10-Q 1 a10-q20150331bofiq3.htm 10-Q 10-Q 2015.03.31 BOFI Q3

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2015

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-51201
BofI HOLDING, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
33-0867444
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4350 La Jolla Village Drive, Suite 140, San Diego, CA
 
92122
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (858) 350-6200
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  ¨
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    ¨  Yes    x  No
The number of shares outstanding of the Registrant’s common stock on the last practicable date: 15,351,369 shares of common stock, $0.01 par value per share, as of April 23, 2015.




BOFI HOLDING, INC.
INDEX

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
March 31,
2015
 
June 30,
2014
ASSETS
 
 
 
Cash and due from banks
$
228,450

 
$
155,484

Federal funds sold
100

 
100

Total cash and cash equivalents
228,550

 
155,584

Securities:
 
 
 
Trading
7,738

 
8,066

Available-for-sale
167,056

 
214,778

Held-to-maturity—fair value $234,291 as of March 2015 and $243,966 as of June 2014
233,934

 
247,729

Stock of the Federal Home Loan Bank, at cost
44,979

 
42,770

Loans held for sale, carried at fair value
22,911

 
20,575

Loans held for sale, lower of cost or fair value
85,571

 
114,796

Loans—net of allowance for loan losses of $25,455 as of March 2015 and $18,373 as of June 2014
4,641,262

 
3,532,841

Accrued interest receivable
18,063

 
13,863

Furniture, equipment and software—net
8,099

 
6,707

Deferred income tax
30,829

 
25,245

Cash surrender value of life insurance
5,761

 
5,625

Mortgage servicing rights, carried at fair value
1,354

 
562

Other real estate owned and repossessed vehicles
2,281

 
75

Other assets
30,132

 
13,783

TOTAL ASSETS
$
5,528,520

 
$
4,402,999

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
247,264

 
$
186,786

Interest bearing
4,121,508

 
2,854,750

Total deposits
4,368,772

 
3,041,536

Securities sold under agreements to repurchase
35,000

 
45,000

Advances from the Federal Home Loan Bank
583,000

 
910,000

Subordinated debentures
5,155

 
5,155

Accrued interest payable
1,346

 
1,350

Accounts payable and accrued liabilities and other liabilities
39,219

 
29,180

Total liabilities
5,032,492

 
4,032,221

COMMITMENTS AND CONTINGENCIES (Note 8)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock—$0.01 par value; 1,000,000 shares authorized;
 
 
 
Series A—$10,000 stated value and liquidation preference per share; 515 shares issued and outstanding as of March 31, 2015 and June 2014
5,063

 
5,063

Common stock—$0.01 par value; 50,000,000 shares authorized; 16,279,767 shares issued and 15,285,080 shares outstanding as of March 2015; 15,423,822 shares issued and 14,451,900 shares outstanding as of June 2014
163

 
154

Additional paid-in capital
274,490

 
207,579

Accumulated other comprehensive income (loss)—net of tax
(8,297
)
 
(10,366
)
Retained earnings
241,515

 
183,460

Treasury stock, at cost; 994,687 shares as of March 2015 and 971,922 shares as of June 2014
(16,906
)
 
(15,112
)
Total stockholders’ equity
496,028

 
370,778

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,528,520

 
$
4,402,999

See accompanying notes to the condensed consolidated financial statements.

1


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
(Dollars in thousands, except per share data)
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
57,441

 
$
38,931

 
$
159,816

 
$
104,273

Investments
5,470

 
6,232

 
16,981

 
18,463

Total interest and dividend income
62,911

 
45,163

 
176,797

 
122,736

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
9,634

 
6,572

 
25,140

 
17,894

Advances from the Federal Home Loan Bank
2,194

 
2,021

 
6,655

 
4,888

Other borrowings
418

 
907

 
1,351

 
3,353

Total interest expense
12,246

 
9,500

 
33,146

 
26,135

Net interest income
50,665

 
35,663

 
143,651

 
96,601

Provision for loan losses
2,900

 
1,600

 
8,300

 
3,100

Net interest income, after provision for loan losses
47,765

 
34,063

 
135,351

 
93,501

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Realized gain on sale of securities

 

 
587

 
208

Other-than-temporary loss on securities:
 
 
 
 
 
 
 
Total impairment (losses) gains
(1,185
)
 
(617
)
 
(5,832
)
 
(1,969
)
Loss (gain) recognized in other comprehensive income
478

 
(102
)
 
3,628

 
(195
)
Net impairment loss recognized in earnings
(707
)
 
(719
)
 
(2,204
)
 
(2,164
)
Fair value gain (loss) on trading securities
(125
)
 
53

 
(328
)
 
488

Total unrealized (loss) gain on securities
(832
)
 
(666
)
 
(2,532
)
 
