan association holding companies mean, and this discussion assumes the continued applicability of, the OTS’ regulations that survive the Transfer Date as Fed Board regulations.

Activities Restrictions. The primary governing statute for the supervision and regulation of savings and loan holding companies is HOLA, although there are other statutes that expressly apply to both savings and loan holding companies and bank holding companies, such as the Change in Bank Control Act and the Management Interlocks Act. As noted above, the Fed Board intends to issue an interim final rule that will codify the rules that will regulate the permissible activities for savings and loan holding companies. The Fed Board has stated that it intends to conform portions of the OTS’ regulations governing activities of savings and loan holding companies to those found in the Fed Board’s Regulation Y (which among other things limits non-banking activities in which bank holding companies may engage to

 

 

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activities “closely related to banking”), although Regulation Y will not per se apply to savings and loan holding companies. We currently engage only in activities that fall within the “closely-related to banking” standard and we expect that any non-banking activities in which we would engage would comply with the restrictions applicable to bank holding companies.

Mergers and Acquisitions. BofI must obtain approval from the Fed Board before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for BofI to acquire control of a savings institution, the Fed Board would consider, among many factors, the financial and managerial resources and future prospects of BofI and the target institution, the effect of the proposed acquisition on the risk to the insurance fund backing up federally-insured deposits, the convenience and the needs of the community and the impact of the proposed acquisition on competition. However, the standards for approving proposed mergers and acquisitions and the process for obtaining approval are likely to be subject to further review and modification by the Fed Board. It cannot be determined with certainty at this time what, if any, changes may result from such review and what the effect of any such changes will be on our ability to consummate future mergers and acquisitions that we may choose to undertake.

The Fed Board may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions; (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Sarbanes-Oxley Act. The Sarbanes-Oxley Act was signed into law on July 30, 2002 in response to public concerns regarding corporate accountability in connection with certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, including BofI.

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and corporate governance rules. It also requires the Securities and Exchange Commission and securities exchanges to adopt extensive additional disclosures, corporate governance and related rules and mandates. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems (such as the regulation of the accounting profession) and state corporate law (such as the relationship between a board of directors and management and between a board of directors and its committees). As noted herein, the Dodd-Frank Act imposes additional disclosure and corporate government requirements and represents further federal involvement in matters historically addressed by state corporate law.

REGULATION OF BANK OF INTERNET

General. As a federally-chartered savings and loan association whose deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”), Bank of Internet is subject to extensive regulation by the FDIC and, as of the Transfer Date, the OCC. Under the Dodd-Frank Act, the examination, regulation and supervision of savings and loan associations, such as Bank of Internet, were transferred from the OTS to the OCC, the federal regulator of national banks under the National Bank Act. On the Transfer Date, the OCC issued a Joint Notice with the FDIC identifying the OTS regulations governing savings and loan associations that the OCC (with respect to federally-chartered savings associations) and the FDIC (with respect to state-chartered savings associations) will enforce beginning on the Transfer Date. The OCC stated that the Joint Notice was not intended to effect any substantive changes. The OCC also stated that it will publish, with a request for comment, an interim final rule republishing the OTS regulations as OCC regulations. Like the Fed Board, the OCC states that it expects to continue its review of the OTS’ regulations and to consider substantive amendments. Inasmuch as we cannot predict with certainty the substance of any amendments proposed by the OCC, what the final amendments, if any, will contain and when such amendments may become effective, it is difficult to predict the overall impact of the transition of supervision from the OTS to the OCC and of any amendments to the OTS’ rules and regulations on our business, financial condition and results of operations. In the meantime, we expect to continue to operate under what are in effect the OTS’ regulations and, as used herein, references to OCC regulations for savings and loan associations mean the OTS’ regulations as of the Transfer Date.

