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BOFI HOLDING INC 2018 ANNUAL REPORT
4350 La Jolla Village Drive
Suite 140
San Diego, CA 92122
www.axosfinancial.com
Banking
EvolvedSM
AxosTM is a technology-driven financial services
company providing a diverse and ever-growing
range of innovative products and services for
personal, business and institutional clients nationwide.
Axos believes in liberating people from the constraints
of traditional banking. We believe in a bank that is
honest, transparent and fair. A bank that uses
technology with purpose. A bank that supports people
when they need it, and gets out of the way when they
don’t. A bank that is in sync with – and adapting to – a
changing world. By giving our customers the tools, the
information, and the ability to make smarter choices,
Axos empowers them to make real progress toward
their goals, and the freedom to focus on the people,
places and things that matter most to all of us.
Welcome to Axos BankTM - Banking EvolvedSM
Executive Officers
Board of Directors
Gregory Garrabrants
President and
Chief Executive Officer
Eshel Bar-Adon
Executive Vice President
Specialty Finance and
Chief Legal Officer
Jill Bauer
Executive Vice President
Trustee and Fiduciary Services
Matthew Brunsman
Executive Vice President
Chief Digital Officer
Mary Ellen Ciafardini
Executive Vice President
Human Resources
Thomas Constantine
Executive Vice President
Chief Credit Officer
Jan Durrans
Executive Vice President
Chief of Staff and
Chief Performance Officer
James Fraser
Executive Vice President
Specialty Real Estate, C&I Lending
Raymond Matsumoto
Executive Vice President
Chief Operating Officer
Andrew J. Micheletti
Executive Vice President
Chief Financial Officer
Brian Swanson
Executive Vice President
Chief Lending Officer
John Tolla
Executive Vice President
Chief Governance, Risk and
Compliance Officer
Derrick K. Walsh
Senior Vice President
Chief Accounting Officer
Paul J. Grinberg
Chairman
Nicholas A. Mosich
Vice Chairman
James S. Argalas
J. Brandon Black
John Gary Burke
James J. Court
Uzair Dada
Gregory Garrabrants
Edward J. Ratinoff
Corporate Headquarters
Axos Financial, Inc.
Axos Bank
4350 La Jolla Village Drive
Suite 140
San Diego, CA 92122
www.axosfinancial.com
www.axosbank.com
Investor Relations
Johnny Lai
Vice President, Corporate Development
and Investor Relations
(858) 649-2218
jlai@axosfinancial.com
Corporate Secretary
Angela Lopez
Corporate Secretary,
Vice President Corporate Governance
(858) 704-6225
alopez@axosfinancial.com
Transfer Agent
Computershare Investor Services
250 Royall Street
Canton, MA 02021
(800) 962-4284
www-us.computershare.com/investor
Independent Registered
Public Accounting Firm
BDO USA, LLP
San Diego, California
FELLOW SHAREHOLDERS
We launched Bank of Internet USA eighteen years ago
The evolution of BofI Holding, Inc., has been equally
on our great nation’s Independence Day to symbolize our
impactful. Since our IPO on NASDAQ on March 15, 2005,
commitment to liberating our customers from high-fee,
raising approximately $33 million at a split-adjusted price
high-cost banking.
We believe we have lived up to that commitment. We have
provided better value products to our customers and have
grown dramatically, with millions of customers now using
our various banking services. We are humbled and grateful
that our clients have shared our journey as a digital banking
pioneer and that they continue to trust us to provide them
banking services in a unique and innovative way.
When we launched our bank, Google was only two years
old and the iPhone wouldn’t be released for seven years.
Delivering banking services on the “Internet” was unique,
and calling out our delivery channel in the bank’s name
made sense at the time. In the nearly two decades since
our founding, waves of digitally-driven changes have
dramatically reshaped customer expectations
in most
industries. We acknowledge these high expectations
created by the world’s greatest digital companies – and we
are evolving to rise to the challenge.
of $2.88 per share, we have been ranked in the Top 5 in
financial performance by S&P Global Market Intelligence
for ten consecutive years and added to the Russell 2000®,
S&P SmallCap 600® and KBW Nasdaq Financial Technology
indexes since we became a public company.
BofI Holding, Inc. became Axos Financial,
Inc. on September 12, 2018. Additionally, our
consolidated subsidiary, BofI Federal Bank, will
be rebranded Axos Bank on October 1, 2018.
Organic growth has been a hallmark of our bank and this
year was no exception. We experienced broad-based
growth across our relatively mature businesses, such as
single family jumbo mortgages and multifamily, as well as
in our newer commercial businesses such as equipment
leasing and commercial specialty real estate lending. We
continued to expand our commercial cash and treasury
We will make every effort to be a better kind of bank by giving
management businesses, which contributed to a 63% in-
clients and partners the tools, the information, and the
crease in our business non-interest-bearing deposits and a
power to make smarter choices. We believe they deserve
25% increase in our business demand deposits in fiscal 2018.
a different kind of bank – a better kind of bank. That’s what
they can expect from us.
We demonstrated our capital discipline by opportunistically
buying back approximately $35 million of our common stock
As one component of a comprehensive, multi-year program
at a weighted average price of $28.49 per share. With our
to better serve our customers’ needs and to align our brand
track record of consistently growing loans by double-digits
with our strategic vision, BofI Holding, Inc. became Axos
and maintaining a return on equity of 17% or greater while
Financial, Inc. on September 12, 2018. Additionally, our
keeping credit losses below industry averages, we continue
consolidated subsidiary, BofI Federal Bank, will be rebranded
to generate excess capital. In April, we invested some of
Axos Bank on October 1, 2018. Brands are meaningful only
our excess capital to acquire the Chapter 7 bankruptcy and
with respect to the promises they make to their customers.
non-7 trustee and fiduciary services business from Epiq. The
The promise we make to our customers and strategic
acquisition not only enhances our deposit franchise and
partners is that we will listen and strive to deliver an evolved
fee income, it also fits our strategic goal of providing tech-
banking experience that meets their high expectations.
enabled services to specialty industry verticals through an
Key accomplishments in fiscal 2018
• Total loan and lease balances increased
• Completed acquisition of trustee and fiduciary
14.3% to approximately $8.4 billion at 6/30/18
services business from Epiq
• Net interest margin increased to 4.11% in
• Achieved Top 10 Ranking for Public Thrift
FY 2018 from 3.95% in FY 2017
by S&P Global Market Intelligence for a
• Maintained best-in-class Return on Equity of
10th consecutive year
17.1% and 39.6% Efficiency Ratio
• Named Best Online Bank for
• Originated over $1 billion of Refund Advance®
loan product with H&R Block
2nd consecutive year by MONEY
efficient and differentiated software and services model.
and relevant offers and suggestions, all within a secure and
We see tremendous opportunities to leverage the strong
easy-to-use platform. Given our control over the platform,
relationships the rebranded Axos Fiduciary Services team
we will add more features, functions and partners to our
has with trustees to expand our deposit balances and client
Universal Digital Bank ecosystem to increase customer
base across a variety of Chapter 7 and non-7 verticals.
satisfaction and loyalty, cross-sell and longevity.
We are equally excited about the announced acquisition of
The consistency of our performance, growing from an
approximately $3 billion of deposits from Nationwide Bank.
institution with under $950 million of assets ten years ago to
As one of the premier and most trusted financial services
approximately $9.5 billion today while maintaining a robust
brands, we are delighted they have entrusted us with serving
risk management framework and industry-leading returns,
the future banking needs of their nearly 100,000 customers.
is a testament to the quality and commitment of our people.
We look forward to a successful transition of the Nationwide
We have a high-performance culture that encourages and
Bank deposit customers in late calendar 2018.
rewards our team members to embrace our core values.
We are equally excited about
the announced acquisition of
approximately $3 billion of
deposits from Nationwide Bank.
Our evolution continues to gain positive momentum across
every facet of the organization. The most prominent and
visible strategic initiative is the rollout of our new consumer
TM
banking technology platform – the Universal Digital Bank.
The flexible, responsive and clean user interface, coupled
with an open architected microservices back-end architec-
ture, allows our consumer banking and lending customers to
easily perform routine functions such as checking balances,
pay bills, deposit money through their mobile devices, and
We are excited about the opportunities we have as we
embark on our next phase of growth. From our humble
beginnings as a consumer-direct online bank with limited
products and capabilities, we have evolved into a diversified
and highly profitable financial services company with nearly
$1 billion of equity and strategic partnerships with multiple
Fortune 500 companies. Through consistent investment in
people, processes and technology and leadership from our
board of directors and business unit leaders, we have built a
strong foundation for continued success. I am proud of our
achievements and highly motivated to lead our organization
to deliver a more holistic value to our clients, communities,
business partners, and team members.
Respectfully,
transfer money to friends and family. Equally important, they
Greg Garrabrants
can customize their banking environment and receive timely
President and Chief Executive Officer
New Online Banking Platform – Universal Digital Bank
Collection of modular tiles power our user
Flexible user experience is crafted by a flexible
experience building blocks, taking the content,
API-driven open banking architecture that
functionality, and flexibility they need from different
provides the logic to enable channel specific
underlying systems, partner integrations and
functionality, data persistency, and cross-
combining it into a dynamic customer experience
channel/cross-business services orchestration
2005
2018
Lending
Single Family Mortgage
Multifamily Lending
Funding
Consumer Online Deposits
FHLB Borrowings
Fee Income
Mortgage Banking
Deposit/Service Fees
Prepayment Fees
Single Family Mortgage
Multifamily Lending
Warehouse Lending
Auto Lending
Small Balance Commercial
Consumer Unsecured Lending
Factoring
Structured Settlements
Equipment Finance
Lender Finance
Commercial Specialty R/E
C&I Bank Loans
H&R Block-Related Lending
Consumer Online Deposits
FHLB Borrowings
BofI Advisor
Prepaid BIN Sponsorships
Small Business Banking
Cash/Treasury Management
Specialty Deposits
Mortgage Banking
Deposit/Service Fees
Prepayment Fees
Other Loan Gain on Sale
Software Licensing Fees
Correspondent Lending
Deposit Sponsorship Fees
H&R Block-Related Fees
2018 FORM 10-K
[ THIS PAGE INTENTIONALLY LEFT BLANK ]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________________________________________________
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
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
(State or other jurisdiction of
incorporation or organization)
4350 La Jolla Village Drive, Suite 140, San Diego, CA
(Address of principal executive offices)
33-0867444
(I.R.S. Employer
Identification No.)
92122
(Zip Code)
Registrant’s telephone number, including area code: (858) 350-6200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $.01 par value
6.25% Subordinated Notes Due 2026
Name of each exchange on which registered
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________________________________________________________________
No
No
No
Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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
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.
Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
No
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based upon the closing sales price
of the common stock on the NASDAQ Global Select Market of $29.90 on December 31, 2017 was $1,523,473,172.
The number of shares of the registrant’s common stock outstanding as of August 17, 2018 was 62,776,754.
__________________________________________________________________________________________
Portions of the registrant’s definitive Proxy Statement for the period ended June 30, 2018 are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
(cid:60)(cid:1)(cid:53)(cid:41)(cid:42)(cid:52)(cid:1)(cid:49)(cid:34)(cid:40)(cid:38)(cid:1)(cid:42)(cid:47)(cid:53)(cid:38)(cid:47)(cid:53)(cid:42)(cid:48)(cid:47)(cid:34)(cid:45)(cid:45)(cid:58)(cid:1)(cid:45)(cid:38)(cid:39)(cid:53)(cid:1)(cid:35)(cid:45)(cid:34)(cid:47)(cid:44)(cid:1)(cid:62)
BOFI HOLDING, INC.
INDEX
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
1
1
20
28
28
28
29
30
30
32
34
57
57
57
57
61
62
62
62
62
62
62
63
63
65
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, goals 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. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,”
“seeks,” “estimates,” “should,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-
looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing
statements.
Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies,
many of which are difficult to predict and beyond the control of BofI or the Bank, which could cause our actual results to differ
materially from the results expressed or implied in such forward-looking statements. These and other risks, uncertainties and
contingencies are described in this Annual Report on Form 10-K, including under “Item 1A. Risk Factors”, and the Company’s
other reports filed with the Securities and Exchange Commission (the “SEC”) from time to time, including but are not limited to
the following:
The soundness of other financial institutions;
• Changes in interest rates;
• General economic and market conditions, including the risk of a significant economic downturn;
•
• Changes in laws, regulation or regulatory oversight;
• Policies and regulations enacted by the Consumer Financial Protection Bureau;
• Changes in real estate values;
• Possible defaults on our mortgage loans;
• Mortgage buying activity of Fannie Mae and Freddie Mac;
•
The adequacy of our allowance for loan and lease losses;
• Changes in the value of goodwill and other intangible assets;
• Our ability to acquire and integrate acquired companies;
• Changes in our relationship with H&R Block, Inc. and the financial benefits of that relationship;
•
• Our ability to access the equity capital markets;
• Access to adequate funding;
• Our ability to manage our growth and deploy assets profitably;
• Competition for customers from other banks and financial services companies;
• Our ability to maintain and enhance our brand;
• A natural disaster, especially in California;
• Our ability to retain the services of key personnel and attract, hire and retain other skilled managers;
• Possible exposure to environmental liability;
• Our dependence on third-party service providers for core banking technology;
• Privacy concerns relating to our technology that could damage our reputation or deter customers from using our products
The outcome or impact of current or future litigation involving the Company;
and services;
• Risk of systems failure and security breaches, including “hacking” and “identity theft”; and
• Our reliance on continued and unimpeded access to the internet.
The forward-looking statements contained in this Annual Report are made on the basis of the views and assumptions of management
regarding future events and business performance as of the date this Annual Report is filed with the SEC. We do not undertake
any obligation to update these statements to reflect events or circumstances occurring after the date this report is filed.
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 BofI Federal Bank, our
consolidated subsidiary.
i
PART I
ITEM 1. BUSINESS
Overview
BofI Holding, Inc., is the holding company for BofI Federal Bank, a diversified financial services company with over
$9.5 billion in assets that provides consumer and business banking products through its online, low-cost distribution channels and
affinity partners. The Bank has deposit and loan customers nationwide including consumer and business checking, savings and
time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in
target sectors, and selected specialty finance receivables. The Bank generates fee income from consumer and business products
including fees from loans originated for sale and transaction fees earned from processing payment activity. BofI Holding, Inc.’s
common stock is listed on the NASDAQ Global Select Market and is a component of the Russell 2000® Index, the S&P SmallCap
600® Index and the KBW Nasdaq Financial Technology Index.
At June 30, 2018, we had total assets of $9,539.5 million, loans of $8,470.1 million, mortgage-backed and other investment
securities of $180.3 million, total deposits of $7,985.4 million and borrowings of $511.6 million. Because we do not incur the
significantly higher fixed operating costs inherent in a branch-based distribution system, we are able to rapidly grow our deposits
and assets by providing a better value to our customers and by expanding our low-cost distribution channels.
We distribute our deposit products through a wide range of retail distribution channels, and our deposits consist of demand,
savings and time deposits accounts. We distribute our loan products through our retail, correspondent and wholesale channels,
and the loans we retain are primarily first mortgages secured by single family real property and by multifamily real property as
well as commercial & industrial loans to businesses. Our mortgage-backed securities consist of mortgage pass-through securities
issued by government-sponsored entities, non-agency collateralized mortgage obligations, and asset-backed mortgage-backed
securities issued by private sponsors. We believe our flexibility to adjust our asset generation channels has been a competitive
advantage allowing us to avoid markets and products where credit fundamentals are poor or risks and rewards are not sufficient
to support our required return on equity.
Our distribution channels for our deposit and lending products include:
• Multiple national online banking brands with tailored products targeted to specific consumer segments;
• Affinity groups where we gain access to the affinity group’s members, and our exclusive relationships with
financial advisory firms;
• A business banking division focused on providing deposit products and loans to specific nationwide industry
verticals (e.g., Homeowners’ Associations) and small and medium size businesses;
• A commission-based lending sales force that operates from home offices focusing primarily on the origination
of single family and multifamily mortgage loans;
• A commission-based lending sales force that operates from the corporate office focusing on commercial and
industrial loans to businesses;
• A commission-based leasing sales force that operates from our Salt Lake City office focusing on commercial
and industrial leases to businesses;
• A bankruptcy and non-bankruptcy trustee and fiduciary services team that operates from our Kansas City location
•
focusing on specialized software and consulting services that provide deposits; and
Inside sales teams that originate loans and deposits from self-generated internet leads, third-party purchase leads,
and from our retention and cross-sell of our existing customer base.
Our business strategy is to grow our loan and lease originations and our deposits to achieve increased economies of scale
and reduce the cost of products and services to our customers by leveraging our distribution channels and technology. We have
designed our online banking platform and our workflow processes to handle traditional banking functions with elimination of
duplicate and unnecessary paperwork and human intervention. Our charter allows us to operate in all fifty states, and our online
presence allows us increased flexibility to target a large number of loan and deposit customers based on demographics, geography
and price. Our low-cost distribution channels provide opportunities to increase our core deposits and increase our loan originations
by attracting new customers and developing new and innovative products and services.
Our long-term business plan includes the following principal objectives:
• Maintain an annualized return on average common stockholders’ equity of 17.0% or better;
• Annually increase average interest-earning assets by 15% or more; and
• Maintain annualized efficiency ratio to a level 40% or lower.
1
ASSET ORIGINATION AND FEE INCOME BUSINESSES
We have built diverse loan origination and fee income businesses that generate attractive financial returns through our
online distribution channels. We believe the diversity of our businesses and our online distribution channels provide us with increased
flexibility to manage through changing market and operating environments.
Single Family Mortgage Secured Lending
We generate earning assets and fee income from our mortgage lending activities, which consist of originating and servicing
mortgages secured primarily by first liens on single family residential properties for consumers and for lender-finance businesses.
We divide our single family mortgage originations between loans we retain and loans we sell. Our mortgage banking business
generates fee income and gains from sales of those consumer single family mortgage loans we sell. Our loan portfolio generates
interest income and fees from loans we retain. We also provide home equity loans for consumers secured by second liens on single
family mortgages. Our lender-finance loans are secured by our first lien on single family mortgages and include warehouse lines
for third-party mortgage companies.
We originate fixed and adjustable rate prime residential mortgage loans using a paperless loan origination system and
centralized underwriting and closing process. We warehouse our mortgage banking loans and sell to investors prime conforming
and jumbo residential mortgage loans. Our mortgage servicing business includes collecting loan payments, applying principal and
interest payments to the loan balance, managing escrow funds for the payment of mortgage-related expenses, such as taxes and
insurance, responding to customer inquiries, counseling delinquent mortgagors and supervising foreclosures.
We originate single family mortgage loans for consumers through multiple channels on a retail, wholesale and correspondent
basis.
• Retail. We originate single family mortgage loans directly through i) our multiple national online banking brand
websites, where our customers can view interest rates and loan terms, enter their loan applications and lock in
interest rates directly over the internet, ii) our relationships with large affinity groups and iii) our call center which
uses self-generated internet leads, third-party purchased leads, and cross-selling to existing customer base.
• Wholesale. We have developed relationships with independent mortgage companies, cooperatives and individual
loan brokers and we manage these relationships and our wholesale loan pipeline through our originations systems
and websites. Through our secure website, our approved brokers can compare programs, terms and pricing on a
real time basis and communicate with our staff.
• Correspondent. We acquire closed loans from third-party mortgage companies that originate single family loans
in accordance with our portfolio specifications or the specifications of our investors. We may purchase pools of
seasoned, single-family loans originated by others during economic cycles when those loans have more attractive
risk-adjusted returns than those we may originate.
We originate lender-finance loans to businesses secured by first liens on single family mortgage loans from cross selling,
retail direct and through third-parties. Our warehouse customers are primarily generated through cross selling to our network of
third-party mortgage companies approved to wholesale our consumer mortgage loans. Other lender-finance customers are generated
by our commissions-based sales force dedicated to commercial & industrial lending who contact businesses directly or through
individual loan brokers.
Multifamily Mortgage Secured Lending
We originate adjustable rate multifamily residential mortgage loans and project-based multifamily real estate secured loans
with interest rates that adjust based on U.S. Treasury security yields and London Interbank Offered Rate (“LIBOR”). Many of our
loans 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.
We divide our multifamily residential mortgage originations between the loans we retain and the loans we sell. Our mortgage
banking business generates gains from those multifamily mortgage loans we sell. Our loan portfolio generates interest income and
fees from the loans we retain.
We originate multifamily mortgage loans using a commission-based commercial lending sales force that operates from
home offices across the United States or from our headquarters location. Customers are targeted through origination techniques
such as direct mail marketing, personal sales efforts, email marketing, online marketing and print advertising. Loan applications
are submitted electronically to centralized employee teams who underwrite, process and close loans. The sales force team members
operate regionally both as retail originators for apartment owners and wholesale representatives to other mortgage brokers.
2
Commercial Real Estate Secured and Commercial Lending
Our commercial real estate secured lending consists of mortgages secured by first liens on commercial real estate.
Historically, we have limited our exposure to commercial real estate and have primarily purchased seasoned mortgages on small
commercial properties when they were offered as a part of a residential mortgage loan pool. In fiscal 2015, we began to originate
adjustable rate small balance commercial real estate loans with interest rates that adjust based on U.S. Treasury security yields and
LIBOR. Many of our loans 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.
Our commercial and industrial lending (“C&I”) is primarily comprised of real estate-backed and asset-backed loans and
leases to businesses and non-bank lenders. We started our C&I lending in 2010 with a focus on business cash flow lending and
subsequently have moved to providing financing to non-bank lenders that originate lending products secured by residential and
commercial real estate assets. Our C&I lending has also expanded to other specialty commercial real estate lending types, as well
as to other asset-based lending secured by non-real estate-related collateral.
Our C&I group also provides leases to small businesses and middle market companies that use the funds to purchase
machinery, equipment and software essential to their operations. The lease terms are generally between two and ten years and
amortize primarily to full repayment, or in some cases, to a residual balance that is expected to be collected through the sale of the
collateral to the lessee or to a third party. The leases are offered nationwide to companies in targeted industries through a direct
sales force and through independent third party sales referrals.
Specialty Finance Factoring
Our specialty finance division engages in the wholesale and retail purchase of state lottery prize and structured settlement
annuity payments. These payments are high credit quality deferred payment receivables having a state lottery commission or
primarily highly rated insurance company payor. Purchases of state lottery prize or structured settlement annuity payments are
governed by specific state statutes requiring judicial approval of each transaction. No transaction is funded before an order approving
such transaction has been entered by a court of competent jurisdiction. Our commission-based sales force originates contracts for
the retail purchase of such payments from leads generated by our dedicated research department through the use of proprietary
research techniques. The Specialty Finance Division also utilizes direct mail and online marketing to generate leads. Since 2013,
pools of structured settlement receivables have been originated for sale depending upon management’s assessment of interest rate
risk, liquidity, and offers containing favorable terms.
Prepaid Cards and Refund Transfer
Our prepaid cards division provides card issuing and bank identification number (“BIN”) sponsorship services to companies
who have developed payroll, general purpose reloadable, incentive and gift card programs. BIN Sponsorship includes issuing debit
and prepaid cards from BINs licensed to the Bank by the various payment networks, managing risk for all programs, overseeing
compliance with network and government regulations, and functioning as liaison between program managers and the payment
networks. These programs generate recurring fee income and low cost deposits.
We are also responsible for the primary oversight and control of a refund transfer program under an agreement with Emerald
Financial Services, LLC (“EFS”), a wholly owned subsidiary of H&R Block, Inc. (“H&R Block”). Under this program, the Bank
opens a temporary bank account for each H&R Block customer who is receiving an income tax refund and elects to defer payment
of his or her tax preparations fees. After the Internal Revenue Service and any state income tax authorities transfer the refund into
the customer’s account, the net funds are transferred to the customer and the temporary deposit account is closed. We earn a fixed
fee paid by H&R Block for each of the H&R Block customers electing a refund transfer.
Automobile Lending
Our automobile lending division originates prime loans to customers secured by new and used automobiles (“autos”). In
2015 and 2016 we added systems and personnel to increase our auto lending portfolio. We hold all of the auto loans that we have
originated and perform the loan servicing functions for these loans.
3
Other Consumer and Business Lending
We originate fixed rate term unsecured personal loans to individual borrowers in all fifty states. We offer loans between
$5,000 and $35,000 with terms of twelve, twenty-four, thirty-six, forty-eight and sixty months to well qualified borrowers. The
minimum credit score is 680. All applicants apply digitally and are required to supply proof of income, identity and bank account
documentation. One hundred percent of loans are manually underwritten by a seasoned underwriter with a telephone interview
conducted in respect of every approved loan prior to funding. We source our unsecured personal loans organically through current
bank customers, lead aggregators and additional marketing efforts.
Through our strategic partnerships division, our Bank establishes contractual relationships with third-party service providers
(“Program Managers”) possessing demonstrated expertise in managing programs involving marketing and processing financial
products such as credit, debit, and prepaid cards, and small business and consumer loans. These relationships include our relationships
with H&R Block, Netspend and BFS Capital, among others. As delineated by the related contracts, a Program Manager provides
program management services in its areas of expertise subject to our Bank’s continuing control and active supervision of the subject
program. Underwriting standards and credit decisioning remain with our Bank in all cases. Each of these relationships is designed
to allow our Bank to leverage the Program Manager’s knowledge and experience to distribute program-related financial products
to a broad and increasing base of customers. With respect to credit products, our Bank generally originates the resulting receivable
for sale, but may, in its discretion, retain such receivable. Our Bank performs extensive due diligence with respect to each Program
Manager and program, and maintains a regimen of comprehensive risk management and strict compliance oversight with respect
to all programs. Under agreements with EFS and H&R Block, our Bank uses our underwriting guidelines and credit policies to
offer and fund unsecured lines of credit to consumers primarily through the H&R Block tax preparation offices and earns interest
income and fee income. Our Bank retains 10% of these lines of credit and sells the remainder to H&R Block. Our Bank also
originates or purchases interest-free loans to consumers that are offered primarily through H&R Block tax preparation offices. Our
Bank has a limited guarantee from H&R Block that reduces our Bank’s credit exposure on these interest-free loans.
Our Bank also provides overdraft lines of credit for our qualifying deposit customers with checking accounts.
4
Portfolio Management
Our investment analysis capabilities are a core competency of our organization. We decide whether to hold originated
assets for investment or to sell them in the capital markets based on our assessment of the yield and risk characteristics of these
assets as compared to other available opportunities to deploy our capital. Because risk-adjusted returns available on acquisitions
may exceed returns available through retaining assets from our origination channels, we have elected to purchase loans and securities
(see discussion below) from time to time. Some of our loans and security acquisitions were purchased at discounts to par value,
which enhance our effective yield through accretion into income in subsequent periods.
Loan Portfolio Composition. The following table sets forth the composition of our loan and lease portfolio in amounts
and percentages by type of loan at the end of each fiscal year-end for the last five years:
2018
2017
At June 30,
2016
2015
2014
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Single family real
estate secured:
Mortgage
Home equity
$4,198,941
49.3% $3,901,754
52.4% $3,678,520
57.5% $2,980,795
59.6% $1,918,626
Warehouse and other
412,085
2,306
—%
4.8%
2,092
452,390
—%
6.1%
2,470
537,714
—%
8.4%
3,604
385,413
0.1%
7.7%
12,690
370,717
53.4%
0.4%
10.3%
Multifamily real estate
secured
Commercial real estate
secured
Auto and RV secured
Factoring
Commercial &
Industrial
Other
Total loans and leases
held for investment
Allowance for loan
and lease losses
Unamortized
premiums/discounts,
net of deferred loan
fees
Net loans and leases
held for investment
1,800,919
21.1% 1,619,404
21.7% 1,373,216
21.5% 1,185,531
23.7%
978,511
27.2%
220,379
213,522
169,885
1,481,051
18,598
2.6%
2.5%
2.1%
17.4%
0.2%
162,715
154,246
160,674
992,232
3,754
2.2%
2.1%
2.1%
13.3%
0.1%
121,746
73,676
98,275
514,300
2,542
1.9%
1.2%
1.5%
8.0%
—%
61,403
13,140
122,200
248,584
601
1.2%
0.3%
2.4%
5.0%
—%
24,061
14,740
118,945
152,619
1,971
0.7%
0.4%
3.3%
4.2%
0.1%
8,517,686
100.0% 7,449,261
100.0% 6,402,459
100.0% 5,001,271
100.0% 3,592,880
100.0%
(49,151)
(40,832)
(35,826)
(28,327)
(18,373)
(36,246)
(33,936)
(11,954)
(44,326)
(41,666)
$8,432,289
$7,374,493
$6,354,679
$4,928,618
$3,532,841
The following table sets forth the amount of loans maturing in our total loans held for investment based on the contractual
terms to maturity:
(Dollars in thousands)
June 30, 2018
Term to Contractual Maturity
Less Than Three
Months
Over Three
Months Through
One Year
Over One Year
Through Five
Years
Over Five Years
Total
$
363,626
$
628,659
$
1,370,582
$
6,154,819
$
8,517,686
5
The following table sets forth the amount of our loans at June 30, 2018 that are due after June 30, 2019 and indicates
whether they have fixed, floating or adjustable interest rates:
(Dollars in thousands)
Single family real estate secured:
Mortgage
Home equity
Warehouse and other
Multifamily real estate secured
Commercial real estate secured
Auto and RV secured
Factoring
Commercial & Industrial
Other
Total
Fixed
Floating or
Adjustable
Total
$
59,366
$
4,080,062
$
727
142,960
25,328
7,751
213,429
167,909
175,224
19,483
1,573
41,131
1,609,521
210,297
—
—
770,640
—
4,139,428
2,300
184,091
1,634,849
218,048
213,429
167,909
945,864
19,483
$
812,177
$
6,713,224
$
7,525,401
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:
State or Region
California—south1
California—north2
New York
Florida
Arizona
Washington
Illinois
Hawaii
Colorado
Texas
All other states
Percentage of Loan Principal Secured by Real Estate Located in State or Region
At June 30, 2018
Single family
Total Real Estate
Mortgage Loans
Mortgage
Home Equity
Multifamily
real estate
secured
Commercial
real estate
secured
53.34%
17.74%
7.89%
5.76%
2.43%
1.61%
1.41%
1.41%
1.14%
0.90%
6.37%
52.17%
15.98%
10.35%
7.50%
3.31%
1.08%
0.21%
1.91%
0.78%
0.54%
6.17%
100.00%
100.00%
41.13%
11.58%
11.58%
0.90%
2.93%
6.11%
—%
—%
—%
—%
25.77%
100.00%
56.24%
21.16%
2.16%
1.59%
0.39%
3.09%
4.13%
0.22%
2.09%
1.80%
7.13%
55.29%
27.03%
1.71%
2.17%
—%
1.24%
4.94%
0.41%
1.08%
1.52%
4.61%
100.00%
100.00%
1 Consists of mortgage loans secured by real property in California with ZIP Code ranges from 90000 to 92999.
2 Consists of mortgage 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 (“LTV”). The
following table shows the LTVs of our loan portfolio on weighted-average and median bases at June 30, 2018. 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.
Single family
Total Real Estate
Mortgage Loans
Mortgage
Home Equity1
Multifamily
real estate
secured
Commercial
real estate
secured
Weighted Average LTV
Median LTV
55.35%
56.40%
56.61%
58.12%
30.69%
54.87%
52.80%
51.40%
49.58%
46.82%
1 Amounts represent combined LTV calculated by adding the current balances of both the first and second liens of the borrower and dividing that sum by an
independent estimated value of the property at the time of origination.
Our effective weighted-average LTV of 56.04% for real estate mortgage loans originated during the fiscal year ended
June 30, 2018 has resulted, and we believe will continue to result, in relatively low average loan defaults and favorable write-off
experience.
6
Loan Underwriting Process and Criteria. We individually underwrite the loans that we originate and all loans that we
purchase. For our brand partnership lending products, we construct or validate loan origination models to meet our minimum
standards as further described below. Our loan underwriting policies and procedures are written and adopted by our board of directors
and our credit committee. Credit extensions generated by the Bank conform to the intent and technical requirements of our lending
policies and the applicable lending regulations of our federal regulators.
In the underwriting process we consider all relevant factors including 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 material owners or partners of the borrower. In evaluating a multifamily
or commercial credit, we consider all relevant factors including the outside financial assets of the material owners or partners,
payment history at the Bank or other financial institutions, and the management / ownership experience with similar properties or
businesses. 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 recurring 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. See “Regulation of BofI Federal Bank” for further information. At June 30,
2018, the Bank’s loans-to-one-borrower limit was $133.1 million, based upon the 15% of unimpaired capital and surplus
measurement. At June 30, 2018, our largest loan and single lending relationship was $100.0 million.
Loan and Lease Quality and Credit Risk. Historically, our level of non-performing mortgage loans as a percentage of our
loan and lease portfolio has been relatively low compared to the overall residential lending market. The economy and the mortgage
and consumer credit markets have stabilized. Additionally, we have recently increased our efforts to make loans to businesses
through lending programs that are not as seasoned as our mortgage lending. Therefore, we anticipate that our rate of non-performing
loans and leases may increase in the future, and we have provided an allowance for estimated loan and lease losses.
Non-performing assets are defined as non-performing loans and leases, real estate acquired by foreclosure or deed-in-lieu
thereof and repossessed vehicles. Generally, non-performing loans and leases are defined as nonaccrual loans and leases and loans
and leases 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 due to
financial difficulty of the customer. Our policy with respect to non-performing 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 or lease 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 and leases 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 and Lease Losses” for a history
of non-performing assets and allowance for loan and lease losses.
Investment Securities Portfolio. 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 invest available funds in government and high-
grade non-agency securities. 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, municipal
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. During the quarter ended September 30, 2016, the Company elected to reclassify
all of its held-to-maturity securities to available-for-sale. See Note 4 – “Securities” to the Consolidated Financial Statements for
further information.
7
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:
(Dollars in thousands)
Fiscal year end
June 30, 2018
June 30, 2017
June 30, 2016
June 30, 2015
June 30, 2014
Available-for-Sale
Held-to-maturity
Fair Value
Carrying Amount
Trading
Fair Value
Total
$
180,305
$
264,470
265,447
163,361
214,778
— $
—
199,174
225,555
247,729
— $
8,327
7,584
7,832
8,066
180,305
272,797
472,205
396,748
470,573
The following table sets forth the expected maturity distribution of our mortgage-backed securities and the contractual
maturity distribution of our Non-RMBS securities and the weighted-average yield for each range of maturities:
(Dollars in thousands)
Amount
Yield1
Amount
Yield1
Total Amount
Due Within One
Year
At June 30, 2018
Due After One but
within Five Years
Yield1
Amount
Due After Five but
within Ten Years
Yield1
Amount
Due After Ten Years
Yield1
Amount
Available-for-sale
Mortgage-backed securities:
U.S. Agency2
Non-Agency3
Total Mortgage-
Backed Securities
Non-RMBS
Municipal
Asset-backed securities and
structured notes
$ 13,102
0.18% $
1,371
1.54% $
4,004
1.68% $
3,008
1.84% $
4,719
(2.55)%
19,384
4.67%
3,012
4.97%
8,902
4.84%
5,583
4.46%
1,887
3.96 %
$ 32,486
2.86% $
4,383
3.90% $ 12,906
3.86% $
8,591
3.54% $
6,606
(0.69)%
$ 20,953
2.85% $
6,089
1.20% $
1,033
1.30% $
127,558
6.04%
69,611
6.06%
57,947
6.01%
—
—
—
—% $ 13,831
3.70 %
—%
—
— %
—% $ 13,831
3.70 %
Total Non-RMBS
$ 148,511
5.59% $ 75,700
5.67% $ 58,980
5.93% $
Available-for-sale—Amortized
Cost
$ 180,997
5.10% $ 80,083
5.58% $ 71,886
5.56% $
8,591
3.54% $ 20,437
Available-for-sale—Fair Value
$ 180,305
5.10% $ 81,029
5.58% $ 71,969
5.56% $
7,939
3.54% $ 19,368
Total securities
$ 180,305
5.10% $ 81,029
5.58% $ 71,969
5.56% $
7,939
3.54% $ 19,368
2.28 %
2.28 %
2.28 %
1 Weighted-average yield is based on amortized cost of the securities. Residential mortgage-backed security yields and maturities include impact of expected
prepayments and other timing factors such as interest rate forward curve. Yields presented in this table are adjusted for OTTI, which is non-accretable.
2 U.S. government-backed or government-sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.
3 Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities and secured by prime,
Alt-A or pay-option ARM mortgages.
4 Collateralized debt obligations secured by pools of bank trust preferred securities.
Our securities portfolio of $180.3 million at June 30, 2018 is composed of approximately 7.2% U.S. agency residential
mortgage-backed securities (“RMBS”) and other debt securities issued by the government-sponsored enterprises Fannie Mae and
Freddie Mac (each, a “GSE” and, together, the “GSEs”), primarily Freddie Mac and Fannie Mae; 1.1% Alt-A, private-issue super
senior, first-lien RMBS; 8.6% Pay-Option ARM, private-issue super senior first-lien RMBS; 11.2% Municipal securities and 71.9%
other residential mortgage-backed, asset-backed and whole business securities. We had no commercial mortgage-backed securities
(“CMBS”), sub-prime RMBS, or bank pooled trust preferred securities at June 30, 2018.