(1,676
)
Prepayment penalty fee income
454

 
458

 
2,384

 
2,286

Gain on sale – other
2,419

 
1,915

 
4,425

 
6,051

Mortgage banking income
4,330

 
2,358

 
10,330

 
7,483

Banking service fees and other income
1,995

 
1,147

 
5,118

 
3,380

Total non-interest income
8,366

 
5,212

 
20,312

 
17,732

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and related costs
11,249

 
7,721

 
31,710

 
23,464

Data processing and internet
1,717

 
1,562

 
4,914

 
4,068

Advertising and promotional
1,462

 
670

 
4,217

 
2,473

Professional services
1,725

 
1,404

 
3,324

 
4,325

FDIC and regulator fees
902

 
572

 
2,508

 
1,666

Depreciation and amortization
868

 
744

 
2,351

 
2,161

Occupancy and equipment
735

 
589

 
2,288

 
1,715

Real estate owned and repossessed vehicles
44

 
(51
)
 
152

 
(146
)
Other general and administrative
1,641

 
1,136

 
5,262

 
4,441

Total non-interest expense
20,343

 
14,347

 
56,726

 
44,167

INCOME BEFORE INCOME TAXES
35,788

 
24,928

 
98,937

 
67,066

INCOME TAXES
14,714

 
10,318

 
40,650

 
27,120

NET INCOME
$
21,074

 
$
14,610

 
$
58,287

 
$
39,946

NET INCOME ATTRIBUTABLE TO COMMON STOCK
$
20,997

 
$
14,533

 
$
58,055

 
$
39,714

COMPREHENSIVE INCOME
$
21,694

 
$
15,268

 
$
60,356

 
$
39,377

Basic earnings per share
$
1.35

 
$
1.00

 
$
3.82

 
$
2.78

Diluted earnings per share
$
1.35

 
$
1.00

 
$
3.81

 
$
2.76

See accompanying notes to the condensed consolidated financial statements.

2



BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
NET INCOME
$
21,074

 
$
14,610

 
$
58,287

 
$
39,946

Other comprehensive income (loss), net of tax:

 
 
 
 
 
 
 
Net unrealized gain (loss) from available-for-sale securities, net of tax expense (benefit) of $(156) and $(351) for the three months ended March 31, 2015 and 2014, and $(261) and $466 for the nine months ended March 31, 2015 and 2014, respectively.

234

 
528

 
373

 
(699
)
Other-than-temporary impairment on securities recognized in other comprehensive income, net of tax expense (benefit) of $(258) and $(87) for the three months ended March 31, 2015 and 2014, and $(1,516) and $(87) for the nine months ended March 31, 2015 and 2014, respectively.

386

 
130

 
2,048

 
130

Reclassification of net (gain) loss from available-for-sale securities included in income, net of tax expense (benefit) of $0 and $0 for the three months ended March 31, 2015 and 2014 and $235 and $0 for the nine months ended March 31, 2015 and 2014, respectively.

 

 
(352
)
 

Other comprehensive income (loss)

620

 
658

 
2,069

 
(569
)
Comprehensive income
$
21,694

 
$
15,268

 
$
60,356

 
$
39,377


See accompanying notes to the condensed consolidated financial statements.



3


BOFI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss, Net of Income Tax
 
Treasury
Stock
 
Total
 
 
 
 
Number of Shares
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
BALANCE—July 1, 2014
515

 
$
5,063

 
15,423,822

 
(971,922
)
 
14,451,900

 
$
154

 
$
207,579

 
$
183,460

 
$
(10,366
)
 
$
(15,112
)
 
$
370,778

Net income

 

 

 

 

 

 

 
58,287

 

 

 
58,287

Other comprehensive income

 

 

 

 

 

 

 

 
2,069

 

 
2,069

Cash dividends on preferred stock

 

 

 

 

 

 

 
(232
)
 

 

 
(232
)
Issuance of common stock

 

 
789,219

 

 
789,219

 
8

 
61,189

 

 

 

 
61,197

Stock-based compensation expense

 

 

 

 

 

 
4,787

 

 

 

 
4,787

Restricted stock grants and tax benefits

 

 
66,326

 
(22,765
)
 
43,561

 
1

 
920

 

 

 
(1,794
)
 
(873
)
Stock option exercises and tax benefits

 

 
400

 

 
400

 

 
15

 

 

 

 
15

BALANCE—March 31, 2015
515

 
$
5,063

 
16,279,767

 
(994,687
)
 
15,285,080

 
$
163

 
$
274,490

 
$
241,515

 
$
(8,297
)
 
$
(16,906
)
 
$
496,028


See accompanying notes to the condensed consolidated financial statements.