Lending activities and other investments of Bank of Internet must comply with various statutory and regulatory requirements. The Bank is also subject to reserve

 

 

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requirements promulgated by the Fed Board. The OCC, together with the FDIC, will continue regular examinations of the Bank and prepare reports for the Bank’s board of directors on any deficiencies found in the operations of the Bank. The relationship between the Bank and its 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 the Bank.

The Bank must file periodic reports with the OCC concerning its activities and financial condition, in addition to obtaining any required regulatory approvals or exemptions prior to entering into specified transactions, such as mergers with or acquisitions of other financial institutions or raising capital. 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 fund and depositors. This regulatory structure also gives applicable 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 OCC, the FDIC or the Fed Board, could have a material adverse effect on the Bank and our business, financial condition and results of operations.

Insurance of Deposit Accounts. The FDIC administers a deposit insurance fund (the “DIF”) that insures depositors in certain types of accounts up to a prescribed amount for the loss of any such depositor’s respective deposits due to the failure of an FDIC member depository institution. As the administrator of the DIF, the FDIC assesses its member depository institutions and determines the appropriate DIF premiums to be paid by each such institution. The FDIC is authorized to examine its member institutions and to require that they file periodic reports of their condition and operations. The FDIC may also prohibit any member institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the primary federal regulator, now the OCC, the opportunity to take such action. The FDIC may terminate an institution’s access to the DIF if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. We do not know of any practice, condition or violation that might lead to termination of our access to the DIF.

Bank of Internet is a member depository institution of the FDIC and its deposits are insured by the DIF up to the applicable limits, which are backed by the full faith and credit of the U. S. Government. Effective with the passing of the Dodd-Frank Act, the basic deposit insurance limit was

permanently raised to $250,000, instead of the $100,000 limit previously in effect.

Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the DIF. As a result, the FDIC has significantly increased the initial base assessment rates paid by member institutions for access to the DIF. The base assessment rate was increased by seven basis points (seven cents for every $100 of deposits) for the first quarter of 2009. Effective April 1, 2009, initial base assessment rates were changed to range from 12 basis points to 45 basis points across all risk categories with possible adjustments to these rates based on certain debt-related components. These increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all member institutions due to recent bank and savings association failures. The emergency assessment amounted to five basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, subject to a maximum equal to 10 basis points times the institution’s assessment base. Management cannot predict what insurance assessment rates will be in the future.

In addition, the FDIC may impose additional emergency special assessments of up to five basis points per quarter on each institution’s assets minus Tier 1 capital, if necessary, to maintain public confidence in the DIF or as a result of deterioration in the deposit DIF reserve ratio due to institution failures. Additionally, as an alternative to the special assessments, in September 2009, the FDIC adopted a rule that required member institutions to prepay its estimated quarterly risk-based assessment for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. This new rule did not immediately impact our earnings because the prepayment is being amortized over time. Any additional emergency special assessment imposed by the FDIC will negatively impact our earnings.

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

Under OCC regulations, 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 OCC 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

 

 

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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). OCC regulations also establish three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At June 30, 2011, Bank of Internet met the capital requirements of a “well capitalized” institution under applicable OCC regulations.

In general, the prompt corrective action regulation prohibits an FDIC member 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 OCC 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 OCC may, if the institution is well capitalized, reclassify it as adequately capitalized. If the institution is adequately capitalized, but not well capitalized, the OCC may require it to comply with restrictions applicable to undercapitalized institutions. If the institution is undercapitalized, the OCC may 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.

Capital regulations applicable to savings associations such as the Bank 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 and most financial institutions are expected to maintain capital levels well above the minimum. In addition, OCC regulations provide that minimum capital levels greater than those provided in the regulations may be established by the OCC 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 is not subject to any such individual minimum regulatory capital requirement and the Bank’s regulatory capital exceeded all minimum regulatory capital requirements as of June 30, 2011. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits. The guidelines set forth safety and soundness standards that the federal banking regulatory agencies use to identify and address problems at FDIC member institutions before capital becomes impaired. If the OCC determines that the Bank fails to meet any standard prescribed by the guidelines, the OCC may require us to submit to it an acceptable plan to achieve compliance with the standard. OCC regulations establish deadlines for the submission and review of such safety and soundness compliance plans in response to any such determination. We are not aware of any conditions relating to these safety and soundness standards that would require us to submit a plan of compliance to the OCC.