8
We manage the credit risk of our non-agency RMBS by purchasing those 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
percentage of the current face value) is known as credit enhancement. At June 30, 2018, the weighted-average credit enhancement
in our entire non-agency RMBS portfolio was 18.9%. The credit enhancement percentage and the ratings agency grade (e.g. “AA”)
do not consider additional credit protection available to the Bank, if needed, from its purchase discount. All of the Bank’s non-
agency RMBS purchases were at a discount to par and we do not solely rely upon nationally recognized statistical rating organizations
(“NRSRO”) ratings when determining classification. This change in Bank policy was brought about by changes in regulatory stance
regarding classification of securities as mandated by Congress under section 939A of the Dodd-Frank Act, which required any
reference to, or reliance on, NRSROs to be removed when determining the creditworthiness of securities. We have experienced
personnel monitor the performance and measure the security for impairment in accordance with regulatory guidance. As of June 30,
2018, 27.4% of our non-agency RMBS securities have been downgraded from investment grade at acquisition to below investment
grade. See Management’s Discussion and Analysis—“Critical Accounting Policies—Securities.”
DEPOSIT GENERATION
We offer a full line of deposit products, which we source through our online distribution channels using an operating
platform and marketing strategies that emphasize low operating costs and are flexible and scalable for our business. Our full
featured products and platforms, 24/7 customer service and our affinity relationships result in customer accounts with strong
retention characteristics. We continuously collect customer feedback and improve our processes to satisfy customer needs.
At June 30, 2018, we had $7,985.4 million in deposits of which $6,017.6 million, or 75.4% were demand and savings
accounts and $1,967.7 million, or 24.6% were time deposits. We generate deposit customer relationships through our distribution
channels including websites, sales teams, online advertising, print and digital advertising, financial advisory firms, affinity
partnerships and lending businesses which generate escrow deposits and other operating funds. Our distribution channels include:
• A business banking division, which focuses on providing deposit products nationwide to industry verticals (e.g.,
Homeowners’ Associations and Non-Profit) as well as cash management products to a variety of businesses through a
dedicated sales team;
• A national online banking brand with tailored products targeted to specific consumer segments. For example, one tailored
product is designed for customers who are looking for full-featured demand accounts and very competitive fees and
interest rates, while another product targets primarily tech-savvy, Generation X and Generation Y customers that are
seeking a low-fee cost structure and a high-yield savings account;
• A concierge banking offer through Virtus Bank serving the needs of high net worth individuals with premium products
and dedicated service;
•
Financial advisory firms who introduce their clients to our deposit products through BofI Advisor;
• Relationships with affinity groups where we gain access to the affinity group’s members;
• A call center that opens accounts through self-generated internet leads, third-party purchased leads, affinity relationships,
and our retention and cross-sell efforts to our existing customer base;
• A prepaid card division, which provides card issuing and BIN sponsorship services to companies and generate low cost
deposits; and
• A bankruptcy and non-bankruptcy trustee and fiduciary service business who introduce their clients to our deposit products.
Our online consumer banking platform is full-featured requiring only single sign-in with quick and secure access to activity,
statements and other features including:
Purchase Rewards. Customers can earn cash back by using their VISA® Debit Card at select merchants.
Mobile Banking. Customers can access with Touch ID on eligible devices, review account balances, transfer funds, deposit
checks and pay bills from the convenience of their mobile phone.
Mobile Deposit. Customers can instantly deposit checks from their smart phones using our Mobile App.
Online Bill Payment Service. Customers can automatically pay their bills online from their account.
Peer to Peer payments. Customers can securely send money via email or text messaging through this service.
My Deposit. Customers can scan checks with this remote deposit solution from their home computers. Scanned images
will be electronically transmitted for deposit directly to their account.
9
Text Message Banking. Customers can view their account balances, transaction history, and transfer funds between their
accounts via these text message commands from their mobile phones.
Unlimited ATM reimbursements. With certain checking accounts, Customers are reimbursed for any fees incurred using
an ATM (excludes international ATM transactions). This gives them access to any ATM in the nation, for free.
Secure Email. Customers can send and receive secure emails from our customer service department without concern for
the security of their information.
InterBank Transfer. Customers can transfer money to their accounts at other financial institutions from their online banking
platform.
VISA® Debit Cards or ATM Cards. Customers may choose to receive either a free VISA® Debit or an ATM card upon
account opening. Customers can access their accounts worldwide at ATMs and any other locations that accept VISA®
Debit cards.
Overdraft Protection. Eligible Customers can enroll in one of our overdraft protection programs.
Digital Wallets. Our Apple Pay™, Samsung Pay™ and Android Pay™ solutions provide the same ease to pay as a debit
card with an eligible device. The mobile experience is easy and seamless.
Cash Deposit through Reload @ the Register. Customers can visit any Walmart, Safeway, ACE Cash Express, CVS
Pharmacy, Dollar General, Dollar Tree, Family Dollar, Kroger, Rite Aid, 7-Eleven and Walgreens, and ask to load cash
into their account at the register. A fee is applied.
Our consumer and business deposit balances consisted of 52.9% and 47.1% of total deposits at June 30, 2018, respectively.
Our business deposit accounts feature a full suite of treasury and cash management products for our business customers including
online and mobile banking, remote deposit capture, analyzed business checking and money market accounts. We service our
business customers by providing them with a dedicated relationship manager and an experienced business banking operations
team.
Our deposit operations are conducted through a centralized, scalable operating platform which supports all of our
distribution channels. The integrated nature of our systems and our ability to efficiently scale our operations create competitive
advantages that support our value proposition to customers. Additionally, the features described above such as online account
opening and online bill-pay promote self-service and further reduce our operating expenses.
We believe our deposit franchise will continue to provide lower all-in funding costs (interest expense plus operating
costs) with greater scalability than branch-intensive banking models because the traditional branch model with high fixed operating
costs will experience continued declines in consumer traffic due to the decline in paper check deposits and due to growing consumer
preferences to bank online.
The number of deposit accounts at the end of each of the last five fiscal years is set forth below:
2018
2017
2016
2015
2014
At June 30,
Non-interest-bearing, prepaid and other
3,535,904
3,113,128
1,816,266
Checking and savings accounts
Time deposits
270,082
2,309
274,962
2,748
292,012
4,807
Total number of deposit accounts
3,808,295
3,390,838
2,113,085
553,245
31,461
5,515
590,221
182,011
24,098
7,571
213,680
The net increase of 422,776 of non-interest bearing, prepaid and other accounts for the fiscal year ended June 30, 2018
was primarily the result of new H&R Block-branded products. Our non-interest bearing, prepaid and other accounts contain two
omnibus accounts that when condensed for regulatory reporting purposes result in 7,368 accounts as of June 30, 2018.
10
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:
2018
2017
At June 30,
2016
2015
2014
(Dollars in thousands)
Amount
Rate1
Amount
Rate1
Amount
Rate1
Amount
Rate1
Amount
Rate1
Non-interest-bearing
$ 1,015,355
— $
848,544
— $
588,774
— $
309,339
— $
186,786
—
Interest-bearing:
Demand
Savings
2,519,845
1.60% 2,593,491
0.89% 1,916,525
0.63% 1,224,308
0.48% 1,129,535
2,482,430
1.31% 2,651,176
0.81% 2,484,994
0.69% 2,126,792
0.67%
935,973
Total demand and savings
5,002,275
1.46% 5,244,667
0.85% 4,401,519
0.66% 3,351,100
0.60% 2,065,508
Time deposits
1,967,720
2.32%
806,296
2.46% 1,053,758
1.96%
791,478
1.99%
789,242
Total interest-bearing
6,969,995
1.70% 6,050,963
1.06% 5,455,277
0.91% 4,142,578
0.87% 2,854,750
0.63%
0.73%
0.67%
1.61%
0.93%
Total deposits
$ 7,985,350
1.48% $ 6,899,507
0.93% $ 6,044,051
0.82% $ 4,451,917
0.81% $ 3,041,536
0.88%
1 Based on weighted-average stated interest rates at the end of the period.
The following tables set forth the average balance, the interest expense and the average rate paid on each type of deposit
at the end of each of the last five fiscal years:
2018
2017
2016
For the Fiscal Year Ended June 30,
(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
Savings
Time deposits
Total interest-
bearing deposits
Total deposits
$ 2,381,000
$
28,807
1.21% $ 2,197,000
$
16,049
0.73% $ 1,460,266
$
8,750
2,325,238
990,635
25,206
25,838
1.08%
2.61%
2,422,769
941,919
18,507
21,938
0.76%
2.33%
2,189,157
852,590
15,861
18,056
$ 5,696,873
$ 6,749,817
$
$
79,851
79,851
1.40% $ 5,561,688
1.18% $ 6,336,099
$
$
56,494
56,494
1.02% $ 4,502,013
0.89% $ 5,241,777
$
$
42,667
42,667
0.60%
0.72%
2.12%
0.95%
0.81%
(Dollars in thousands)
Demand
Savings
Time deposits
Total interest-bearing deposits
Total deposits
For the Fiscal Year Ended June 30,
Average
Balance
$
1,549,207
$
1,313,088
790,661
$
$
3,652,956
3,908,277
$
$
2015
Interest
Expense
10,165
10,544
14,024
34,733
34,733
Avg. Rate
Paid
Average
Balance
2014
Interest
Expense
Avg. Rate
Paid
0.66% $
869,673
$
0.80%
1.77%
653,211
876,621
0.95% $
2,399,505
0.89% $
2,523,364
$
$
5,736
4,987
14,094
24,817
24,817
0.66%
0.76%
1.61%
1.03%
0.98%
The following table shows the maturity dates of our certificates of deposit at the end of each of the last five fiscal years:
(Dollars in thousands)
2018
2017
At June 30,
2016
2015
2014
Within 12 months
13 to 24 months
25 to 36 months
37 to 48 months
49 months and thereafter
Total
$
1,259,119
$
187,536
$
497,825
$
373,999
$
97,226
11,118
35,981
564,276
14,149
74,631
3,305
526,675
41,668
5,463
71,518
437,284
73,118
36,991
4,605
302,765
$
1,967,720
$
806,296
$
1,053,758
$
791,478
$
363,879
137,647
61,491
31,867
194,358
789,242
11
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:
(Dollars in thousands)
Fiscal year end
June 30, 2018
June 30, 2017
June 30, 2016
June 30, 2015
June 30, 2014
Term to Maturity
Within Three
Months
Over Three
Months to
Six Months
Over Six
Months to
One Year
Over One
Year
Total
$
96,837
$
75,464
$
33,125
$
41,569
$
71,771
100,048
37,842
74,741
21,137
133,603
189,604
107,997
71,266
228,532
106,826
115,127
606,892
539,726
386,837
384,083
246,995
771,066
1,001,909
721,109
681,948
Borrowings. In addition to deposits, we have historically funded our asset growth through advances from the Federal
Home Loan Bank of San Francisco (“FHLB”). Our bank can borrow up to 40% 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, 2018, the Company had
$457.0 million advances outstanding with another $1.6 billion available immediately, which represents a fully collateralized
position, for advances from the FHLB for terms up to ten years.
The Bank has federal funds lines of credit with two major banks totaling $35.0 million. At June 30, 2018, the Bank had
no outstanding balance on either line.
The Bank can also borrow from the Federal Reserve Bank of San Francisco (“FRB”), and borrowings may be collateralized
by commercial, consumer and mortgage loans as well as securities pledged to the FRB. Based on loans and securities pledged at
June 30, 2018, we had a total borrowing capacity of approximately $917.0 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.
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%, for a
rate of 4.73% as of June 30, 2018, and is paid quarterly.
In March 2016, we completed the sale of $51.0 million aggregate principal amount of our 6.25% Subordinated Notes
due February 28, 2026 (the “Notes”). We received $51.0 million in gross proceeds as a part of this transaction, before the 3.15%
underwriting discount and other offering expenses. The Notes mature on February 28, 2026 and accrue interest at a rate of 6.25%
per annum, with interest payable quarterly. The Notes may be redeemed on or after March 31, 2021, which date may be extended
at our discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions.
12
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,
2018
2017
2016
2015
2014
(Dollars in thousands)
Advances from the FHLB:
Average balance outstanding
$ 1,296,120
$
798,982
$
855,029
$
700,805
Maximum amount outstanding at any month-end during the period
$ 2,240,000
$ 1,317,000
$ 1,129,000
$ 1,075,000
Balance outstanding at end of period
Average interest rate at end of period
Average interest rate during period
Securities sold under agreements to repurchase:
Average balance outstanding
Maximum amount outstanding at any month-end during the period
Balance outstanding at end of period
Average interest rate at end of period
Average interest rate during period
Subordinated notes and debentures and other:
Average balance outstanding
Maximum amount outstanding at any month-end during the period
Balance outstanding at end of period
Average interest rate at end of period
Average interest rate during period
MERGERS AND ACQUISITIONS
$
457,000
$
640,000
$
727,000
$
753,000
2.14%
1.76%
1.79%
1.55%
$
$
$
$
$
$
5,575
20,000
$
$
33,068
35,000
— $
20,000
—%
4.11%
4.25%
4.43%
54,522
54,552
54,552
$
$
$
55,873
56,511
54,463
6.55%
6.70%
6.57%
6.62%
$
$
$
$
$
$
1.53%
1.31%
35,000
35,000
35,000
4.38%
4.44%
22,025
58,185
58,066
6.27%
5.90%
$
$
$
$
$
$
1.36%
1.27%
36,562
45,000
35,000
4.38%
4.47%
5,155
5,155
5,155
2.68%
2.77%
$
$
$
$
$
$
$
$
$
576,307
910,000
910,000
0.97%
1.21%
85,726
110,000
45,000
4.46%
4.48%
5,155
5,155
5,155
2.63%
2.77%
From time to time we undertake acquisitions or similar transactions consistent with our operating and growth
strategies. During the fiscal years ended June 30, 2018 and 2017, there were transactions that are discussed further in Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Mergers and
Acquisitions.”
TECHNOLOGY
Our technology is built on a collection of enterprise and client platforms that have been purchased, developed in-house
or integrated with software systems to provide products and services to our customers. The implementation of our technology has
been conducted using industry best-practices and using standardized approaches in system design, software development, testing
and delivery. At the core of our infrastructure, we have designed and implemented secure and scalable hardware solutions to ensure
we meet the needs of our business. Our customer experiences were designed to address the needs of an internet-only bank and its
customers. Our websites and technology platforms drive our customer-focused and self-service engagement model, reducing the
need for human interaction while increasing our overall operating efficiencies. Our focus on internal technology platforms enable
continuous automation and secure and scalable processing environments for increased transaction capacity. We intend to continue
to improve and adapt technology platforms to meet business objectives and implement new systems with the goal of efficiently
enabling our business.
SECURITY
We recognize that information is a critical asset. How information is managed, controlled and protected has a significant
impact on the delivery of services. Information assets, including those held in trust, must be protected from unauthorized use,
disclosure, theft, loss, destruction and alteration.
We employ an information security program to achieve our security objectives. The program is designed to identify,
measure, manage and control the risks to system and data availability, integrity, and confidentiality, and to ensure accountability
for system actions.
13
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, in the future, we may 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, 2018, we had 801 full-time equivalent 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 its online acquisition channels. Competition for those deposits comes from a
wide variety of 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 may adversely affect our overall
financial condition and earnings. We may not be able to compete successfully against current and future competitors.
REGULATION
GENERAL
BofI Holding, Inc. (the “Company”) is regulated as a savings and loan holding company by the Board of Governors of
the Federal Reserve System (the “Federal Reserve”). The Company is required to file reports with, and otherwise comply with
the rules and regulations of, the Federal Reserve. The Bank, as a federal savings bank, is subject to regulation, examination and
supervision by the Office of the Comptroller of the Currency (“OCC”) as its primary regulator, and the Federal Deposit Insurance
Corporation (“FDIC”) as its deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and
financial condition. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July
21, 2010, created a new Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve that
has broad authority to issue regulations implementing numerous consumer laws, to which we are subject.
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 the Company and the Bank. The information below does not purport to be complete and is qualified in
its entirety by reference to all applicable laws and regulations. In addition, new and amended legislation, rules and regulations
governing the Company and the Bank are introduced from time to time by the U.S. government and its various agencies. Any such
legislation, regulatory changes or amendments could adversely affect the Company or the Bank, and no assurance can be given
as to whether, or in what form, any such changes may occur.
REGULATION OF BOFI HOLDING, INC.
General. The Company is a unitary savings and loan holding company within the meaning of the Home Owners’ Loan
Act (“HOLA”). Accordingly, the Company is registered as a savings and loan holding company with the Federal Reserve and is
subject to the Federal Reserve’s regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve
has enforcement authority over the Company and its subsidiaries. Among other things, this authority permits the Federal Reserve
to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Company recently
elected to be treated as a “financial holding company” under Federal Reserve rules.
14
Capital. Savings and loan holding companies, such as the Company, were historically not subject to specific regulatory
capital requirements. However, pursuant to the Dodd-Frank Act, savings and loan holding companies are now subject to the same
capital and activity requirements as those applicable to bank holding companies. Moreover, the Dodd-Frank Act required that the
Federal Reserve promulgate consolidated capital requirements for depository institution holding companies that are not less
stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.
In July 2013, the Company’s primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator,
the OCC, published final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking
organizations. The rules implement the Basel Committee’s December 2010 capital framework known as “Basel III” for
strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules
substantially revise the capital requirements applicable to depository institutions and their holding companies, including the
Company and the Bank, and are discussed in more detail below under “Regulation of BofI Federal Bank – Regulatory Capital
Requirements and Prompt Corrective Action”.
Source of Strength. The Dodd-Frank Act extends the Federal Reserve “source of strength” doctrine to savings and loan
holding companies. Such policy requires holding companies to act as a source of financial strength to their subsidiary depository
institutions by providing capital, liquidity and other support in times of an institution’s financial distress. The regulatory agencies
have yet to issue joint regulations implementing this policy.
Change in Control. The federal banking laws require that appropriate regulatory approvals must be obtained before an
individual or company may take actions to “control” a bank or savings association. The definition of control found in the HOLA
is similar to that found in the Bank Holding Company Act of 1956 (“BHCA”) for bank holding companies. Both statutes apply a
similar three-prong test for determining when a company controls a bank or savings association. Specifically, a company has
control over either a bank or savings association if the company:
•
•
•
directly or indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more
of the voting securities of a company;
controls in any manner the election of a majority of the directors (or any individual who performs similar functions in
respect of any company, including a trustee under a trust) of the board; or
directly or indirectly exercises a controlling influence over the management or policies of the bank.
Regulation LL, which was implemented in 2011 by the Federal Reserve, includes a specific definition of “control” similar
to the statutory definition, with certain additional provisions. Additionally, Regulation LL modifies the regulations for purposes
of determining when a company or natural person acquires control of a savings association or savings and loan holding company
under the HOLA or the Change in Bank Control Act (“CBCA”). In light of the similarity between the statutes governing bank
holding companies and savings and loan holding companies, the Federal Reserve uses its established rules and processes with
respect to control determinations under HOLA and the CBCA to ensure consistency between equivalent statutes administered by
the same agency.
Furthermore, the Federal Reserve 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.
In August 2018 the Company received approval from the Federal Reserve Bank of San Francisco and became a savings
and loan holding company that is treated as a financial holding company under the rules and regulations of the Federal Reserve.
Financial holding companies are generally permitted to affiliate with securities firms and insurance companies and engage in other
activities that are "financial in nature." Such activities include, among other things, securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities;
and activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval is required for a
financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial
in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve.
REGULATION OF BOFI FEDERAL BANK
General. As a federally-chartered savings and loan association whose deposit accounts are insured by FDIC, BofI Federal
Bank is subject to extensive regulation by the FDIC and the OCC. Under the Dodd-Frank Act, the examination, regulation and
supervision of savings associations, such as BofI Federal Bank, were transferred from the OTS to the OCC, the federal regulator
of national banks under the National Bank Act. The following discussion summarizes some of the principal areas of regulation
applicable to the Bank and its operations.
15
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 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.
BofI Federal Bank 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.
Effective July 1, 2016, the FDIC revised the deposit insurance premium assessment method for banks with less than $10
billion in assets that have been insured by the FDIC for at least five years. This revision changed the assessment method to the
financial ratios method, which is based on a statistical model estimating the probability of failure of a bank over three years. The
FDIC also updated the financial measures used in the financial ratios method consistent with the statistical model, eliminated risk
categories for established small banks, and used the financial ratios method to determine assessment rates for all such banks
(subject to minimum or maximum initial assessment rates based upon a bank’s composite examination rating). The initial base
assessment rates for all insured institutions were reduced from 5 to 35 basis points to 3 to 30 basis points. Total base assessment
rates after possible adjustments were reduced from 2.5 to 45 basis points to 1.5 to 40 basis points. Management cannot predict
what insurance assessment rates will be in the future.
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.
The New Capital Rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios
that, when fully phased in, will require banking organizations to maintain a minimum “common equity Tier 1” (or “CET1”) ratio
of 4.5%, a Tier 1 risk-based capital ratio of 6.0% (increased from 4.0%), a total risk-based capital ratio of 8.0%, and a minimum
leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The effective date of these requirements for
the Company and the Bank was January 1, 2015.
A capital conservation buffer of 2.5% above each of these levels (to be phased in over three years which began in 2016,
beginning at 0.625% and increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019) will
be required for banking institutions to avoid restrictions on their ability to make capital distributions, including the payment of
dividends.
The New Capital Rules provide for a number of new deductions from and adjustments to CET1. These include, for
example, the requirement that deferred tax assets dependent upon future taxable income and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such
categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on
January 1, 2015 and will be phased in over three years for the Bank.
The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect our
regulatory capital position relative to that of our competitors, including those that may not be subject to the same regulatory
requirements as the Bank. Various aspects of Basel III will be subject to multi-year transition periods ending December 31, 2018
and Basel III generally continues to be subject to further evaluation and interpretation by the U.S. banking regulators. As of June 30,
2018, the Company and the Bank remain well-capitalized under the currently enacted capital adequacy requirements of Basel III,
and would remain well-capitalized when including implementation of the deductions and other adjustments to CET1 on a fully
phased-in basis.
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.
16
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 the
additional capital standard of tangible capital equal to at least 1.5% of total adjusted assets.
The Bank’s 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. BofI Federal Bank 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, 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.”
In connection with the approval of the acquisition of the H&R Block Bank deposits on September 1, 2015, the Bank
executed a letter agreement with the OCC to maintain its Tier 1 leverage capital ratio at a minimum of 8.50% for the quarters
ended in June, September and December and a minimum of 8.00% for the quarter ended in March, subject to certain adjustments.
At June 30, 2018 the Bank is in compliance with this letter agreement. As of August 2018, due to the Bank’s satisfactory operational
performance under the letter agreement the OCC has removed the additional capital maintenance requirements required in the
letter agreement.
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 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 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” (defined as total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business). 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, 2018, the Bank was in compliance with its QTL requirement and met the
definition of a domestic building and loan association.
17
Liquidity Standard. Savings associations are required to maintain sufficient liquidity to ensure safe and sound operations.
As of June 30, 2018, BofI Federal Bank was in compliance with the applicable liquidity standard.
Volcker Rule. Effective April 15, 2014, the federal banking agencies have adopted regulations with a conformance period
for certain features that lasted until July 21, 2017, to implement the provisions of the Dodd-Frank Act known as the Volcker Rule.
Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates (collectively,
“banking entities”), are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial
instruments and from acquiring or retaining an ownership interest in a “covered fund.” The term “covered fund” can include, in
addition to many private equity and hedge funds and other entities, certain collateralized mortgage obligations, collateralized debt
obligations and collateralized loan obligations, and other items, but does not include wholly owned subsidiaries, certain joint
ventures, or loan securitizations generally if the underlying assets are solely loans.
Trading in certain government obligations is not prohibited by the Volcker Rule, including obligations of or guaranteed
by the United States or an agency or government-sponsored entity of the United States, obligations of a State of the United States
or a political subdivision thereof, and municipal securities. Proprietary trading generally does not include transactions under
repurchase and reverse repurchase agreements, securities lending transactions and purchases and sales for the purpose of liquidity
management if the liquidity management plan meets specified criteria; nor does it generally include transactions undertaken in a
fiduciary capacity. In addition, activities eligible for exemption include, among others, certain brokerage, underwriting and
marketing activities, and risk-mitigating hedging activities with respect to specific risks and subject to specified conditions. As of
June 30, 2018, BofI Federal Bank was in compliance with the Volcker Rule.
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 the Company 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 persons 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, BofI Federal Bank 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.
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Federal Home Loan Bank (“FHLB”) 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 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 Federal Reserve requires all depository institutions to maintain non-interest bearing reserves
at specified levels against their transaction accounts (primarily checking, negotiable order of withdrawal (“NOW”), and Super
NOW checking accounts) and non-personal time deposits. At June 30, 2018, 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 CFPB in order to regulate any person who offers
or provides personal, family or household financial products or services. The CFPB 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 CFPB. Congress established the CFPB to create 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 CFPB, (ii) all consumer financial protection functions, powers and duties transferred from other federal
agencies, such as the Federal Reserve, 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 CFPB 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.
Depository institutions 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 (the OCC for the Bank), rather than the CFPB.
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 CFPB 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.
Depository institutions with more than $10 billion in assets and their affiliates are subject to direct supervision by the
CFPB, including any applicable examination, enforcement and reporting requirements the CFPB may establish. As of June 30,
2018, we had $9.5 billion in total assets. If the Bank continues to grow and has assets in excess of $10 billion in the future, the
Bank and its operations will become subject to the direct supervision and oversight of the CFPB.
In addition, if our total assets equal or exceed $10 billion, we will become subject to certain enhanced prudential standards
established by FRB regulations promulgated under the Dodd-Frank Act for larger institutions, including additional risk management
policies and practices and annual stress tests using various scenarios established by the FRB, designed to determine whether our
capital planning, assessment of capital adequacy and risk management practices adequately protect the Company in the event of
an economic downturn.
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.
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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 (the “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.
AVAILABLE INFORMATION
BofI Holding, Inc. files reports, proxy and information statements and other information electronically with the SEC.
You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
DC 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. The SEC’s website site address is http://www.sec.gov. Our web site address is http://
www.bofiholding.com, and we make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K and amendments thereto available on our website free of charge.
ITEM 1A. RISK FACTORS
Risks Relating to Our Industry
Changes in interest rates could adversely affect our performance.
Our results of operations depend to a great extent on our net interest income, which is the difference between the interest
rates earned on interest-earning assets such as loans and leases and investment securities, and the interest rates paid on interest-
bearing liabilities such as deposits and borrowings. We are exposed to interest rate risk because our interest-earning assets and
interest-bearing liabilities do not react uniformly or concurrently to changes in interest rates, as the two have different time periods
for adjustment and can be tied to different measures of rates. Interest rates are sensitive to factors that are beyond our control,
including general economic conditions and the policies of various governmental and regulatory agencies, including the FRB. The
monetary policies of the FRB, implemented through open market operations and regulation of the discount rate and reserve
requirements, affect prevailing interest rates. Loan and lease originations and repayment rates tend to increase with declining
interest rates and decrease with rising interest rates. On the deposit side, increasing interest rates generally lead to interest rate
increases on our deposit accounts. In the past few years prevailing interest rates have begun to increase and the financial markets
are anticipating further increases in interest rates by the FRB. We manage the sensitivity of our assets and liabilities; however a
large or rapid increase in market interest rates would likely have an adverse impact on our net interest income and a decrease in
our refinancing business and related fee income, and could cause an increase in delinquencies and non-performing loans and leases
in our adjustable-rate loans. In addition, changes in interest rates can affect the value of our loans and leases, investments and
other interest-rate sensitive assets and our ability to realize gains on the sale or resolution of these assets.
A significant economic downturn could result in increases in our level of non-performing loans and leases and/or
reduce demand for our products and services, which could have an adverse effect on our results of operations.
Our business and results of operations are affected by the financial markets and general economic conditions, including
factors such as the level and volatility of interest rates, inflation, home prices, unemployment and under-employment levels,
bankruptcies, household income and consumer spending. While the national economy and most regions have improved since the
financial crisis of 2008 and subsequent economic recession, we continue to operate in an uncertain economic environment due to
a variety of reasons, including but not limited to trade wars, geopolitical tensions, rising oil prices and emerging market crises.
The risks associated with our business become more acute in periods of a slowing economy or slow growth. A return or continuation
of recessionary conditions or negative events in the housing markets, including significant and continuing home price declines
and increased delinquencies and foreclosures, would adversely affect our mortgage and construction loans and result in increased
asset write-downs. In addition, poor economic conditions, including continued high unemployment in the United States, have
contributed to increased volatility in the financial and capital markets and diminished expectations for the U.S. economy. While
we are continuing to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the
residential and commercial real estate markets. Declines in real estate values, an economic downturn or continued high
unemployment levels may result in higher than expected loan and lease delinquencies and a decline in demand for our products
and services. These negative events may cause us to incur losses and may adversely affect our capital, financial condition and
results of operations.
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The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness
of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in
the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and
other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions,
or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other
institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or
client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices
not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses
would not materially and adversely affect our results of operations.
Changes in laws, regulation or oversight may increase our costs and adversely affect our business and operations.
We operate in a highly regulated industry and are subject to oversight, regulation and examination by federal and/or state
governmental authorities under various laws, regulations and policies, which impose requirements or restrictions on our operations,
capitalization, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged and interest rates
paid on deposits. We must also comply with federal anti-money laundering, tax withholding and reporting, and consumer protection
statutes and regulations. A considerable amount of management time and resources is devoted to oversight of, and development
and implementation of controls and procedures relating to, compliance with these laws, regulations and policies. In addition, in
August 2018, the Company became a savings and loan holding company that is treated as a financial holding company by the
Federal Reserve Board.
The laws, regulation and supervisory policies are subject to regular modification and change. New or amended laws,
rules and regulations could impact our operations, increase our capital requirements or substantially restrict our growth and
adversely affect our ability to operate profitably by making compliance much more difficult or expensive, restricting our ability
to originate or sell loans, or further restricting the amount of interest or other charges or fees earned on loans or other products.
In addition, further regulation could increase the assessment rate we are required to pay to the FDIC, adversely affecting our
earnings. It is very difficult to predict future changes in regulation or the competitive impact that any such changes would have
on our business.
The Dodd-Frank Act (“Dodd-Frank”), enacted in 2010, instituted major changes to the banking and financial institutions
regulatory regimes. A section of Dodd-Frank commonly referred to as the Durbin amendment, reduced the level of interchange
fees that could be charged by institutions with greater than $10 billion in assets. If we continue to grow so that our total assets
exceed $10 billion, the Durbin amendment could adversely affect or reduce our ability to earn interchange fees and maintain our
fee-sharing prepaid card partnerships, such as with H&R Block. Other changes to statutes, regulations, or regulatory policies,
including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and
unpredictable ways including subjecting us to additional costs, limiting the types of financial services and products we may offer,
and increasing the ability of non-banks to offer competing financial services and products. Failure to comply with laws, regulations,
or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have
a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.
The Tax Reform Act of 2017, enacted in December 2017, resulted in certain changes that may affect our business.
Beginning on January 1, 2018, the ceiling on the mortgage interest deduction was reduced from $1,000,000 to $750,000 for
indebtedness incurred in acquiring, constructing, or improving a residence. For mortgage indebtedness incurred before December
15, 2017, the Tax Reform Act permits homeowners to maintain the current $1,000,000 ceiling. The Tax Reform Act also prohibits
the deduction of interest on home equity indebtedness, and limits annual itemized deductions for state and local taxes (including
state and local income, property, and sales taxes) to $10,000. The Bank originates and holds a large amount of mortgage loans
and mortgage backed securities. The reduction or elimination of these tax benefits and other changes in federal income tax policies
could have a material adverse effect on the demand for the Bank’s loan products and the pricing and liquidity of the mortgage
securities which the Bank holds. The reduction in the mortgage interest deduction and limitation of itemized deductions for property
taxes, particularly in higher priced states in which we operate, such as California, could adversely affect the ability of some potential
borrowers to obtain credit, otherwise reduce the demand for home purchases and construction, and increase delinquencies or
defaults on our mortgage assets, which could have a material adverse effect on our business and results of operations.
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Policies and regulations enacted by the Consumer Financial Protection Bureau may negatively impact our residential
mortgage loan business and compliance risk.
Our consumer business, including our mortgage and deposit businesses, may be adversely affected by the policies enacted
or regulations adopted by the CFPB which under the Dodd-Frank Act has broad rule-making authority over consumer financial
products and services. The CFPB is in the process of reshaping consumer financial protection laws through rule-making and
enforcement against unfair, deceptive and abusive acts or practices. The CFPB has broad rule-making authority to administer and
carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and
services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or
abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a
consumer financial product or service. The prohibition on “abusive” acts or practices is being clarified each year by CFPB
enforcement actions and opinions from courts and administrative proceedings. In January 2014, a series of final rules issued by
the CFPB to implement provisions in the Dodd-Frank Act related to mortgage origination and servicing went into effect and caused
an increase in the cost of originating and servicing residential mortgage loans. While it is difficult to quantify any future increases
in our regulatory compliance burden, the costs associated with regulatory compliance, including the need to hire additional
compliance personnel, may continue to increase.
Possible replacement of the LIBOR benchmark interest rate may have an impact on our business, financial condition
or results of operations.
On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United Kingdom,
announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The FCA and the submitting
LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative
reference rate. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals
by the Alternative Reference Rates Committee of the Federal Reserve Board. Other financial services regulators and industry
groups are evaluating the possible phase-out of LIBOR and the development of alternate reference rate indices or reference rates.
Many of our assets and liabilities are indexed to LIBOR. We are evaluating the potential impact of the possible replacement of
the LIBOR benchmark interest rate, but are not able to predict whether LIBOR will cease to be available after 2021, whether the
alternative rates the Federal Reserve Board proposes to publish will become market benchmarks in place of LIBOR, or what the
impact of such a transition will have on our business, financial condition, or results of operations.
Risks Relating to Mortgage Loans and Mortgage-Backed Securities
Declining real estate values, particularly in California, could reduce the value of our loan and lease portfolio and impair
our profitability and financial condition.
The majority of the loans in our portfolio are secured by real estate. At June 30, 2018, approximately 71.1% of our
mortgage portfolio was secured by real estate located in California. In recent years, there has been significant volatility in real
estate values in California and in some cases the collateral for our real estate loans has become less valuable. If real estate values
decrease or more of our borrowers experience financial difficulties, we will experience increased charge-offs, as the proceeds
resulting from foreclosure may be significantly lower than the amounts outstanding on such loans. In addition, declining real estate
values frequently accompany periods of economic downturn or recession and increasing unemployment, all of which can lead to
lower demand for mortgage loans of the types we originate. A decline of real estate values or decline of the credit position of our
borrowers in California would have a material adverse effect on our business, prospects, financial condition and results of operations.
Many of our mortgage loans are unseasoned and defaults on such loans would harm our business.
At June 30, 2018, our multifamily residential loans were $1,800.9 million or 28.9% of our mortgage loans and our
commercial real estate loans were $220.4 million, or 3.5% of our mortgage loans. The payment on such loans is typically dependent
on the cash flows generated by the projects, which are affected by the supply and demand for multifamily residential units and
commercial property within the relative market. If the market for multifamily residential units and commercial property experiences
a decline in demand, multifamily and commercial borrowers may suffer losses on their projects and be unable to repay their loans.
If residential housing values were to decline and nationwide unemployment were to increase, we are likely to experience increases
in the level of our non-performing loans and foreclosed and repossessed vehicles in future periods.
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We could recognize other-than-temporary impairment on securities held in our available-for-sale portfolio.
We analyze securities held in our portfolio for other-than-temporary impairment on a quarterly basis. The process for
determining whether impairment is other-than-temporary can involve difficult, subjective judgments about the future financial
performance of the issuer, market conditions, and the value of any collateral underlying the security in order to assess the probability
of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions
affecting issuers and the performance of the underlying collateral, we may be required to recognize other-than-temporary
impairment in future periods reducing future earnings and capital levels.
A decrease in the mortgage buying activity of Fannie Mae, Freddie Mac and Ginnie Mae or a failure by Fannie Mae,
Ginnie Mae and Freddie Mac to satisfy their obligations with respect to their RMBS could have a material adverse effect on our
business, financial condition and results of operations.