4



BOFI HOLDING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Nine Months Ended
 
March 31,
(Dollars in thousands)
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
58,287

 
$
39,946

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Accretion of discounts on securities
(4,342
)
 
(6,394
)
Net accretion of discounts on loans
(557
)
 
(2,168
)
Stock-based compensation expense
4,787

 
3,146

Tax benefit from exercise of common stock options and vesting of restricted stock grants
(933
)
 
(2,614
)
Valuation of financial instruments carried at fair value
328

 
(488
)
Net gain on sale of investment securities
(587
)
 

Impairment charge on securities
2,204

 
2,163

Provision for loan losses
8,300

 
3,100

Deferred income taxes
(7,127
)
 
(1,615
)
Origination of loans held for sale
(721,780
)
 
(523,561
)
Unrealized (gain) loss on loans held for sale
267

 
391

Gain on sales of loans held for sale
(14,755
)
 
(13,924
)
Proceeds from sale of loans held for sale
775,806

 
576,160

Change in fair value of mortgage servicing rights

229

 

(Gain) loss on sale of other real estate and foreclosed assets
55

 
(350
)
Depreciation and amortization of furniture, equipment and software
2,351

 
2,161

Net changes in assets and liabilities which provide (use) cash:
 
 
 
Accrued interest receivable
(4,200
)
 
(1,886
)
Other assets
(12,433
)
 
2,368

Accrued interest payable
(4
)
 
(264
)
Accounts payable and accrued liabilities
9,178

 
(2,332
)
Net cash provided by (used in) operating activities
95,074

 
73,839

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities
(4,446
)
 
(68,033
)
Proceeds from sale of available-for-sale mortgage-backed securities
9,539

 

Proceeds from repayment of securities
62,761

 
73,170

Purchase of stock of Federal Home Loan Bank
(11,850
)
 
(17,395
)
Proceeds from redemption of stock of Federal Home Loan Bank
9,641

 
16,005

Origination of loans for portfolio
(2,348,617
)
 
(1,617,484
)
Origination of mortgage warehouse loans, net
(71,405
)
 

Proceeds from sales of other real estate owned and repossessed assets
107

 
2,605

Purchases of loans, net of discounts and premiums
(146
)
 

Principal repayments on loans
1,283,914

 
743,666

Net purchases of furniture, equipment and software
(3,743
)
 
(2,410
)
Net cash used in investing activities
(1,074,245
)
 
(869,876
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
1,327,236

 
740,977

Proceeds from Federal Home Loan Bank advances
421,000

 
612,000

Repayment of Federal Home Loan Bank advances
(748,000
)
 
(610,417
)
Repayment of other borrowings and securities sold under agreements to repurchase
(10,000
)
 
(50,000
)
Proceeds from exercise of common stock options
3

 
243

Proceeds from issuance of common stock
61,197

 
27,556

Tax benefit from exercise of common stock options and vesting of restricted stock grants
933

 
2,614

Cash dividends on preferred stock
(232
)
 
(232
)
Net cash provided by financing activities
1,052,137

 
722,741

NET CHANGE IN CASH AND CASH EQUIVALENTS
72,966

 
(73,296
)
CASH AND CASH EQUIVALENTS—Beginning of year
155,584

 
201,694

CASH AND CASH EQUIVALENTS—End of period
$
228,550

 
$
128,398

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Interest paid on deposits and borrowed funds
$
33,151

 
$
26,397

Income taxes paid
$
49,859

 
$
24,646

Transfers to other real estate owned and repossessed vehicles from loans
$
2,452

 
$
1,110

Transfers from loans held for investment to loans held for sale
$
30,000

 
$
39,799

Transfers from loans held for sale to loans held for investment
$
7,237

 
$
1,471

Sale of loans, cash not received
$
5,340

 
$

See accompanying notes to the condensed consolidated financial statements.

5


BOFI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Dollars in thousands, except per share data)
(Unaudited)

1.
BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of BofI Holding, Inc. and its wholly owned subsidiary, BofI Federal Bank (the “Bank” and collectively with BofI Holding, Inc., the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the nine months ended March 31, 2015 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2014 included in our Annual Report on Form 10-K.