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 its regulator, 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

 

¡  

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

 

 

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qualified thrift investments as specified by the 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 the Bank’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. Savings 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, 2011, the Bank 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. As of June 30, 2011, Bank of Internet was in compliance with the applicable liquidity standard.

Transactions with Related Parties. The authority of the Bank to engage in transactions with “affiliates” (i.e., any company that controls or is under common control with it, including BofI and any non-depository institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of a savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies, and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act generally prohibits loans by public companies to their executive officers and directors. However, there is a specific exception for loans by financial institutions, such as the Bank, to its executive officers and directors that are made in compliance with federal banking laws. Under such laws, our authority to extend credit to executive officers, directors, and 10% or more shareholders

(“insiders”), as well as entities such person’s control is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on its capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and cannot involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

Capital Distribution Limitations. Regulations applicable to the Bank 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 OCC 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 OCC.

Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OCC 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 OCC, other federal regulatory agencies or the Department of Justice, taking enforcement actions against the institution. To the best of our knowledge, Bank of Internet is in full compliance with each of the Community Reinvestment Act, the Equal Credit Opportunity Act and the Fair Housing Act and we do not anticipate the Bank becoming the subject of any enforcement actions.

Federal Home Loan Bank System. The Bank 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

 

 

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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, the Bank is required to own capital stock in a Federal Home Loan Bank 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 Fed Board requires all depository institutions to maintain non-interest 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, 2011, the Bank 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 OCC and conduct any activities of the subsidiary in compliance with regulations and orders of the OCC. The OCC has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OCC 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.

Consumer Laws and Regulations. The Dodd-Frank Act established the Bureau of Consumer Financial Protection (“BCFP”) in order to regulate any person who offers or provides personal, family or household financial products or services. The BCFP is an independent “watchdog” within the Federal Reserve System to enforce and create “Federal consumer financial laws.” Banks as well as nonbanks are subject to any rule, regulation or guideline created by the BCFP. The only authority the Fed Board has over the BCFP is the authority to delegate examinations regarding compliance with “Federal consumer financial laws.” Except for the power of the Fed Board to reject any rules of the BCFP in extremely limited situations, the BCFP may promulgate any consumer financial rule or guideline, and exempt whomever it wants therefrom. If a court interprets a BCFP regulation or guideline, a court may only consider the BCFP’s interpretation of the rule or guideline. Subject to certain limited exemptions, persons subject to the BCFP include anyone who offers or provides consumer financial products or services, including banks, savings associations, credit unions, mortgage brokers, debt collectors and consumer credit reporting agencies. The apparent goal is to have only one agency in charge of protecting consumers by overseeing the application and implementation of “Federal consumer financial laws,” which includes (i) rules, orders and guidelines of the BCFP, (ii) all consumer financial

protection functions, powers and duties transferred from other federal agencies, such as the Fed Board, the OCC, the FDIC, the Federal Trade Commission, and the Department of Housing and Urban Development, and (iii) a long list of consumer financial protection laws enumerated in the Dodd-Frank Act, such as the Electronic Fund Transfer Act, the Consumer Leasing Act of 1976, the Alternative Mortgage Transaction Parity Act of 1982, the Equal Credit Opportunity Act, the Expedited Funds Availability Act, the Truth in Lending Act and the Truth in Savings Act, among many others. The BCFP has broad examination and enforcement authority, including the power to issue subpoenas and cease and desist orders, commence civil actions, hold investigations and hearings and seek civil penalties, as well as the authority to regulate disclosures, mandate registration of any covered person and to regulate what it considers unfair, deceptive, abusive practices.