During the last three fiscal years we have sold over $1,385.8 million of residential mortgage loans to Fannie Mae, Freddie
Mac and Ginnie Mae and, as of June 30, 2018, approximately 7.2% of our securities portfolio consisted of RMBS issued or
guaranteed by these GSEs. Since 2008, Fannie Mae and Freddie Mac have been in conservatorship, with its primary regulator,
the Federal Housing Finance Agency, acting as conservator. The United States government may enact structural changes to one
or more of the GSEs, including privatization, consolidation and/or a reduction in the ability of GSEs to purchase mortgage loans
or guarantee mortgage obligations. We cannot predict if, when or how the conservatorships will end, or what associated changes
(if any) may be made to the structure, mandate or overall business practices of either of the GSEs. Accordingly, there continues
to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form and whether
they will continue to meet their obligations with respect to their RMBS. A substantial reduction in mortgage purchasing activity
by the GSEs could result in a material decrease in the availability of residential mortgage loans and the number of qualified
borrowers, which in turn may lead to increased volatility in the residential housing market, including a decrease in demand for
residential housing and a corresponding drop in the value of real property that secures current residential mortgage loans, as well
as a significant increase in interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may
decrease, which would result in a decrease in mortgage loan revenues and a corresponding decrease in non-interest income. Any
decision to change the structure, mandate or overall business practices of the GSEs and/or the relationship among the GSEs, the
government and the private mortgage loan markets, or any failure by the GSEs to satisfy their obligations with respect to their
RMBS, could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to the Company
If our allowance for loan and lease losses, particularly in growing areas of lending such as commercial and industrial
(“C&I”) is not sufficient to cover actual loan and lease losses, our earnings, capital adequacy and overall financial condition
may suffer materially.
Our loans are generally secured by single family, multifamily and commercial real estate properties, each initially having
a fair market value generally greater than the amount of the loan secured. Although our loans and leases are typically secured, the
risk of default, generally due to a borrower’s inability to make scheduled payments on his or her loan, is an inherent risk of the
banking business. In determining the amount of the allowance for loan and lease losses, we make various assumptions and judgments
about the collectibility of our loan and lease portfolio, including the creditworthiness of our borrowers, the value of the real estate
serving as collateral for the repayment of our loans and our loss history. Defaults by borrowers could result in losses that exceed
our loan and lease loss reserves. We have originated or purchased many of our loans and leases recently, so we do not have sufficient
repayment experience to be certain whether the established allowance for loan and lease losses is adequate. We may have to
establish a larger allowance for loan and lease losses in the future if, in our judgment, it becomes necessary. Any increase in our
allowance for loan and lease losses would increase our expenses and consequently may adversely affect our profitability, capital
adequacy and overall financial condition.
In addition, we continue to increase our emphasis on non-residential lending, particularly in C&I lending, and these types
of loans and leases are expected to comprise a larger portion of our originations and loan and lease portfolio in future periods. To
the extent that we fail to adequately address the risks associated with C&I lending, we may experience increases in levels of non-
performing loans and leases and be forced to take additional loan and lease loss reserves, which would adversely affect our net
interest income and capital levels and reduce our profitability. For further information about our C&I lending business, please
refer to “Business – Asset Origination and Fee Income Businesses – Commercial Real Estate Secured and Commercial Lending.”
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our
accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our
results of operations. Such methods, estimates, and judgments, include methodologies to value our securities, evaluate securities
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for other-than-temporary impairment and estimate our allowance for loan and lease losses. These methods, estimates, and judgments
are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to
change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our
results of operations.
Changes in the value of goodwill and other intangible assets could reduce our earnings.
The Company accounts for goodwill and other intangible assets in accordance with generally accepted accounting
principles (“GAAP”), which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least
annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and other intangible assets is
performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values
involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the
federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external
factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and
may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future
date.
Our acquisitions involve integration and other risks.
From time to time we undertake acquisitions of assets, deposits, lines of business and other companies consistent with
our operating and growth strategies. Our recent acquisitions are discussed below under “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Mergers and Acquisitions.” Acquisitions involve a number of risks
and challenges, including our ability to integrate the acquired operations and the associated internal controls and regulatory
functions into our current operations, our ability to retain key personnel of the acquired operations, our ability to limit the outflow
of acquired deposits and successfully retain and manage acquired assets, our ability to attract new customers and generate new
assets in areas not previously served, and the possible assumption of risks and liabilities related to litigation or regulatory proceedings
involving the acquired operations. Additionally, no assurance can be given that the operation of acquisitions would not adversely
affect our existing profitability, that we would be able to achieve results in the future similar to those achieved by the acquired
operations, that we would be able to compete effectively in the markets served by the acquired operations, or that we would be
able to manage any growth resulting from the transaction effectively. We also face the risk that the anticipated benefits of any
acquisition may not be realized fully or at all, or within the time period expected.
As a public company, we face the risk of shareholder lawsuits and other related or unrelated litigation, particularly if
we experience declines in the price of our common stock. We have been named as a party to purported class action and derivative
lawsuits, and we may be named in additional litigation, all of which could require significant management time and attention and
result in significant legal expenses.
As described in detail below in “Item 3 – Legal Proceedings,” putative class action lawsuits have been filed in the United
States District Court, Southern District of California, alleging, among other things, that our Company, Chief Executive Officer
and Chief Financial Officer violated the federal securities laws by failing to disclose the wrongful conduct that is alleged by a
former employee in a complaint, and that as a result the Company’s statements regarding its internal controls, and portions of its
financial statements, were false and misleading. Derivative lawsuits have also been filed against our management arising from
the same events, alleging breach of fiduciary duty, mismanagement, abuse of control and unjust enrichment. Regardless of the
merits, the expense of defending such litigation may have a substantial impact if our insurance carriers fail to cover the full cost
of the litigation, and the time required to defend the actions could divert management’s attention from the day-to-day operations
of our business, which could adversely affect our business, results of operations and cash flows. An unfavorable outcome in such
litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows. The
Company and its management deny any wrongdoing and are vigorously defending the referenced lawsuits.
We may seek additional capital but it may not be available when it is needed and limit our ability to execute our strategic
plan. In addition, raising additional equity capital would dilute existing shareholders’ equity interests and may cause our stock
price to decline.
We are required by regulatory authorities to maintain adequate levels of capital to support our operations. In addition,
we may elect to raise additional capital to support the growth of our business or to finance acquisitions, if any, or we elect to raise
additional capital for other reasons. We may seek to do so through the issuance of, among other things, our common stock or
securities convertible into our common stock, which could dilute existing shareholders’ interests in the Company.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions
and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot
provide assurance on our ability to raise additional capital if needed or if it can be raised on terms acceptable to us. If we cannot
24
raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on our financial condition,
results of operations and prospects. In addition, raising equity capital will have a dilutive effect on the equity interests of our
existing shareholders and may cause our stock price to decline.
Access to adequate funding cannot be assured.
We have significant sources of liquidity as a result of our federal thrift structure, including deposits, brokered deposits,
the FHLB, repurchase lending facilities, and the FRB discount window. We rely primarily upon deposits and FHLB advances.
Our ability to attract deposits could be negatively impacted by a public perception of our financial prospects or by increased deposit
rates available at troubled institutions suffering from shortfalls in liquidity. The FHLB is subject to regulation and other factors
beyond our control. These factors may adversely affect the availability and pricing of advances to members such as the Bank.
Selected sources of liquidity may become unavailable to the Bank if it were to no longer be considered “well-capitalized.”
Our inability to manage our growth or deploy assets profitably could harm our business and decrease our overall
profitability, which may cause our stock price to decline.
Our assets and deposit base have grown substantially in recent years, and we anticipate that we will continue to grow
over time, perhaps significantly. To manage the expected growth of our operations and personnel, we will be required to manage
multiple aspects of the business simultaneously, including among other things: (i) improve existing and implement new transaction
processing, operational and financial systems, procedures and controls; (ii) maintain effective credit scoring and underwriting
guidelines; (iii) maintain sufficient levels of regulatory capital; and (iv) expand our employee base and train and manage this
growing employee base. In addition, acquiring other banks, asset pools or deposits may involve risks such as exposure to potential
asset quality issues, disruption to our normal business activities and diversion of management’s time and attention due to integration
and conversion efforts. If we are unable to manage growth effectively or execute integration efforts properly, we may not be able
to achieve the anticipated benefits of growth and our business, financial condition and results of operations could be adversely
affected.
In addition, we may not be able to sustain past levels of profitability as we grow, and our past levels of profitability should
not be considered a guarantee or indicator of future success. If we are not able to maintain our levels of profitability by deploying
growth in our deposits in profitable assets or investments, our net interest margin and overall level of profitability will decrease
and our stock price may decline.
We face strong competition for customers and may not succeed in implementing our business strategy.
Our business strategy depends on our ability to remain competitive. There is strong competition for customers from
existing banks and other types of financial institutions, including those that use the Internet as a medium for banking transactions
or as an advertising platform. Our competitors include large, publicly-traded, Internet-based banks, as well as smaller Internet-
based banks; “brick and mortar” banks, including those that have implemented websites to facilitate online banking; and traditional
banking institutions such as thrifts, finance companies, credit unions and mortgage banks. Some of these competitors have been
in business for a long time and have name recognition and an established customer base. Most of our competitors are larger and
have greater financial and personnel resources. In order to compete profitably, we may need to reduce the rates we offer on loans
and leases and investments and increase the rates we offer on deposits, which actions may adversely affect our business, prospects,
financial condition and results of operations.
To remain competitive, we believe we must successfully implement our business strategy. Our success depends on, among
other things:
• Having a large and increasing number of customers who use our bank for their banking needs;
• Our ability to attract, hire and retain key personnel as our business grows;
• Our ability to secure additional capital as needed;
• The relevance of our products and services to customer needs and demands and the rate at which we and our competitors
introduce or modify new products and services;
• Our ability to offer products and services with fewer employees than competitors;
• The satisfaction of our customers with our customer service;
• Ease of use of our websites; and
• Our ability to provide a secure and stable technology platform for financial services that provides us with reliable and
effective operational, financial and information systems.
If we are unable to implement our business strategy, our business, prospects, financial condition and results of operations
could be adversely affected.
25
We recently changed the branding of the Bank. Our business depends on a strong brand, and failing to maintain and
enhance our brand could hurt our ability to maintain or expand our customer base.
The brand identities that we have developed will significantly contribute to the success of our business. Commencing
October 1, 2018, we will change the name of the Bank and the branding of most of our banking products to “Axos Bank”.
Maintaining and enhancing the “Axos Bank” brands (including our other trade styles and trade names) is critical to expanding
our customer base. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry
for our “brick and mortar” competitors in the internet-based banking market. Our brands could be negatively impacted by a number
of factors, including data privacy and security issues, service outages, and product malfunctions. If our name change is not widely
accepted by customers or proves to be less popular than anticipated, if we fail to maintain and enhance our brands generally, or if
we incur excessive expenses in these efforts, our business, financial condition and results of operations may be adversely affected.
In addition, maintaining and enhancing our brand will depend on our ability to continue to provide high-quality products and
services, which we may not do successfully.
A natural disaster, especially in California, could harm our business.
We are based in San Diego, California, and approximately 71.1% of our mortgage loan portfolio was secured by real
estate located in California at June 30, 2018. In addition, some of our computer systems that operate our internet websites and
their back-up systems are located in San Diego, California. Historically, California has been vulnerable to natural disasters.
Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters
could harm our operations directly through interference with communications, including the interruption or loss of our websites,
which would prevent us from gathering deposits, originating loans and leases and processing and controlling our flow of business,
as well as through the destruction of facilities and our operational, financial and management information systems. A natural
disaster or recurring power outages may also impair the value of our largest class of assets, our loan and lease portfolio, which is
comprised substantially of real estate loans. Uninsured or under-insured disasters may reduce borrowers’ ability to repay mortgage
loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans
through foreclosure and making it more likely that we would suffer losses on defaulted loans. Although we have implemented
several back-up systems and protections (and maintain standard business interruption insurance), these measures may not protect
us fully from the effects of a natural disaster. The occurrence of natural disasters in California could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our success depends in large part on the continuing efforts of a few individuals. If we are unable to retain these key
personnel or attract, hire and retain others to oversee and manage our company, our business could suffer.
Our success depends substantially on the skill and abilities of our senior management team, including our Chief Executive
Officer and President, Gregory Garrabrants, our Chief Financial Officer, Andrew J. Micheletti, and other employees that perform
multiple functions that might otherwise be performed by separate individuals at larger banks. The loss of the services of any of
these individuals or other key employees, whether through termination of employment, disability or otherwise, could have a
material adverse effect on our business. In addition, our ability to grow and manage our growth depends on our ability to continue
to identify, attract, hire, train, retain and motivate highly skilled executive, technical, managerial, sales, marketing, customer service
and professional personnel. The implementation of our business plan and our future success will depend on such qualified personnel.
Competition for such employees is intense, and there is a risk that we will not be able to successfully attract, assimilate or retain
sufficiently qualified personnel. If we fail to attract and retain the necessary personnel, our business, prospects, financial condition
and results of operations could be adversely affected.
We are exposed to risk of environmental liability with respect to properties to which we take title.
In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities
with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal
injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be
required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated
site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental
contamination emanating from the property. If we become subject to significant environmental liabilities, our business, prospects,
financial condition and results of operations could be adversely affected.
26
Technology Risks in our Online Business
We depend on third-party service providers for our core banking technology, and interruptions in or terminations of their
services could materially impair the quality of our services.
We rely substantially upon third-party service providers for our core banking technology and to protect us from bank
system failures or disruptions. This reliance may mean that we will not be able to resolve operational problems internally or on a
timely basis, which could lead to customer dissatisfaction or long-term disruption of our operations. Our operations also depend
upon our ability to replace a third-party service provider if it experiences difficulties that interrupt operations or if an essential
third-party service terminates. If these service arrangements are terminated for any reason without an immediately available
substitute arrangement, our operations may be severely interrupted or delayed. If such interruption or delay were to continue for
a substantial period of time, our business, prospects, financial condition and results of operations could be adversely affected.
Privacy concerns relating to our technology could damage our reputation and deter current and potential customers
from using our products and services.
Generally speaking, concerns have been expressed about whether internet-based products and services compromise the
privacy of users and others. Concerns about our practices with regard to the collection, use, disclosure or security of personal
information of our customers or other privacy related matters, even if unfounded, could damage our reputation and results of
operations. While we strive to comply with all applicable data protection laws and regulations, as well as our own posted privacy
policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others,
or could cause us to lose customers, which could potentially have an adverse effect on our business.
In addition, as nearly all of our products and services are internet-based, the amount of data we store for our customers
on our servers (including personal information) has been increasing and will continue to increase. Any systems failure or
compromise of our security that results in the release of our customers’ data could seriously limit the adoption of our products and
services, as well as harm our reputation and brand and, therefore, our business. We may also need to expend significant resources
to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as
we add more customers and expand the number of internet-based products and services we offer.
We have risks of systems failure and security risks, including “hacking” and “identity theft.”
The computer systems and network infrastructure utilized by us and others could be vulnerable to unforeseen problems.
This is true of both our internally developed systems and the systems of our third-party service providers. Our operations are
dependent upon our ability to protect computer equipment against damage from fire, power loss, telecommunication failure or
similar catastrophic events.
Any damage or failure that causes an interruption in our operations or security breaches such as hacking or identity theft
could adversely affect our business, prospects, financial condition and results of operations.
If our security measures are breached, or if our services are subject to attacks that degrade or deny the ability of customers
to access our products and services, our products and services may be perceived as not being secure, customers may curtail or
stop using our products and services, and we may incur significant legal and financial exposure.
Our products and services involve the storage and transmission of customers’ proprietary information, and security
breaches could expose us to a risk of loss of this information, litigation, and potential liability. Our security measures may be
breached due to the actions of outside parties, employee error, malfeasance, or otherwise and, as a result, an unauthorized party
may obtain access to our data or our customers’ data. Additionally, outside parties may attempt to fraudulently induce employees
or customers to disclose sensitive information in order to gain access to our data or our customers’ data. Any such breach or
unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in
the security of our products and services that could potentially have an adverse effect on our business. Because the techniques
used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized
until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could
be harmed and, as a result, we could lose customers, which may have a material adverse effect on our business, financial condition
and results of operations.
27
Our business depends on continued and unimpeded access to the internet by us and our customers. Internet access
providers may be able to block, degrade, or charge for access to our website, which could lead to additional expenses and the
loss of customers.
Our products and services depend on the ability of our customers to access the internet and our website. Currently, this
access is provided by companies that have significant market power in the broadband and internet access marketplace, including
incumbent telephone companies, cable companies and mobile communications companies. Some of these providers have the
ability to take measures that could degrade, disrupt, or increase the cost of customer access to our products and services by restricting
or prohibiting the use of their infrastructure to access our website or by charging fees to us or our customers to provide access to
our website. Such interference could result in a loss of existing customers and/or increased costs and could impair our ability to
attract new customers, which could have a material adverse effect on our business, financial condition and results of operations.
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 4350 La Jolla
Village Drive, Suite 140, San Diego, California 92122, and our telephone number is (858) 350-6200. Our San Diego facilities
consist of a total of approximately 158,000 square feet under leases that expire June 30, 2030.
ITEM 3. LEGAL PROCEEDINGS
We may from time to time become a party to other claims or litigation that arise in the ordinary course of business, such
as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the
Bank. None of such matters are expected to have a material adverse effect on the Company’s financial condition, results of
operations or business.
Litigation. On October 15, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named
defendants in a putative class action lawsuit styled Golden v. BofI Holding, Inc., et al, and brought in United States District Court
for the Southern District of California (the “Golden Case”). On November 3, 2015, the Company, its Chief Executive Officer and
its Chief Financial Officer were named defendants in a second putative class action lawsuit styled Hazan v. BofI Holding, Inc., et
al, and also brought in the United States District Court for the Southern District of California (the “Hazan Case”). On February
1, 2016, the Golden Case and the Hazan Case were consolidated as In re BofI Holding, Inc. Securities Litigation, Case #: 3:15-
cv-02324-GPC-KSC (the “Class Action”), and the Houston Municipal Employees Pension System was appointed lead plaintiff.
The plaintiffs allege that the Company and other named defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a complaint filed
in connection with a wrongful termination of employment lawsuit filed on October 13, 2015 (the “Employment Matter”) and that
as a result the Company’s statements regarding its internal controls, as well as portions of its financial statements, were false and
misleading. On March 21, 2018, the Court entered a final order dismissing the Class Action with prejudice. On March 28, 2018,
the plaintiff filed a notice of appeal.
On April 3, 2017, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a
putative class action lawsuit styled Mandalevy v. BofI Holding, Inc., et al, and brought in United States District Court for the
Southern District of California (the “Mandalevy Case”). The Mandalevy Case seeks monetary damages and other relief on behalf
of a putative class that has not been certified by the Court. The complaint in the Mandalevy Case (the “Mandalevy Complaint”)
alleges a class period that differs from that alleged in the First Class Action, and that the Company and other named defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to
disclose wrongful conduct that was alleged in a March 2017 media article. The Mandalevy Case has not been consolidated into
the First Class Action.
The Company and the other named defendants dispute the allegations of wrongdoing advanced by the plaintiffs in the
Class Action, the Mandalevy Case, and in the Employment Matter, as well as those plaintiffs’ statement of the underlying factual
circumstances, and are vigorously defending each case.
In addition to the Class Action and the Mandalevy Case, two separate shareholder derivative actions were filed in
December, 2015, purportedly on behalf of the Company. The first derivative action, Calcaterra v. Garrabrants, et al, was filed in
the United States District Court for the Southern District of California on December 3, 2015. The second derivative action, Dow
28
v. Micheletti, et al, was filed in the San Diego County Superior Court on December 16, 2015. A third derivative action, DeYoung
v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 22, 2016, a
fourth derivative action, Yong v. Garrabrants, et al, was filed in the United States District Court for the Southern District of
California on January 29, 2016, a fifth derivative action, Laborers Pension Trust Fund of Northern Nevada v. Allrich et al, was
filed in the United States District Court for the Southern District of California on February 2, 2016, and a sixth derivative action,
Garner v. Garrabrants, et al, was filed in the San Diego County Superior Court on August 10, 2017. Each of these six derivative
actions names the Company as a nominal defendant, and certain of its officers and directors as defendants. Each complaint sets
forth allegations of breaches of fiduciary duties, gross mismanagement, abuse of control, and unjust enrichment against the
defendant officers and directors. The plaintiffs in these derivative actions seek damages in unspecified amounts on the Company’s
behalf from the officer and director defendants, certain corporate governance actions, and an award of their costs and attorney’s
fees.
The United States District Court for the Southern District of California ordered the four above-referenced derivative
actions pending before it to be consolidated and appointed lead counsel in the consolidated action. On June 7, 2018, the Court
entered an order granting defendant’s motion for judgment on the pleadings, but giving the plaintiffs limited leave to amend by
June 28, 2018. The plaintiffs failed to file an amended complaint, and instead plaintiffs filed on June 28, 2018 a motion to stay
the case pending resolution of the securities class action and Employment Matter. On August 10, 2018, defendants filed an opposition
to plaintiffs’ motion.
The two derivative actions pending before the San Diego County Superior Court have been consolidated and have been
stayed by agreement of the parties. All defendants dispute, and intend to vigorously defend against, the allegations raised in the
Consolidated Action and the state court derivative actions.
In view of the inherent difficulty of predicting the outcome of each legal action, particularly since claimants seek substantial
or indeterminate damages, it is not possible to reasonably predict or estimate the eventual loss or range of loss, if any, related to
each legal action.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
29
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 Global Select Market on March 15, 2005 under the symbol “BOFI.”
There were 62,776,754 shares of common stock outstanding held by approximately 45,000 shareholders as of August 17, 2018.
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.
Quarter ended:
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
March 31, 2018
June 30, 2018
DIVIDENDS
BofI Holding, Inc. Common Stock
Price Per Share
High
$22.98
$29.78
$32.11
$26.43
$28.59
$29.90
$42.15
$44.65
Low
$15.34
$18.29
$26.13
$21.91
$23.44
$24.61
$29.86
$38.50
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
Common Stock Repurchases. On March 17, 2016, the Board of Directors of the Company, authorized a program to
repurchase up to $100 million of common stock. The new share repurchase authorization replaces the previous share repurchase
plan approved on July 5, 2005. The Company may repurchase shares on the open market or through privately negotiated transactions
at times and prices considered appropriate, at the discretion of the Company, and subject to its assessment of alternative uses of
capital, stock trading price, general market conditions and regulatory factors. The repurchase program does not obligate the
Company to acquire any specific number of shares. The share repurchase program will continue in effect until terminated by the
Board of Directors of the Company. Shares of common stock repurchased under this plan will be held as treasury shares. During
the fiscal year ended June 30, 2018, the Company has repurchased a total of $35.2 million, or 1,233,491 common shares at an
average price of $28.49 per share with $64.8 million remaining under the current board authorized stock repurchase program. The
Company accounts for treasury stock using the cost method as a reduction of shareholders’ equity in the accompanying unaudited
condensed consolidated financial statements.
Net Settlement of Restricted Stock Awards. In November 2007 and October 2014, the stockholders of the Company
approved an amendment to the 2004 Stock Incentive Plan and approved the 2014 Stock Incentive Plan, respectively, which among
other changes permitted net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum
income tax obligation. During the fiscal year ended June 30, 2018, there were 294,817 restricted stock unit award shares which
were retained by the Company and converted to cash at the average rate of $33.78 per share to fund the grantee’s income tax
obligations.
30
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 during the fourth fiscal quarter ended June 30, 2018.
Period
Stock Repurchases (dollars in thousands)
Quarter Ended June 30, 2018
April 1, 2018 to June 30, 2018
For the Three Months Ended June 30, 2018
Stock Retained in Net Settlement
April 1, 2018 to April 30, 2018
May 1, 2018 to May 31, 2018
June 1, 2018 to June 30, 2018
For the Three Months Ended June 30, 2018
Number of
Shares
Purchased
Average
Price Paid
Per Shares
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
— $
— $
—
—
— $
— $
64,817
64,817
85
15
144,607
144,707
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, 2018. There were no securities issued under equity compensation plans not approved by
security holders.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(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))
629,755
$
N/A
629,755
$
—
N/A
—
2,404,854
N/A
2,404,854
31
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.
(Dollars in thousands, except per share amounts)
2018
2017
2016
2015
2014
At or for the Fiscal Years Ended June 30,
Selected Balance Sheet Data:
Total assets
Loans and leases, net of allowance for loan and lease
losses
Loans held for sale, at fair value
Loans held for sale, at cost
Allowance for loan and lease losses
Securities—trading
Securities—available-for-sale
Securities—held-to-maturity
Total deposits
Securities sold under agreements to repurchase
Advances from the FHLB
Subordinated notes and debentures and other
Total stockholders’ equity
Selected Income Statement Data:
Interest and dividend income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Net income attributable to common stock
Per Common Share Data:
Net income:
Basic (revised for 2017 and 2016)1
Diluted (revised for 2017 and 2016)1
Book value per common share
Tangible book value per common share (Non-GAAP)
Weighted average number of common shares
outstanding:
Basic (revised for 2017 and 2016)1,2
Diluted (revised for 2017 and 2016)1,2
Common shares outstanding at end of period2
Performance Ratios and Other Data:
Loan and lease originations for investment
Loan originations for sale
Loan and lease purchases
Return on average assets
Return on average common stockholders’ equity
Interest rate spread3
Net interest margin4
Efficiency ratio5
$
9,539,504
$
8,501,680
$
7,599,304
$
5,823,719
$
4,402,999
8,432,289
7,374,493
6,354,679
4,928,618
3,532,841
35,077
2,686
49,151
—
180,305
—
18,738
6,669
40,832
8,327
264,470
—
20,871
33,530
35,826
7,584
265,447
199,174
25,430
77,891
28,327
7,832
163,361
225,555
20,575
114,796
18,373
8,066
214,778
247,729
7,985,350
6,899,507
6,044,051
4,451,917
3,041,536
—
457,000
54,552
960,513
20,000
640,000
54,463
834,247
35,000
727,000
56,016
683,590
35,000
753,000
5,155
533,526
45,000
910,000
5,155
370,778
$
475,074
$
387,286
$
317,707
$
244,364
$
172,878
106,580
368,494
25,800
342,694
70,941
173,936
239,699
87,288
152,411
152,102
2.41
2.37
15.24
13.99
$
$
$
$
$
$
74,059
313,227
11,061
302,166
68,132
137,605
232,693
97,953
134,740
134,431
2.11
2.10
13.05
12.94
63,136,232
64,147,220
62,688,064
63,656,542
63,915,100
63,536,244
5,922,801
1,564,165
$
$
4,182,701
1,375,443
— $
276,917
1.68%
17.78%
3.74%
3.95%
36.08%
1.68%
17.05%
3.79%
4.11%
39.58%
32
$
$
$
$
$
$
$
$
$
56,696
261,011
9,700
251,311
66,340
112,756
204,895
85,604
119,291
118,982
1.87
1.87
10.73
10.67
63,597,259
63,672,280
63,219,392
3,633,911
1,363,025
140,493
1.75 %
19.43 %
3.70 %
3.91 %
34.44 %
45,419
198,945
11,200
187,745
30,590
77,478
140,857
58,175
82,682
82,373
1.35
1.34
8.51
8.48
61,177,908
61,404,364
62,075,004
3,271,911
1,048,982
2,452
1.61%
18.34%
3.79%
3.92%
33.75%
$
$
$
$
$
$
$
$
$
35,781
137,097
5,350
131,747
22,455
59,933
94,269
38,313
55,956
55,647
0.97
0.96
6.33
6.32
57,471,296
57,770,768
57,807,600
2,297,976
741,494
95
1.59%
17.89%
3.81%
3.95%
37.56%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(Dollars in thousands, except per share amounts)
2018
2017
2016
2015
2014
At or for the Fiscal Years Ended June 30,
Tier 1 leverage (core) capital to adjusted average assets
8.88%
9.60%
8.78 %
9.25%
Capital Ratios:
Equity to assets at end of period
BofI Holding, Inc:
Tier 1 leverage (core) capital to adjusted average assets
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
BofI Federal Bank:
Tier 1 leverage (core) capital to adjusted tangible
assets6
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Asset Quality Ratios:
Net charge-offs to average loans and leases7
Non-performing loans and leases to total loans and leases
Non-performing assets to total assets
Allowance for loan and lease losses to total loans and
leases held for investment at end of period
Allowance for loan and lease losses to non-performing
loans and leases
10.07%
9.81%
8.99 %
9.16%
8.42%
9.45%
13.27%
13.34%
14.84%
9.95%
14.66%
14.75%
16.38%
9.12 %
14.42 %
14.53 %
16.36 %
9.59%
14.98%
15.12%
15.91%
N/A
12.53%
12.53%
13.27%
0.19%
0.37%
0.43%
0.58%
N/A
14.25%
14.25%
14.97%
0.06%
0.38%
0.35%
0.55%
N/A
14.00 %
14.00 %
14.75 %
(0.01)%
0.50 %
0.42 %
0.56 %
N/A
14.58%
14.58%
15.38%
0.03%
0.62%
0.55%
0.57%
N/A
N/A
N/A
N/A
N/A
8.66%
N/A
14.42%
15.11%
0.04%
0.57%
0.46%
0.51%
157.40%
143.81%
112.45 %
91.88%
90.13%
1 See Note 1 – “Organizations and Summary of Significant Accounting Policies” of the consolidated financial statements for a reconciliation to previously issued
financial statements for correction of immaterial errors for fiscal years ended June 30, 2017 and 2016.
2 Common stock and per share amounts have been retroactively restated for the fiscal years ended June 30, 2015 and 2014 presented to reflect the four-for-one
split of the Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015.
3 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.
4 Net interest margin represents net interest income as a percentage of average interest-earning assets.
5 Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.
6 Reflects regulatory capital ratios of BofI Federal Bank. Effective January 1, 2015, the Bank’s capital requirements changed the tier 1 leverage ratio from using
end of period adjusted tangible assets to using adjusted average assets for the quarter and added a common equity tier 1 capital ratio.
7 Net charge-offs do not include any amounts transferred to loans held for sale.
33
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 expressed or implied in our forward-looking statements due to various important factors, including those set forth
under “Risk Factors” in Item 1A. 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
BofI Holding, Inc. is the holding company for BofI Federal Bank, a diversified financial services company with
approximately $9.5 billion in assets that provides innovative banking and lending products and services to customers nationwide
through scalable low cost distribution channels and affinity partners. The Bank has deposit and loan and lease customers nationwide
including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily
residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. The Bank
generates fee income from consumer and business products including fees from loans originated for sale and transaction fees
earned from processing payment activity. BofI Holding, Inc.’s common stock is listed on the NASDAQ Global Select Market and
is a component of the Russell 2000® Index, the S&P SmallCap 600® Index and the KBW Nasdaq Financial Technology Index.
Net income for the fiscal year ended June 30, 2018 was $152.4 million compared to $134.7 million and $119.3 million
for the fiscal years ended June 30, 2017 and 2016, respectively. Net income attributable to common stockholders for the fiscal
year ended June 30, 2018 was $152.1 million, or $2.37 per diluted share compared to $134.4 million, or $2.10 per diluted share
and $119.0 million, or $1.87 per diluted share for the years ended June 30, 2017 and 2016, respectively. Growth in our interest
earning assets, particularly the loan and lease portfolio, was the primary driver of the increase in our net income from fiscal 2016
to fiscal 2018. Net interest income increased $55.3 million for the year ended June 30, 2018 compared to the year ended June 30,
2017.
Net interest income for the year ended June 30, 2018 was $368.5 million compared to $313.2 million and $261.0 million
for the years ended June 30, 2017 and 2016, respectively. The growth of net interest income from fiscal year 2016 through 2018
is primarily due to net loan and lease portfolio growth.
Provision for loan and lease losses for the year ended June 30, 2018 was $25.8 million, compared to $11.1 million and
$9.7 million for the years ended June 30, 2017 and 2016, respectively. The increase of $14.7 million for fiscal year 2018 is the
result of an increase in Refund Advance loan fundings from $0.3 billion to $1.1 billion from 2017 to 2018, respectively, combined
with growth and changes in the loan and lease mix of the portfolio. The increase of $1.4 million for fiscal year 2017 is primarily
the result of growth and changes in the loan and lease mix of the portfolio.
Non-interest income was $70.9 million compared to non-interest income of $68.1 million and $66.3 million for the fiscal
years ended June 30, 2018, 2017 and 2016. The increase from fiscal year 2017 to fiscal year 2018 was primarily the result of an
increase of $5.7 million in banking and service fees due to increased fees from H&R Block-branded products, an increase of $1.2
million in gain on sale-other primarily from increased sales of structured settlements, and a decrease of $1.1 million in unrealized
loss on securities partially offset by a decrease in realized gain from sale of securities of $3.9 million, decreased levels of prepayment
penalty fee income of $0.7 million, and a mortgage banking income decrease of $0.5 million. The increase from 2016 to 2017
was primarily due to increased banking and service fees due to increased fees from H&R Block-branded products increased
mortgage banking income, gain on sale of securities, partially offset by a decrease in gain on sale-other primarily from sales of
structured settlements.
Non-interest expense for the fiscal year ended June 30, 2018 was $173.9 million compared to $137.6 million and $112.8
million for the years ended June 30, 2017 and 2016, respectively. The increase was primarily due to an increase of $19.2 million
in the Bank’s staffing for lending, information technology infrastructure development, trustee and fiduciary services and regulatory
compliance, an increase in advertising and promotions of $6.1 million, an increase in data processing and internet of $4.1 million,
and an increase in other general and administrative costs of $3.4 million. Our staffing rose to 801 full-time equivalents compared
to 681 and 647 at June 30, 2018, 2017 and 2016, respectively.
Total assets were $9,539.5 million at June 30, 2018 compared to $8,501.7 million at June 30, 2017. Assets grew $1,037.8
million or 12.2% during the last fiscal year, primarily due to an increase in the origination of single family mortgage loans and
C&I loans. These loans were funded primarily with growth in deposits.
Our future performance will depend on many factors: changes in interest rates, competition for deposits and quality loans,
the credit performance of our assets, regulatory actions, strategic transactions, and our ability to improve operating efficiencies.
See “Item 1A. Risk Factors.”
34
MERGERS AND ACQUISITIONS
From time to time we undertake acquisitions or similar transactions consistent with our operating and growth
strategies. During the fiscal years ended June 30, 2016, 2017 and 2018 there were three acquisitions, which are discussed below.
H&R Block Bank Deposit Acquisition
On August 31, 2015, our Bank completed the acquisition of approximately $419 million in deposits consisting of checking,
individual retirement savings, and CD accounts from H&R Block Bank and its parent company, H&R Block, Inc. (“H&R Block”).
In connection with the closing of this transaction: (i) our Bank and Emerald Financial Services, LLC, a Delaware limited liability
company and wholly-owned subsidiary of H&R Block (“EFS”), entered into the Program Management Agreement (“PMA”),
dated August 31, 2015; (ii) our Bank and H&R Block, EFS, HRB Participant I, LLC, a Delaware limited liability company and
wholly-owned subsidiary of H&R Block, entered into the Emerald Receivables Participation Agreement, dated August 31, 2015;
and (iii) our Bank and H&R Block entered into the Guaranty Agreement (together, the “PMA and related Agreements”), dated
August 31, 2015. Through the PMA and related Agreements our Bank will provide H&R Block-branded financial services products
and services. The three products and services that represent the primary focus and the majority of transactional volume that our
Bank will process are described in detail below.
The first product is Emerald Prepaid Mastercard® services. The Bank entered into agreements to offer this product in
August 2015. Under the agreements, the Bank is responsible for the primary oversight and control of the prepaid card programs
of a wholly-owned subsidiary of H&R Block. The Bank holds the prepaid card customer deposits for those cards issued under the
prepaid programs in non-interest bearing accounts and earns a fixed fee paid by H&R Block’s subsidiary for each automated
clearing house (“ACH”) transaction processed through the prepaid card customer accounts. A portion of H&R Block’s customers
use the Emerald Card as an option to receive federal and state income tax refunds. The prepaid customer deposits are included in
non-interest bearing deposit liabilities on the balance sheet of the Company and the ACH fee income is included in the income
statement under the line banking and service fees.
The second product is Refund Transfer. The Bank entered into agreements to offer this product in August 2015. The Bank
is responsible for the primary oversight and control of the refund transfer program of a wholly-owned subsidiary of H&R Block.
The Bank opens a temporary bank account for each H&R Block customer who is receiving an income tax refund and elects to
defer payment of his or her tax preparation fees. After the Internal Revenue Service and any state income tax authorities transfer
the refund into the customer’s account, the net funds are transferred to the customer and the temporary deposit account is closed.
The Bank earns a fixed fee paid by H&R Block for each of the H&R Block customers electing a Refund Transfer. The fees are
earned primarily in the quarters ending March 31st and are included in the income statement under the line banking and service
fees.
The third product is Emerald Advance. The Bank entered into agreements to offer this product in August 2015. Under
the agreements the Bank is responsible for the underwriting guidelines and credit policies for unsecured consumer lines of credit
offered to H&R Block customers. The Bank offers and funds unsecured lines of credit to consumers primarily through the H&R
Block tax preparation offices and earns interest income and fee income. The Bank retains 10% of the Emerald Advance and sells
the remainder to H&R Block. The lines of credit are included in loans and leases on the balance sheet of the Company and the
interest income and fee income are included in the income statement under the line loans and leases interest and dividend income.