2.
SIGNIFICANT ACCOUNTING POLICIES
Securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has both the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Trading securities refer to certain types of assets that banks hold for resale at a profit at fair value. Increases or decreases in the fair value of trading securities are recognized in earnings as they occur. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Gains and losses on securities sales are based on a comparison of sales proceeds and the amortized cost of the security sold using the specific identification method. Purchases and sales are recognized on the trade date. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized or accreted using the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. The Company’s portfolios of held-to-maturity and available-for-sale securities are reviewed quarterly for other-than-temporary impairment. In performing this review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) whether the Company intends to sell or it is more likely than not that it will be required to sell a security in an unrealized loss position before the Company recovers the security’s amortized cost. If either of these criteria for (4) is met, the entire difference between amortized cost and fair value is recognized in earnings. Alternatively, if the criteria for (4) is not met, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred purchase premiums and discounts, deferred loan origination fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Premiums and discounts on loans purchased as well as loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method.
Recognition of interest income on all portfolio segments is generally discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

6


Loans Held for Sale. U.S government agency (“agency”) loans originated and intended for sale in the secondary market are carried at fair value. Net unrealized gains and losses are recognized through the income statement. The Bank generally sells its loans with the servicing released to the buyer. Gains and losses on loan sales are recorded as mortgage banking income, based on the difference between sales proceeds and carrying value. Non-agency loans held for sale are carried at the lower of cost or fair value.
Loans that were originated with the intent and ability to hold for the foreseeable future (loans held in portfolio) but which have been subsequently designated as being held for sale for risk management or liquidity needs are carried at the lower of cost or fair value calculated on an individual loan by loan basis.
There may be times when loans have been classified as held for sale and for some reason cannot be sold. Loans transferred to a long-term-investment classification from held-for-sale are transferred at the lower of cost or market value on the transfer date. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. A loan cannot be classified as a long-term investment unless the Bank has both the ability and the intent to hold the loan for the foreseeable future or until maturity.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level estimated to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is charged against current period operating results and recoveries of loans previously charged-off. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible. Allocations of the allowance may be made for specific loans but the entire allowance is available for any loan that, in management’s judgment, should be charged off. See Note 5 of these financial statement footnotes and the financial statement footnotes for the year ended June 30, 2014 included in our Annual Report on Form 10-K for further information.


3.
FAIR VALUE

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

When available, the Company generally uses quoted market prices to determine fair value, in which case the items are classified in Level 1. In some cases where a market price is available, the Company will make use of acceptable practical expedients (such as matrix pricing) to calculate fair value, in which case the items are classified in Level 2.

The Company considers relevant and observable market prices in its valuations where possible. The frequency of transactions, the size of the bid-ask spread and the nature of the participants are some of the factors the Company uses to help determine whether a market is active and orderly or inactive and not orderly. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value.

7


If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, credit spreads, housing value forecasts, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified:
Securities—trading. Trading securities are recorded at fair value. The trading portfolio consists of two different issues of floating-rate debt securities collateralized by pools of bank trust preferred securities. Recent liquidity and economic uncertainty have made the market for collateralized debt obligations less active or inactive. As quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying assets. The Company’s expected cash flows are calculated for each security and include the impact of actual and forecasted bank defaults within each collateral pool as well as structural features of the security’s tranche such as lock outs, subordination and overcollateralization. The forecast of underlying bank defaults in each pool is based upon a quarterly financial update including the trend in non-performing assets, the allowance for loan losses and the underlying bank’s capital ratios. Also a factor is the Company’s loan loss experience in the local economy in which the bank operates. At March 31, 2015, the Company’s forecast of cash flows for both securities includes actual and forecasted defaults totaling 25.9% of all banks in the collateral pools, compared to 20.9% of the banks actually in default. The expected cash flows reflect the Company’s best estimate of all pool losses which are then applied to the overcollateralization reserve and the subordinated tranches to determine the cash flows. The Company selects a discount rate margin based upon the spread between U.S. Treasury rates and the market rates for active credit grades for financial companies. The discount margin when added to the U.S. Treasury rate determines the discount rate, reflecting primarily market liquidity and interest rate risk since expected credit loss is included in the cash flows. At March 31, 2015, the Company used a weighted average discount margin of 450 basis points above U.S. Treasury rates to calculate the net present value of the expected cash flows and the fair value of its trading securities.
The Level 3 fair values determined by the Company for its trading securities rely heavily on management’s assumptions as to the future credit performance of the collateral banks, the impact of the global and regional economic activity, the timing of forecasted defaults and the discount rate applied to cash flows. The fair value of the trading securities at March 31, 2015 is sensitive to an increase or decrease in the discount rate. An increase in the discount margin of 100 basis points would have reduced the total fair value of the trading securities and decreased net income before income tax by $885. A decrease in the discount margin of 100 basis points would have increased the total fair value of the trading securities and increased net income before income tax by $1,040.
Securities—available-for-sale and held-to-maturity. Available-for-sale securities are recorded at fair value and consist of residential mortgage-backed securities (“RMBS”) issued by U.S. agencies, non-agencies, collateralized loan obligations, and municipals. Held-to-maturity securities are recorded at amortized cost and consist of RMBS issued by U.S. agencies, RMBS issued by non-agencies, and municipals. Fair value for U.S. agency securities is generally based on quoted market prices of similar securities used to form a dealer quote or a pricing matrix. There continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the availability and reliability of transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. The Company computes Level 3 fair values for each non-agency RMBS in the same manner (as described below) whether available-for-sale or held-to-maturity.
To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. For each security, the Company inputs a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of each security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by and decreased by the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (and decreased by) the forecasted decrease or increase in the national home price appreciation (“HPA”) index. The largest factors influencing the Company’s modeling of the monthly default rate are unemployment and housing price appreciation. The most updated national unemployment rate announced prior to the end of the period covered by this report (reported for February 2015) was 5.5%, down from the high of 10.2% in October 2009. Consensus estimates for unemployment are that the rate will continue to decline. Going forward, the Company is projecting lower monthly default rates. The range of loss severity rates applied to each default used in the Company’s projections at March 31,