However, savings associations with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the consumer protection laws and regulations by their primary bank regulators. Such laws and regulations and the other consumer protection laws and regulations to which the Bank has been subject have historically mandated certain disclosure requirements and regulated the manner in which financial institutions must deal with customers when taking deposits from, making loans to, or engaging in other types of transactions with, such customers. The effect of the BCFP on the development and promulgation of consumer protection rules and guidelines and the enforcement of federal “consumer financial laws” on the Bank, if any, cannot be determined with certainty at this time.

Privacy Standards. The Gramm-Leach-Bliley Act (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. The Bank is subject to OCC regulations implementing the privacy protection provisions of the GLBA. These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices.

Anti-Money Laundering and Customer Identification. The U.S. government enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act") on October 26, 2001 in response to the terrorist events of September 11, 2001. The USA Patriot Act gives the federal government broad powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. In February 2010, Congress re-enacted certain expiring provisions of the USA Patriot Act.

 

 

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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) 764-6597. This facility occupies a total of approximately 29,094 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. RESERVED

 

 

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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 Global Market on March 15, 2005 under the symbol “BOFI.” There were 10,475,351 shares of common stock outstanding held by approximately 1,325 registered owners as of August 26, 2011. 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
Price Per Share
 
Quarter ended:     High         Low    

June 30, 2009

  $ 7.49      $ 5.34   

September 30, 2009

  $ 8.75      $ 6.13   

December 31, 2009

  $ 10.90      $ 8.02   

March 31, 2010

  $ 14.00      $ 9.73   

June 30, 2010

  $ 18.23      $ 14.12   

September 30, 2010

  $ 16.79      $ 11.15   

December 31, 2010

  $ 15.97      $ 11.93   

March 31, 2011

  $ 15.98      $ 14.77   

June 30, 2011

  $ 16.80      $ 13.83   

DIVIDENDS

The holders of record of our Series A preferred stock, which was issued in 2003 and 2004, are entitled to receive annual dividends at the rate of six percent (6%) of the stated value per share, which stated value is $10,000 per share. Dividends on the Series A 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 board of directors has never declared or paid any cash dividends on our common stock and does not expect to do so in the foreseeable future.Our ability to pay dividends, should our board of directors elect to do so, depends largely upon the ability of the Bank to declare and pay dividends to us. 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 10.2 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, 2011, no additional 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, 2011, there were 72,933 restricted stock award shares which were retained by the Company and converted to cash at the average rate of $14.18 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, 2006 to June 30, 2011:

 

Period   Number
of Shares
Purchased
    Average
Price Paid
Per Shares
    Total Number of
Shares Purchased as
Part of Publically
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, 20081

    80,200        3.92        404,700        510,291   

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   

Fiscal Year Ended June 30, 2010

       

July 1, 2009 to June 30, 2010

                  595,700        319,291   

Fiscal Year Ended June 30, 2011

       

July 1, 2010 to June 30, 2011

                           

Ending Balance at June 30, 2011

    595,700      $ 5.72                 

Stock Retained in Net Settlement

       

July 1, 2007 to June 30, 2008

    8,777         

July 1, 2008 to June 30, 2009

    18,830         

July 1, 2009 to June 30, 2010

    19,391         

July 1, 2010 to June 30, 2011

    72,933         

Total Treasury Shares at June 30, 2011

    715,631                           

 

1

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

 

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

 

 

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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 any time 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.

During the year ended June 30, 2010, the Company adopted a resolution requiring the holders of the Company’s Series B preferred stock to convert all 4,790 shares of Series B preferred stock into the Company’s common stock in accordance with the terms of the Certificate of Designation for the Series B preferred stock. The mandatory conversion of all of the Series B preferred stock was completed and there were no Series B preferred shares outstanding at June 30, 2011.

 

 

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information regarding the aggregate number of securities to be issued under all of our stock option and equity based compensation plans upon exercise of outstanding options, warrants and other rights and their weighted-average exercise prices as of June 30, 2011. There were no securities issued under equity compensation plans not approved by security holders.