The fourth product is an interest-free Refund Advance loan. The Bank exclusively originated and funded all of H&R
Block’s interest-free Refund Advance loans to tax preparation clients for the 2018 tax season. The Bank performed the credit
underwriting, loan origination, and funding associated with the interest-free Refund Advance loans in the current tax season and
received fees from H&R Block for operating the program. No fee is charged to the tax preparation client. Repayment of the Refund
Advance loan is deducted from the client’s tax refund proceeds; if an insufficient refund to repay the Refund Advance loan is
received, there is no recourse to the client, no negative credit reporting occurs in respect of the client and no collection efforts are
made against the client. This agreement is an expansion of the services BofI provided to H&R Block in the 2017 tax season when
the Bank participated through purchases of the loans with other providers in the Refund Advance loan program. During the 2017
tax season, the Bank purchased the Refund Advance loans from a third-party bank at a discount and recorded the accretion of the
loan discount as interest income, reported on the income statement under the interest and dividend income line item. During the
2018 tax season, the Bank recorded the fees received from H&R Block as interest income on loans, reported on the income
statement under the interest and dividend income line item. In July 2018, the Bank has renewed its agreement with H&R Block
to be the exclusive provider of interest-free Refund Advance loans to customers during the 2019 tax season.
The H&R Block-branded financial services products introduce seasonality into the Company’s quarterly reports on Form
10-Q in the unaudited condensed consolidated income statements through the banking and service fees category of non-interest
35
income and the other general and administrative category of non-interest expense, with the peak income and expense in these
categories typically occurring during the Company’s third fiscal quarter ended March 31.
Pacific Western Equipment Finance Asset Acquisition
On March 31, 2016, the Bank entered into an Asset Purchase Agreement with Pacific Western Bank to acquire
approximately $140 million of equipment leases from Pacific Western Equipment Finance and assumed certain insignificant
operations and related liabilities. The purchase price and total consideration paid for the assets consisted of the fair market value
of the assumed liabilities plus a lease purchase price premium of approximately 2.5%.
Epiq Acquisition
On April 4, 2018, a subsidiary of the Bank acquired the bankruptcy trustee and fiduciary services business of Epiq Systems,
Inc. The business provides specialized software and consulting services to bankruptcy and non-bankruptcy trustees and fiduciaries
in all fifty states. This business is expected to generate fee income from bank partners and bankruptcy cases, as well as opportunities
to source low cost deposits. No deposits were acquired as part of the transaction. The Company recorded an unidentified intangible
asset (goodwill) incident to the acquisition of $36.0 million and an intangible asset of $32.7 million. The existing business has $1
billion of Chapter 7 and non-Chapter 7 deposits currently held at seven bank partners which have contractual wind-down periods
ranging from 9 to 24 months. We currently benefit from fees paid to us by partner banks and anticipate the $1 billion of deposits
held at the seven bank partners to transfer to the Bank potentially providing a lower cost of funds.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and results of operations is based upon our consolidated
financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these consolidated financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing
basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We
believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly
from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance
sheet dates and our results of operations for the reporting periods.
Securities. 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. For securities other than non-agency RMBS, we use observable market participant
inputs and categorize these securities as Level II in determining fair value. For non-agency RMBS securities, we use a level III
fair value model approach. 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 as well as the forecasted increase or
decrease in the national home price appreciation (HPA) index. 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 HPA index. To determine the discount rates used to compute the present value of the expected cash flows for these non-
agency RMBS 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 RMBS 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
36
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 flows for purposes of measuring the credit
component of an other-than-temporary impairment of our debt securities.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is maintained at a level estimated to
provide for probable incurred losses in the loan and lease portfolio. Management determines the adequacy of the allowance based
on reviews of individual loans and leases 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 and lease losses, which is reduced by charge-offs and recoveries of loans previously charged-off. Allocations
of the allowance may be made for specific loans but the entire allowance is available for any loan that, in management’s judgment,
may be uncollectible or impaired.
The allowance for loan and lease losses includes specific and general reserves. Specific reserves are provided for impaired
loans. 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’s
ability 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 and lease losses 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 loan class. 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. The following portfolio segments have been identified: single family
secured mortgage, home equity secured mortgage, single family warehouse and other, multifamily secured mortgage, commercial
real estate mortgage, recreational vehicles and auto secured, factoring, C&I and other.
37
USE OF NON-GAAP FINANCIAL MEASURES
In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such
as tangible book value per common share. Non-GAAP financial measures have inherent limitations, are not required to be uniformly
applied and are not audited. Readers should be aware of these limitations and should be cautious as to their use of such measures.
Although we believe the non-GAAP financial measures disclosed in this report enhance investors’ understanding of our business
and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial
measures.
We define book value adjusted for intangible assets and goodwill as tangible book value (“tangible book value”), a non-GAAP
financial measure. Tangible book value is calculated using common shareholder equity minus mortgage servicing rights, goodwill
and intangible assets, divided by common shares outstanding at the end of the period. Tangible book value per common share, a
non-GAAP financial measure, is calculated dividing tangible book value by the common shares outstanding at the end of the
period. We believe tangible book value per common share is useful in evaluating the Company’s capital strength, financial condition,
and ability to manage potential losses.
Below is a reconciliation of total stockholders’ equity tangible book value (Non-GAAP):
(Dollars in thousands, except per share amounts)
Total stockholders’ equity
Less: preferred stock
Common stockholders’ equity
Less: mortgage servicing rights, carried at fair value
Less: goodwill and intangible assets
At the Fiscal Years Ended June 30,
$
2018
960,513
5,063
955,450
10,752
67,788
$
2017
834,247
5,063
829,184
7,200
—
$
2016
683,590
5,063
678,527
3,943
—
$
2015
533,526
5,063
528,463
2,098
—
$
2014
370,778
5,063
365,715
562
—
Tangible common stockholders equity (Non-GAAP)
$
876,910
$
821,984
$
674,584
$
526,365
$
365,153
Common shares outstanding at end of period
62,688,064
63,536,244
63,219,392
62,075,004
57,807,600
Tangible book value per common share (Non-GAAP) $
13.99
$
12.94
$
10.67
$
8.48
$
6.32
38
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,
2018
Interest
Income /
Expense
Average
Yields
Earned /
Rates
Paid
Average
Balance1
2017
Interest
Income /
Expense
Average
Yields
Earned /
Rates
Paid
Average
Balance1
2016
Interest
Income /
Expense
Average
Yields
Earned /
Rates
Paid
Average
Balance1
$ 7,893,072
$
446,991
5.66% $ 6,819,102
$
358,849
5.26% $ 5,680,003
$
291,058
5.12%
807,348
12,450
1.54%
658,580
5,204
0.79%
498,483
2,070
0.42%
209,434
11,335
5.41%
393,334
16,889
4.29%
442,070
18,910
4.28%
61,222
4,298
7.02%
55,577
6,344
11.41%
62,255
5,669
9.11%
8,971,076
475,074
5.30%
7,926,593
387,286
4.89%
6,682,811
317,707
4.75%
(Dollars in thousands)
Assets:
Loans and leases2,3
Interest-earning
deposits in other
financial institutions
Mortgage-backed and
other investment
securities
Stock of the FHLB, at
cost
Total interest-earning
assets
Non-interest-earning
assets
100,380
Total assets
$ 9,071,456
116,545
$ 8,043,138
140,066
$ 6,822,877
Liabilities and
Stockholders’ Equity:
Interest-bearing demand
and savings
$ 4,706,238
$
54,013
1.15% $ 4,619,769
$
34,556
0.75% $ 3,649,423
$
24,611
Time deposits
990,635
25,838
2.61%
941,919
21,938
2.33%
852,590
18,056
0.67%
2.12%
Securities sold under
agreements to
repurchase
Advances from the
FHLB
Subordinated notes and
debentures and other
Total interest-bearing
liabilities
Non-interest-bearing
demand deposits
Other non-interest-
bearing liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income
Interest rate spread4
Net interest margin5
5,575
229
4.11%
33,068
1,465
4.43%
35,000
1,555
4.44%
1,296,120
22,848
1.76%
798,982
12,403
1.55%
855,029
11,175
1.31%
54,522
3,652
6.70%
55,873
3,697
6.62%
22,025
1,299
5.90%
7,053,090
106,580
1.51%
6,449,611
74,059
1.15%
5,414,067
56,696
1.05%
1,052,944
68,361
897,061
774,411
58,040
761,076
739,764
51,672
617,374
$ 9,071,456
$ 8,043,138
$ 6,822,877
$
368,494
$
313,227
$
261,011
3.79%
4.11%
3.74%
3.95%
3.70%
3.91%
1 Average balances are obtained from daily data.
2 Loans and leases include loans held for sale, loan and lease premiums, discounts and unearned fees.
3 Interest income includes reductions for amortization of loan and lease and investment securities premiums and earnings from accretion of discounts and loan
and lease fees. Loan and lease fee income is not significant. Also includes $29.3million as of June 30, 2018, $30.3 million as of June 30, 2017 and $31.0 million
as of June 30, 2016 of loans that qualify for Community Reinvestment Act credit which are taxed at a reduced rate.
4 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.
5 Net interest margin represents net interest income as a percentage of average interest-earning assets.
39
RESULTS OF OPERATIONS
Our results of operations depend on our net interest income, which is the difference between interest income on interest-
earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth
in our interest earning assets and is subject to competitive factors in the online banking market. Our net interest income is reduced
by our estimate of loss provisions for our loan and lease portfolio. We also earn non-interest income primarily from mortgage
banking activities, banking products and service activity, prepaid card fee income, prepayment fee income from multifamily
borrowers who repay their loans before maturity and from gains on sales of other loans and investment securities. Losses on
investment securities reduce non-interest income. The largest component of non-interest expense is salary and benefits, which is
a function of the number of personnel, which increased from 681 full time employees at June 30, 2017 to 801 full-time equivalent
employees at June 30, 2018. We are subject to federal and state income taxes, and our effective tax rates were 36.42%, 42.10%
and 41.78% for the fiscal years ended June 30, 2018, 2017, and 2016, respectively. Other factors that affect our results of operations
include expenses relating to data processing, advertising, depreciation, occupancy, professional services, and other miscellaneous
expenses.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2018 AND JUNE 30, 2017
Net Interest Income. Net interest income totaled $368.5 million for the fiscal year ended June 30, 2018 compared to
$313.2 million for the fiscal year ended June 30, 2017. The following table sets forth the effects of changing rates and volumes
on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable
to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense
attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate
has been allocated proportionally to both, based on their relative absolute values.
(Dollars in thousands)
Increase (decrease) in interest income:
Loans and leases
Federal funds sold
Interest-earning deposits in other financial institutions
Mortgage-backed and other investment securities
Stock of the FHLB, at cost
Total increase (decrease) in interest income
Increase (decrease) in interest expense:
Interest-bearing demand and savings
Time deposits
Securities sold under agreements to repurchase
Advances from the FHLB
Other borrowings
Fiscal Year Ended June 30, 2018 vs 2017
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
$
59,441
$
28,701
$
88,142
$
$
$
$
1,393
(9,217)
592
52,209
660
1,174
(1,137)
8,577
(90)
$
$
5,853
3,663
(2,638)
35,579
18,797
2,726
(99)
1,868
45
7,246
(5,554)
(2,046)
87,788
19,457
3,900
(1,236)
10,445
(45)
Total increase (decrease) in interest expense
$
9,184
$
23,337
$
32,521
The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.
Interest Income. Interest income for the fiscal year ended June 30, 2018 totaled $475.1 million, an increase of $87.8
million, or 22.7%, compared to $387.3 million in interest income for the fiscal year ended June 30, 2017 primarily due to growth
in volume of interest-earning assets from loan originations, primarily from commercial & industrial lending as well as accretion
from origination fees from Refund Advance loans. Fundings of Refund Advance loans increased from $0.3 billion to $1.1 billion
for the fiscal years ended June 30, 2017 and June 30, 2018, respectively. Average interest-earning assets for the fiscal year ended
June 30, 2018 increased by $1,044.5 million compared to the fiscal year ended June 30, 2017 primarily due to loan and lease
originations for investment which increased $1,740.1 million during the year ended June 30, 2018. Yields on loans and leases
increased by 40 basis points to 5.66% for the fiscal year ended June 30, 2018, primarily due to increased yields in the single family,
commercial & industrial and H&R Block-branded loan products. For the fiscal year ended June 30, 2018, the growth in average
balances contributed additional interest income of $52.2 million, which was supplemented by a $35.6 million increase in interest
income due to the increase in average rate. The average yield earned on our interest-earning assets increased to 5.30% for the
fiscal year ended June 30, 2018, up from 4.89% for the same period in 2017 primarily due to the increase in rate from loans and
leases. As a result of the Federal Reserve decisions to increase the Fed Funds rate over the last year we have marked up our
40
adjustable loans and have increased the market rates on new loans. A contributing factor to the increase of loans and leases income
is the amortization of origination fees for H&R Block-branded products.
Interest Expense. Interest expense totaled $106.6 million for the fiscal year ended June 30, 2018, an increase of $32.5
million, or 43.9% compared to $74.1 million in interest expense during the fiscal year ended June 30, 2017, due primarily to
increased rates on deposits and advances, as a result of the Federal Reserve decisions to increase the Fed Funds rate over the last
year. The average rate paid on all of our interest-bearing liabilities increased to 1.51% for the fiscal year ended June 30, 2018 from
1.15% for the fiscal year ended June 30, 2017, due primarily to increased rates on deposits and advances from FHLB. Average
interest-bearing liabilities for the fiscal year ended June 30, 2018 increased $603.5 million compared to fiscal 2017. The average
rate on interest-bearing deposits increased to 1.15% from 0.75% due to increases in prevailing deposit rates across the industry.
The rates on advances from the FHLB also increased to 1.76% from 1.55% due primarily to the Fed rate increases. The average
rate on time deposits increased to 2.61% for the fiscal year ended June 30, 2018 from 2.33% for the fiscal year ended June 30,
2017, due to Fed rate increases. Average FHLB advances for the fiscal year ended June 30, 2018 increased $497.1 million, or
62.2% compared to fiscal 2017. The average non-interest-bearing demand deposits were $1,052.9 million for the fiscal year ended
June 30, 2018, representing an increase of $278.5 million.
Provision for Loan and Lease Losses. Provision for loan and lease losses was $25.8 million for the fiscal year ended
June 30, 2018 and $11.1 million for fiscal 2017. The increase in the loan and lease loss provision was primarily due to the increase
in Refund Advance loan fundings from $0.3 billion to $1.1 billion during fiscal 2017 and 2018, respectively, combined with overall
loan portfolio growth. The provisions are made to maintain our allowance for loan and lease losses at levels which management
believes to be adequate. The assessment of the adequacy of our allowance for loan and lease losses is based upon a number of
quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss history and changes in the
volume and mix of loans and collateral values.
See “Asset Quality and Allowance for Loan and Lease Losses” for discussion of our allowance for loan and lease losses
and the related loss provisions.
Non-interest Income. The following table sets forth information regarding our non-interest income:
(Dollars in thousands)
Realized gain on securities:
Sale of securities
Total realized gain on securities
Unrealized loss on securities:
Total impairment losses
Loss (gain) recognized in other comprehensive income
Net impairment loss recognized in earnings
Fair value (gain) loss on trading securities
Total unrealized loss on securities
Prepayment penalty fee income
Gain on sale – other
Mortgage banking income
Banking and service fees
Total non-interest income
For the Fiscal Year Ended June 30,
2018
2017
$
(18) $
(18)
(6,271)
6,115
(156)
—
(156)
3,862
5,734
13,755
47,764
$
70,941
$
3,920
3,920
(10,937)
8,973
(1,964)
743
(1,221)
4,574
4,487
14,284
42,088
68,132
Our relationship with H&R Block began in fiscal 2016 and introduced seasonality into banking and service fees category
of non-interest income, with an increase during our second quarter and the peak income in this category typically occurring during
our third fiscal quarter ended March 31. Therefore, banking and services fees for the three months ended March 31, are not
indicative of results to be expected for other quarters during the fiscal year. Historically, the primary non-interest income generating
H&R Block products and services that lead to the increased banking and service fees are Emerald Prepaid Mastercard® (“EPC”)
and Refund Transfer (“RT”).
Non-interest income totaled $70.9 million for the fiscal year ended June 30, 2018 compared to non-interest income of
$68.1 million for fiscal 2017. The increase was primarily the result of an increase of $5.7 million in banking and service fees due
to H&R Block-branded products and service fee income, a $1.2 million increase in gain on sale-other primarily from sales of
structured settlements and lottery receivables, and a decrease in net unrealized loss on securities of $1.1 million, partially offset
by a decrease in realized gain from sale of securities of $3.9 million, decreased levels of prepayment penalty fee income of $0.7
41
million, and a decrease in mortgage banking income of $0.5 million. Banking and service fees includes H&R Block-branded
product fees, deposit fees, fee income from prepaid card sponsors, and certain C&I loan fees. The primary non-interest income-
generating H&R Block products and services that led to the increased banking and service fees are EPC and RT. For the fiscal
year ended June 30, 2018, EPC increased $0.2 million to $8.0 million from $7.8 million for fiscal 2017. For the fiscal year ended
June 30, 2018, RT decreased $0.3 million to $12.5 million from $12.8 million for fiscal 2017.
Included in gain on sale – other are sales of unsecured and secured consumer and business loans originated through
introductions from our third-party partner relationships, for example H&R Block-branded Emerald Advance, and sales of structured
settlement annuity and state lottery receivables. We engage in the wholesale and retail purchase of state lottery prize and structured
settlement annuity payments. These payments are high credit quality deferred payment receivables having a state lottery commission
or investment grade (top two tiers) insurance company payor. The Bank originates contracts for the retail purchase of such payments
and classifies these under the heading of Factoring in the loan portfolio. Factoring yields are typically higher than mortgage loan
rates. Typically, the gain received upon sale of these payment streams is greater than the gain received from an equivalent amount
of mortgage loan sales. Since 2013, pools of structured settlement receivables have been originated for sale depending upon
management’s assessment of interest rate risk, liquidity, and offers containing favorable terms and are classified on our balance
sheet as loans held for sale. Increased originations and favorable terms during fiscal 2018 resulted in an increase in gain on sale
from structured settlement annuity and state lottery receivables.
Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods
shown:
(Dollars in thousands)
Salaries and related costs
Data processing and internet
Advertising and promotional
Depreciation and amortization
Occupancy and equipment
Professional services
FDIC and regulator fees
Real estate owned and repossessed vehicles
General and administrative expenses
Total non-interest expense
For the Fiscal Year Ended June 30,
2018
2017
$
100,975
$
17,400
15,500
8,574
6,063
5,280
4,860
260
$
15,024
173,936
$
81,821
13,323
9,367
6,094
5,612
4,980
4,330
498
11,580
137,605
Non-interest expense totaled $173.9 million for the fiscal year ended June 30, 2018, an increase of $36.3 million compared
to fiscal 2017. Salaries and related costs increased $19.2 million, or 23.4%, in fiscal 2018 due to increased staffing levels to support
growth in the Bank’s staffing for lending, information technology infrastructure development, regulatory compliance, and the
trustee and fiduciary services. Our staff increased to 801 from 681 or 17.62% between fiscal 2018 and 2017 and increased to 681
from 647 or 5.26% between fiscal 2017 and 2016.
Data processing and internet expense increased $4.1 million, primarily due to enhancements to customer interfaces and
the Bank’s core processing system.
Advertising and promotion expense increased $6.1 million, primarily due to additional lead generation costs, increased
deposit marketing and rebranding costs.
Depreciation and amortization, increased $2.5 million primarily due to depreciation on lending platform enhancements
and infrastructure development and amortization of intangibles.
Occupancy and equipment expense increased $0.5 million, in order to support increased production and office space for
additional employees.
Professional services, which include accounting and legal fees, increased $0.3 million in fiscal 2018 compared to 2017.
The increase in professional services was primarily due to increased legal expenses, partially offset by increased insurance
reimbursements.
The change in our cost of Federal Deposit Insurance Corporation (“FDIC”) and OCC standard regulatory charges increased
by $0.5 million in fiscal 2018 compared to fiscal 2017. The overall growth of the Bank’s liabilities has been offset by the generally
favorable change in the FDIC deposit insurance premium calculation. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premiums to the FDIC.
General and administrative expenses increased by $3.4 million in fiscal 2018 compared to 2017. The increases were
primarily due to costs to support loan and deposit production.
42
Income Tax Expense. Income tax expense was $87.3 million for the fiscal year ended June 30, 2018 compared to $98.0
million for fiscal 2017. Our effective tax rates were 36.42% and 42.10% for the fiscal year ended June 30, 2018 and 2017,
respectively.
As a result of legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on
December 22, 2017, during the quarter ended December 31, 2017, the Company revised its estimated annual effective rate to
reflect a change in the federal statutory rate from 35.0% to 21.0%. The Tax Act makes broad and complex changes to the U.S. tax
code that will affect our fiscal year ending June 30, 2018, including reducing the U.S. federal corporate statutory tax rate to 21.0%
beginning January 1, 2018, which results in a blended federal corporate statutory tax rate of 28.1% for the Company’s fiscal year
ending June 30, 2018 that is based on the applicable tax rates before and after the Tax Act and the number of days in the fiscal
year.
During the quarter ended December 31, 2017, the Company revalued the deferred tax balance to reflect the new corporate
tax rate, which resulted in a decrease in net deferred tax assets of $9,189. As a result, income tax expense reported for the fiscal
year ended June 30, 2018 was adjusted to reflect the effects of the change in the tax law and the application of the newly enacted
rates to existing deferred balances.
Additionally, the Company received tax credits for the year ended June 30, 2018. These tax credits reduced the effective
tax rate by approximately 2.38%. Lastly, the Company adopted ASU 2016-09 effective July 1, 2017. As a result of the adoption,
the Company recorded $2.4 million of income tax benefits for the fiscal year ended June 30, 2018, respectively, related to excess
tax benefits from stock compensation. Prior to 2018, such excess tax benefits were generally recorded directly in stockholders’
equity. This new accounting standard may potentially increase the volatility in the Company’s effective tax rates.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2017 AND JUNE 30, 2016
Net Interest Income. Net interest income totaled $313.2 million for the fiscal year ended June 30, 2017 compared to
$261.0 million for the fiscal year ended June 30, 2016. The following table sets forth the effects of changing rates and volumes
on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable
to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense
attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate
has been allocated proportionally to both, based on their relative absolute values.
(Dollars in thousands)
Increase/(decrease) in interest income:
Loan and Leases
Interest-earning deposits in other financial institutions
Mortgage-backed and other investment securities
Stock of the FHLB, at cost
Total increase/(decrease) in interest income
Increase/(decrease) in interest expense:
Interest-bearing demand and savings
Time deposits
Securities sold under agreements to repurchase
Advances from the FHLB
Other borrowings
Fiscal Year Ended June 30, 2017 vs 2016
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
$
$
$
59,657
$
8,134
$
$
$
837
(2,065)
(652)
57,777
6,863
1,996
(86)
(758)
2,221
$
$
2,297
44
1,327
11,802
3,082
1,886
(4)
1,986
177
67,791
3,134
(2,021)
675
69,579
9,945
3,882
(90)
1,228
2,398
Total increase/(decrease) in interest expense
$
10,236
$
7,127
$
17,363
The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.
Interest Income. Interest income for the fiscal year ended June 30, 2017 totaled $387.3 million, an increase of $69.6
million, or 21.9%, compared to $317.7 million in interest income for the fiscal year ended June 30, 2016 primarily due to growth
in volume of interest-earning assets. Average interest-earning assets for the fiscal year ended June 30, 2017 increased by $1,243.8
million compared to the fiscal year ended June 30, 2016 primarily due to loan and lease originations for investment which increased
$548.8 million and loan and lease purchases for investment which increased $136.4 million during the year ended June 30, 2017.
43
Yields on loans and leases increased by 14 basis points to 5.26% for the fiscal year ended June 30, 2017, primarily due to increased
yields in the single family, commercial & industrial and H&R Block-branded loan products. For the fiscal year ended June 30,
2017, the growth in average balances contributed additional interest income of $57.8 million, which was supplemented by a $11.8
million increase in interest income due to the increase in average rate. The average yield earned on our interest-earning assets
increased to 4.89% for the fiscal year ended June 30, 2017, up from 4.75% for the same period in 2016 primarily due to the increase
in rate from loans and leases.
Interest Expense. Interest expense totaled $74.1 million for the fiscal year ended June 30, 2017, an increase of $17.4
million, or 30.6% compared to $56.7 million in interest expense during the fiscal year ended June 30, 2016, due primarily to
increased volumes of deposits and other borrowings as well as increased rates on deposits and advances. The average rate paid
on all of our interest-bearing liabilities increased to 1.15% for the fiscal year ended June 30, 2017 from 1.05% for the fiscal year
ended June 30, 2016, due primarily to increased rates on deposits and advances from FHLB. Average interest-bearing liabilities
for the fiscal year ended June 30, 2017 increased $1,035.5 million compared to fiscal 2016. The average interest-bearing balances
of demand and savings increased $970.3 million and the average interest-bearing balances increased $1,035.5 million due to
increased deposits and the full year impact of our subordinated notes issued in March 2016. The average rate on interest-bearing
deposits increased to 0.75% from 0.67% due to increases in prevailing deposit rates across the industry. The rates on advances
from the FHLB also increased to 1.55% from 1.31% due primarily to the Fed rate increases. The average rate on time deposits
increased to 2.33% for the fiscal year ended June 30, 2017 from 2.12% for the fiscal year ended June 30, 2016, due to issuance
of longer term time deposits. The average non-interest-bearing demand deposits were $774.4 million for the fiscal year ended
June 30, 2017, representing an increase of $34.6 million.
Provision for Loan and Lease Losses. Provision for loan and lease losses was $11.1 million for the fiscal year ended
June 30, 2017 and $9.7 million for fiscal 2016. The provisions are made to maintain our allowance for loan and lease losses at
levels which management believes to be adequate. The assessment of the adequacy of our allowance for loan and lease losses is
based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss
history and changes in the volume and mix of loans and collateral values.
See “Asset Quality and Allowance for Loan and Lease Losses” for discussion of our allowance for loan and lease losses
and the related loss provisions.
Non-interest Income. The following table sets forth information regarding our non-interest income:
(Dollars in thousands)
Realized gain on securities:
Sale of mortgage-backed securities
Total realized gain on securities
Unrealized loss on securities:
Total impairment losses
Loss (gain) recognized in other comprehensive income
Net impairment loss recognized in earnings
Fair value gain (loss) on trading securities
Total unrealized loss on securities
Prepayment penalty fee income
Gain on sale-other
Mortgage banking income
Banking and service fees
Total non-interest income
For the Fiscal Year Ended June 30,
2016
2017
$
3,920
$
3,920
(10,937)
8,973
(1,964)
743
(1,221)
4,574
4,487
14,284
42,088
$
68,132
$
1,427
1,427
(3,472)
2,907
(565)
(248)
(813)
2,914
15,540
11,076
36,196
66,340
Non-interest income totaled $68.1 million for the fiscal year ended June 30, 2017 compared to non-interest income of
$66.3 million for fiscal 2016. The increase was primarily the result of an increase of $5.9 million in banking and service fees due
to H&R Block-branded products and service fee income, an increase in mortgage banking income of $3.2 million, an increase in
realized gain from sale of securities of $2.5 million, and increased levels of prepayment penalty fee income of $1.7 million, partially
offset by a $11.1 million decrease in gain on sale-other primarily from reduced sales of structured settlements and lottery receivables.
Banking and service fees includes H&R Block-branded product fees, deposit fees and certain C&I loan fees as well as fee income
from prepaid card sponsors. The primary non-interest income-generating H&R Block products and services that led to the increased
banking and service fees are EPC and RT. For the fiscal year ended June 30, 2017, EPC increased $1.4 million to $7.8 million
from $6.4 million for fiscal 2016. For the fiscal year ended June 30, 2017, RT increased $0.3 million to $12.8 million from $12.5
million for fiscal 2016.
44
Included in gain on sale – other are sales of unsecured and secured consumer and business loans originated through
introductions from our third-party partner relationships, for example H&R Block-branded Emerald Advance, and sales of structured
settlement annuity and state lottery receivables. These payments are high credit quality deferred payment receivables having a
state lottery commission or investment grade (top two tiers) insurance company payor. The Bank originates contracts for the retail
purchase of such payments and classifies these under the heading of Factoring in the loan portfolio. Factoring yields are typically
higher than mortgage loan rates. Typically, the gain received upon sale of these payment streams is greater than the gain received
from an equivalent amount of mortgage loan sales. Since 2013, pools of structured settlement receivables have been originated
for sale depending upon management’s assessment of interest rate risk, liquidity, and offers containing favorable terms and are
classified on our balance sheet as loans held for sale. Decreased originations and less favorable terms during fiscal 2017 resulted
in a decrease in gain on sale from structured settlement annuity and state lottery receivables.
Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods
shown:
(Dollars in thousands)
Salaries and related costs
Data processing and internet
Advertising and promotional
Depreciation and amortization
Occupancy and equipment
Professional services
FDIC and regulator fees
Real estate owned and repossessed vehicles
Other general and administrative
Total non-interest expense
For the Fiscal Year Ended June 30,
2017
2016
$
$
81,821
$
13,323
9,367
6,094
5,612
4,980
4,330
498
11,580
137,605
$
66,667
10,348
6,867
4,795
4,326
4,700
4,632
(46)
10,467
112,756
Non-interest expense totaled $137.6 million for the fiscal year ended June 30, 2017, an increase of $24.8 million compared
to fiscal 2016. Salaries and related costs increased $15.2 million, or 22.7%, in fiscal 2017 due to increased staffing levels to support
growth in the Bank’s staffing for lending, information technology infrastructure development, and regulatory compliance. Our
staff increased to 681 from 647 between fiscal 2017 and 2016 and increased to 647 from 467 between fiscal 2016 and 2015.
Data processing and internet expense increased $3.0 million, primarily due to growth in the number of customer accounts
and enhancements to the Bank’s core processing system.
Advertising and promotion expense increased $2.5 million, primarily due to additional lead generation costs and increased
deposit marketing.
Depreciation, increased $1.3 million primarily due to depreciation on lending platform enhancements and infrastructure
development.
Occupancy and equipment expense increased $1.3 million, in order to support increased production and office space for
additional employees.
Professional services, which include accounting and legal fees, increased $0.3 million in fiscal 2017 compared to 2016.
The increase in professional services was primarily due to increased legal expenses, partially offset by increased insurance
reimbursements.
The change in our cost of Federal Deposit Insurance Corporation (“FDIC”) and OCC standard regulatory charges decreased
by $0.3 million in fiscal 2017 compared to fiscal 2016, the nominal changes were due to a favorable change in the FDIC deposit
insurance premium calculation partially offset by the overall growth of the Bank’s liabilities. As an FDIC-insured institution, the
Bank is required to pay deposit insurance premiums to the FDIC.
Other general and administrative costs increased by $1.1 million in fiscal 2017 compared to 2016. The increases were
primarily due to costs supports loan and deposit production.
Income Tax Expense. Income tax expense was $98.0 million for the fiscal year ended June 30, 2017 compared to $85.6
million for fiscal 2016. Our effective tax rates were 42.10% and 41.78% for the fiscal year ended June 30, 2017 and 2016,
respectively. The changes in the tax rates are the result of changes in state tax allocations.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2018 AND JUNE 30, 2017
45
Our total assets increased $1,037.8 million, or 12.2%, to $9,539.5 million, as of June 30, 2018, up from $8,501.7 million
at June 30, 2017. The loan and lease portfolio increased $1,057.8 million on a net basis, primarily from portfolio loan and lease
originations and purchases of $5,922.8 million less principal repayments and other adjustments of $4,865.0 million. Investment
securities decreased $92.5 million primarily due to repayments and sales, partially offset by purchases. Total liabilities increased
by $911.6 million or 11.9%, to $8,579.0 million at June 30, 2018, up from $7,667.4 million at June 30, 2017. The increase in total
liabilities resulted primarily from growth in deposits of $1,085.8 million partially offset by a decrease in advances from FHLB of
$183.0 million.
Stockholders’ equity increased by $126.3 million, or 15.1%, to $960.5 million at June 30, 2018, up from $834.2 million
at June 30, 2017. The increase was the result of $152.4 million in net income for the fiscal year, $10.4 million vesting and issuance
of RSUs and stock-based compensation expense, partially offset by $35.2 million in stock repurchases, $1.1 million unrealized
gain in other comprehensive income, net of tax, and $0.3 million in dividends declared on preferred stock. On March 17, 2016,
the Board of Directors of the Company, authorized a program to repurchase up to $100.0 million of common stock. As of June 30,
2018, the Company has repurchased a total of $35.2 million, or 1,233,491 common shares at an average price of $28.49 per share
with $64.8 million remaining under the current board authorized stock repurchase program.
46
ASSET QUALITY AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Non-performing loans and leases and foreclosed assets or “non-performing assets” consisted of the following:
(Dollars in thousands)
Non-performing assets:
Non-accrual loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Commercial real estate secured
Total non-accrual loans secured by real estate
Auto and recreational vehicle secured
Commercial & Industrial
Other
Total non-performing loans and leases
Foreclosed real estate
Repossessed vehicles
Total non-performing assets
2018
2017
At June 30,
2016
2015
2014
$
28,446
$
23,377
$
28,400
$
22,842
$
12,396
16
232
—
28,694
60
2,361
111
31,226
9,385
206
16
4,255
—
27,648
157
314
274
28,393
1,353
60
33
2,218
254
30,905
278
—
676
31,859
207
45
9
5,399
2,128
30,378
453
—
—
30,831
1,225
15
168
4,302
2,985
19,851
534
—
—
20,385
—
75
$
40,817
$
29,806
$
32,111
$
32,071
$
20,460
Total non-performing loans and leases as a percentage of total loans and
leases
Total non-performing assets as a percentage of total assets
0.37%
0.43%
0.38%
0.35%
0.50%
0.42%
0.62%
0.55%
0.57%
0.46%
Our non-performing assets increased to $40.8 million at June 30, 2018 from $29.8 million at June 30, 2017. The increase in
non-performing assets during the fiscal year ended June 30, 2018 was substantially comprised of an increase in foreclosed real estate
of $8.0 million and an increase in non-performing loans and leases of $2.8 million. Non-performing assets as a percentage of total
assets increased to 0.43% at June 30, 2018 from 0.35% at June 30, 2017. The decrease in non-performing assets during the fiscal year
ended June 30, 2017 compared to June 30, 2016 was comprised of a decrease in non-performing loans and leases of $3.5 million
partially offset by an increase in foreclosed real estate of $1.1 million.
The increase in non-performing loans and leases is primarily the result of increased single family residential and commercial
and industrial loans during the year ended June 30, 2018, partially offset by a decrease in non-performing loans by multifamily real
estate secured loans. The decrease in non-performing loans and leases as a percentage of total loans and leases is primarily the result
of loan growth. Approximately 3.30% of our non-performing loans and leases at June 30, 2018 were considered TDRs, compared to
5.56% at June 30, 2017. Borrowers making timely payments after a troubled debt restructuring are considered non-performing for at
least six months. Generally, after six months of timely payments, troubled debt restructured loans are reclassified from the non-
performing loan and lease category to performing and any previously deferred interest income is recognized. Approximately 91.10%
of the Bank’s non-performing loans and leases are single family first mortgages already written down in aggregate to 41.28% of the
original appraisal value of the underlying properties.
At June 30, 2018, our $28.4 million in single family non-performing loans represents 47 loans in 17 states ranging in amount
from $9,000 to $5.0 million. At June 30, 2017, our $23.4 million in single family non-performing loans represents 40 loans in 19 states
ranging in amount from $12,000 to $5.0 million. The Bank has already taken impairment charge-offs of $1.9 million on the non-
performing single family loans at June 30, 2018. Our $0.2 million in multifamily non-performing loans represents one loan in one state
at June 30, 2018, with impairment charge-offs taken in the amount of $0.1 million. At June 30, 2017 the $4.3 million of non-performing
multifamily loans represented four loans in two states, with impairment charge-offs taken in the amount of $0.1 million. At June 30,
2017 and 2018, we had no non-performing commercial real estate loans.
The $60,000 in non-performing automobile and recreational vehicle (“RV”) loans represents 7 loans ranging in amount from
$1,000 to $21,000 at June 30, 2018. The $157,000 in non-performing automobile and RV loans represented 12 loans ranging in amount
from $200 to $40,000 at June 30, 2017. Foreclosed real estate of $9.4 million at June 30, 2018 represents three single family properties.
Foreclosed real estate of $1.4 million at June 30, 2017 represented two single family properties. All foreclosed real estate is measured
at the lower of carrying value or fair value less costs to sell. Repossessed vehicles of $206,000 includes twenty-two vehicles with fair
values ranging in amount from $1 to $28,000 at June 30, 2018, compared to $60,000 at June 30, 2017, which includes five vehicles
47
with fair values ranging in amount from $6,000 to $17,000. Impaired loans are generally adjusted through charge-offs against the
allowance for loan and lease losses.