8


2015 are from 15.0% up to 66.7% based upon individual bond historical performance. The default rates and the severities are projected for every non-agency RMBS security held by the Company and will vary monthly based upon the actual performance of the security and the macroeconomic factors discussed above.
To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime” securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally have borrowers with a little lower FICO and a little less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at March 31, 2015 are from 0.8% up to 21.1% with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range. The Company applies its discount rates to the projected monthly cash flows which already reflect the full impact of all forecasted losses using the assumptions described above. When calculating present value of the expected cash flows at March 31, 2015, the Company computed its discount rates as a spread between 241 and 881 basis points over the interpolated swap curve with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range.
Loans Held for Sale. Loans held for sale at fair value are primarily single-family and multifamily residential loans. The fair value of residential loans held for sale is determined by pricing for comparable assets or by existing forward sales commitment prices with investors.
Impaired Loans. Impaired loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or the collateral pledged. The accrual of interest income has been discontinued for impaired loans. The impaired loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Company assesses loans individually and identifies impairment when the loan is classified as impaired, has been restructured, or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. The fair value of an impaired loan is determined based on an observable market price or current appraised value of the underlying collateral. The fair value of impaired loans with specific write-offs or allocations of the allowance for loan losses are generally based on recent real estate appraisals or internal valuation analyses consistent with the methodology used in real estate appraisals and include other third-party valuations and analysis of cash flows. These appraisals and analyses are updated at least on an annual basis. The Company primarily obtains real estate appraisals and in the rare cases where an appraisal cannot be obtained, the Company performs an internal valuation analysis. These appraisals and analyses may utilize a single valuation approach or a combination of approaches including comparable sales and income approaches. The sales comparison approach uses at least three recent similar property sales to help determine the fair value of the property being appraised. The income approach is calculated by taking the net operating income generated by the collateral property of the rent collected and dividing it by an assumed capitalization rate. Adjustments are routinely made in the process by the appraisers to account for differences between the comparable sales and income data available. When measuring the fair value of the impaired loan based upon the projected sale of the underlying collateral, the Company subtracts the costs expected to be incurred for the transfer of the underlying collateral, which includes items such as sales commissions, delinquent taxes and insurance premiums. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining fair value.
Other Real Estate Owned and Repossessed Vehicles. Non-recurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value, less estimated costs to sell. Fair values are generally based on third-party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Mortgage Servicing Rights. The Company initially records all mortgage servicing rights (“MSRs”) at fair value and accounts for MSRs at fair value during the life of the MSR, with changes in fair value recorded through current period earnings. Fair value adjustments encompass market-driven valuation changes as well as modeled amortization involving the run-off of value that occurs due to the passage of time as individual loans are paid by borrowers. Market expectations about loan duration, and correspondingly the expected term of future servicing cash flows, may vary from time to time due to changes in expected prepayment activity, especially when interest rates rise or fall. Market expectations of increased loan prepayment speeds may negatively impact the fair value of the single family MSRs. Fair value is also dependent on the discount rate used in calculating present value, which is imputed from observable market activity and market participants and results in Level 3 classification. Management reviews and adjusts the discount rate on an ongoing basis. An increase in the discount rate would reduce the estimated fair value of the MSRs asset.

9


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

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


10


The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and June 30, 2014. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
March 31, 2015
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Collateralized Debt Obligations
$

 
$

 
$
7,738

 
$
7,738

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency RMBS
$

 
$
49,791

 
$

 
$
49,791

Non-Agency RMBS

 

 
27,977

 
27,977

Municipal

 
21,373

 

 
21,373

Other Debt Securities

 
67,915

 

 
67,915

Total—Securities—Available-for-Sale
$

 
$
139,079

 
$
27,977

 
$
167,056

Loans Held for Sale
$

 
$
22,911

 
$

 
$
22,911

Mortgage Servicing Rights
$

 
$

 
$
1,354

 
$
1,354

Other assets – Derivative Instruments
$

 
$

 
$
2,620

 
$
2,620

LIABILITIES:
 
 
 
 
 
 
 