 

Plan Category  

(a)

Number of
securities to be
issued upon
exercise of
outstanding options
and units granted

    (b)
Weighted-average
exercise price of
outstanding options
and units granted
   

(c)

Number of
securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))

 

Equity compensation plans approved by security holders

    657,607      $ 10.45        1,012,772   

Equity compensation plans not approved by security holders

                  N/A   

Total

    657,607      $ 10.45        1,012,772   

 

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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,  
(Dollars in thousands, except per share amounts)   2011     2010     2009     2008     2007  

Selected Balance Sheet Data:

         

Total assets

  $ 1,940,087      $ 1,421,081      $ 1,302,208      $ 1,194,245      $ 947,163   

Loans, net of allowance for loan losses

    1,325,101        774,899        615,463        631,413        507,906   

Loans held for sale

    20,110        5,511        3,190                 

Allowance for loan losses

    7,419        5,893        4,754        2,710        1,450   

Securities—trading

    5,053        4,402        5,445                 

Securities—available for sale

    145,671        242,430        265,807        209,119        296,068   

Securities—held to maturity

    370,626        320,807        350,898        300,895        61,902   

Total deposits

    1,340,325        968,180        648,524        570,704        547,949   

Securities sold under agreements to repurchase

    130,000        130,000        130,000        130,000        90,000   

Advances from the FHLB

    305,000        182,999        262,984        398,966        227,292   

Junior subordinated debentures and other borrowings

    7,655        5,155        165,155        5,155        5,155   

Total stockholders’ equity

    147,766        129,808        88,939        83,082        72,750   

Selected Income Statement Data:

         

Interest and dividend income

  $ 92,935      $ 85,572      $ 77,778      $ 63,301      $ 44,586   

Interest expense

    34,422        34,953        41,419        45,281        33,738   

Net interest income

    58,513        50,619        36,359        18,020        10,848   

Provision (benefit) for loan losses

    5,800        5,775        4,730        2,226        (25

Net interest income after provision for loan losses

    52,713        44,844        31,629        15,794        10,873   

Noninterest income (loss)

    7,993        8,316        (6,687     1,379        1,180   

Noninterest expense

    26,534        17,283        12,894        10,162        6,450   

Income before income tax expense

    34,172        35,877        12,048        7,011        5,603   

Income tax expense

    13,593        14,749        4,906        2,815        2,284   

Net income

  $ 20,579      $ 21,128      $ 7,142      $ 4,196      $ 3,319   

Net income attributable to common stock

  $ 20,270      $ 20,517      $ 6,452      $ 3,884      $ 3,007   

Per Share Data:

         

Net income:

         

Basic

  $ 1.88      $ 2.31      $ 0.78      $ 0.46      $ 0.36   

Diluted

  $ 1.87      $ 2.22      $ 0.77      $ 0.46      $ 0.36   

Book value per common share

  $ 13.67      $ 12.25      $ 9.79      $ 8.95      $ 8.19   

Tangible book value per common share

  $ 13.67      $ 12.25      $ 9.79      $ 8.95      $ 8.19   

Weighted average number of common shares outstanding:

         

Basic

    10,763,571        8,869,453        8,284,938        8,388,172        8,283,098   

Diluted

    10,857,470        9,396,652        8,876,991        8,502,821        8,405,215   

Common shares outstanding at end of period

    10,436,332        10,184,975        8,082,768        8,299,563        8,267,590   

Performance Ratios and Other Data:

         

Loan originations for investment

  $ 608,901      $ 74,702      $ 33,170      $ 64,888      $ 67,449   

Loan originations for sale

    216,868        114,842        83,741        516        7,579   

Loan purchases

    124,784        185,812        57,410        205,067        44,976   

Return on average assets

    1.26     1.56     0.59     0.40     0.41

Return on average common stockholders’ equity

    15.17     21.17     8.79     5.41     4.50

Interest rate spread 1

    3.50     3.64     2.83     1.40     0.98

Net interest margin 2

    3.67     3.83     3.04     1.72     1.36

Efficiency ratio 3

    39.90     29.33     43.46     52.40     53.60

Capital Ratios:

         

Equity to assets at end of period

    7.62     9.13     6.83     6.96     7.68

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

    7.99     8.79     6.98     7.09     7.90

Tier 1 risk-based capital ratio 4

    12.41     14.56     11.14     13.95     14.76

Total risk-based capital ratio 4

    13.01     15.25     11.73     14.40     15.05

Tangible capital to tangible assets 4

    7.99     8.79     6.98     7.09     7.90

Asset Quality Ratios:

         

Net charge-offs to average loans outstanding

    0.45     0.69     0.43     0.18       

Nonperforming loans to total loans

    0.72     1.48     0.45     0.66     0.05

Nonperforming assets to total assets

    0.99     1.01     0.65     0.39       

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

    0.56     0.75     0.76     0.43     0.28

Allowance for loan losses to nonperforming loans

    77.18     50.35     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, a consumer-focused, nationwide savings bank operating primarily over the Internet. The Bank generates retail deposits in all 50 states and originates loans for our customers directly through our websites, including www.bankofinternet.com, www.ufbdirect.com and www.apartmentbank.com. BofI is a unitary savings and loan holding company subject to primary federal regulation by the Fed Board.

Net income for the fiscal year ended June 30, 2011 was $20.6 million compared to $21.1 million and $7.1 million for the fiscal years ended June 30, 2010 and 2009, respectively. Net income attributable to common stockholders for the fiscal year ended June 30, 2011 was $20.3 million, or $1.87 per diluted share compared to $20.5 million, or $2.22 per diluted share and $6.5 million, or $0.77 per diluted share for the years ended June 30, 2010 and 2009, respectively. Growth in our interest earning assets, particularly the loan portfolio, was the primary driver of the increase in our net income between fiscal 2009 and fiscal 2011. Net income declined $0.5 million for the year ended June 30, 2011 compared to the year ended June 30, 2010, primarily due to a decrease on net gains of sales of securities which were $2.4 million pretax for fiscal 2011, down from $13.0 million pretax for fiscal 2010. Excluding the impact of realized and unrealized gains and losses associated with our securities portfolio, net income would have been $19.7 million for the fiscal year ended June 30, 2011, $17.6 million and $12.2 million for fiscal years 2010 and 2009, respectively. We categorize net income without the after-tax impact of realized and unrealized securities gain and losses as core earnings which increased 11.93% in fiscal 2011 and 44.26% in fiscal 2010. Gains and losses on investment securities, net of tax are excluded from earnings to provide useful information about the Bank’s operating performance.

Excluded was realized gains, of $2.4 million, $13.0 million, and losses of $5.1 million as of June 30, 2011, 2010 and 2009, respectively, and unrealized losses of $0.9 million, $7.1 million and $3.5 million, respectively.

Net interest income for the year ended June 30, 2011 was $58.5 million compared to $50.6 million and $36.4 million for the years ended June 30, 2010 and 2009, respectively. The increase was primarily due to growth in our loan portfolio from fiscal years 2009 through 2011.

Provision for loan losses for the years ended June 30, 2011 and 2010 was $5.8 million, respectively, and $4.7 million for the year ended June 30, 2009. The increase of $1.1 million for fiscal year 2010 is primarily due to higher RV write-offs.

Mortgage banking income was $4.7 million compared to $1.7 million and $1.4 million for the years ended June 30, 2011, 2010, and 2009. The increase was a result of higher loan originations for sale of $216.9 million compared to $114.9 and $83.7 million for the years ended June 30, 2011, 2010, and 2009, respectively. Net gains on sales of securities decreased $10.6 million as fewer securities were sold during the year, as a result, non interest income declined to $8.0 million from $8.3 million.