The $111,000 in non-performing other loans represents seven loans ranging in amount from $9,000 to $23,000 at June 30,
2018, compared to $274,000 at June 30, 2017 which includes 8 loans ranging in amount from $5,000 to $70,000.
We have experienced growth in our non-performing single family mortgage loans over the last five years; however, we believe
that the write-downs taken as of June 30, 2018 on these non-performing loans and the low average LTVs on the balance of our single
family mortgage real estate loans in our portfolio make our future risk of loss better than other banks with significant exposure to real
estate loans. If average nationwide residential housing values decline or if nationwide unemployment increases, we are likely to
experience growth in the level of our non-performing loans and leases, foreclosed real estate and repossessed vehicles in future periods.
Allowance for Loan and Lease Losses. We maintain an allowance for loan and lease losses in an amount that we believe is
sufficient to provide adequate protection against probable incurred losses in our loan and lease portfolio. We evaluate quarterly the
adequacy of the allowance based upon reviews of individual loans and leases, recent loss experience, current economic conditions,
risk characteristics of the various categories of loans and leases and other pertinent factors. The evaluation is inherently subjective, as
it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by
the provision for loan and lease losses, which is charged against current period operating results. The allowance is decreased by the
amount of charge-offs of loans and leases deemed uncollectible and increased by recoveries of loans and leases previously charged
off.
The allowance for loan and lease losses includes specific and general reserves. Specific reserves are provided for impaired
loans considered TDRs. All other impaired loans and leases are written down through charge-offs to their realizable value. A loan or
lease is measured for impairment generally two different ways. If the loan or lease 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
interest rate to the carrying value of the loan or lease. If the loan or lease is collateral dependent, the net proceeds from the sale of the
collateral is compared to the carrying value of the loan or lease. If the calculated amount is less than the carrying value of the loan or
lease, the loan or lease has impairment.
A general reserve is included in the allowance for loan and lease losses and is determined by adding the results of a quantitative
and a qualitative analysis to all other loans and leases 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 and lease
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 and lease review system, changes
in the underlying collateral of the loans and leases, 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 and leases affected by the qualitative factors.
The assessment of the adequacy of the Company’s allowance for loan and lease losses is based upon a range of quantitative
and qualitative factors, including levels and trends of past due and nonaccrual loans and leases, change in volume and mix of loans
and leases, collateral values and charge-off history.
The Company provides general loan loss reserves for its auto and RV loans based upon the borrower credit score at the time
of origination and the Company’s loss experience to date. The Company obtains updated credit scores for its auto and RV borrowers
approximately every six months. The updated credit score will result in a higher or lower general loan loss allowance depending on
the change in borrowers’ FICO scores and the resulting shift in loan balances among the five FICO bands from which the Company
measures and calculates its reserves. For the general loss reserve, the Company does not use individually updated credit scores or
valuations for the real estate collateralizing its real estate loans.
The allowance for loan and lease losses for the auto and RV loan portfolio at June 30, 2018 was determined by classifying
each outstanding loan according to the original FICO score and providing loss rates. The Company had $213,462 (dollars in thousands)
of auto and RV loan balances subject to general reserves as follows: FICO greater than or equal to 770: $105,612; 715 – 769: $73,013;
700 – 714: $18,524; 660 – 699: $14,992 and less than 660: $1,321.
The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan and
the loan-to-value ratio (“LTV”) at date of origination. The allowance for each class is determined by stratifying the outstanding unpaid
balance for each loan by the LTV and applying a loss rate. At June 30, 2018, the LTV groupings for each significant mortgage class
were as follows (dollars in thousands):
The Company had $4,170,495 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV
less than or equal to 60%: $2,443,303; 61% – 70%: $1,387,807; 71% – 80%: $339,193; and greater than 80%: $192.
The Company had $1,800,687 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV
less than or equal to 55%: $957,441; 56% – 65%: $562,928; 66% – 75%: $269,619; 76% – 80%: $9,499 and greater than 80%: $1,200.
48
During the quarter ended March 31, 2011, the Company divided the LTV analysis into two classes, separating the purchased loans
from the loans underwritten directly by the Company.
Based on historical performance, the Company concluded that multifamily loans originated by the Bank require lower estimated
loss rates than multifamily loans purchased. In fiscal years 2002 through 2004 the Company originated $137 million of primarily 30-
year multifamily mortgage loans using the same basic underwriting criteria and accounting for 20%, 25% and 19% of the total average
balance of the loan portfolio for fiscal year 2004, 2003 and 2002, respectively. The Company intentionally slowed its multifamily and
single family origination volume in 2005 through 2009 based upon the overall loosening of credit standards by competitors and the
economic downturn. Since 2009, the economy has stabilized and competitive underwriting standards have strengthened allowing the
Company to resume its originations. Since 2013, our weighted average of multifamily loans is equal to 22.6% of the total loan portfolio.
For these reasons, the Company believes that its historical underwriting experience originating multifamily loans allows the Company
to use its historical loss rate as a reasonable indicator of risk. The historic loss or quantitative component of the Company’s general
loan loss allowance is supplemented with a qualitative factor including a volume-based adjustment. At June 30, 2018 and June 30,
2017, all of the qualitative components of the general loan loss allowance for multifamily loans accounted for 100% and 100% of the
total multifamily allowance, respectively.
The Bank originates and purchases mortgage loans with terms that may include repayments that are less than the repayments
for fully amortizing loans, including interest only loans, option adjustable-rate mortgages, and other loan types that permit payments
that may be smaller than interest accruals. The Bank’s lending guidelines for interest only loans are adjusted for the increased credit
risk associated with these loans by requiring borrowers with such loans to borrow at LTVs that are lower than standard amortizing
ARM loans and by calculating debt to income ratios for qualifying borrowers based upon a fully amortizing payment, not the interest
only payment. The Company’s Credit Committee monitors and performs reviews of interest only loans. Adverse trends reflected in
the Company’s delinquency statistics, grading and classification of interest only loans would be reported to management and the Board
of Directors. As of June 30, 2018, the Company had $1,123.1 million of interest only loans and $2.3 million of option ARM mortgage
loans. Through June 30, 2018, the net amount of deferred interest on these loan types was not material to the financial position or
operating results of the Company.
The Company had $220,379 of commercial real estate loan balances subject to general reserves as follows: LTV less than or
equal to 50%: $104,070; 51% – 60%: $47,591; 61% – 70%: $56,649; 71% – 80%: $12,069 and greater than 80%: $0.
The Company’s commercial secured portfolio consists of business loans well-collateralized by real estate. The Company’s
other portfolio consists of receivables factoring for businesses and consumers. The Company allocates its allowance for loan and lease
losses for these asset types based on qualitative factors which consider the value of the collateral and the financial position of the issuer
of the receivables.
We believe the weighted average LTV percentage at June 30, 2018 of 55.35% for our entire real estate loan portfolio is lower
and more conservative than most banks which has resulted, and is expected to continue to result in the future, in lower average mortgage
loan charge-offs when compared to the real estate loan portfolios of other comparable banks.
Seasonal fluctuations in the Other loan classification and its associated allowance for loan and lease losses primarily relate
to tax season H&R Block-related loan products. These products are generally short term in nature, in that they are intended to be repaid
within a few weeks or months of origination; if they are not repaid timely, they are generally charged off in their entirety at 120 days
delinquent, consistent with regulatory guidance for unsecured consumer loan products. The Company provides general loan loss reserves
for its H&R Block-related loans based upon prior years’ loss experience with consideration for current year loan performance. The
increase in provision for loan and lease losses in the Other loan classification from $5.3 million to $17.1 million for the fiscal year
ended June 30, 2017 and 2018, the increase in charge-offs from $3.5 million to $14.6 million for the fiscal year ended June 30, 2017
and 2018 and the increase in allowance transfers to held-for-sale from $1.8 million to $2.3 million for the fiscal year ended June 30,
2017 and 2018 were primarily due to the increase in Refund Advance loan fundings from $0.3 billion to $1.1 billion during the quarters
ended March 31, 2017 and March 31, 2018, respectively, as well as the Company’s continued funding of Emerald Advance loans.
During fiscal 2018 the Company was the sole provider of the Refund Advance product. The increase in provision for loan and lease
losses in the Other loan classification from $2.8 million to $5.3 million for the fiscal year ended June 30, 2016 and 2017, respectively,
and the increase in charge-offs from $0 to $3.5 million for the fiscal year ended June 30, 2016 and 2017 were primarily due to the
Company’s participation in the Refund Advance loan program during which $0.3 billion of loans were purchased during the quarter
ended March 31, 2017, as well as its continued funding of Emerald Advance loans. The increase in provision for loan and lease losses
in the Other loan classification from a reduction of $5,000 to a provision of $2.8 million for the fiscal year ended June 30, 2015 and
2016, respectively, and the increase in allowance transferred to held-for-sale from $0 to $2.7 million for the fiscal year ended June 30,
2015 and 2016 were primarily due to the introduction of the Emerald Advance loan program. There is no long-term impact on the loan
and lease portfolio credit quality, because substantially all of the tax season H&R Block-related loan products are either collected,
charged-off or sold by the end of the Company’s fiscal year. While they do incur higher proportional default and charge-off rates than
the remainder of the Company’s loan and lease portfolio, these asset quality attributes are within expectations of the design of the
products.
49
The following table sets forth the changes in our allowance for loan and lease losses, by portfolio class for the dates indicated:
Single Family Real Estate Secured:
(Dollars in
thousands) Mortgage
Home
Equity
Warehouse
and Other
Multi-
family
Real
Estate
Secured
Commercial
Real Estate
Secured
Auto
and RV
Secured
Factoring
Commercial
& Industrial
Other
Total
Total
Allowance
as a % of
Total
Loans
Balance at
June 30,
2013
Provision for
loan losses
Charge-offs
Recoveries
Balance at
June 30,
2014
Provision for
loan and
lease losses
Charge-offs
Recoveries
Balance at
June 30,
2015
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2016
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2017
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2018
$
4,812
$
183
$
1,250
$
3,186
$
1,378
$ 1,536
$
201
$
1,623
$
13
$14,182
0.62%
3,214
(125)
58
3
(98)
46
9
—
—
708
(359)
250
12
(355)
—
(142)
(620)
38
78
—
—
1,425
43
5,350
—
—
(34)
(1,591)
40
432
7,959
134
1,259
3,785
1,035
812
279
3,048
62
18,373
0.51%
6,305
(747)
147
(1)
(43)
32
620
—
—
922
(344)
—
224
(156)
—
288
(271)
124
13
—
—
2,834
(5)
11,200
—
—
— (1,561)
12
315
13,664
122
1,879
4,363
1,103
953
292
5,882
69
28,327
0.57%
5,040
(205)
(134)
(3)
—
167
18,666
2,308
(1,115)
—
113
19,972
632
(271)
—
35
—
38
23
(6)
(23)
—
25
19
(18)
(1)
—
14
806
—
—
—
(311)
(114)
—
—
(1,056)
(147)
—
982
854
(339)
—
147
2,685
3,938
882
1,615
(387)
—
—
—
323
—
—
377
110
(23)
—
39
990
(433)
—
207
2,298
4,638
1,008
2,379
69
(287)
—
—
372
—
—
—
(159)
1,390
—
—
—
(803)
—
212
(47)
1,748
2,800
9,700
—
—
—
245
156
—
—
—
401
44
—
—
—
—
—
(808)
— (2,727)
(2,727)
—
—
1,334
7,630
142
35,826
0.56%
2,251
5,316
11,061
— (3,502)
(5,096)
— (1,828)
(1,828)
—
108
869
9,881
236
40,832
0.55%
6,357
17,113
25,800
— (14,617)
(15,979)
— (2,307)
(2,307)
—
544
805
$
20,368
$
14
$
2,080
$
5,010
$
849
$ 3,178
$
445
$
16,238
$
969
$49,151
0.58%
At June 30, 2018, the entire allowance for loan and lease losses for each portfolio class was calculated as a contingent
impairment (ASC 450, Contingencies for Gain and Loss). When specific loan and lease impairment analysis is performed under ASC
310-10, the impairment is either recorded as a charge-off to the loan and lease loss allowance or, if such loan is a TDR, the impairment
is recorded as a specific loan and lease loss allowance.
50
The following table sets forth our allowance for loan and lease losses by portfolio class:
2018
2017
At June 30,
2016
2015
2014
Loan
Category
as a %
of Total
Loans
Amount of
Allowance
Loan
Category
as a %
of Total
Loans
Loan
Category
as a %
of Total
Loans
Amount of
Allowance
Loan
Category
as a %
of Total
Loans
Amount of
Allowance
Amount of
Allowance
Amount of
Allowance
Loan
Category
as a %
of Total
Loans
$
20,368
49.3% $
19,972
52.4% $
18,666
57.5% $
13,664
59.6% $
7,959
14
2,080
—%
4.8%
19
2,298
—%
6.1%
23
2,685
—%
8.4%
122
1,879
0.1%
7.7%
134
1,259
53.4%
0.4%
10.3%
5,010
21.1%
4,638
21.7%
3,938
21.5%
4,363
23.7%
3,785
27.2%
849
3,178
445
16,238
969
2.6%
2.5%
2.1%
17.4%
0.2%
1,008
2,379
401
9,881
236
2.2%
2.1%
2.1%
13.3%
0.1%
882
1,615
245
7,630
142
1.9%
1.2%
1.5%
8.0%
—%
1,103
953
292
5,882
69
1.2%
0.3%
2.4%
5.0%
—%
1,035
812
279
3,048
62
0.7%
0.4%
3.3%
4.2%
0.1%
$
49,151
100.0% $
40,832
100.0% $
35,826
100.0% $
28,327
100.0% $
18,373
100.0%
(Dollars in thousands)
Single family real estate
secured:
Mortgage
Home equity
Warehouse & Other
Multifamily real estate
secured
Commercial real estate
secured
Auto & RV secured
Factoring
Commercial & Industrial
Other
Total
The Company’s allowance for loan and lease losses increased $8.3 million or 20.4% from June 30, 2017 to June 30, 2018. As
a percentage of the outstanding loan balance the Company’s loan and lease loss allowance was 0.58% at June 30, 2018 and 0.55% at
June 30, 2017. Provisions for loan loss were $25.8 million for fiscal 2018 and $11.1 million for fiscal 2017. The Company’s loan and
lease loss provisions for fiscal 2018 compared to 2017 increased by $14.7 million as a result of an increase in Refund Advance loan
fundings from $0.3 billion to $1.1 billion from 2017 to 2018, respectively, combined with loan and lease portfolio growth and a change
in the loan and lease mix.
Charge-offs, net of recoveries, for fiscal 2018 decreased $0.8 million, increased $0.4 million and increased $16,000 for single
family mortgage, multifamily and commercial real estate secured loans, respectively. Charge-offs, net of recoveries, for the auto & RV
portfolio increased $0.4 million for fiscal 2018. Charge-offs, net of recoveries, for the Other portfolio increased $10.7 million for fiscal
2018. For fiscal 2017 charge-offs, net of recoveries, increased $1.0 million, decreased $0.5 million and increased $0.8 million for single
family mortgage, multifamily and commercial real estate secured loans, respectively. Charge-offs, net of recoveries, attributable to the
auto & RV portfolio increased $34,000 for fiscal 2017. Charge-offs, net of recoveries, attributable to the Other portfolio increased $3.4
million for fiscal 2017.
Between June 30, 2017 and 2018, the Bank’s total allowance for loan and lease losses as a proportion of the loan and lease
portfolio increased 3 basis points primarily due to a change in the loan and lease mix.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Our sources of liquidity include deposits, borrowings, payments and maturities of outstanding loans, sales of
loans, maturities or gains on sales of investment securities and other short-term investments. While scheduled loan payments and
maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally invest excess
funds in overnight deposits and other short-term interest-earning assets. We use cash generated through retail deposits, our largest
funding source, to offset the cash utilized in lending and investing activities. Our short-term interest-earning investment securities
are also used to provide liquidity for lending and other operational requirements. As an additional source of funds, we have two
credit agreements. BofI Federal Bank can borrow up to 40% of its total assets from the FHLB. Borrowings are collateralized by
pledging certain mortgage loans and investment securities to the FHLB. Based on loans and securities pledged at June 30, 2018,
we had a total borrowing availability of approximately $1.6 billion available immediately, which represents a fully collateralized
position, for advances from the FHLB for terms up to ten years. The Bank can also borrow from the discount window at the FRB.
FRB borrowings are collateralized by commercial loans, consumer loans and mortgage-backed securities pledged to the FRB.
Based on loans and securities pledged at June 30, 2018, we had a total borrowing capacity of approximately $917.0 million, all
of which was available for use. At June 30, 2018, we also had $35.0 million in unsecured fed funds purchase lines with two major
banks under which there were no borrowings outstanding.
51
In the past, we have used long-term borrowings to fund our loans and to minimize our interest rate risk. Our future
borrowings will depend on the growth of our lending operations and our exposure to interest rate risk. We expect to continue to
use deposits and advances from the FHLB as the primary sources of funding our future asset growth.
In December 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%, for a
rate of 4.73% as of June 30, 2018, with interest paid quarterly starting in February 2005. We entered into this transaction to provide
additional regulatory capital to our Bank to support its growth.
In February 2015, we filed a shelf registration with the SEC which allows us to issue up to $350.0 million through the
sale of debt securities, common stock, preferred stock and warrants.
In March 2016, we completed the sale of $51.0 million aggregate principal amount of our 6.25% Subordinated Notes
due February 28, 2026 (the “Notes”). We received $51.0 million in gross proceeds as a part of this transaction, before the 3.15%
underwriting discount and other offering expenses. The Notes mature on February 28, 2026 and accrue interest at a rate of 6.25%
per annum, with interest payable quarterly. The Notes may be redeemed on or after March 31, 2021, which date may be extended
at the our discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions described
in the Indenture.
In March 2018, we filed a post-effective amendment to deregister all securities unsold under the February 2015 shelf
registration and subsequently, we filed a new shelf registration with the SEC which allows us to issue up to $350.0 million through
the sale of debt securities, common stock, preferred stock and warrants.
AT-THE-MARKET OFFERINGS
On February 23, 2015, we entered into an At-the-Market (“ATM”) Equity Distribution Agreement with FBR Capital
Markets & Co., Sterne, Agee & Leach, Inc. and Raymond James & Associates, Inc. (the “2015 Distribution Agents”) pursuant to
which we may issue and sell through the 2015 Distribution Agents from time to time shares of our common stock in at the market
offerings with an aggregate offering price of up to $50.0 million (the “2015 ATM Offering”). The sales of shares of our common
stock under the Equity Distribution Agreement are to be made in “at the market” offerings as defined in Rule 415 of the Securities
Act of 1933, as amended, including sales made directly on the NASDAQ Global Select Market (the principal existing trading
market for our common stock), or sales made through a market maker or any other trading market for our common stock, or (with
our prior consent) in privately negotiated transactions at negotiated prices. The aggregate compensation payable to the 2015
Distribution Agents under the Distribution Agreement will not exceed 2.5% of the gross sales price of the shares sold under the
agreement. We have also agreed to reimburse the 2015 Distribution Agents for up to $75,000 in their expenses through September
30, 2015 and up to $25,000 thereafter and have provided the 2015 Distribution Agents with customary indemnification rights. In
February 2015, we commenced sales of common stock through the 2015 ATM Offering. The details of the shares of common
stock sold through the 2015 ATM Offering through March 31, 2015 are as follows (dollars in thousands, except per share data):
Number of
Shares Sold1
Net Proceeds
Distribution Agent
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
Weighted Average
Per Share Price1
Month
22.68
$
February 2015
23.38
$
March 2015
23.10
$
April 2015
23.69
$
May 2015
24.69
$
June 2015
27.37
$
July 2015
32.81
August 2015
$
30.99
September 2015 $
32.43
$
October 2015
40,000 $
518,528 $
265,088 $
122,800 $
251,592 $
280,000 $
40,000 $
240,000 $
163,808 $
Compensation to
Distribution Agent
23
303
153
73
155
192
33
186
132
884 $
11,818 $
5,971 $
2,837 $
6,057 $
7,471 $
1,279 $
7,252 $
5,181 $
1 Amounts have been retroactively restated for the fiscal year ended June 30, 2015 and prior periods presented to reflect the four-for-one forward split of the Company’s common stock
effected in the form of a stock dividend that was distributed on November 17, 2015.
As of December 31, 2015, the total gross sales were $50.0 million, which completed this offering.
52
Off-Balance Sheet Commitments. At June 30, 2018, we had commitments to originate loans with an aggregate outstanding
principal balance of $786.0 million, commitments to sell loans with an aggregate outstanding principal balance at the time of sale
of $87.6 million, and no commitments to purchase loans, investment securities or any other unused lines of credit. See Item 3.
Legal Proceedings for further information on pending litigation in which we are involved.
Contractual Obligations. The Company enters into contractual obligations in the normal course of business primarily
as a source of funds for its asset growth and to meet required capital needs. Our time deposits due within one year of June 30,
2018 totaled $1,259.1 million. If these maturing deposits do not remain with us, we may be required to seek other sources of funds,
including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on deposits
and borrowings than we currently pay on time deposits maturing within one year. We believe, however, based on past experience,
that a significant portion of our time deposits will remain with us. We believe we have the ability to attract and retain deposits by
adjusting interest rates offered.
The following table presents our contractual obligations for long-term debt, time deposits, and operating leases by payment
date:
At June 30, 2018
Payments Due by Period
(Dollars in thousands)
Long-term debt obligations1, 2
Time deposits2
Operating lease obligations3
Total
Total
Less than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
$
$
561,124
$
239,509
$
135,003
$
87,828
$
2,096,763
87,124
1,288,400
4,573
142,602
12,918
150,092
15,082
2,745,011
$
1,532,482
$
290,523
$
253,002
$
98,784
515,669
54,551
669,004
1 Long-term debt includes advances from the FHLB and Subordinated notes and debentures.
2 Amounts include principal and interest due to recipient.
3 Payments are for the lease of real property.
Capital Requirements. Our Company and Bank are subject to regulatory capital adequacy requirements promulgated by
federal bank regulatory agencies. Failure by our Company or Bank to meet minimum capital requirements could result in certain
mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements.
The Federal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our Bank. The
following tables present regulatory capital information for our Company and Bank. Information presented for June 30, 2018,
reflects the Basel III capital requirements that became effective January 1, 2015 for both our Company and Bank. Under these
capital requirements and the regulatory framework for prompt corrective action, our Company and Bank must meet specific capital
guidelines that involve quantitative measures of our Company and Bank’s assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Our Company’s and Bank’s capital amounts and classifications are also subject
to qualitative judgments by regulators about components, risk weightings and other factors.
Quantitative measures established by regulation require our Company and Bank to maintain certain minimum capital
amounts and ratios. Federal bank regulators require our Company and Bank maintain minimum ratios of core capital to adjusted
average assets of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0%
and total risk-based capital to risk-weighted assets of 8.0%. To be “well capitalized,” our Company and Bank must maintain
minimum leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%,
8.0% and 10.0%, respectively. At June 30, 2018, our Company and Bank met all the capital adequacy requirements to which they
were subject to and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes
that no conditions or events have occurred since June 30, 2018 that would materially adversely change the Company’s and Bank’s
capital classifications. From time to time, we may need to raise additional capital to support our Company’s and Bank’s further
growth and to maintain their “well capitalized” status.
53
The Bank’s and Company’s capital amounts, capital ratios and requirements were as follows:
(Dollars in thousands)
Regulatory Capital:
Tier 1
BofI Holding, Inc.
BofI Federal Bank
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
“Well
Capitalized”
Ratio
Minimum
Capital
Ratio
$ 893,338
$ 833,759
$ 837,985
$ 804,317
Common equity tier 1
$ 888,275
Total capital (to risk-weighted assets) $ 993,650
$ 828,696
$ 837,985
$ 804,317
$ 925,720
$ 887,297
$ 845,278
Assets:
Average adjusted
Total risk-weighted
Regulatory Capital Ratios:
Tier 1 leverage (core) capital to
adjusted average assets
Common equity tier 1 capital (to risk-
weighted assets)
Tier 1 capital (to risk-weighted
assets)
Total capital (to risk-weighted assets)
$9,450,894
$8,380,909
$9,509,891
$8,374,509
$6,694,963
$5,651,522
$6,686,634
$5,645,112
9.45%
9.95%
8.88%
9.60%
5.00%
4.00%
13.27%
14.66%
12.53%
14.25%
6.50%
4.50%
13.34%
14.84%
14.75%
16.38%
12.53%
13.27%
14.25%
14.97%
8.00%
10.00%
6.00%
8.00%
Beginning January 1, 2016, Basel III implements a requirement for all banking organizations to maintain a capital
conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions,
stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed
of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. At June 30,
2018, the Company and Bank are in compliance with the capital conservation buffer requirement, which increases the three risk-
based capital ratios by 0.625% each year through 2019, at which point, the common equity tier 1 risk based, tier 1 risk-based and
total risk-based capital ratios will be 7.0%, 8.5% and 10.5%, respectively.
In connection with the approval of the acquisition of the H&R Block Bank deposits on September 1, 2015, the Bank executed
a letter agreement with the OCC to maintain its Tier 1 leverage capital ratio at a minimum of 8.50% for the quarters ended in June,
September and December and a minimum of 8.00% for the quarter ended in March, subject to certain adjustments. At June 30,
2018 the Bank is in compliance with this letter agreement. As of August 2018, due to the Bank’s satisfactory operational performance
under the letter agreement, the OCC has removed the additional capital maintenance requirements required in the letter agreement.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the sensitivity of income and capital to changes in interest rates, foreign currency exchange
rates, commodity prices and other relevant market rates or prices. The primary market risk to which we are exposed is interest
rate risk. Changes in interest rates can have a variety of effects on our business. In particular, changes in interest rates affect our
net interest income, net interest margin, net income, the value of our securities portfolio, the volume of loans originated, and the
amount of gain or loss on the sale of our loans.
We are exposed to different types of interest rate risk. These risks include lag, repricing, basis, prepayment and lifetime
cap risk, each of which is described in further detail below:
Lag/Repricing Risk. Lag risk results from the inherent timing difference between the repricing of our adjustable rate
assets and our liabilities. Repricing risk is caused by the mismatch of repricing methods between interest-earning assets and interest-
bearing liabilities. Lag/repricing risk can produce short-term volatility in our net interest income during periods of interest rate
movements even though the effect of this lag generally balances out over time. One example of lag risk is the repricing of assets
indexed to the monthly treasury average (“MTA”). The MTA index is based on a moving average of rates outstanding during the
previous 12 months. A sharp movement in interest rates in a month will not be fully reflected in the index for 12 months resulting
in a lag in the repricing of our loans and securities based on this index. We expect more of our interest-earning liabilities will
mature or reprice within one year than will our interest-bearing assets, resulting in a one year negative interest rate sensitivity gap
(the difference between our interest rate sensitive assets maturing or repricing within one year and our interest rate sensitive
liabilities maturing or repricing within one year, expressed as a percentage of total interest-earning assets). In a rising interest rate
54
environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a
greater increase in its yield on assets relative to its cost on liabilities, and thus an increase in its net interest income.
Basis Risk. Basis risk occurs when assets and liabilities have similar repricing timing but repricing is based on different
market interest rate indices. Our adjustable rate loans that reprice are directly tied to indices based upon U.S. Treasury rates,
LIBOR, Eleventh District Cost of Funds and the Prime rate. Our deposit rates are not directly tied to these same indices. Therefore,
if deposit interest rates rise faster than the adjustable rate loan indices and there are no other changes in our asset/liability mix,
our net interest income will likely decline due to basis risk.
Prepayment Risk. Prepayment risk results from the right of customers to pay their loans prior to maturity. Generally,
loan prepayments increase in falling interest rate environments and decrease in rising interest rate environments. In addition,
prepayment risk results from the right of customers to withdraw their time deposits before maturity. Generally, early withdrawals
of time deposits increase during rising interest rate environments and decrease in falling interest rate environments. When estimating
the future performance of our assets and liabilities, we make assumptions as to when and how much of our loans and deposits will
be prepaid. If the assumptions prove to be incorrect, the asset or liability may perform differently than expected. In the last three
fiscal years, the Bank has experienced high rates of loan prepayments due to historically low interest rates and a low LTV loan
portfolio.
Lifetime Cap Risk. Our adjustable rate loans have lifetime interest rate caps. In periods of rising interest rates, it is possible
for the fully indexed interest rate (index rate plus the margin) to exceed the lifetime interest rate cap. This feature prevents the
loan from repricing to a level that exceeds the cap’s specified interest rate, thus adversely affecting net interest income in periods
of relatively high interest rates. On a weighted average basis, our adjustable rate loans at June 30, 2018 had lifetime rate caps that
were 607 basis points greater than their current stated note rates. If market rates rise by more than the interest rate cap, we will
not be able to increase these loan rates above the interest rate cap.
The principal objective of our asset/liability management is to manage the sensitivity of Market Value of Equity (“MVE”)
to changing interest rates. Asset/liability management is governed by policies reviewed and approved annually by our board of
directors. Our board of directors has delegated the responsibility to oversee the administration of these policies to the asset/liability
committee (“ALCO”). The interest rate risk strategy currently deployed by ALCO is to primarily use “natural” balance sheet
hedging. ALCO makes precise adjustments to the overall MVE sensitivity by recommending investment and borrowing strategies.
The management team then executes the recommended strategy by increasing or decreasing the duration of the investments and
borrowings, resulting in the appropriate level of market risk the board wants to maintain. Other examples of ALCO policies
designed to reduce our interest rate risk include limiting the premiums paid to purchase mortgage loans or mortgage-backed
securities. This policy addresses mortgage prepayment risk by capping the yield loss from an unexpected high level of mortgage
loan prepayments. At least once a quarter, ALCO members report to our board of directors the status of our interest rate risk profile.
We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing
liabilities that mature within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of
the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution
with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would result in the yield
on its assets to increase at a faster pace than the cost of its interest-bearing liabilities.
During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets mature
at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income.
55
The following table sets forth the interest rate sensitivity of our assets and liabilities:
(Dollars in thousands)
Interest-earning assets:
Cash and cash equivalents
Mortgage-backed and other investment securities1
Stock of the FHLB, at cost
Loans, net of allowance for loan and lease losses2
Loans held for sale
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing deposits3
Advances from the FHLB
Other borrowings
Total interest-bearing liabilities
Other non-interest-bearing liabilities
Stockholders’ equity
Total liabilities and equity
Net interest rate sensitivity gap
Cumulative gap
Term to Repricing, Repayment, or Maturity at
Six Months or
Less
Over Six
Months Through
One Year
June 30, 2018
Over One
Year
through
Five Years
Over Five
Years
Total
$
622,850
$
—
$
— $
—
$
152,830
17,250
3,071,106
37,763
3,901,799
—
3,901,799
1,521,081
214,500
5,111
1,280
—
17,079
—
1,026,606
4,179,893
—
—
1,027,886
4,196,972
$
$
—
1,027,886
4,740,549
15,000
—
1,740,692
4,755,549
—
—
—
—
1,740,692
2,161,107
2,161,107
$
$
$
4,755,549
(3,727,663)
(1,566,556)
—
4,196,972
229,719
197,500
—
427,219
—
—
427,219
3,769,753
2,203,197
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,116
—
154,684
—
163,800
—
163,800
478,646
30,000
49,441
558,087
—
—
558,087
(394,287)
1,808,910
$
$
$
$
$
622,850
180,305
17,250
8,432,289
37,763
9,290,457
249,047
9,539,504
6,969,995
457,000
54,552
7,481,547
1,097,444
960,513
9,539,504
1,808,910
1,808,910
19.47%
19.47%
Net interest rate sensitivity gap—as a % of interest-
earning assets
Cumulative gap—as a % of cumulative interest-
earning assets
23.26%
(40.12)%
40.58%
(4.24)%
23.26%
(16.86)%
23.71%
19.47 %
1 Comprised of U.S. government securities, mortgage-backed securities and other securities, which are classified as trading and available-for-sale. The table
reflects contractual repricing dates.
2 The table reflects either contractual repricing dates, or maturities.
3 The table assumes that the principal balances for demand deposit and savings accounts will reprice in the first year.
Although “gap” analysis is a useful measurement device available to management in determining the existence of interest
rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes
in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions
about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response
to a change in the interest rate environment.
Our net interest margin for the fiscal year ended June 30, 2018 increased to 4.11% compared to 3.95% for the fiscal year
ended June 30, 2017. During the fiscal year ended June 30, 2018, interest income earned on loans and on mortgage backed securities
was influenced by the amortization of premiums and discounts on purchases, and interest expense paid on deposits and new
borrowings were influenced by the Fed Funds rate.
The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest
rates for the 1-12 months and 13-24 months’ time periods. For purposes of modeling net interest income sensitivity the Bank
assumes no growth in the balance sheet other than for retained earnings:
(Dollars in thousands)
Up 200 basis points
Base
Down 200 basis points
As of June 30, 2018
First 12 Months
Next 12 Months
Net Interest Income
Percentage Change
from Base
Net Interest Income
Percentage Change
from Base
$
$
$
377,301
354,883
328,766
56
6.3 % $
— % $
(7.4)% $
381,210
373,301
365,131
2.1 %
— %
(2.2)%
We attempt to measure the effect market interest rate changes will have on the net present value of assets and liabilities,
which is defined as MVE. We analyze the MVE sensitivity to an immediate parallel and sustained shift in interest rates derived
from current U.S. Treasury and LIBOR yield curves. For rising interest rate scenarios, the base market interest rate forecast was
increased by 100, 200 and 300 basis points. For the falling interest rate scenarios, we used a 100 basis points decrease due to
limitations inherent in the current rate environment.
The following table indicates the sensitivity of MVE to the interest rate movement as described above:
(Dollars in thousands)
Up 300 basis points
Up 200 basis points
Up 100 basis points
Base
Down 100 basis points
As of June 30, 2018
Market Value of Equity
Percentage
Change from Base
MVE as a
Percentage of Assets
$
$
$
$
$
1,096,938
1,135,321
1,152,826
1,146,593
1,050,428
(4.3)%
(1.0)%
0.5 %
— %
(8.4)%
11.9%
12.2%
12.2%
12.0%
10.9%
The computation of the prospective effects of hypothetical interest rate changes is based on numerous assumptions,
including relative levels of interest rates, asset prepayments, runoffs in deposits and changes in repricing levels of deposits to
general market rates, and should not be relied upon as indicative of actual results. Furthermore, these computations do not take
into account any actions that we may undertake in response to future changes in interest rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and
Qualitative Disclosures About Market Risk.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following financial statements are filed as a part of this report beginning on page F-1:
DESCRIPTION
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at June 30, 2018 and 2017
Consolidated Statements of Income for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended June 30, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, under supervision and with the participation of
the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures,
as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of June 30, 2018, the disclosure controls and procedures were effective to ensure that information
required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
57
Management’s Report On Internal Control Over Financial Reporting. Management is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(1)
promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; our principal
executive and principal financial officers and effected by the board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control—Integrated Framework (2013 version). The Company has excluded the bankruptcy trustee and
fiduciary services acquisition on April 4, 2018 from Epiq Systems, Inc. representing approximately: (i) less than 1% total assets;
(ii) less than 1% of net interest income; (iii) 3% of non-interest income; and (iv) less than 1% of net income for the year ended
June 30, 2018, from the scope of management’s report on internal control over financial reporting. Based on this assessment,
management has determined that our internal control over financial reporting as of June 30, 2018 is effective.
BDO USA, LLP has audited the effectiveness of the company’s internal control over financial reporting as of June 30,
2018, as stated in their report dated August 23, 2018.
Changes in Internal Control Over Financial Reporting. On April 4, 2018, the Company completed the bankruptcy
trustee and fiduciary services acquisition, which is being integrated into the Company’s operations. As part of the integration
activities, management is continuing to apply controls and procedures to the bankruptcy trustee and fiduciary services business
and to enhance Company-wide controls to reflect the risks inherent in the bankruptcy trustee and fiduciary services business. There
were no other changes in the Company’s internal control over financial reporting during the the quarter ended June 30, 2018 (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.
58
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
BofI Holding, Inc.
San Diego, California
Opinion on Internal Control over Financial Reporting
We have audited BofI Holding, Inc.’s (the “Company’s”) internal control over financial reporting as of June 30, 2018, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of June 30, 2018 and 2017, the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended
June 30, 2018, and the related notes and our report dated August 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls
of the bankruptcy trustee and fiduciary services business of Epiq Systems, Inc., which was acquired on April 4, 2018, and which
is included in the consolidated balance sheets of the Company and subsidiaries as of June 30, 2018, and the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended. The bankruptcy trustee
and fiduciary services business of Epiq Systems, Inc. constituted less than 1% of total assets as of June 30, 2018, and less than
1%, 3% and less than 1% of net interest income, non-interest income, and net income, respectively, for the year then ended.
Management did not assess the effectiveness of internal control over financial reporting of the bankruptcy trustee and fiduciary
services business of Epiq Systems, Inc. because of the timing of the acquisition which was completed on April 4, 2018. Our audit
of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial
reporting of the bankruptcy trustee and fiduciary services business of Epiq Systems, Inc.