Other liabilities – Derivative Instruments
$

 
$

 
$
559

 
$
559

 
 
 
 
 
 
 
 
 
June 30, 2014
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Collateralized Debt Obligations
$

 
$

 
$
8,066

 
$
8,066

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency RMBS
$

 
$
59,880

 
$

 
$
59,880

Non-Agency RMBS

 

 
37,409

 
37,409

Municipal

 
28,943

 

 
28,943

Other Debt Securities

 
88,546

 

 
88,546

Total—Securities—Available-for-Sale
$

 
$
177,369

 
$
37,409

 
$
214,778

Loans Held for Sale
$

 
$
20,575

 
$

 
$
20,575

Mortgage Servicing Rights
$

 
$

 
$
562

 
$
562

Other assets – Derivative Instruments
$

 
$

 
$
1,364

 
$
1,364

LIABILITIES:
 
 
 
 
 
 
 
Other liabilities – Derivative Instruments
$

 
$

 
$
489

 
$
489



11


The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
 
For the Three Months Ended
 
March 31, 2015
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations

 
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
 
 
Opening Balance
$
7,862

 
$
31,926

 
$
1,037

 
$
659

 
$
41,484

Transfers into Level 3

 

 

 

 

Transfers out of Level 3

 

 

 

 

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

 

 

 

 

Included in earnings—Fair value gain (loss) on trading securities
(124
)
 

 

 

 
(124
)
Included in earnings—Mortgage banking income

 

 
(194
)
 
1,402

 
1,208

Included in other comprehensive income

 
(232
)
 

 

 
(232
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
 
 
Purchases

 

 
511

 

 
511

Issues

 

 

 

 

Sales

 

 

 

 

Settlements

 
(3,013
)
 

 

 
(3,013
)
Other-than-temporary impairment

 
(704
)
 

 

 
(704
)
Closing balance
$
7,738

 
$
27,977

 
$
1,354

 
$
2,061

 
$
39,130

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(124
)
 
$

 
$
(194
)
 
$
1,402

 
$
1,084

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended
 
March 31, 2015
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations
 
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
 
 
Opening Balance
$
8,066

 
$
37,409

 
$
562

 
$
875

 
$
46,912

Transfers into Level 3

 

 

 

 

Transfers out of Level 3

 

 

 

 

Total gains or losses for the period:
 
 
 
 
 
 
 
 


Included in earnings—Sale of mortgage-backed securities

 

 

 

 

Included in earnings—Fair value gain (loss) on trading securities
(328
)
 

 

 

 
(328
)
Included in earnings—Mortgage banking

 

 
(229
)
 
1,186

 
957

Included in other comprehensive income

 
(1,351
)
 

 

 
(1,351
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
 


Purchases

 

 
1,021

 

 
1,021

Issues

 

 

 

 

Sales

 

 

 

 

Settlements

 
(7,162
)
 

 

 
(7,162
)
Other-than-temporary impairment

 
(919
)
 

 

 
(919
)
Closing balance
$
7,738

 
$
27,977

 
$
1,354

 
$
2,061

 
$
39,130

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(328
)
 
$

 
$
(229
)
 
$
1,186

 
$
629


12



 
For the Three Months Ended
 
March 31, 2014
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations
 
Securities – Available-for-Sale: Non-Agency RMBS
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
Opening Balance
$
7,546

 
$
40,841

 
$
1,055

 
$
49,442

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

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

 

 

 

Included in earnings—Fair value gain on trading securities
53

 

 

 
53

Included in earnings—Mortgage banking

 

 
(48
)
 
(48
)
Included in other comprehensive income

 
(389
)
 

 
(389
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Issues

 

 

 

Sales

 

 

 

Settlements

 
(1,674
)
 

 
(1,674
)
Other-than-temporary impairment

 
(193
)
 

 
(193
)
Closing balance
$
7,599

 
$
38,585

 
$
1,007

 
$
47,191

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
53

 
$

 
$
(48
)
 
$
5

 
 
 
 
 
 
 
 
 
For the Nine Months Ended
 
March 31, 2014
(Dollars in thousands)
Securities – Trading: Collateralized Debt Obligations
 
Securities – Available-for-Sale: Non-Agency RMBS
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
Opening Balance
$
7,111

 
$
49,284

 
$
2,222

 
$
58,617

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

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

 

 

 

Included in earnings—Fair value gain (loss) on trading securities
488

 

 

 
488

Included in earnings—Mortgage banking

 

 
(1,215
)
 
(1,215
)
Included in other comprehensive income

 
(1,306
)
 

 
(1,306
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Issues

 

 

 

Sales

 

 

 

Settlements

 
(9,198
)
 

 
(9,198
)
Other-than-temporary impairment

 
(195
)
 