Non interest expense for the years ended June 30, 2011 was $26.5 million compared to $17.3 million and $12.9 for the year ended June 30, 2009, respectively. The increase was primarily due to additional staffing, which rose to 173 full-time equivalents compared to 90 and 57 at June 30, 2011, 2010, and 2009, respectively.

Total assets were $1,940.1 million at June 30, 2011 compared to $1,421.1 million at June 30, 2010 and $1,302.2 million at June 30, 2009. Assets grew $519.0 million or 36.52% during the last fiscal year primarily due to an increase in the origination of single family and multifamily mortgage loans. These loans were funded with growth in deposits. Assets grew $118.9 million or 9.1% during fiscal 2010 primarily due to the purchase of mortgage-backed securities and mortgage loan pools. These investments were funded with growth in deposits.

Our future performance will 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

 

 

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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.

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. 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 (or decreased by) the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (or decreased by) the forecasted 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 lower FICO and less documentation of

income. “Pay-option ARMs” are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). Separate discount rates are calculated 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 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 excess of the present value over 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 or the last accounting yield (ASC Topic 325-40-35). 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

 

 

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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 incurred losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is charged against current period operating results and recoveries of loans previously charged-off. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible.

The allowance for loan loss includes specific and general reserves. Specific reserves are provided for impaired loans considered TDRs. All other impaired loans are written down through charge-offs to their realizable value and no specific or general reserve is provided. A loan is measured for impairment generally two different ways. If the loan is primarily dependent upon the borrower to make payments,

then impairment is calculated by comparing the present value of the expected future payments discounted at the effective loan rate to the carrying value of the loan. If the loan is collateral dependent, the net proceeds from the sale of the collateral is compared to the carrying value of the loan. If the calculated amount is less than the carrying value of the loan, the loan has impairment.

A general reserve is included in the allowance for loan loss and is determined by adding the results of a quantitative and a qualitative analysis to all other loans not measured for impairment at the reporting date. The quantitative analysis determines the Bank’s actual annual historic charge-off rates and applies the average historic rates to the outstanding loan balances in each pool, the product of which is the general reserve amount. The qualitative analysis considers one or more of the following factors: changes in lending policies and procedures, changes in economic conditions, changes in the content of the portfolio, changes in lending management, changes in the volume of delinquency rates, changes to the scope of the loan review system, changes in the underlying collateral of the loans, changes in credit concentrations and any changes in the requirements to the credit loss calculations. A loss rate is estimated and applied to those loans affected by the qualitative factors.

 

 

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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,  
    2011     2010     2009  
       
(Dollars in thousands)   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
 

Assets:

                       

Loans2, 3

  $ 1,013,645        $ 60,508        5.97   $ 670,013        $ 43,697        6.52   $ 635,780        $ 41,782        6.57

Federal funds sold

    8,407          11        0.13     23,529          31        0.13     4,008          34        0.85

Interest-earning deposits in other financial institutions

    384                 0.00     232                 0.00     442          15        3.39

Mortgage-backed and other investment securities4

    556,518          32,353        5.81     609,697          41,780        6.85     535,918          35,753        6.67

Stock of the FHLB, at cost

    16,845          63        0.37     18,756          64        0.34     19,036          194        1.02

Total interest-earning assets

    1,595,799          92,935        5.82     1,322,227          85,572        6.47     1,195,184          77,778        6.51

Noninterest-earning assets

    38,741              30,133              24,930         

Total assets

  $ 1,634,540            $ 1,352,360            $ 1,220,114         

Liabilities and Stockholders’ Equity:

                       

Interest-bearing demand and savings

  $ 344,964        $ 3,015        0.87   $ 447,305        $ 6,374        1.42   $ 186,309        $ 4,583        2.46

Time deposits

    776,638          19,261        2.48     413,999          14,880        3.59     433,410          19,400        4.48

Securities sold under agreements to repurchase

    130,000          5,736        4.41     130,000          5,726        4.40     130,000          5,677