59
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with both generally accepted
accounting principles and regulatory reporting instructions. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with both generally accepted accounting principles and
regulatory reporting instructions, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Diego, California
August 23, 2018
60
ITEM 9B. OTHER INFORMATION
None.
61
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item with respect to directors and executive officers is incorporated herein by reference
to the information contained in the section captioned “Election of Directors” and “Executive Compensation” in our definitive
Proxy Statement for the 2018 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after June 30, 2018 (the “Proxy Statement”).
The information with respect to our audit committee and our audit committee financial expert is incorporated herein by
reference to the information contained in the section captioned “Committees of the Board of Directors” in the Proxy Statement.
The information with respect to our Code of Ethics is incorporated herein by reference to the information contained in the section
captioned “Corporate Governance—Code of Business Conduct” in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to the information contained in the section
captioned “Executive Compensation” in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information called for by this item is incorporated herein by reference to the information contained in the sections
captioned “Principal Holders of Common Stock” and “Security Ownership of Directors and Named Executive Officers” in the
Proxy Statement.
Information regarding securities authorized for issuance under equity compensation plans is disclosed above in Item 5,
which information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item is incorporated herein by reference to the information contained in the sections
captioned “Related Transactions And Other Matters” and “Corporate Governance—Board of Directors Composition and
Independence” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item is incorporated herein by reference to the information contained in the section
captioned “Independent Registered Public Accounting Firm” in the Proxy Statement.
62
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1).
Financial Statements: See Part II, Item 8—Financial Statements and Supplementary data.
(a)(2).
(a)(3).
Exhibit
Number
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2*
10.3*
10.4*
10.5*
10.6
10.7*
Financial Statement Schedules: All financial statement schedules have been omitted as they are either not required, not applicable, or the
information is otherwise included.
Exhibits:
Description
Incorporated By Reference to
Certificate of Incorporation of the Company, filed with
the Delaware Secretary of State on July 6, 1999
Exhibit 3.1 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on August 19, 1999
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on February 25, 2003
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on January 25, 2005
Certificate Eliminating Reference to a Series of Shares
from the Certificate of Incorporation of the Company
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on October 25, 2013
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on November 5, 2015
By-laws
Certificate of Designation-Series A – 6% Cumulative
Nonparticipating Perpetual Preferred Stock,
Convertible through January 1, 2009
Subordinated Indenture, dated as of March 3, 2016,
between BofI Holding, Inc. and U.S. Bank National
Association, as trustee.
First Supplemental Indenture, dated as of March 3,
2016, between BofI Holding, Inc. and U.S. Bank
National Association, as trustee.
Global Note to represent the 6.25% Subordinated
Notes due February 28, 2026 of BofI Holding, Inc.
Amendment No.1 dated March 24, 2016 to First
Supplemental Indenture, dated as of March 3, 2016,
between BofI Holding, Inc. and U.S. Bank National
Association, as trustee.
Form of Indemnification Agreement between the
Company and each of its executive officers and
directors
Exhibit 3.5 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Exhibit 3.6 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Exhibit 3.2 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Exhibit 3.3 to the Current Report on Form 8-K filed on September 7, 2011.
Exhibit 3.1 to the Current Report on Form 8-K filed on October 28, 2013.
Exhibit 3.1 to the Current Report on Form 8-K filed on November 6, 2015.
Exhibit 3.4 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
Exhibit 3.3 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Exhibit 4.1 to the Current Report on Form 8-K filed on February 26, 2016.
Exhibit 4.2 to the Current Report on Form 8-K filed on February 26, 2016.
Exhibit 4.3 to the Current Report on Form 8-K filed on February 26, 2016.
Exhibit 4.1 to the Current Report on Form 8-K filed on March 24, 2016.
Exhibit 10.1 to the Registration Statement on Form S-1/A (File No. 333-121329)
filed on February 24, 2005.
Amended and Restated 1999 Stock Option Plan, as
amended
Exhibit 10.2 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
2004 Stock Incentive Plan, as amended November 20,
2007
Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
2004 Employee Stock Purchase Plan, including forms
of agreements thereunder
Exhibit 10.4 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
First Amended Employment Agreement, dated April
22, 2010, between Bank of Internet USA and Andrew
J. Micheletti.
Exhibit 99.1 to the Current Report on Form 8-K filed on April 28, 2010.
Amended and Restated Declaration of Trust of BofI
Trust I dated December 16, 2004
Exhibit 10.10 to the Registration Statement on Form S-1/A (File No. 333-121329)
filed on January 26, 2005.
Amended and Restated Employment Agreement, dated
May 26, 2011, between the Company and subsidiaries,
and Gregory Garrabrants
Exhibit 99.1 to the Current Report on Form 8-K filed on May 27, 2011.
63
Exhibit
Number
10.7.1*
10.8
10.13
10.13.1
10.13.2
10.14*
10.15
10.16
21.1
23.1
24.1
31.1
31.2
32.1
32.2
Description
Incorporated By Reference to
Second Amended and Restated Employment
Agreement, dated June 30, 2017, between the
Company and subsidiaries, and Gregory Garrabrants
Lease Agreement dated December 5, 2011 between La
Jolla Village, LLC and the Company
10.9*
BofI Holding, Inc. 2014 Stock Incentive Plan
10.10*
10.11*
10.12*
Amendment to BofI Holding, Inc. 2014 Stock
Incentive Plan
Description of Amendment to Employment Letter
between Eshel Bar-Adon and BofI Federal Bank
Description of Amendment to Employment Letter
between Brian Swanson and BofI Federal Bank
10.12.1*
Description of Amendment to Employment Letter
between Brian Swanson and BofI Federal Bank
Program Management Agreement, dated August 31,
2015, by and among BofI Federal Bank, H&R Block,
Inc. and Emerald Financial Services, LLC
Emerald Advance Receivables Participation
Agreement, dated August 31, 2015, by and among
BofI Federal Bank, H&R Block, Inc., Emerald
Financial Services, LLC and HRB Participant I, LLC
Guaranty Agreement, dated August 31, 2015, by and
among BofI Federal Bank and H&R Block, Inc.
Description of Amendment to Employment Letter
between Thomas Constantine and BofI Federal Bank
Office Space Lease Between Pacifica Tower LLC and
BofI Holding, Inc.
Sixth Amendment to Office Space Lease Between
4350 La Jolla Village LLC and BofI Holding, Inc.
Subsidiaries of the Company consist of BofI Federal
Bank (federal charter) and BofI Trust I (Delaware
charter)
Exhibit 99.1 to the Current Report on Form 8-K filed on July 7, 2017.
Exhibit 99.1 to the Current Report on Form 8-K filed on December 9, 2011.
Appendix A to the Definitive Proxy Statement on Schedule 14A, filed on September
8, 2014.
Exhibit 10.10 to the Annual Report on Form 10-K filed on August 24, 2017.
Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on May 6, 2014.
Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on May 6, 2014.
Exhibits 99.1 and 99.2 to the Current Report on Form 8-K filed on January 15, 2015.
Exhibit 10.1 (Program Management Agreement) to Form 8-K filed by H&R Block,
Inc. on September 1, 2015. ***
Exhibit 10.2 to Form 8-K filed by H&R Block, Inc. on September 1, 2015. ***
Exhibit 10.3 to Form 8-K filed by H&R Block, Inc. on September 1, 2015. ***
Exhibit 10.16 to the Annual Report on Form 10-K filed on August 26, 2015.
Exhibit 10.1 to Form 8-K filed on May 18, 2018.
Exhibit 10.2 to Form 8-K filed on May 18, 2018.
Consent of BDO USA, LLP, Independent Registered
Public Accounting Firm
Filed herewith.
Power of Attorney, incorporated by reference to the
signature page to this report.
Signature page to this report.
Chief Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Executive Officer Certification Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
101.INS**
XBRL Instance Document
The instance document does not appear in the interactive data file because its XBRL
tags are embedded within the inline XBRL document.
101.SCH** XBRL Taxonomy Extension Schema Document
Filed herewith.
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase
Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase
Document
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
*Indicates management contract or compensatory plan, contract or arrangement.
**XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject
to liability under these sections.
***Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the Securities and
Exchange Commission upon request copies of any omitted schedule. A list of the omitted schedules and exhibits is set forth on the final page of the exhibit, and
is incorporated herein by reference.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 23, 2018
BOFI HOLDING, INC.
By:
/s/ Gregory Garrabrants
Gregory Garrabrants
President and Chief Executive Officer
65
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Gregory Garrabrants and Andrew J. Micheletti, jointly and severally, his or her attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant as of August 23, 2018 in the capacities indicated:
Signature
Title
/s/ Gregory Garrabrants
Gregory Garrabrants
/s/ Andrew J. Micheletti
Andrew J. Micheletti
/s/ Derrick K. Walsh
Derrick K. Walsh
/s/ Paul Grinberg
Paul Grinberg
/s/ Nicholas A. Mosich
Nicholas A. Mosich
/s/ James S. Argalas
James S. Argalas
/s/ J. Brandon Black
J. Brandon Black
/s/ Gary Burke
Gary Burke
/s/ James Court
James Court
/s/ Edward J. Ratinoff
Edward J. Ratinoff
/s/ Uzair Dada
Uzair Dada
Chief Executive Officer (Principal Executive Officer), Director
Chief Financial Officer (Principal Financial Officer)
Chief Accounting Officer (Principal Accounting Officer)
Chairman
Vice Chairman
Director
Director
Director
Director
Director
Director
66
BOFI HOLDING, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at June 30, 2018 and 2017
Consolidated Statements of Income for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended June 30, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-8
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
BofI Holding, Inc.
San Diego, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of BofI Holding, Inc. (the “Company”) and subsidiaries as of
June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash
flows for each of the three years in the period ended June 30, 2018, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company and subsidiaries at June 30, 2018 and 2017, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and our report dated August 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2013.
San Diego, California
August 23, 2018
F-1
BOFI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par and stated value)
ASSETS
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
Securities:
Trading
Available for sale
Stock of the Federal Home Loan Bank, at cost
Loans held for sale, carried at fair value
Loans held for sale, carried at lower of cost or fair value
Loans and leases—net of allowance for loan and lease losses of $49,151 as of June 2018
and $40,832 as of June 2017
Accrued interest receivable
Furniture, equipment and software—net
Deferred income tax
Cash surrender value of life insurance
Mortgage servicing rights, carried at fair value
Other real estate owned and repossessed vehicles
Goodwill and other intangible assets—net
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Securities sold under agreements to repurchase
Advances from the Federal Home Loan Bank
Subordinated notes and debentures and other
Accrued interest payable
Accounts payable and accrued liabilities and other liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS’ EQUITY:
At June 30,
2018
2017
$
$
622,750
100
622,850
—
180,305
17,250
35,077
2,686
8,432,289
26,729
21,454
17,957
6,358
10,752
9,591
67,788
88,418
9,539,504
1,015,355
6,969,995
7,985,350
—
457,000
54,552
1,753
80,336
8,578,991
$
$
$
$
628,172
15,369
643,541
8,327
264,470
63,207
18,738
6,669
7,374,493
20,781
16,659
34,341
6,174
7,200
1,413
—
35,667
8,501,680
848,544
6,050,963
6,899,507
20,000
640,000
54,463
1,284
52,179
7,667,433
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 June 2018 and June 2017
Common stock—$0.01 par value; 150,000,000 shares authorized, 65,796,060 shares issued
and 62,688,064 shares outstanding as of June 2018, 65,115,932 shares issued and
63,536,244 shares outstanding as of June 2017
Additional paid-in capital
Accumulated other comprehensive income (loss)—net of tax
Retained earnings
Treasury stock, at cost; 3,107,996 shares as of June 2018 and 1,579,688 shares as of June
2017
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
5,063
5,063
658
366,515
(613)
671,348
651
346,117
487
519,246
(82,458)
960,513
9,539,504
$
(37,317)
834,247
8,501,680
$
See accompanying notes to the consolidated financial statements.
F-2
BOFI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
2017
2016
2018
$
$
446,991
28,083
475,074
$
358,849
28,437
387,286
79,851
22,848
3,881
106,580
368,494
25,800
342,694
56,494
12,403
5,162
74,059
313,227
11,061
302,166
291,058
26,649
317,707
42,667
11,175
2,854
56,696
261,011
9,700
251,311
(18)
3,920
1,427
(6,271)
6,115
(156)
—
(156)
3,862
5,734
13,755
47,764
70,941
100,975
17,400
15,500
8,574
6,063
5,280
4,860
260
15,024
173,936
239,699
87,288
152,411
152,102
151,311
2.41
2.37
$
$
$
$
$
(10,937)
8,973
(1,964)
743
(1,221)
4,574
4,487
14,284
42,088
68,132
81,821
13,323
9,367
6,094
5,612
4,980
4,330
498
11,580
137,605
232,693
97,953
134,740
134,431
142,531
2.11
2.10
$
$
$
$
$
(3,472)
2,907
(565)
(248)
(813)
2,914
15,540
11,076
36,196
66,340
66,667
10,348
6,867
4,795
4,326
4,700
4,632
(46)
10,467
112,756
204,895
85,604
119,291
118,982
121,386
1.87
1.87
(Dollars in thousands, except earnings per share)
INTEREST AND DIVIDEND INCOME:
Loans and leases, including fees
Investments
Total interest and dividend income
INTEREST EXPENSE:
Deposits
Advances from the Federal Home Loan Bank
Other borrowings
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income, after provision for loan and lease losses
NON-INTEREST INCOME:
Realized gain (loss) on sale of securities
Other-than-temporary loss on securities:
Total impairment losses
Loss (gain) recognized in other comprehensive income
Net impairment loss recognized in earnings
Fair value gain (loss) on trading securities
Total unrealized loss on securities
Prepayment penalty fee income
Gain on sale – other
Mortgage banking income
Banking and service fees
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and related costs
Data processing and internet
Advertising and promotional
Depreciation and amortization
Occupancy and equipment
Professional services
FDIC and regulatory fees
Real estate owned and repossessed vehicles
General and administrative expense
Total non-interest expense
INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME
NET INCOME ATTRIBUTABLE TO COMMON STOCK
COMPREHENSIVE INCOME
Basic earnings per common share (as revised for 2017 and 2016)
Diluted earnings per common share (as revised for 2017 and 2016)
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-3
BOFI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
NET INCOME
Year Ended June 30,
2018
2017
2016
$
152,411
$
134,740
$
119,291
Net unrealized gain (loss) from available-for-sale securities, net of tax expense (benefit) of $(2,449),
$3,363, and $(68) for the years ended June 30, 2018, 2017 and 2016, respectively.
(5,493)
5,218
(94)
Other-than-temporary impairment on securities recognized in other comprehensive income, net of
tax expense (benefit) of $1,918, $3,195 and $2,177 for the years ended June 30, 2018, 2017 and
2016, respectively.
Reclassification of net (gain) loss from available-for-sale securities included in income, net of tax
expense (benefit) of $(104), $1,536 and $598 for the years ended June 30, 2018, 2017 and 2016,
respectively.
Other comprehensive income (loss)
Comprehensive income
4,197
4,957
3,018
196
(1,100)
(2,384)
7,791
(829)
2,095
$
151,311
$
142,531
$
121,386
See accompanying notes to the consolidated financial statements.
F-4
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l
BOFI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Accretion of discounts on securities
Net accretion of discounts on loans and leases
Amortization of borrowing costs
Stock-based compensation expense
Valuation of financial instruments carried at fair value
Net gain on sale of investment securities
Impairment charge on securities
Provision for loan and lease losses
Deferred income taxes
Origination of loans held for sale
Unrealized (gain) loss on loans held for sale
Gain on sales of loans held for sale
Proceeds from sale of loans held for sale (revised for 2017 and 2016)
Change in fair value of mortgage servicing rights
(Gain) loss on sale of other real estate and foreclosed assets
Depreciation and amortization
Net changes in assets and liabilities which provide (use) cash:
Accrued interest receivable
Other assets (revised for 2017 and 2016)
Accrued interest payable
Accounts payable and accrued liabilities
Net cash provided by operating activities (revised for 2017 and 2016)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
Proceeds from sales of available-for-sale and trading securities
Proceeds from repayment of securities
Purchase of stock of the Federal Home Loan Bank
Proceeds from redemption of stock of Federal Home Loan Bank
Origination of loans held for investment
Proceeds from sale of loans held for investment (revised for 2017 and 2016)
Origination of mortgage warehouse loans, net
Proceeds from sales of other real estate owned and repossessed assets
Cash paid for acquisition
Purchases of loans and leases, net of discounts and premiums
Principal repayments on loans and leases
Purchases of furniture, equipment and software
Net cash used in investing activities (revised for 2017 and 2016)
Year Ended June 30,
2017
2016
2018
$
152,411
$
134,740
$
119,291
(624)
(29,381)
208
20,399
—
18
156
25,800
17,034
(1,564,165)
(253)
(19,489)
1,576,353
83
(258)
8,574
(6,082)
(40,988)
469
27,650
167,915
(100,503)
52,714
139,338
(33,966)
79,923
(5,895,902)
20,719
(26,899)
1,832
(70,002)
—
4,818,558
(11,817)
(1,026,005)
(2,766)
(4,859)
208
14,535
(743)
(3,920)
1,964
11,061
(2,220)
(1,375,443)
222
(18,771)
1,433,068
(31)
(42)
6,094
4,511
807
(383)
466
(5,276)
959
72
11,326
248
(1,427)
565
9,700
(6,647)
(1,363,025)
(97)
(26,616)
1,427,986
889
(145)
4,795
(6,070)
(9,539)
401
9,513
198,498
166,903
(249,909)
161,048
307,456
(66,294)
60,210
(4,068,990)
31,918
(113,711)
367
—
(269,886)
3,427,818
(8,758)
(788,731)
(161,395)
14,969
80,009
(136,952)
146,099
(3,582,766)
49,882
(51,145)
1,478
—
(140,493)
2,253,017
(10,239)
(1,537,536)
F-6
BOFI HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Proceeds from the Federal Home Loan Bank term advances
Repayment of the Federal Home Loan Bank term advances
Net (repayment) proceeds of Federal Home Loan Bank other advances
Repayments of other borrowings and securities sold under agreements to
repurchase
Tax payments related to settlement of restricted stock units
Repurchase of treasury stock
Proceeds from exercise of common stock options
Proceeds from issuance of common stock
Tax benefit from exercise of common stock options and vesting of restricted
stock grants
Cash dividends paid on preferred stock
Proceeds from issuance of subordinated notes
Net cash provided by financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds
Income taxes paid
Transfers to other real estate and repossessed vehicles
Transfers from loans and leases held for investment to loans held for sale
Transfers from loans held for sale to loans and leases held for investment
Loans held for investment sold, cash not received (revised for 2016)
Securities transferred from held-to-maturity to available-for-sale portfolio
Year Ended June 30,
2017
2016
2018
$
$ 1,085,843
—
(30,000)
(153,000)
855,456
—
(95,000)
8,000
$ 1,592,134
70,000
(35,000)
(61,000)
(20,000)
(9,952)
(35,183)
—
—
—
(309)
—
837,399
(20,691)
643,541
622,850
106,112
79,628
10,113
31,207
3,969
17,742
$
$
$
$
$
$
$
$
(15,000)
(6,532)
—
—
—
432
(309)
—
747,047
156,814
486,727
643,541
74,442
102,482
1,982
2,935
2,790
$
$
$
$
$
$
$
— $
— $
194,153
$
—
(6,141)
—
151
21,120
2,531
(309)
51,000
1,634,486
263,853
222,874
486,727
56,296
89,184
571
79,706
25,141
32,124
—
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-7
BOFI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2018, 2017 AND 2016
(Dollars in thousands, except per share and stated value amounts)
1. ORGANIZATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation. The consolidated financial statements include the accounts of BofI Holding,
Inc. and its wholly owned subsidiary, BofI Federal Bank (collectively, the “Company”). All significant intercompany balances
have been eliminated in consolidation. Reclassifications were made to previously reported amounts in the consolidated statements
of cash flows for Federal Home Loan Bank (“FHLB”) advances within net cash provided by financing activities to make them
consistent with the current period presentation. The purpose of the reclassifications were to disclose the Company’s FHLB term
advances separately from the FHLB other advances.
BofI Holding, Inc. was incorporated in the State of Delaware on July 6, 1999 for the purpose of organizing and launching
an Internet-based savings bank. BofI Federal Bank (the “Bank”), which opened for business over the Internet on July 4, 2000, is
subject to regulation and examination by the Office of the Comptroller of the Currency (“OCC”), its primary regulator. The Federal
Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposit accounts up to the maximum allowable amount.
On November 17, 2015, the Company completed a four-for-one forward stock split in the form of a stock dividend.
References made to outstanding shares or per share amounts in the condensed consolidated financial statements and accompanying
notes have been retroactively restated to reflect this four-for-one forward stock split. In November 2015, the number of authorized
shares of common stock available for issuance was increased from 50,000,000 to 150,000,000 as approved by the Company’s
Board of Directors and stockholders.
Use of Estimates. In preparing consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan and lease losses, the assessment for other-than-
temporary impairment on investment securities and the fair value of certain financial instruments.
Business. The Bank provides consumer and business banking products through the online distribution channels and affinity
partners. The Bank’s deposit products are demand accounts, savings accounts and time deposits marketed to consumers and
businesses located in all fifty states. The Bank’s primary lending products are residential single family and multifamily mortgage
loans. The Bank’s business is primarily concentrated in the State of California and is subject to the general economic conditions
of that state.
Cash and Cash Equivalents. The Bank’s cash, due from banks, money market mutual funds and federal funds sold, all
of which have original maturities within 90 days, consist of cash and cash equivalents. Net cash flows are reported for customer
deposit transactions.
Restrictions on Cash. Federal Reserve Board regulations require depository institutions to maintain certain minimum
reserve balances. Included in cash were balances required by the Federal Reserve Bank of San Francisco of $78,433 and $57,529
at June 30, 2018 and 2017, respectively.
Interest Rate Risk. The Bank’s assets and liabilities are generally monetary in nature and interest rate changes have an
effect on the Bank’s performance. The Bank decreases the effect of interest rate changes on its performance by striving to match
maturities and interest sensitivity between loans and deposits. A significant change in interest rates could have a material effect on
the Bank’s results of operations.
Concentration of Credit Risk. The Bank’s loan portfolio was collateralized by various forms of real estate with
approximately 71.1% of the mortgage portfolio located in California at June 30, 2018. The Bank’s loan portfolio contains
concentrations of credit in multifamily, single family, commercial, and home equity loans. The Bank believes its underwriting
standards combined with its low LTV requirements substantially mitigate the risk of loss which may result from these concentrations.
Brand Partnership Products. Through its strategic partnerships division, the Bank has agreements with third-party service
providers (“Program Managers”) possessing demonstrated expertise in managing programs involving marketing and processing
financial products such as credit, debit, and prepaid cards, and small business and consumer loans. These relationships include the
F-8
Company’s relationships with H&R Block, Inc., Netspend and BFS Capital, among others. As delineated by the related contracts,
a Program Manager provides program management services in its areas of expertise subject to the Bank’s continuing control and
active supervision of the subject program. Underwriting standards and credit decisioning remain with the Bank in all cases. Each
of these relationships is designed to allow the Bank to leverage the Program Manager’s knowledge and experience to distribute
program-related financial products to a broad and increasing base of customers. With respect to credit products, the Bank generally
originates the resulting receivable for sale, but may, in its discretion, retain such receivable. The Bank performs extensive due
diligence with respect to each Program Manager and program, and maintains a regimen of comprehensive risk management and
strict compliance oversight with respect to all programs.
Through our agreement with H&R Block, Inc. (“H&R Block”) and its wholly-owned subsidiaries the Bank provides H&R
Block-branded financial products and services. The products and services that represent the primary focus and the majority of
transactional volume that the Bank processes are described in detail below.
The first product is Emerald Prepaid Mastercard® services. The Bank entered into agreements to offer this product in
August 2015. Under the agreements, the Bank is responsible for the primary oversight and control of the prepaid card programs
of a wholly-owned subsidiary of H&R Block. The Bank holds the prepaid card customer deposits for those cards issued under the
prepaid programs in non-interest bearing accounts and earns a fixed fee paid by H&R Block’s subsidiary for each automated
clearing house (“ACH”) transaction processed through the prepaid card customer accounts. A portion of H&R Block’s customers
use the Emerald Card as an option to receive federal and state income tax refunds. The prepaid customer deposits are included in
non-interest bearing deposit liabilities on the balance sheet of the Company and the ACH fee income is included in the income
statement under the line banking and service fees.
The second product is Refund Transfer. The Bank entered into agreements to offer this product in August 2015. The Bank
is responsible for the primary oversight and control of the refund transfer program of a wholly-owned subsidiary of H&R Block.
The Bank opens a temporary bank account for each H&R Block customer who is receiving an income tax refund and elects to
defer payment of his or her tax preparation fees. After the Internal Revenue Service and any state income tax authorities transfer
the refund into the customer’s account, the net funds are transferred to the customer and the temporary deposit account is closed.
The Bank earns a fixed fee paid by H&R Block for each of the H&R Block customers electing a Refund Transfer. The fees are
earned primarily in the quarters ending March 31st and are included in the income statement under the line banking and service
fees.
The third product is Emerald Advance. The Bank entered into agreements to offer this product in August 2015. Under the
agreements the Bank is responsible for the underwriting guidelines and credit policies for unsecured consumer lines of credit
offered to H&R Block customers. The Bank offers and funds unsecured lines of credit to consumers primarily through the H&R
Block tax preparation offices and earns interest income and fee income. The Bank retains 10% of the Emerald Advance and sells
the remainder to H&R Block. The lines of credit are included in loans and leases on the balance sheet of the Company and the
interest income and fee income are included in the income statement under the line loans and leases interest and dividend income.
The fourth product is an interest-free Refund Advance loan. The Bank exclusively originated and funded all of H&R
Block’s interest-free Refund Advance loans to tax preparation clients for the 2018 tax season. The Bank performed the credit
underwriting, loan origination, and funding associated with the interest-free Refund Advance loans in the current tax season and
received fees from H&R Block for operating the program. No fee is charged to the tax preparation client. Repayment of the Refund
Advance loan is deducted from the client’s tax refund proceeds; if an insufficient refund to repay the Refund Advance loan is
received, there is no recourse to the client, no negative credit reporting occurs in respect of the client and no collection efforts are
made against the client. This agreement is an expansion of the services BofI provided to H&R Block in the 2017 tax season when
the Bank participated through purchases of the loans with other providers in the Refund Advance loan program. During the 2017
tax season, the Bank purchased the Refund Advance loans from a third-party bank at a discount and recorded the accretion of the
loan discount as interest income, reported on the income statement under the interest and dividend income line item. During the
2018 tax season, the Bank recorded the fees received from H&R Block as interest income on loans, reported on the income statement
under the interest and dividend income line item.
The H&R Block-branded financial services products introduce seasonality into the Company’s quarterly reports on Form
10-Q in the unaudited condensed consolidated income statements through the banking and service fees category of non-interest
income and the other general and administrative category of non-interest expense, with the peak income and expense in these
categories typically occurring during the Company’s third fiscal quarter ended March 31.
F-9
Securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has both the
positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold
before maturity. Trading securities refer to certain types of assets that banks hold for resale at a profit or when the Company elects
to account for certain securities at fair value. Increases or decreases in the fair value of trading securities are recognized in earnings
as they occur. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax. During the quarter ended September 30, 2016, the Company elected to reclassify all of its held-
to-maturity securities to available-for-sale. See Note 4 – “Securities” for further information.
Gains and losses on securities sales are based on a comparison of sales proceeds and the amortized cost of the security
sold using the specific identification method. Purchases and sales are recognized on the trade date. Interest income includes
amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized or accreted using the level-
yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. The
Company’s portfolios of held-to-maturity and available-for-sale securities are reviewed quarterly for other-than-temporary
impairment. In performing this review, management considers (1) the length of time and extent that fair value has been less than
amortized cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates
on the market value of the security and (4) how to record an impairment by assessing whether the Company intends to sell it or 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 and Leases. Loans and leases 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 and lease origination fees and costs, and an allowance for loan and lease 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.
The Company provides equipment financing to its customers through a variety of lease arrangements. The most common
arrangement is a direct financing (capital) lease. For direct financing leases, lease receivables are recorded on the balance sheet
but the leased property is not, although the Company generally retains legal title to the leased property until the end of each lease.
Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value,
less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized
over the weighted average life of the lease portfolio. Leases acquired in an acquisition are initially measured and recorded at their
fair value on the acquisition date. Purchase discounts or premiums on acquired leases are recognized as an adjustment to interest
income over the contractual life of the leases using the effective interest method or taken into income when the related leases are
paid off. Direct financing leases are subject to our allowance for loans and leases.
Recognition of interest income on all portfolio segments is generally discontinued at the time the loan or lease is 90 days
delinquent unless the loan and lease 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 and leases 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 status.
Loans and leases are returned to accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Loans Held for Sale. U.S. government agency (“agency”) loans originated and intended for sale in the secondary market
are carried at fair value. Net unrealized gains and losses are recognized through mortgage banking income in the income statement.
The Bank sells its mortgage loans with either servicing released or servicing retained depending upon market pricing. Gains and
losses on loan sales are recorded as mortgage banking income or other gains on sale, 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 using pools of loans with similar characteristics.
There may be times when loans have been classified as held for sale and 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
F-10
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 and Lease Losses. The allowance for loan and lease losses is maintained at a level estimated to
provide for probable incurred losses in the loan and lease portfolio. Management determines the adequacy of the allowance based
on reviews of individual loans and leases 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 and lease losses, which is charged against current period operating results, and recoveries of loans and leases
previously charged-off. The allowance is decreased by the amount of charge-offs of loans and leases deemed uncollectible.
Allocations of the allowance may be made for specific loans and leases but the entire allowance is available for any loan or lease
that, in management’s judgment, should be charged off.
The allowance for loan and lease losses includes general reserves and may include specific reserves. Specific reserves
may be provided for impaired loans and leases considered Troubled Debt Restructurings (“TDRs”). All other impaired loans and
leases are written down through charge-offs to the fair value of collateral, less estimated selling cost, and no specific or general
reserve is provided. A loan or lease is impaired when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. Loans and leases for
which terms have been modified resulting in a concession and for which the borrower is experiencing financial difficulties are
considered TDRs and classified as impaired. A loan or lease is measured for impairment generally two different ways. If the loan
or lease 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 or lease is collateral
dependent, the net proceeds from the sale of the collateral is compared to the carrying value of the loan or lease. If the calculated
amount is less than the carrying value of the loan or lease, the loan or lease has impairment.
A general reserve is included in the allowance for loan and lease losses and is determined by adding the results of a
quantitative and a qualitative analysis to all other loans and leases not measured for impairment at the reporting date. The quantitative
analysis determines the Bank’s actual annual historic charge-off rates for the previous three fiscal years and applies the average
historic rates to the outstanding loan and lease 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 and lease review system, changes in the underlying collateral of the loans and leases, 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 and leases affected by the qualitative factors. The following portfolio segments have been identified: single family
secured mortgage, home equity secured mortgage, single family warehouse and other, multi-family secured mortgage, commercial
real estate and land secured mortgage, auto secured and recreational vehicles, factoring, commercial and industrial (“C&I”) and
other.
General loan and lease loss reserves are calculated by grouping each mortgage loan or lease by collateral type and by
grouping the LTV ratios of each loan within the collateral type. An estimated allowance rate for each LTV group within each type
of loan and lease is multiplied by the total principal amount in the group to calculate the required general reserve attributable to
that group. Management uses an allowance rate that provides a larger loss allowance for loans with greater LTV ratios. General
loan loss reserves for C&I loans are determined through a loan level grading system to base its projected loss rates. A matrix was
created with a base loss rate with additional potential industry and volume risk adjustments, to calculate a loss rating for each deal.
Given the lack of historical loss experience for this segment at the Company, an allowance loss range is based upon historical peer
loss rates. General loan loss reserves for consumer loans are calculated by grouping each loan by credit score (e.g., FICO) at
origination and applying an estimated allowance rate to each group. In addition to credit score grading, general loan loss reserves
are increased for all consumer loans determined to be 90 days or more past due. Specific reserves or direct charge-offs are calculated
when an internal asset review of a loan or lease identifies a significant adverse change in the financial position of the borrower or
the value of the collateral. The specific reserve or direct charge-off is based on discounted cash flows, observable market prices
or the estimated value of underlying collateral.
Specific loan or lease charge-offs on impaired loans or leases are recorded as a write-off and a decrease to the allowance
in the period the impairment is identified. A loan or lease is classified as a TDR when management determines that an existing
borrower is in financial distress and the borrower’s loan or lease terms are modified to provide the borrower a financial concession
(e.g., lower payment) that would not otherwise be provided by another lender based upon borrower’s current financial condition.
TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows
using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan or lease, the loan or lease is
reported, net, at the fair value of the collateral less cost to sell. For TDRs that subsequently default, the Company determines the
amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.
F-11
If the present value of estimated cash flows under the modified terms of a TDR discounted at the original loan or lease
effective rate is less than the book value of the loan or lease before the TDR, the excess is specifically allocated to the loan or lease
in the allowance for loan and lease losses.
Mortgage Servicing Rights. Mortgage servicing rights are recorded as separate assets on our consolidated balance sheets
when the Company retains the right to service loans that we have sold.
Mortgage Banking Derivatives. Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary
market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives.
Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on
the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate
locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in
the fair values of these derivatives are included in mortgage banking income.
Furniture, Equipment and Software. Fixed asset purchases in excess of five hundred dollars are capitalized and recorded
at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to
seven years. Leasehold improvements are amortized over the lesser of the assets’ useful lives or the lease term.
Income Taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred
tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.
Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between
the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and
laws. The Company records a valuation allowance when management believes it is more likely than not that deferred tax assets
will not be realized. An income tax position will be recognized as a benefit only if it is more likely than not that it will be sustained
upon IRS examination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company recognizes interest and/or
penalties related to income tax matters in income tax expense.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of
the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished
from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles,
are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill)
are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.
Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually. The
Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate
the assets might be impaired.
The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, the Company determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, it does not have to perform the two-step
goodwill impairment test. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment
test are judgmental and often involve the use of significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. Estimates of fair value are primarily determined using discounted cash
flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected
future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of
appropriate market comparables. Future events could cause the Company to conclude that goodwill or other intangibles have
become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse
impact on the Company’s financial condition and results of operations.
F-12
Earnings per Common Share. Earnings per common share (“EPS”) are presented under two formats: basic EPS and
diluted EPS. Basic EPS is computed by dividing the net income attributable to common stock (net income after deducting dividends
on preferred stock) by the sum of the weighted-average number of common shares outstanding during the year and the unvested
average of restricted stock unit shares and participating restricted stock units (“RSU”. Diluted EPS is computed by dividing the
sum of net income attributable to common stock and dividends on diluted preferred stock by the sum of the weighted-average
number of common shares outstanding during the year and the impact of dilutive potential common shares, such as non-participating
RSU’s, stock options and convertible preferred stock.
The Company accounts for unvested stock-based compensation awards containing non-forfeitable rights to dividends or
dividend equivalents (collectively, “dividends”) as participating securities and includes the awards in the EPS calculation using
the two-class method. The Company has granted restricted stock units under the 2004 Plan to certain directors and employees,
which entitle the recipients to receive non-forfeitable dividends during the vesting period on a basis equivalent to the dividends
paid to holders of common stock. These unvested awards meet the definition of participating securities. Under the two class method,
all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities, based on their
respective rights to receive dividends. Under the 2014 Plan, restricted stock units have no shareholder rights, meaning they are not
entitled to dividends and are considered nonparticipating. These nonparticipating restricted stock units are not included in the basic
earnings per common share calculation and are included in the diluted earnings per common share calculation using the treasury
stock method.
Stock-Based Compensation. Compensation cost is recognized for stock options and restricted stock unit awards issued
to employees, based on the fair value of these awards at the date of grant. A Black–Scholes model is utilized to estimate fair value
of the stock options, while market price of the Company’s common stock at the date of grant is used for restricted stock unit awards,
except for the Chief Executive Officer’s restricted stock unit awards under an employment agreement effective July 1, 2017. For
the Chief Executive Officer’s restricted stock unit awards under an employment agreement effective July 1, 2017, a Monte Carlo
simulation is utilized to estimate the value of path-dependent options in order to determine the fair value of the restricted stock
unit award. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards
with only a service condition that have a graded vesting schedule, compensation cost is recognized on a straight-line basis over
the requisite service period for the entire award. For awards that contain a market condition and have a graded vesting schedule
compensation cost is recognized using an accelerated attribution method over the requisite service period for the awards.
Federal Home Loan Bank (“FHLB”) stock. The Bank is a member of the FHLB system. Members are required to own
a certain amount of FHLB stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of
par value.
Cash Surrender Value of Life Insurance. The Bank has purchased life insurance policies on certain key executives. Bank
owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which
is the cash surrender value adjusted for other amounts due that are probable at settlement.
Loan Commitments and Related Financial Instruments. Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Comprehensive Income. Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available-for-sale, which are also recognized as separate
components of equity.
Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business,
are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are now such matters that will have a material effect on the financial statements.
Dividend Restriction. Banking regulations require maintaining certain capital levels and may limit the dividends paid by
the Bank to the holding company. As of June 30, 2018, there are no dividend restrictions on the Bank or the Company.
Fair Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in Note 3. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly affect the estimates.
F-13
Operating Segments. While the chief decision-makers monitor the revenue streams of the various products and services,
operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service
operations are considered by management to be one reportable operating segment.
Revisions of Previously Issued Financial Statements for Correction of Immaterial Errors. During the fourth quarter of
2018, the Company identified an immaterial error related to an incorrect calculation of basic and diluted earnings per common
share related to unvested non-participating restricted stock units. The corrected calculation results in increased basic and diluted
earnings per common share in certain periods. In order to correct this immaterial error, the Company revised the basic and diluted
earnings per common share for fiscal years ended June 30, 2016 and 2017 and for the interim quarters for the fiscal years ended
June 30, 2017 and 2018. The revisions are reflected in the tables below.
(Dollars in thousands, except per share
data)
Previously
Reported
Adjustment
Revised
Previously
Reported
Adjustment
Revised
At June 30, 2017
At June 30, 2016
Earnings Per Common Share
Net income attributable to common
shareholders
Average common shares issued and
outstanding
Average unvested RSUs
Total qualifying shares
$
Earnings per common share
Diluted Earnings Per Common Share
2.07
$
$
134,431
$
— $
134,431
$
118,982
$
— $
118,982
63,358,886
1,491,228
64,850,114
— 63,358,886
62,909,411
— 62,909,411
(1,193,572)
(1,193,572)
0.04
297,656
1,355,796
63,656,542
64,265,207
$
2.11
$
1.85
$
(667,948)
(667,948)
0.02
687,848
63,597,259
$
1.87
Dilutive net income attributable to
common shareholders
$
134,431
$
— $
134,431
$
118,982
$
— $
118,982
Average common shares issued and
outstanding
64,850,114
Dilutive effect of stock options
Dilutive effect of average unvested
RSUs
—
—
Total dilutive common shares issued
and outstanding
64,850,114
Diluted earnings per common share
$
2.07
$
(1,193,572)
—
63,656,542
64,265,207
—
5,845
(667,948)
—
63,597,259
5,845
258,558
258,558
—
69,176
69,176
(935,014)
0.03
$
63,915,100
64,271,052
2.10
$
1.85
$
(598,772)
0.02
$
63,672,280
1.87
Unaudited
Basic earnings per common share
Previously reported
Adjustment
Revised
Diluted earnings per common share
Previously reported
Adjustment
Revised
Quarters Ended in Fiscal Year 2018
June 30,
March 31,
December 31,
September 30,
$
$
$
$
0.58
0.01
0.59
0.58
—
0.58
$
$
$
$
0.80
0.02
0.82
0.80
—
0.80
$
$
$
$
0.49
0.01
0.50
0.49
—
0.49
$
$
$
$
0.50
0.01
0.51
0.50
—
0.50
F-14
Unaudited
Basic earnings per common share
Previously reported
Adjustment
Revised
Diluted earnings per common share
Previously reported
Adjustment
Revised
Quarters Ended in Fiscal Year 2017
June 30,
March 31,
December 31,
September 30,
$
$
$
$
0.50
0.01
0.51
0.50
0.01
0.51
$
$
$
$
0.63
0.01
0.64
0.63
0.01
0.64
$
$
$
$
0.50
0.01
0.51
0.50
—
0.50
$
$
$
$
0.45
—
0.45
0.45
—
0.45
During the fourth quarter of 2018, the Company identified an immaterial error related to the classification of proceeds
from the sale of loans that were transferred from loans held-for-investment in the consolidated statement of cash flows for the years
ended June 30, 2017 and 2016. The Company revised its previously issued financial statements for the years ended June 30, 2017
and 2016 to correctly present these activities in the cash flow. For the year ended June 30, 2016, the Company revised its supplemental
disclosure of cash flow information to add loans held for investment, sold cash not received of $32,124. There was no change to
net change in cash and cash equivalents. The revisions to cash flows from operating and investing activities are reflected in the
tables below.
(Dollars in thousands)
Cash Flows From Operating Activities:
Previously
Reported
Adjustment
Revised
Previously
Reported
Adjustment
Revised
Year Ended June 30, 2017
Year Ended June 30, 2016
Proceeds from sale of loans held
for sale
Other assets
$ 1,420,031
$
45,762
Net cash provided by in operating
activities1
Cash Flows From Investing Activities:
$
223,884
$
$
$
13,037
$ 1,433,068
$ 1,523,113
$
(95,127) $ 1,427,986
(44,955) $
807
(25,386) $
198,498
$
$
(54,784) $
45,245
$
(9,539)
210,644
$
(43,741) $
166,903
Proceeds from sale of loans held
for investment
$
— $
31,918
$
31,918
$
— $
49,882
$
49,882
Net cash used in investing
$ (1,537,536)
activities
1.Adjustment includes a non-error amount of $6,532 and $6,141 for the years ended June 30, 2017 and 2016, respectively, related to the retrospective application
of ASU 2016-09.
(788,731) $ (1,587,418) $
(820,649) $
31,918
49,882
$
$
The Company assessed the materiality of the errors on prior periods’ financial statements in accordance with SEC Staff
Accounting Bulletin (“SAB”) No. 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of
Financial Statements and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly,
in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements), Consolidated Statements of Income, Consolidated Statements of Cash Flows and Earnings
Per Share footnote have been revised to correctly present these amounts. The above revisions had no effect on net income or retained
earnings. Periods not presented herein will be revised, as applicable, as they are included in future filings.
New Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (the “revenue recognition standard”).
Public entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017.
The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard affects all entities that either enter into contracts with customers to transfer goods or services or enter into contracts for
the transfer of nonfinancial assets unless those contracts are within the scope of other guidance. Therefore, the ASU excludes
revenue associated with financial instruments including loans, leases, securities, and derivatives as these topics are accounted for
following other guidance. Other areas that are within the scope of the revenue recognition standard include service charges on
deposit accounts, and gains and losses on other real estate owned. The Company identified and reviewed the revenue streams within
the scope of ASU 2014-09, including but not limited to service charges on deposit accounts, prepaid card fees and mortgage banking
F-15
income. The Company anticipates adopting the modified retrospective approach and determined that the new guidance will not
require significant changes to the manner in which income from those revenue streams is currently recognized. As such, the
Company concluded that the new guidance will not have a significant impact on the Company’s consolidated financial statements
at the time of adoption.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs. Under the amended guidance, debt issuance costs related to a recognized debt liability are
required to be presented as deductions from the carrying amounts of the corresponding debt liabilities, consistent with the
presentation of debt discounts and premiums. The amended guidance was adopted for the quarter ended September 30, 2016 and
applied retrospectively in accordance with the amended guidance, wherein the balance sheet of each individual period presented
has been adjusted to reflect the period-specific effects of applying the amended guidance. The adoption of this guidance did not
materially impact our consolidated financial position or consolidated results of operations. The company will adopt this standard
on July 1, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases, as amended in July 2018 by ASU 2018-10 Codification
Improvements to Topic 842, Leases and ASU 2018-11 Leases (Topic 842): Targeted Improvements. The new standard establishes
a right-of-use model that requires a lessee to record a right of use asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. ASUs 2016-02, 2018-10 and 2018-11 are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is anticipated
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. The Company continues to evaluate the impact of ASUs
2016-02, 2018-10 and 2018-11, including determining whether other contracts exist that are deemed to be in scope. As such, no
conclusions have yet been reached regarding the potential impact on adoption of ASUs 2016-02, 2018-10 and 2018-11 on the
Company’s consolidated financial statements and regulatory capital and risk-weighted assets; however, the Company does not
expect the amendments to have a material impact on its results of operations.
In March 2016, the FASB issued ASU 2016-09 Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”), which simplifies several areas of accounting for share-based payment transactions, including tax provision, classification
in the cash-flow statement, forfeitures, and statutory tax withholding requirements. Under ASU 2016-09, all excess tax benefits
and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income
statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included
in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-
in capital, the assumed proceeds from applying the treasury stock method when computing earnings per common share should
exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally,
excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing
activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election
to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company has
elected to account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather
than as a liability) to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions. The adoption at July
1, 2017 of ASU 2016-09 did not have a significant impact on our financial position and results of operations.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”), which (i) significantly changes the impairment model for most financial assets
that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii)
provides for recording credit losses on available-for-sale debt securities through an allowance account. ASU 2016-13 also requires
certain incremental disclosures. ASU 2016-13 should be applied on a modified-retrospective transition approach that would require
a cumulative-effect adjustment to the opening retained earnings in the statement of financial condition as of the date of adoption.
A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized
before the effective date. The guidance will be effective for the Company’s financial statements that include periods beginning
July 1, 2020. Early adoption is permitted beginning July 1, 2019. The Company has formed a working group, which is currently
developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system
requirements and the identification of data and resource needs, among other things including evaluating third-party vendor solutions.
The Company expects ASU 2016-13 to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business,
which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed
to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business
combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under
the new standard, when substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar
F-16
assets, the assets acquired would not represent a business and business combination accounting would not be required. The new
standard may result in more transactions being accounted for as asset acquisitions rather than business combinations. The standard
is effective for interim and annual periods beginning after December 15, 2017 and shall be applied prospectively. Early adoption
is permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial
statements.
In February 2017, the FASB issued guidance within ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance
and Accounting for Partial Sales of Nonfinancial Assets. The amendments in ASU 2017-05 to Subtopic 610-20, Other Income-
Gains and Losses from the Derecognition of Nonfinancial Assets, clarify the scope of Subtopic 610-20 and add guidance for partial
sales of nonfinancial assets, including partial sales of real estate. Under current GAAP, there are several different accounting models
to evaluate whether the transfer of certain assets qualify for sale treatment. The new standard reduces the number of potential
accounting models that might apply and clarifies which model does apply in various circumstances. The adoption of this guidance
did not have a significant impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued guidance within ASU 2017-08, Premium Amortization on Purchased Callable Debt
Securities. The amendments in ASU 2017-08 to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, shorten the
amortization period for certain purchased callable debt securities held at a premium to the earliest call date, which more closely
align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.
Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.
The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to
maturity. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of adoption. The amendments in this ASU are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including
adoption in an interim period. The adoption of this guidance is not expected to have a significant impact on the Company’s
consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification
Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based
payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for
all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption
is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial
statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been
made available for issuance. The Company does not anticipate that this guidance will have a material impact on its consolidated
financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities. The ASU expands and refines hedge accounting for both financial and non-financial risk components, aligns
the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes
certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The
effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition
with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The Company does not
anticipate that this guidance will have a material impact on its consolidated financial statements.
In June 2018, the FASB issued guidance within ASU 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting. The amendments in ASU 2018-07 to Topic 718, Compensation-Stock Compensation, are intended to align the
accounting for share-based payment awards issued to employees and nonemployees. Changes to the accounting for nonemployee
awards include: 1) equity classified share-based payment awards issued to nonemployees will now be measured on the grant date,
instead of the previous requirement to remeasure the awards through the performance completion date; 2) for performance
conditions, compensation cost associated with the award will be recognized when achievement of the performance condition is
probable, rather than upon achievement of the performance condition; and 3) the current requirement to reassess the classification
(equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible
instruments. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under
ASC 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. The Company’s share-based payment awards to nonemployees
consist only of grants made to the Company’s nonemployee Directors as compensation solely related to each individual’s role as
a nonemployee Director. As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to
its nonemployee Directors in the same manner as share-based payment awards for its employees. Accordingly, the amendments
in this guidance will not have an effect on the accounting for the Company’s share-based payment awards to its nonemployee
Directors.
F-17
2. ACQUISITIONS
The Company completed one acquisition during the fiscal year ended June 30, 2018. The pro forma results of operations
and the results of operations for acquisition since the acquisition date have not been separately disclosed because the effects were
not material to the consolidated financial statements. The purchase transaction is detailed below.
Bankruptcy trustee and fiduciary services business of Epiq Systems, Inc. On April 4, 2018, the Company completed
the acquisition of the bankruptcy trustee and fiduciary services business of Epiq Systems, Inc. (“Epiq”). The assets acquired by
the Company include comprehensive software solutions, trustee customer relationships, trade name, accounts receivable and fixed
assets. The business provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees
and fiduciaries in all fifty states. This business is expected to generate fee income from bank partners and bankruptcy cases, as
well as opportunities to source low cost deposits. No deposits were acquired as part of the transaction.
Under the terms of the purchase agreement, the aggregate purchase price included the payment of $70.0 million in cash.
The Company acquired assets with approximate fair values of $32.7 million of intangible assets, including customer relationships,
developed technologies, a covenant not to compete and the trade name, and $1.6 million of accounts receivable and fixed assets,
resulting in $35.7 million of goodwill. Transaction-related expenses were de minimis.
The following table sets forth the approximate fair value of assets acquired from Epiq on the consolidated balance sheets
as of April 4, 2018:
(Dollars in thousands)
Fair value of consideration paid
Cash
Total consideration paid
Fair value of assets acquired
Intangible assets
Other assets
Total assets
Fair value of net assets acquired
Goodwill incident to acquisition
April 4, 2018
70,002
70,002
32,720
1,563
34,283
34,283
35,719
$
$
The Company has included the financial results of the acquired bankruptcy trustee and fiduciary services business in its
consolidated financial statements subsequent to the acquisition date. The Epiq transaction has been accounted for under the
acquisition method of accounting. The assets, both tangible and intangible, were recorded at their estimated fair values as of the
transaction date. The Company made significant estimates and exercised judgment in estimating fair values and accounting for
such acquired assets and liabilities. The Company’s accounting for the acquisition has not been finalized as the Company continues
to evaluate the working capital adjustment, which is expected to have an immaterial effect, if any, on the value of goodwill
recognized.
The Company recognized goodwill of $35.7 million as of April 4, 2018, which is calculated as the excess of the
consideration exchanged as compared to the fair value of identifiable assets acquired. Goodwill resulted from expanded product
lines and low-cost funding opportunities and is expected to be deductible for tax purposes. See Note 7 to the consolidated financial
statements for further information on goodwill and other intangible assets.
3. FAIR VALUE
Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. ASC Topic 820 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:
Level 2:
Level 3:
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.
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.
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 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 are given little, if any, weight in measuring fair value.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use,
where possible, current market-based or independently sourced market parameters, such as interest rates, credit spreads, housing
value forecasts, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level
input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some
significant inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure various financial
instruments at fair value, including an indication of the level in the fair-value hierarchy in which each instrument is generally
classified:
Securities—trading, available-for-sale, and held-to-maturity. Trading securities are recorded at fair value. Available-
for-sale securities are recorded at fair value and consist of residential mortgage-backed securities (“RMBS”) issued by U.S.
agencies, RMBS issued by non-agencies, municipal securities as well as other Non-RMBS securities. Fair value for U.S. agency
securities and municipal securities are generally based on quoted market prices of similar securities used to form a dealer quote
or a pricing matrix. There continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the
availability and reliability of transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for
these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected
cash flows available to the securities from the underlying mortgage assets. The Company computes Level 3 fair values for each
non-agency RMBS in the same manner (as described below) whether available-for-sale or held-to-maturity.
To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and
loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates
and borrower attributes such as credit score and loan documentation at the time of origination. The Company inputs for each
security a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for
the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company
from the historic default rate observed in the pool of loans collateralizing the security, increased by and decreased by the forecasted
increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from
the historic loss severity rate observed in the pool of loans, increased by or decreased by the forecasted increase or decrease in the
national home price appreciation (“HPA”) index. The largest factors influencing the Company’s modeling of the monthly default
rate are unemployment and HPA, as a strong correlation exists. The most updated unemployment rate reported in May 2018 was
F-19
3.8%. Consensus estimates for unemployment are that the rate will continue to decline. Going forward, the Company is projecting
lower monthly default rates. The Company projects that severities will continue to improve.
To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS
securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime”
securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally
have borrowers with a lower FICO and less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers
that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates
separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions
for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at June 30, 2018 are
from 1.5% up to 10.6% with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending
toward the higher end of the range. The range of loss severity rates applied to each default used in the Company’s projections at
June 30, 2018 are from 40.0% up to 68.0% 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. 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 June 30, 2018, the Company computed its discount rates as a spread between 265 and
713 basis points over the LIBOR Index using the LIBOR forward 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.
The Bank’s estimate of fair value for non-agency securities using Level 3 pricing is highly subjective and is based on the
Bank’s estimate of voluntary prepayments, default rates, severities and discount margins, which are forecasted monthly over the
remaining life of each security. Changes in one or more of these assumptions can cause a significant change in the estimated fair
value. For further details see the table later in this note that summarizes quantitative information about level 3 fair value
measurements.
Loans Held for Sale. Loans held for sale at fair value are primarily single-family 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 and Leases. Impaired loans and leases are loans and leases 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 and leases. The impaired loans and leases are characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected. The Company assesses loans and leases individually and identifies impairment
when the loan or lease is classified as impaired or has been restructured or management has serious doubts about the future
collectibility of principal and interest, even though the loans and leases may currently be performing. The fair value of an impaired
loan or lease is determined based on an observable market price or current appraised value of the underlying collateral. The fair
value of impaired loans and leases with specific write-offs or allocations of the allowance for loan and lease 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 or lease 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 nonaccrual loans and leases may result in increases or decreases to the provision for loan and lease 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. 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 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.
F-20
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 mortgage banking income
in the income statement. Fair value adjustments encompass market-driven valuation changes as well as modeled amortization
involving the run-off of value that occurs due to the passage of time as individual loans are paid by borrowers. Market expectations
about loan duration, and correspondingly the expected term of future servicing cash flows, may vary from time to time due to
changes in expected prepayment activity, especially when interest rates rise or fall. Market expectations of increased loan
prepayment speeds may negatively impact the fair value of the single family MSRs. Fair value is also dependent on the discount
rate used in calculating present value, which is imputed from observable market activity and market participants and results in
Level 3 classification. Management reviews and adjusts the discount rate on an ongoing basis. An increase in the discount rate
would reduce the estimated fair value of the MSRs asset.
Mortgage Banking Derivatives. Fair value for mortgage banking derivatives are either securities based upon prices in
active markets for identical securities or based on quoted market prices of similar assets used to form a dealer quote or a pricing
matrix, resulting in a Level 2 classification, or derivatives requiring unobservable inputs resulting in Level 3 classification.
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.
F-21
The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring
basis. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement:
(Dollars in thousands)
ASSETS:
June 30, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Securities—Trading: Collateralized Debt Obligations
$
— $
— $
— $
—
Securities—Available-for-Sale:
Agency RMBS
Non-Agency RMBS
Municipal
Asset-backed securities and structured notes
Total—Securities—Available-for-Sale
Loans Held for Sale
Mortgage servicing rights
Other assets—Derivative instruments
LIABILITIES:
Other liabilities—Derivative instruments
$
$
$
$
$
—
—
—
—
— $
— $
— $
— $
— $
12,926
—
20,212
129,724
162,862
35,077
$
$
— $
— $
— $
—
17,443
—
—
17,443
$
— $
10,752
1,321
368
$
$
$
12,926
17,443
20,212
129,724
180,305
35,077
10,752
1,321
368
(Dollars in thousands)
ASSETS:
June 30, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Securities—Trading: Collateralized Debt Obligations
$
— $
— $
8,327
$
8,327
Securities—Available-for-Sale:
Agency RMBS
Non-Agency RMBS
Municipal
Asset-backed securities and structured notes
Total—Securities—Available-for-Sale
Loans Held for Sale
Mortgage servicing rights
Other assets—Derivative Instruments
LIABILITIES:
Other liabilities—Derivative instruments
$
$
$
$
$
27,206
—
27,163
138,598
192,967
18,738
$
$
— $
— $
— $
—
71,503
—
—
71,503
$
— $
7,200
1,194
168
$
$
$
27,206
71,503
27,163
138,598
264,470
18,738
7,200
1,194
168
—
—
—
—
— $
— $
— $
— $
— $
F-22
The following table presents 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:
(Dollars in thousands)
Assets:
Opening Balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses for the period:
Included in earnings—Sale of securities
Included in earnings—Fair value gain(loss) on
trading securities
Included in earnings—Mortgage banking income
Included in other comprehensive income
Purchases, issues, sales and settlements:
Purchases
Issues
Sales
Settlements
Other-than-temporary impairment
Closing balance
Change in unrealized gains or losses for the period
included in earnings for assets held at the end of the
reporting period
$
$
1 See Note 3 – “Securities” for further information on transfers.
Year Ended June 30, 2018
Securities-
Trading:
Collateralized
Debt
Obligations
Securities-
Available-for-
Sale: Non-
Agency RMBS1
Mortgage
Servicing
Rights
Derivative
Instruments,
net
Total
$
8,327
$
71,503
$
7,200
$
1,026
$
88,056
—
—
282
—
—
—
—
—
(8,609)
—
—
—
—
(300)
—
—
(1,629)
—
—
(44,270)
(7,705)
(156)
—
—
—
—
(83)
—
3,635
—
—
—
—
—
—
—
—
(73)
—
—
—
—
—
—
— $
17,443
$
10,752
$
953
$
—
—
(18)
—
(156)
(1,629)
3,635
—
(52,879)
(7,705)
(156)
29,148
— $
(300) $
(83) $
(73) $
(456)
(Dollars in thousands)
Assets:
Opening Balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses for the period:
Included in earnings—Sale of securities
Included in earnings—Fair value gain(loss) on
trading securities
Included in earnings—Mortgage banking income
Included in other comprehensive income
Purchases, issues, sales and settlements:
Purchases
Issues
Sales
Settlements
Other-than-temporary impairment
Closing balance
Change in unrealized gains or losses for the period
included in earnings for assets held at the end of the
reporting period
$
$
Year Ended June 30, 2017
Securities-
Trading:
Collateralized
Debt
Obligations
Securities-
Available-for-
Sale: Non-
Agency RMBS
Mortgage
Servicing
Rights
Derivative
Instruments,
net
Total
$
7,584
$
9,364
$
3,943
$
1,318
$
—
—
—
743
—
—
—
—
—
—
—
124,547
—
(1,509)
—
—
13,933
—
—
(59,896)
(12,972)
(1,964)
—
—
—
—
697
—
2,560
—
—
—
—
—
—
—
—
(292)
—
—
—
—
—
—
8,327
$
71,503
$
7,200
$
1,026
$
22,209
124,547
—
(1,509)
743
405
13,933
2,560
—
(59,896)
(12,972)
(1,964)
88,056
743
$
(1,509) $
697
$
(292) $
(361)
F-23
The table below summarizes the quantitative information about Level 3 fair value measurements as of the dates
indicated:
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Inputs
Range (Weighted Average)
June 30, 2018
Securities – Non-agency MBS
Mortgage Servicing Rights
Derivative Instruments
(Dollars in thousands)
Securities – Trading
Securities – Non-agency MBS
Mortgage Servicing Rights
Derivative Instruments
$
$
$
$
$
$
$
17,443
Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
2.5 to 25.8% (14.1%)
1.5 to 10.6% (5.1%)
40.0 to 68.0% (58.9%)
2.7 to 7.1% (4.2%)
10,752
Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
6.0 to 26.6% (9.1%)
2.4 to 9.5 (6.9)
9.5 to 13.0% (9.9%)
953
Sales Comparison Approach
Projected Sales Profit of Underlying
Loans
0.1 to .4% (.3%)
Fair Value
Valuation Technique
Unobservable Inputs
Range (Weighted Average)
8,327
Discounted Cash Flow
Total Projected Defaults,
Discount Rate over Treasury
12.2 to 21.8% (16.8%)
4.5 to 4.5% (4.5%)
June 30, 2017
71,503
Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
2.5 to 23.4% (12.5%)
1.5 to 18.9% (5.3%)
40.0 to 68.8% (57.9%)
2.6 to 5.8% (3.3%)
7,200
Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
6.3 to 26.9% (9.5%)
2.5 to 7.8 (6.6)
9.5 to 13.0% (9.7%)
1,026
Sales Comparison Approach
Projected Sales Profit of Underlying
Loans
0.3 to 0.6% (0.5%)
The significant unobservable inputs used in the fair value measurement of the Company’s residential mortgage-backed
securities are projected prepayment rates, probability of default, and projected 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 projected loss severity and a directionally opposite change in the assumption used for projected 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:
(Dollars in thousands)
Interest income on investments
Fair value adjustment
Total
Year Ended June 30,
2018
2017
2016
$
$
— $
—
— $
311
743
1,054
$
$
245
(248)
(3)
F-24
The table below summarizes the fair value of assets measured for impairment on a non-recurring basis:
(Dollars in thousands)
Impaired loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Auto and RV secured
Commercial & Industrial
Other
Total
Other real estate owned and foreclosed assets:
Single family real estate
Autos and RVs
Total
(Dollars in thousands)
Impaired loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Auto and RV secured
Commercial & Industrial
Other
Total
Other real estate owned and foreclosed assets:
Single family real estate
Autos and RVs
Total
June 30, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Balance
$
$
$
$
— $
—
—
—
—
—
— $
— $
—
— $
— $
—
—
—
—
—
— $
— $
—
— $
28,446
16
232
60
2,361
111
31,226
9,385
206
9,591
June 30, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
$
$
$
— $
—
—
—
—
—
— $
— $
—
— $
— $
—
—
—
—
—
— $
— $
—
— $
23,377
16
4,255
157
314
274
28,393
1,353
60
1,413
$
$
$
$
$
$
$
$
28,446
16
232
60
2,361
111
31,226
9,385
206
9,591
Balance
23,377
16
4,255
157
314
274
28,393
1,353
60
1,413
Impaired loans and leases measured for impairment on a non-recurring basis using the fair value of the collateral for
collateral-dependent loans have a carrying amount of $31,226 at June 30, 2018 and life to date charge-offs of $3,294. Impaired
loans had a related allowance of $278 at June 30, 2018. At June 30, 2017, such impaired loans had a carrying amount of $28,393
and life to date charge-offs of $3,691, and a related allowance of $1,058.
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 $9,591 after charge-offs of $301 at June 30, 2018. Our other real estate owned and foreclosed
assets had a net carrying amount was $1,413 after charge-offs of $332 during the year ended June 30, 2017.
There were no held-to-maturity securities at June 30, 2018 or June 30, 2017.
The Company has elected the fair value option for Agency loans held for sale. These loans are intended for sale and the
Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the
contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are
90 days or more past due nor on non-accrual as of June 30, 2018 and June 30, 2017.
F-25
The aggregate fair value, contractual balance (including accrued interest), and gain was as follows:
(Dollars in thousands)
Aggregate fair value
Contractual balance
Gain
2018
35,077
34,415
662
$
$
$
$
At June 30,
2017
18,738
18,311
427
$
$
2016
20,871
20,226
645
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:
(Dollars in thousands)
Interest income
Change in fair value
Total change in fair value
2018
903
181
1,084
$
$
$
$
At June 30,
2017
602
(514)
88
$
$
2016
826
(846)
(20)
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:
(Dollars in thousands)
Fair Value Valuation Technique
Unobservable Input
Range (Weighted Average)1
June 30, 2018
Impaired loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Auto and RV secured
Commercial & Industrial
Other
Other real estate owned and foreclosed
assets:
Single family real estate
Autos and RVs
$
$
$
$
$
$
$
$
28,446
16
232
60
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach and income
approach
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales and adjustments for
differences in net operating income
expectations, capitalization rate
-48.8 to 66.7% (2.3%)
0.0 to 14.9% (7.4%)
-15.5 to 46.4% (15.4%)
Sales comparison
approach
Adjustment for differences between the
comparable sales
-2.0 to 71.5% (24.0%)
2,361 Discounted cash flow
Discount Rate
-33.8 to 0.0% (-16.9%)
111 Discounted cash flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate
0.0 to 0.0% (0.0%)
0.0 to 10.0% (5.0%)
100.0 to 100.0% (100.0%)
-1.0 to 2.5% (0.8%)
9,385
206
Sales comparison
approach
Sales comparison
approach
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales
-14.1 to 27.3% (0.5%)
-33.9 to 60.5% (7.9%)
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.
F-26
(Dollars in thousands)
Fair Value Valuation Technique
Unobservable Input
Range (Weighted Average)1
June 30, 2017
Impaired loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Auto and RV secured
Commercial & Industrial
Other
Other real estate owned and foreclosed
assets:
Single family real estate
Autos and RVs
$
$
$
$
$
$
$
$
23,377
16
Sales comparison
approach
Sales comparison
approach
4,255
Sales comparison
approach and income
approach
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales and adjustments for
differences in net operating income
expectations, capitalization rate
-38.5 to 79.8% (6.4%)
-6.1 to 26.1% (7.8%)
-24.2 to 48.7% (2.4%)
157
Sales comparison
approach
Adjustment for differences between the
comparable sales
-17.2 to 42.4% (-5.5%)
314 Discounted cash flow
Discount Rate
34.8 to 34.8% (34.8%)
274 Discounted cash flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate
0.0 to 0.0% (0.0%)
0.0 to 10.0% (5.0%)
100.0 to 100.0% (100.0%)
4.5 to 5.2% (4.9%)
1,353
60
Sales comparison
approach
Sales comparison
approach
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales
-10.5 to 12.5% (0.1%)
17.0 to 20.5% (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.
F-27
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of financial instruments at year-end were as follows:
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Loans held for sale, at fair value
Loans held for sale, at lower of cost or fair value
Loans and leases held for investment—net
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Total deposits
Advances from the Federal Home Loan Bank
Subordinated notes and debentures
Accrued interest payable
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
Securities trading
Securities available-for-sale
Loans held for sale, at fair value
Loans held for sale, at lower of cost or fair value
Loans and leases held for investment—net
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Total deposits
Securities sold under agreements to repurchase
Advances from the Federal Home Loan Bank
Subordinated notes and debentures
Accrued interest payable
June 30, 2018
Carrying
Amount
Level 1
Level 2
Level 3
Total Fair
Value
$
622,850
$
622,850
$
— $
— $
622,850
180,305
35,077
2,686
8,432,289
26,729
10,752
7,985,350
457,000
54,552
1,753
—
—
—
—
—
—
—
—
—
—
162,862
35,077
—
—
—
—
7,584,928
453,326
51,693
1,753
June 30, 2017
17,443
—
2,734
180,305
35,077
2,734
8,466,494
8,466,494
26,729
10,752
26,729
10,752
—
—
—
—
7,584,928
453,326
51,693
1,753
Carrying
Amount
Level 1
Level 2
Level 3
Total Fair
Value
$
643,541
$
643,541
$
8,327
264,470
18,738
6,669
7,374,493
20,781
7,200
6,899,507
20,000
640,000
54,463
1,284
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
192,967
18,738
—
—
—
—
— $
643,541
8,327
71,503
—
7,328
8,327
264,470
18,738
7,328
7,521,281
7,521,281
20,781
7,200
20,781
7,200
6,544,056
20,152
645,339
52,930
1,284
—
—
—
—
—
6,544,056
20,152
645,339
52,930
1,284
The methods and assumptions, not previously presented, used to estimate fair value are described as follows: Carrying
amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable,
demand deposits, short-term debt, and variable rate loans and leases or deposits that reprice frequently and fully. For fixed rate
loans, deposits, borrowings or subordinated debt and for variable rate loans and leases, deposits, borrowings or subordinated debt
with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities and loans held
for sale can be found earlier in this footnote. The carrying amount of stock of the Federal Home Loan Bank (“FHLB”) approximates
the estimated fair value of this investment. The fair value of off-balance sheet items is not considered material.
F-28
4. SECURITIES
The amortized cost, carrying amount and fair value for the major categories of securities trading, available-for-sale, and
held-to-maturity for the following periods were:
(Dollars in thousands)
Mortgage-backed securities (RMBS):
U.S agencies1
Non-agency2
Total mortgage-backed securities
Non-RMBS:
Municipal
Asset-backed securities and structured notes
Total Non-RMBS
Total debt securities
(Dollars in thousands)
Mortgage-backed securities (RMBS):
U.S. agencies1
Non-agency2
Total mortgage-backed securities
Non-RMBS:
Municipal
Asset-backed securities and structured notes
Total Non-RMBS
Total debt securities
June 30, 2018
Available-for-sale
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
13,102
$
19,384
32,486
20,953
127,558
148,511
152
116
268
2
2,267
2,269
$
(328) $
(2,057)
(2,385)
(743)
(101)
(844)
12,926
17,443
30,369
20,212
129,724
149,936
$
180,997
$
2,537
$
(3,229) $
180,305
Trading
Fair
Value
June 30, 2017
Available-for-sale
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
— $
27,379
$
286
$
(459) $
—
—
—
8,327
8,327
65,401
92,780
27,568
137,172
164,740
7,406
7,692
19
1,517
1,536
(1,304)
(1,763)
(424)
(91)
(515)
27,206
71,503
98,709
27,163
138,598
165,761
$
8,327
$
257,520
$
9,228
$
(2,278) $
264,470
1 U.S. government-backed or government sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.
2 Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by prime, Alt-
A or pay-option ARM mortgages.
The Company’s non-agency RMBS available-for-sale portfolio with a total fair value of $17,443 at June 30, 2018 consists
of fifteen different issues of super senior securities. During the current fiscal year ended June 30, 2018, the Company sold its two
mezzanine z-tranche securities for a gain of $153.
Debt securities with evidence of credit quality deterioration since issuance and for which it is probable at purchase that
the Company will be unable to collect all of the par value of the security are accounted for under ASC Topic 310-30, Loans and
Debt Securities Acquired with Deteriorated Credit Quality (“ASC Topic 310-30”). Under ASC Topic 310-30, the excess of cash
flows expected at acquisition over the purchase price is referred to as the accretable yield and is recognized in interest income
over the remaining life of the security. During the current fiscal year ended June 30, 2018, the Company sold its one senior support
security for a loss of $861.
The face amounts of debt securities available-for-sale that were pledged to secure borrowings at June 30, 2018 and 2017
were $2,540 and $6,183 respectively.
F-29
The securities with unrealized losses, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position were as follows:
(Dollars in thousands)
RMBS:
U.S. agencies
Non-agency
Total RMBS securities
Non-RMBS:
Municipal debt
Asset-backed securities and structured notes
Total Non-RMBS
Total debt securities
(Dollars in thousands)
RMBS:
U.S. agencies
Non-agency
Total RMBS securities
Non-RMBS:
Municipal debt
Asset-backed securities and structured notes
Total Non-RMBS
Total debt securities
June 30, 2018
Available-for-sale securities in loss position for
Less Than 12
Months
More Than 12
Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
(1) $
6,825
$
(327) $
6,837
$
15,867
(2,056)
15,903
(328)
(2,057)
$
12
36
48
1,740
9,489
11,229
(1)
(2)
(17)
(30)
(47)
22,692
(2,383)
22,740
(2,385)
12,326
6,163
18,489
(726)
(71)
(797)
14,066
15,652
29,718
(743)
(101)
(844)
$
11,277
$
(49) $
41,181
$
(3,180) $
52,458
$
(3,229)
June 30, 2017
Available-for-sale securities in loss position for
Less Than 12
Months
More Than 12
Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
17,161
2,487
19,648
13,431
27,750
41,181
$
(374) $
(16)
2,348
25,097
$
(85) $
(1,288)
$
19,509
27,584
(459)
(1,304)
(390)
27,445
(1,373)
47,093
(1,763)
(420)
(91)
(511)
1,757
—
1,757
(4)
—
(4)
15,188
27,750
42,938
(424)
(91)
(515)
$
60,829
$
(901) $
29,202
$
(1,377) $
90,031
$
(2,278)
There were twenty-six securities that were in a continuous loss position at June 30, 2018 for a period of more than 12
months. There were eleven securities that were in a continuous loss position at June 30, 2018 for a period of less than 12 months.
There were sixteen securities that were in a continuous loss position at June 30, 2017 for a period of more than 12 months. There
were twenty-six securities that were in a continuous loss position at June 30, 2017 for a period of less than 12 months.
The following table summarizes amounts of anticipated credit loss recognized in the income statement through other-
than-temporary impairment charges, which reduced non-interest income:
(Dollars in thousands)
Beginning balance
Additions for the amounts related to the credit loss for which an other-than-temporary impairment
was not previously recognized
Increases to the amount related to the credit loss for which other-than-temporary impairment was
previously recognized
Credit losses realized for securities sold
Ending balance
At June 30,
2018
2017
2016
$
(15,528) $
(20,865) $
(20,503)
(7)
(149)
15,684
(342)
(1,622)
7,301
(112)
(453)
203
$
— $
(15,528)
(20,865)
F-30
At June 30, 2018, no non-agency RMBS were determined to have cumulative credit losses. Cumulative credit losses of
$565 was recognized in earnings during fiscal 2016, $1,964 was recognized in earnings during fiscal 2017 and $156 was recognized
in earnings during fiscal 2018. This year’s other-than-temporary impairment of $156 was related to two non-agency RMBS sold
during the year. The Company measures its non-agency RMBS 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 other-than-temporary impairment of its debt securities. The excess of present value over the fair value of the
security, if any, is the noncredit component of the other-than-temporary impairment. 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 other-
than-temporary impairment is recorded as a loss in earnings and the noncredit component of other-than-temporary impairment is
recorded in comprehensive income, net of the related income tax benefit. If the Company does not intend to hold the security, or
will be required to sell the security prior to a recovery of the amortized cost basis of the security, the credit component and noncredit
component of the other-than-temporary impairment is recorded as a loss in earnings.