 
(195
)
Closing balance
$
7,599

 
$
38,585

 
$
1,007

 
$
47,191

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
488

 
$

 
$
(1,215
)
 
$
(727
)


13


The table below summarizes the quantitative information about level 3 fair value measurements at the periods indicated:
 
March 31, 2015
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Trading:
Collateralized Debt Obligations
$
7,738

Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
18.8 to 32.2% (25.0%)
4.5 to 4.5% (4.5%)
Securities – Available-for-Sale:
Non-agency RMBS
$
27,977

Discounted Cash Flow
Constant Prepayment Rate,
Constant Default Rate,
Loss Severity,
Discount Rate over LIBOR
2.5 to 34.2% (10.0%)
0.8 to 21.1% (5.6%)
15.0 to 66.7% (54.9%)
2.4 to 8.8% (6.0%)
Mortgage Servicing Rights
$
1,354

Discounted Cash Flow
Constant Prepayment Rate,
Expected Life (in years),
Discount Rate
4.6 to 22.1% (8.3%)
3.8 to 7.9 (6.9)
10.0 to 11.5% (10.2%)
Derivative Instruments, net
$
2,061

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.5 to 1.5%
 
June 30, 2014
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Trading:
Collateralized Debt Obligations
$
8,066

Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
19.0 to 26.6% (23.1%)
4.0 to 4.0% (4.0%)
Securities – Available-for-Sale:
Non-agency RMBS
$
37,409

Discounted Cash Flow
Constant Prepayment Rate,
Constant Default Rate,
Loss Severity,
Discount Rate over LIBOR
0.1 to 27.8% (10.0%)
0.0 to 21.7% (5.6%)
1.6 to 87.9% (61.7%)
2.5 to 8.4% (5.2%)
Mortgage Servicing Rights
$
562

Discounted Cash Flow
Constant Prepayment Rate,
Expected Life (in years),
Discount Rate
5.6 to 7.4% (7.4%)
3.6 to 8.3 (7.1)
10.0 to 11.5% (10.1%)
Derivative Instruments, net
$
875

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


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

The table below summarizes changes in unrealized gains and losses and interest income recorded in earnings for level 3 trading assets and liabilities that are still held at the periods indicated:
 
For the Three Months Ended
 
For the Nine Months Ended
 
March 31,
 
March 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Interest income on investments
$
55

 
$
61

 
$
166

 
$
175

Fair value adjustment
(124
)
 
53

 
(328
)
 
488

Total
$
(69
)
 
$
114

 
$
(162
)
 
$
663



14


The table below summarizes assets measured for impairment on a non-recurring basis:
 
March 31, 2015
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
Impaired Loans:
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$

 
$

 
$
25,834

 
$
25,834

Home equity

 

 
11

 
11

Multifamily real estate secured

 

 
5,516

 
5,516

Commercial real estate secured

 

 
2,152

 
2,152

Auto and RV secured

 

 
401

 
401

Total
$

 
$

 
$
33,914

 
$
33,914

Other real estate owned and repossessed vehicles:
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
  Mortgage
$

 
$

 
$
2,184

 
$
2,184

Auto and RV secured

 

 
97

 
97

Total
$

 
$

 
$
2,281

 
$
2,281

HTM Securities – Non-Agency RMBS
$

 
$

 
$
90,533

 
$
90,533

 
 
 
 
 
 
 
 
 
June 30, 2014
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
 
 
 
 
 
 
 
 
Impaired Loans:
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$

 
$

 
$
13,385

 
$
13,385

Home equity

 

 
168

 
168

Multifamily real estate secured

 

 
4,301

 
4,301

Commercial real estate secured

 

 
4,376

 
4,376

Auto and RV secured

 

 
534

 
534

Total
$

 
$

 
$
22,764

 
$
22,764

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Auto and RV secured
$

 
$

 
$
75

 
$
75

HTM Securities – Non-Agency RMBS
$

 
$

 
$
91,297

 
$
91,297


Impaired loans measured for impairment on a non-recurring basis using the fair value of the collateral for collateral-dependent loans have a carrying amount of $33,914, after charge-offs of $921 for the nine months ended March 31, 2015, and life to date charge-offs of $6,265. Impaired loans had a related allowance of $374 at March 31, 2015.

Other real estate owned and foreclosed assets, which are measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $2,281 after charge-offs of $0 for the three months ended March 31, 2015.
Held-to-maturity securities measured for impairment on a non-recurring basis had a fair value of $90,533 and a carrying amount of $88,962 at March 31, 2015, after net impairment charges to income of $1,285 and changes to other comprehensive income of $3,855 during the nine months ended March 31, 2015. The Company recognized net impairment charges to income of $1,969 and changes in other comprehensive loss of $216 for the nine months ended March 31, 2014. These held-to-maturity securities are valued using Level 3 inputs.

15


The Company has elected the fair value option for Agency loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan. None of these loans are 90 days or more past due nor on nonaccrual as of March 31, 2015 and June 30, 2014.
As of March 31, 2015 and June 30, 2014, the aggregate fair value, contractual balance (including accrued interest), and gain was as follows:
(Dollars in thousands)
March 31, 2015
 
June 30, 2014
Aggregate fair value
$
22,911

 
$
20,575

Contractual balance
22,211

 
20,138

Gain
$
700

 
$
437

The total amount of gains and losses from changes in fair value included in earnings for the period indicated below for loans held for sale were:
 
For the Three Months Ended
 
For the Nine Months Ended
 
March 31,
 
March 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Interest income
$
147

 
$
48

 
$
450

 
$
438

Change in fair value
1,583

 
(383
)
 
1,453

 
(2,078
)
Total
$
1,730

 
$
(335
)
 
$
1,903

 
$
(1,640
)

16


The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods indicated:
 
March 31, 2015
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Impaired loans:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
25,834

Sales comparison approach
Adjustment for differences between the comparable sales
-25.0 to 53.7% (1.6%)
Home equity
$
11

Sales comparison approach
Adjustment for differences between the comparable sales
-64.0 to 5.5% (-3.8%)
Multifamily real estate secured
$
5,516

Sales comparison approach, income approach,
Discounted cash flows
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-50.2 to 50.2% (4.8%)
Commercial real estate secured
$
2,152

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-66.5 to 22.1% (-7.1%)
Auto and RV secured
$
401

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 21.1% (10.2%)
Other real estate owned:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
2,184

Sales comparison approach
Adjustment for differences between the comparable sales
-53.9 to 79.3% (-2.5%)
Auto and RV secured
$
97

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 20.6% (10.2%)
HTM Securities – Non-Agency RMBS
$
90,533

Discounted cash flow
Constant prepayment rate,
constant default rate,
loss severity,
discount rate over LIBOR
2.5 to 34.2% (10.0%)
0.8 to 21.1% (5.7%)
15.0 to 66.7% (55.0%)
2.4 to 8.8% (6.3%)
 
June 30, 2014
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Impaired loans:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
13,385

Sales comparison approach
Adjustment for differences between the comparable sales
-28.7 to 35.1% (1.3%)
Home equity
$
168

Sales comparison approach
Adjustment for differences between the comparable sales
-20.0 to 42.7% (10.1%)
Multifamily real estate secured
$
4,301

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-43.3 to 65.0% (13.1%)
Commercial real estate secured
$
4,376

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, Capitalization rate
-84.1 to 82.4% (-22.1%)
Auto and RV secured
$
534

Sales comparison approach
Adjustment for differences between the comparable sales
0.0 to 27.4% (10.3%)
Other real estate owned:
 
 
 
 
Auto and RV secured
$
75

Sales comparison approach
Adjustment for differences between the comparable sales
-84.0 to 41.3% (-32.8%)
HTM Securities – Non-Agency RMBS
$
91,297

Discounted cash flow
Constant prepayment rate,
constant default rate,
loss severity,
discount rate over LIBOR
0.1 to 16.3% (10.2%)
0.0 to 11.1% (5.9%)
3.5 to 76.5% (61.2%)
2.7 to 8.4% (6.2%)
_____________________ 
1 For impaired loans and other real estate owned the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the property being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.


17


Fair value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at December 31, 2014 and June 30, 2014 were as follows:
 
March 31, 2015
 
 
 
Fair Value
 
 
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
228,550

 
$
228,550

 
$

 
$

 
$
228,550

Securities trading
7,738

 

 

 
7,738

 
7,738

Securities available-for-sale
167,056

 

 
139,079

 
27,977

 
167,056

Securities held-to-maturity
233,934

 

 
87,287

 
147,004

 
234,291

Loans held for sale, at fair value
22,911

 

 
22,911

 

 
22,911

Loans held for sale, at lower of cost or fair value
85,571

 

 

 
92,228

 
92,228

Loans held for investment—net
4,641,262

 

 

 
4,743,458

 
4,743,458

Accrued interest receivable
18,063

 

 

 
18,063

 
18,063

Financial liabilities:
 
 
 
 
 
 
 
 


Time deposits and savings
4,368,772

 

 
4,458,053

 

 
4,458,053

Securities sold under agreements to repurchase
35,000

 

 
38,021

 

 
38,021

Advances from the Federal Home Loan Bank
583,000

 

 
593,015

 

 
593,015

Subordinated debentures
5,155

 

 
5,284

 

 
5,284

Accrued interest payable
1,346

 

 
1,346

 

 
1,346

 
June 30, 2014
 
Fair Value
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
155,584

 
$
155,584

 
$