To determine the cash flows expected to be collected and to calculate the present value for purposes of testing for other-
than-temporary impairment, the Company utilizes the same industry-standard tool and the same cash flows as those calculated
for Level 3 fair values as discussed in Note 3 – Fair Value. The discount rates used to compute the present value of the expected
cash flows for purposes of testing for the credit component of the other-than-temporary impairment are either the implicit rate
calculated in each of the Company’s securities at acquisition or the last accounting yield. The Company calculates the implicit
rate at acquisition based on the contractual terms of the security, considering scheduled payments (and minimum payments in the
case of pay-option ARMs) without prepayment assumptions. Once the discount rate (or discount margin in the case of floating
rate securities) is calculated as described above, the discount is used in the industry-standard model to calculate the present value
of the cash flows.
During the current fiscal year ended June 30, 2018, total proceeds of $8,700 and net realized gains of $282 were realized
from the sale of two trading securities with a carrying value of $8,327. During the current fiscal year ended June 30, 2018, the
company sold twenty-four available-for-sale securities with a carrying value of $44,271 resulting in a $300 loss.
The gross gains and losses realized through earnings upon the sale of available-for-sale securities were as follows:
(Dollars in thousands)
Proceeds
Gross realized gains
Gross realized loss
Net gain on securities
2018
At June 30,
2017
2016
$
$
$
44,013
1,269
$
$
(1,569)
(300) $
161,048
7,386
(3,466)
3,920
$
$
$
14,969
1,427
—
1,427
The Company records unrealized gains and unrealized losses in accumulated other comprehensive loss as follows:
(Dollars in thousands)
Available-for-sale debt securities—net unrealized gains
Available-for-sale debt securities—non-credit related
Subtotal
Tax (provision) benefit
Net unrealized gain (loss) on investment securities in accumulated other comprehensive loss
At June 30,
2018
2017
(692) $
—
(692)
79
(613) $
6,949
(6,115)
834
(347)
487
$
$
F-31
The expected maturity distribution of the Company’s mortgage-backed securities and the contractual maturity distribution
of the Company’s Non-RMBS securities classified as available-for-sale and held-to-maturity were:
(Dollars in thousands)
RMBS—U.S. agencies1:
Due within one year
Due one to five years
Due five to ten years
Due after ten years
Total RMBS—U.S. agencies1
RMBS—Non-agency:
Due within one year
Due one to five years
Due five to ten years
Due after ten years
Total RMBS—Non-agency
Non-RMBS:
Due within one year
Due one to five years
Due five to ten years
Due after ten years
Total Non-RMBS
Total
June 30, 2018
Available-for-sale
Amortized
Cost
Fair
Value
$
1,371
$
4,004
3,008
4,719
13,102
3,012
8,902
5,583
1,887
19,384
75,701
58,979
—
13,831
148,511
$
180,997
$
1,344
3,933
2,973
4,676
12,926
2,760
8,116
4,966
1,601
17,443
76,925
59,920
—
13,091
149,936
180,305
1 Residential mortgage-backed security (RMBS) distributions include impact of expected prepayments and other timing factors.
F-32
5. LOANS, LEASES & ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Company’s single family, commercial and multifamily loans, the allowance methodology takes into consideration
the risk that the original borrower information may have adversely changed in two ways. First, in calculating the quantitative factor
for the Company’s general loan and lease loss allowance, the actual loss experience is tracked and stratified by original LTV and year
of origination. As a result, the Company uses relatively higher loss rates across the LTV bands for loans originated and purchased in
years 2005 through 2008 compared to the same LTV ranges for loans originated before 2005 or after 2008. Second, the Company
uses a number of qualitative factors to reflect additional risk. One qualitative loss factor is real estate valuation risk which is applied
to each LTV band primarily based upon the year the real estate loan was originated or purchased. Based upon price appreciation
indices, multifamily property values in years 2005 through 2008 experienced significant declines. As a result, the Company applies
a relatively higher qualitative loss factor rate across the LTV bands for loans originated and purchased in years 2005 through 2008
compared to the same LTV ranges for loans originated or purchased before 2005 or after 2008. Lastly, the Company separates its
allowance for loan and lease losses into loans originated and purchased categories in order to reflect the additional risk associated
with purchased loans.
For the Company’s home equity loans, the allowance methodology takes into consideration the risk that the original borrower
information may have adversely changed in two ways. First, in calculating the quantitative factor for the Company’s general loan loss
allowance, the actual loss experience is tracked and stratified by original combined LTV (“CLTV”) of the first and second liens. As
a result, the Company allocates higher loss rates in proportion to the greater the CLTV. Second, the Company uses a number of
qualitative factors to reflect additional risk. The Company does not have any individual purchased home equity loans in its portfolio
and given the limited time frame under which the Company originated home equity loans, 2006-2009, no additional risk allocation
is used.
For the Company’s single family – warehouse lines, the allowance methodology takes into consideration the structure of
these loans, as they remain in the portfolio for a short period (usually less than a month) and have higher credit protection allocated
compared to traditional single family originations. A matrix was created to reflect most current operating levels of capital and line
usage, which calculates a loss rating to assign to each originator.
For the Company’s factoring loans, the allowance methodology takes into consideration the credit quality of the insurance
company or state securing the loan. The Company obtains credit ratings for these entities through agencies such as A.M. Best and
allocates an allowance allocation based on these ratings.
For the Company’s C&I leveraged loans, equipment finance leases and bridge loans, the allowance methodology incorporates
a loan level grading system, which generally aligns with the credit rating. Industry loss rates are applied to determine the loss allowance
for each of these loans based upon their internal grading. The credit rating incorporates multiple borrower attributes including, but
not limited to, underlying collateral and pledged assets, income generated by the property or assets, borrower’s liquidity and access
to liquid funds, strength of the borrower’s industry, stability of the borrower’s market, the size of the company, collateral diversity,
facility exit strategies and borrower guarantees.
For the Company’s automobile (“auto”) and recreational vehicle (“RV”) loan portfolio, the allowance methodology takes
into consideration potential adverse changes to the borrower’s financial condition since time of origination. The general loan loss
reserves for auto and RV are stratified based upon borrower FICO scores. First, to account for potential deterioration of borrower’s
credit history since time of origination, due to downturn in the economy or other factors, the Company refreshes the FICO scores
used to drive the allowance on a semi-annual basis. The Company believes that current borrower credit history is a better predictor
of potential loss than that was used at time of origination. Second, the Company uses a number of qualitative factors to capture
additional risk when finalizing its calculation of the allowance for loan and lease losses.
Loan and lease segment risk characteristics. The Company considers its loan and lease classes to be the same as its loan
and lease segments. The following are loan and lease segment risk characteristics of the Company’s loan and lease portfolio:
Single family mortgage secured. The Company originates both fixed-rate and adjustable-rate loans secured by one-to-four
family residences located in the U.S. The Company’s lending policies generally limit the maximum LTV ratio on one-to-four family
loans to 80% of the lesser of the appraised value or the purchase price, plus pledged collateral. Terms of maturity typically range from
15 to 30 years. The Company attempts to mitigate residential lending risks by adhering to its underwriting policies in evaluating the
collateral and the credit-worthiness of the borrower.
Home equity. The Company also originates home equity lines of credit and second mortgage loans. Home equity lines of
credit and second mortgage loans have a greater credit risk than one-to-four family residential mortgage loans because they are secured
by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company. The Company
attempts to mitigate residential lending risks by adhering to its underwriting policies in evaluating the collateral and the credit-
worthiness of the borrower.
F-33
Warehouse and other. Single family warehouse loans consist of short-term, secured advances to mortgage bankers on a
revolving basis. These facilities enable the mortgage originators to close loans in their own names and temporarily finance inventories
of closed mortgage loans until they can be sold to an approved investor. Commercial specialty and lender finance loans secured by
single family real estate are originated to businesses secured by first liens on single family mortgage loans. These loans are generally
collateralized by single family mortgage loans that are secured by first liens on single family real estate. The Company attempts to
mitigate residential lending risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the
borrower.
Multifamily. The Company originates loans secured by multifamily real estate (more than four units). These loans involve
a greater degree of risk than one-to-four family residential mortgage loans as these loans are usually greater in amount, dependent on
the cash flow capacity of the project, and may be more difficult to evaluate and monitor. Repayment of loans secured by multifamily
properties frequently depends on the successful operation and management of the properties. Consequently, repayment of such loans
may be affected by adverse conditions in the real estate market or economy. The Company attempts to mitigate these risks by thoroughly
evaluating the global financial condition of the borrower, the management experience of the borrower, and the quality of the collateral
property securing the loan.
Commercial real estate. The Company originates loans across the U.S. secured by small commercial real estate properties.
These are primarily cash flow loans that share characteristics of both real estate and commercial business loans. The primary source
of repayment is frequently cash flow from the operation of the collateral property and secondarily through liquidation of the collateral.
These loans are generally higher risk than other classifications of loans in that they typically involve higher loan amounts, are dependent
on the management experience of the owners, and may be adversely affected by conditions in the real estate market or the economy.
Owner-occupied commercial real estate loans are generally of lower credit risk than non-owner occupied commercial real estate loans
as the borrowers’ businesses are likely dependent on the properties. Underwriting for these loans is primarily dependent on the
repayment capacity derived from the operation of the occupying business rather than rents paid by third parties. The Company attempts
to mitigate these risks by generally limiting the maximum LTV ratio to 65%-80%, depending on property type, and scrutinizing the
financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.
Auto and RV. Auto and RV loans primarily consist of direct and indirect auto loans and legacy RV loans. These auto and
RV loans were originated across the U.S. The collateral for these auto and RV loans is comprised of a mix of new and used autos and
RVs. Auto and RV loans generally have shorter terms to maturity than mortgage loans. Auto and RV loans generally involve a greater
degree of risk than do residential mortgage loans, particularly in the case of auto and RV loans, which are secured by rapidly depreciating
and mobile assets such as autos and RVs. In such cases, any repossessed collateral for a defaulted auto and RV loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.
The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the
borrower.
Factoring. Factoring loans are originated through the wholesale and retail purchase of state lottery prize and structured
settlement annuities. These annuities are high credit quality deferred payment receivables having a state lottery commission or primarily
highly rated insurance company payor. Purchases of state lottery prize or structured settlement annuities are governed by specific
state statutes requiring judicial approval of each transaction. No transaction is funded before an order approving such transaction has
been entered by a court of competent jurisdiction. The Company’s commission-based sales force originates contracts for the retail
purchase of such payments from leads generated by the Company’s dedicated research department through the use of proprietary
research techniques. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-
worthiness of the state or insurer.
Commercial and industrial. Commercial and industrial loans and leases are primarily made based on the operating cash
flows of the borrower or conversion of working capital assets to cash and secondarily on the underlying collateral provided by the
borrower. The cash flows of borrowers may be volatile and the value of the collateral securing these loans and leases may be difficult
to measure. Most commercial and industrial loans and leases are secured by the assets being financed or other business assets such
as accounts receivable or inventory and generally include personal guarantees based on a review of personal financial statements.
Although commercial and industrial loans and leases are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment, because
accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use. Accordingly, the repayment
of a commercial and industrial loan or lease primarily depends on the credit-worthiness of the borrower and guarantors, while the
liquidation of collateral is a secondary and potentially insufficient source of repayment. The Company attempts to mitigate these risks
by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of borrowers and
guarantors.
Other. The Company originates other loans, which include unsecured consumer loans and other small balance business and
consumer loans. Other consumer loans generally have shorter terms to maturity than mortgage loans. Other consumer loans generally
involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured. In
such cases, it is not possible to repossess collateral for a defaulted consumer loan and as such there may not exist an adequate source
F-34
of repayment of the outstanding loan balance as a result of the absence of security. The Company attempts to mitigate these risks by
adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.
The following table sets forth the composition of the loan and lease portfolio as of the dates indicated:
(Dollars in thousands)
Single family real estate secured:
Mortgage
Home equity
Warehouse and other1
Multifamily real estate secured
Commercial real estate secured
Auto and RV secured
Factoring
Commercial & Industrial
Other
Total gross loans and leases
At June 30,
2018
2017
$
4,198,941
$
2,306
412,085
1,800,919
220,379
213,522
169,885
1,481,051
18,598
8,517,686
(49,151)
(36,246)
8,432,289
$
3,901,754
2,092
452,390
1,619,404
162,715
154,246
160,674
992,232
3,754
7,449,261
(40,832)
(33,936)
7,374,493
Allowance for loan and lease losses
Unaccreted discounts and loan and lease fees
Total net loans and leases
$
1 The balance of single family warehouse loans was $175,508 at June 30, 2018 and $187,034 at June 30, 2017. The remainder of the balance was attributable to
commercial specialty and lender finance loans secured by single family real estate.
The following table summarizes activity in the allowance for loan and lease losses for the periods indicated:
(Dollars in thousands)
Balance—beginning of period
Provision for loan and lease loss
Charged off
Transfers to held for sale
Recoveries
Balance—end of period
2018
At June 30,
2017
2016
$
$
$
40,832
25,800
(15,979)
(2,307)
805
$
35,826
11,061
(5,096)
(1,828)
869
49,151
$
40,832
$
The following table summarizes the composition of the impaired loans and leases:
(Dollars in thousands)
Nonaccrual loans and leases—90+ days past due plus other
nonaccrual loans and leases
Troubled debt restructured loans and leases—non-accrual
Troubled debt restructured loans and leases—performing
Total impaired loans and leases
$
$
2018
At June 30,
2017
2016
30,197
1,029
—
31,226
$
$
26,815
1,578
—
28,393
$
$
28,327
9,700
(808)
(2,727)
1,334
35,826
28,790
3,069
210
32,069
F-35
At June 30, 2018, the carrying value of impaired loans and leases is net of write offs of $2,184. At June 30, 2018, $31,226
of impaired loans and leases had no specific allowance allocations. The average carrying value of impaired loans and leases was
$30,420 and $34,154 for the fiscal years ended June 30, 2018 and 2017, respectively. The interest income recognized during the
periods of impairment is insignificant for those loans and leases impaired at June 30, 2018 or 2017. At June 30, 2018 and 2017, there
were no loans or leases still accruing past due 90 days or more, unless the Company received principal and interest from the servicer
despite the borrower’s delinquency. The Company considers the servicer’s recovery of such advances in evaluating whether such
loans should continue to accrue. A loan or lease is considered impaired when, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the
loan or lease agreement. Factors that we consider in determining impairment include payment status, collateral value and the probability
of collecting scheduled principal and interest payments when due. Loans or leases that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value
of expected future cash flows discounted at the loan or lease’s effective interest rate or the fair value of the collateral if repayment of
the loan or lease is expected from the sale of collateral.
The Company has allocated $0 and $44 of the allowance to customers whose loans have been restructured and were determined
to be TDRs as of June 30, 2018 and 2017, respectively. The Company does not have any commitments to fund TDR loans at June 30,
2018.
At June 30, 2018 and 2017, approximately 71.08% and 69.57%, respectively, of the Company’s real estate loans are
collateralized by real property located in California and therefore exposed to economic conditions within this market region.
In the ordinary course of business, the Company has granted related party loans collateralized by real property to principal
officers, directors and their affiliates. There were no new related party loans granted during the fiscal year ended June 30, 2018. During
the fiscal year 2017, the Company originated no new related party loans and did not execute any interest rate modifications of existing
loans. Total principal payments on related party loans were $341 and $353 during the years ended June 30, 2018 and 2017, respectively.
At June 30, 2018 and 2017, these loans amounted to $8,956 and $9,297, respectively, and are included in loans held for investment.
Interest earned on these loans was $81 and $95 during the years ended June 30, 2018 and 2017, respectively.
The Company’s loan and lease portfolio consists of approximately 12.96% fixed interest rate loans and 87.04% adjustable
interest rate loans as of June 30, 2018. The Company’s adjustable rate loans are generally based upon indices using U.S. Treasury
rates, LIBOR and Eleventh District Cost of Funds.
At June 30, 2018 and 2017, purchased loans serviced by others were $64,536 or 0.76% and $84,363 or 1.13% respectively,
of the loan portfolio.
Allowance for Loan and Lease Losses. The Company is committed to maintaining the allowance for loan and lease losses
at a level that is considered to be commensurate with estimated probable incurred credit losses in the portfolio. Although the adequacy
of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. While the
Company believes that the allowance for loan and lease losses is adequate at June 30, 2018, future additions to the allowance will be
subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan and lease portfolio.
Allowance for Credit Loss Disclosures. The assessment of the adequacy of the Company’s allowance for loan and lease
losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans,
changes in the volume and mix of loans, collateral values and charge-off history. Based on historical performance, the Company
divides the LTV analysis into two classes, separating purchased loans from the loans underwritten directly by the Company since
mortgage loans originated by the Company experience lower estimated loss rates.
The Company provides general loan loss reserves for its auto and RV loans based upon the borrower’s credit score at the
time of origination and the Company’s loss experience to date. The Company obtains updated credit scores for its auto and RV
borrowers approximately every six months. The updated credit score will result in a higher or lower general loan loss allowance
depending on the change in borrowers’ FICO scores and the resulting shift in loan balances among the five FICO bands from which
the Company measures and calculates its reserves. For the general loss reserve, the Company does not use individually updated credit
scores or valuations for the real estate collateralizing its real estate loans.
The allowance for loan and lease losses for the auto and RV loan portfolio at June 30, 2018 was determined by classifying
each outstanding loan according to the original FICO score and providing loss rates. The Company had $213,462 of auto and RV loan
balances subject to general reserves as follows: FICO score greater than or equal to 770: $105,612; 715 – 769: $73,013; 700 – 714:
$18,524; 660 – 699: $14,992 and less than 660: $1,321.
F-36
The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan
and the LTV at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each
loan by the LTV and applying a loss rate. At June 30, 2018, the LTV groupings for each significant mortgage class were as follows:
The Company had $4,170,495 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV
less than or equal to 60%: $2,443,303; 61% – 70%: $1,387,807; 71% – 80%: $339,193 and greater than 80%: $192.
The Company had $1,800,687 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV
less than or equal to 55%: $957,441; 56% – 65%: $562,928; 66% – 75%: $269,619; 76% – 80%: $9,499 and greater than 80%: $1,200.
The Company originates and purchases mortgage loans with terms that may include repayments that are less than the
repayments for fully amortizing loans, including interest only loans, option adjustable-rate mortgages, and other loan types that permit
payments that may be smaller than interest accruals. The Companies lending guidelines for interest-only loans are adjusted for the
increased credit risk associated with these loans by requiring borrowers with such loans to borrow at LTVs that are lower than standard
amortizing ARM loans and by calculating debt to income ratios for qualifying borrowers based upon a fully amortizing payment, not
the interest only payment. The Company’s Credit Committee monitors and performs reviews of interest only loans. Adverse trends
reflected in the Company’s delinquency statistics, grading and classification of interest only loans would be reported to management
and the Board of Directors. As of June 30, 2018, the Company had $1,123.1 million of interest only loans and $2.3 million of option
adjustable-rate mortgage loans. Through June 30, 2018, the net amount of deferred interest on these loan types was not material to
the financial position or operating results of the Company.
The Company’s commercial real estate secured portfolio consists of loans well collateralized by commercial real estate. The
Company had $220,379 of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%:
$104,070; 51% – 60%: $47,591; 61% – 70%: $56,649; 71% – 80%: $12,069 and greater than 80%: $0.
The Company’s commercial and industrial portfolio primarily consists of real estate-backed and asset-backed loans and
leases to businesses and non-bank lenders. The Company’s other portfolios consist of receivables factoring for businesses and
consumers and other small balance business and consumer loans. The Company allocates its allowance for loan and lease losses for
these asset types based on qualitative factors which consider various attributes captured in the credit rating, the value of the collateral
and the financial position of the issuer of the receivables.
F-37
The following tables summarize activity in the allowance for loan and lease losses by portfolio classes for the periods
indicated:
Single Family
June 30, 2018
(Dollars in thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
&
Industrial
Other
Total
Balance at July 1, 2017
$
19,972
$
19
$
2,298
$
4,638
$
1,008
$
2,379
$
401
$
9,881
$
236
$
40,832
Provision for loan and
lease loss
Charge-offs
Transfers to held for sale
Recoveries
632
(271)
—
35
Balance at June 30, 2018
$
20,368
$
(18)
(1)
—
14
14
69
(287)
—
—
372
—
—
—
(159)
—
—
—
1,390
(803)
—
212
44
—
—
—
6,357
17,113
25,800
—
—
—
(14,617)
(15,979)
(2,307)
(2,307)
544
969
805
$
49,151
$
2,080
$
5,010
$
849
$
3,178
$
445
$
16,238
$
Single Family
June 30, 2017
(Dollars in thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
&
Industrial
Other
Total
Balance at July 1, 2016
$
18,666
$
23
$
2,685
$
3,938
$
882
$
1,615
$
245
$
7,630
$
142
$
35,826
Provision for loan and
lease loss
Charge-offs
Transfers to held for sale
Recoveries
2,308
(1,115)
—
113
Balance at June 30, 2017
$
19,972
$
(6)
(23)
—
25
19
(387)
—
—
—
323
—
—
377
110
(23)
—
39
990
(433)
—
207
156
—
—
—
2,251
—
—
—
$
2,298
$
4,638
$
1,008
$
2,379
$
401
$
9,881
$
5,316
(3,502)
(1,828)
108
236
11,061
(5,096)
(1,828)
869
$
40,832
Single Family
June 30, 2016
(Dollars in thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
&
Industrial
Consumer
& Other
Total
Balance at July 1, 2015
$
13,664
$
122
$
1,879
$
4,363
$
1,103
$
953
$
292
$
5,882
$
69
$
28,327
Provision for loan and
lease loss
Charge-offs
Transfers to held for sale
Recoveries
5,040
(205)
—
167
Balance at June 30, 2016
$
18,666
$
(134)
(3)
—
38
23
806
—
—
—
(311)
(114)
—
—
$
2,685
$
3,938
$
(1,056)
(147)
—
982
882
854
(339)
—
147
(47)
—
—
—
1,748
—
—
—
2,800
—
(2,727)
—
9,700
(808)
(2,727)
1,334
$
1,615
$
245
$
7,630
$
142
$
35,826
F-38
The following tables present our loans and leases evaluated individually for impairment by portfolio class for the periods
indicated:
June 30, 2018
Unpaid
Principal
Balance
Principal
Balance
Adjustment1
Recorded
Investment
Accrued
Interest/
Origination
Fees
Related
Allocation of
General
Allowance
Related
Allocation of
Specific
Allowance
Total
(Dollars in thousands)
With no related allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Multifamily real estate secured
Purchased
Auto and RV secured
In-house originated
With an allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Commercial & Industrial
Other
Total
As a % of total gross loans and leases
$
$
1,584
3,598
$
951
1,739
$
633
1,859
$
480
369
24,607
1,394
16
172
111
32,331
$
248
309
47
—
—
—
—
3,294
$
232
60
24,560
1,394
16
172
111
29,037
0.38%
0.04%
0.34%
78
—
—
2
—
21
$
711
1,859
$
— $
—
232
62
—
—
24,560
1,415
16
172
111
29,138
0.34%
$
247
14
1
9
7
278
—%
$
—
—
—
101
—%
$
$
June 30, 2017
Unpaid
Principal
Balance
Principal
Balance
Adjustment1
Recorded
Investment
Accrued
Interest/
Origination
Fees
Related
Allocation of
General
Allowance
Related
Allocation of
Specific
Allowance
Total
(Dollars in thousands)
With no related allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Multifamily real estate secured
Purchased
Auto and RV secured
In-house originated
With an allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Multifamily real estate secured
In-house originated
Auto and RV secured
In-house originated
Commercial & Industrial
Other
$
4,240
4,563
$
1,032
1,903
$
3,208
2,660
$
492
418
16,124
1,429
18
4,170
42
314
215
295
12
32
2
192
8
—
277
123
16,112
1,397
16
3,978
34
314
205
—
—
3
—
17
—
186
2
—
$
3,413
2,660
$
— $
—
277
126
16,112
1,414
16
4,164
36
314
—
—
643
37
1
19
1
314
Total
As a % of total gross loans and leases
1 Impaired loans with an allowance recorded do not have any charge-offs. Principal balance adjustments on impaired loans with an allowance recorded represent
interest payments that have been applied to the book balance as a result of the loans’ non-accrual status.
0.01%
0.05%
0.38%
0.39%
0.43%
$
$
$
$
$
$
$
—
413
0.01%
274
28,806
43
1,058
274
32,084
—
3,691
274
28,393
—
—
—
—
—
—
—
—
—
—
—%
—
—
—
—
—
—
—
—
—
—
—
—
—%
F-39
The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and
leases by portfolio segment and based on impairment evaluation method:
June 30, 2018
Single Family
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
(Dollars in thousands)
Mortgage
Allowance for loan and lease losses:
Ending allowance balance attributable to loans and leases:
Individually evaluated for
impairment–
general allowance
Individually evaluated for
impairment–
specific allowance
Collectively evaluated for
impairment
Total ending allowance
balance
Loans and leases:
Loans and leases
individually evaluated for
impairment 1
Loans and leases
collectively evaluated for
impairment
Principal loan and lease
balance
Unaccreted discounts and
loan and lease fees
Total recorded investment
in loans and leases
$
261
$
1
$
— $
— $
— $
— $
— $
9
$
7
$
278
—
20,107
—
13
—
—
2,080
5,010
—
849
—
3,178
—
445
—
16,229
—
962
—
48,873
$
20,368
$
14
$
2,080
$
5,010
$
849
$
3,178
$
445
$
16,238
$
969
$
49,151
$
28,446
$
16
$
— $
232
$
— $
60
$
— $
172
$
111
$
29,037
4,170,495
4,198,941
2,290
2,306
412,085
1,800,687
220,379
213,462
169,885
1,480,879
18,487
8,488,649
412,085
1,800,919
220,379
213,522
169,885
1,481,051
18,598
8,517,686
9,187
48
(706)
5,063
836
2,065
(48,039)
(3,884)
(816)
(36,246)
$ 4,208,128
$
2,354
$
411,379
$ 1,805,982
$
221,215
$
215,587
$
121,846
$
1,477,167
$
17,782
$ 8,481,440
1 Loans and leases evaluated for impairment include TDRs that have been performing for more than six months.
June 30, 2017
Single Family
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
(Dollars in thousands)
Mortgage
Allowance for loan and lease losses:
Ending allowance balance attributable to loans and leases:
Individually evaluated for
impairment –
general allowance
Individually evaluated for
impairment –
specific allowance
Collectively evaluated for
impairment
Total ending allowance
balance
Loans and leases:
Loans and leases
individually evaluated for
impairment 1
Loans and leases
collectively evaluated for
impairment
Principal loan and lease
balance
Unaccreted discounts and
loan and lease fees
Total recorded investment
in loans and leases
$
$
680
$
1
$
— $
19
$
— $
1
$
— $
314
$
43
$
1,058
— $
— $
— $
— $
— $
— $
— $
— $
— $
—
19,292
18
2,298
4,619
1,008
2,378
401
9,567
193
39,774
$
19,972
$
19
$
2,298
$
4,638
$
1,008
$
2,379
$
401
$
9,881
$
236
$
40,832
$
23,377
$
16
$
— $
4,255
$
— $
157
$
— $
314
$
274
$
28,393
3,878,377
3,901,754
2,076
2,092
452,390
1,615,149
162,715
154,089
160,674
991,918
3,480
7,420,868
452,390
1,619,404
162,715
154,246
160,674
992,232
3,754
7,449,261
10,486
34
(1,702)
4,586
744
2,054
(49,350)
(640)
(148)
(33,936)
$ 3,912,240
$
2,126
$
450,688
$ 1,623,990
$
163,459
$
156,300
$
111,324
$
991,592
$
3,606
$ 7,415,325
1 Loans and leases evaluated for impairment include TDRs that have been performing for more than six months.
F-40
Credit Quality Disclosure. Nonaccrual loans and leases consisted of the following as of the dates indicated:
(Dollars in thousands)
Nonaccrual loans and leases:
Single Family Real Estate Secured:
Mortgage
In-house originated
Purchased
Home Equity
In-house originated
Multifamily Real Estate Secured
In-house originated
Purchased
Total nonaccrual loans secured by real estate
Auto and RV Secured
Commercial and Industrial
Other
Total nonaccrual loans and leases
Nonaccrual loans and leases to total loans and leases
At June 30,
2018
2017
$
$
$
25,193
3,253
16
—
232
28,694
60
2,361
111
19,320
4,057
16
3,978
277
27,648
157
314
274
31,226
$
0.37%
28,393
0.38%
Approximately 3.30% of our nonaccrual loans and leases at June 30, 2018 were considered TDRs, compared to 5.56% at
June 30, 2017. Borrowers who make timely payments after TDRs are considered non-performing for at least six months. Generally,
after six months of timely payments, those TDRs are reclassified from the nonaccrual loan and lease category to performing and any
previously deferred interest income is recognized. Approximately 91.10% of the Bank’s nonaccrual loans and leases are single family
first mortgages already written down to 41.28% in aggregate, of the original appraisal value of the underlying properties.
The following tables provide the outstanding unpaid balance of loans and leases that are performing and nonaccrual by
portfolio class as of the dates indicated:
Single Family
June 30, 2018
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
& Industrial
Other
Total
Performing
$ 4,170,495
$
2,290
$
412,085
$ 1,800,687
$
220,379
$
213,462
$
169,885
$
1,478,690
$
18,487
$ 8,486,460
Nonaccrual
28,446
16
—
232
—
60
—
2,361
111
31,226
Total
$ 4,198,941
$
2,306
$
412,085
$ 1,800,919
$
220,379
$
213,522
$
169,885
$
1,481,051
$
18,598
$ 8,517,686
June 30, 2017
Single Family
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
& Industrial
Other
Total
Performing
$ 3,878,377
$
2,076
$
452,390
$ 1,615,149
$
162,715
$
154,089
$
160,674
$
991,918
$
3,480
$ 7,420,868
Nonaccrual
23,377
16
—
4,255
—
157
—
314
274
28,393
Total
$ 3,901,754
$
2,092
$
452,390
$ 1,619,404
$
162,715
$
154,246
$
160,674
$
992,232
$
3,754
$ 7,449,261
F-41
The Company divides loan balances when determining general loan loss reserves between purchases and originations as
follows:
(Dollars in thousands)
Origination
Purchase
Total
Origination
Purchase
Total
Origination
Purchase
Total
Single Family Real Estate Secured: Mortgage
Multifamily Real Estate Secured
Commercial Real Estate Secured
Performing
Nonaccrual
Total
$
$
4,134,011
$
36,484
$
4,170,495
$
1,735,051
$
65,636
$
1,800,687
$
212,235
$
8,144
$
220,379
25,193
3,253
28,446
—
232
232
—
—
—
4,159,204
$
39,737
$
4,198,941
$
1,735,051
$
65,868
$
1,800,919
$
212,235
$
8,144
$
220,379
June 30, 2018
June 30, 2017
(Dollars in thousands)
Origination
Purchase
Total
Origination
Purchase
Total
Origination
Purchase
Total
Single Family Real Estate Secured: Mortgage
Multifamily Real Estate Secured
Commercial Real Estate Secured
Performing
Nonaccrual
Total
$
$
3,827,649
$
50,728
$
3,878,377
$
1,528,912
$
86,237
$
1,615,149
$
150,880
$
11,835
$
162,715
19,320
4,057
23,377
3,978
277
4,255
—
—
—
3,846,969
$
54,785
$
3,901,754
$
1,532,890
$
86,514
$
1,619,404
$
150,880
$
11,835
$
162,715
From time to time the Company modifies loan terms temporarily for borrowers who are experiencing financial stress. These
loans are performing and accruing and will generally return to the original loan terms after the modification term expires.
F-42
During the temporary period of modification, the Company classifies these loans as performing TDRs that consisted of the
following as of the dates indicated:
Single Family
June 30, 2018
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
Performing loans
temporarily
modified as TDR $
Nonaccrual loans
and leases
— $ — $
— $
— $
— $
— $
— $
— $ — $ —
28,446
16
—
232
—
60
—
2,361
111
31,226
Total impaired
loans and leases $ 28,446
$
16
$
— $
232
$
— $
60
$
— $
2,361
$
111
$ 31,226
Single Family
Year Ended June 30, 2018
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
Interest income
recognized on
performing TDRs $
— $ — $
— $
— $
— $
— $
— $
— $ — $ —
Average balances
of performing
TDRs
Average balances
of impaired loans
and leases
$
— $ — $
— $
— $
— $
— $
— $
— $ — $ —
$ 27,108
$
16
$
— $
2,385
$
— $
129
$
— $
535
$
247
$ 30,420
Single Family
June 30, 2017
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
Performing loans
temporarily
modified as TDR $
Nonaccrual loans
and leases
— $ — $
— $
— $
— $
— $
— $
— $ — $ —
23,377
16
—
4,255
—
157
—
314
274
28,393
Total impaired
loans and leases $ 23,377
$
16
$
— $
4,255
$
— $
157
$
— $
314
$
274
$ 28,393
Single Family
Year Ended June 30, 2017
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
Interest income
recognized on
performing TDRs $
7
$ — $
— $
— $
— $
— $
— $
— $ — $
7
Average balances
of performing
TDRs
Average balances
of impaired loans
and leases
$
125
$ — $
— $
— $
— $
— $
— $
— $ — $
125
$ 28,823
$
34
$
— $
4,409
$
144
$
231
$
— $
63
$
450
$ 34,154
F-43
Single Family
June 30, 2016
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
Performing loans
temporarily
modified as TDR $
210
$ — $
— $
— $
— $
— $
— $
— $ — $
210
Nonaccrual loans
28,400
33
—
2,218
254
278
—
—
676
31,859
Total impaired
loans
$ 28,610
$
33
$
— $
2,218
$
254
$
278
$
— $
— $
676
$32,069
Single Family
Year Ended June 30, 2016
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
Interest income
recognized on
performing TDRs $
9
$ — $
— $
— $
— $
— $
— $
— $ — $
9
Average balances
of performing
TDRs
$
214
$ — $
— $
— $
— $
— $
— $
— $ — $
214
Average balances
of impaired loans $ 22,969
$
18
$
— $
4,495
$
969
$
327
$
— $
— $
135
$28,913
Interest recognized on performing loans temporarily modified as TDRs was $0, $7, and $9 for the years ended June 30, 2018,
2017 and 2016 respectively. The average balances of performing TDRs and nonaccrual loans was $0 and $30,420 for the year ended
June 30, 2018, $125 and $34,154 for the year ended June 30, 2017 and $214 and $28,913 for the year ended June 30, 2016, respectively.
The Company’s loan modifications included Single Family, Multifamily, Commercial and Other loans of which included
one or a combination of the following: a reduction of the stated interest rate, extended payment due dates or delinquent property taxes
that were paid by the Bank and either repaid by the borrower over a one-year period or capitalized and amortized over the remaining
life of the loan. The Company’s loan modifications also included RV loans in which borrowers were able to make interest-only
payments for a period of six months to one year which then reverted back to fully amortizing.
The following tables present the loans modified as TDRs during the periods indicated:
(Dollars in thousands)
Other
Total loans modified as TDRs
$
Year Ended June 30,
2018
2017
2016
—
— $
259
259
$
—
—
F-44
The following tables present loans by class modified as troubled debt restructurings that occurred during the periods indicated:
(Dollars in thousands)
Troubled Debt Restructurings:
Single family real estate secured:
Mortgage
In-house originated
Total
(Dollars in thousands)
Troubled Debt Restructurings:
Other
Total
(Dollars in thousands)
Troubled Debt Restructurings:
Single family real estate secured:
Mortgage
In-house originated
Total
Year Ended June 30, 2018
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of Loans
—
—
$
$
— $
— $
—
—
Year Ended June 30, 2017
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of Loans
7
7
$
259
259
$
259
259
Year Ended June 30, 2016
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of Loans
—
—
$
$
— $
— $
—
—
The Company had no loans modified as TDRs within the previous twelve months for which there was a payment default for
the fiscal years ended June 30, 2018 and June 30, 2017, respectively. The Company defines a payment default as 90 days past due.
Credit Quality Indicators. The Company categorizes loans and leases into risk categories based on relevant information
about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit
documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases
individually by classifying the loans and leases as to credit risk. The Company uses the following definitions for risk ratings.
Pass. Loans and leases classified as pass are well protected by the current net worth and paying capacity of the obligor or
by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
Special Mention. Loans and leases classified as special mention have a potential weakness that deserves management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease
or of the institution’s credit position at some future date.
Substandard. Loans and leases classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss
if the deficiencies are not corrected.
Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions,
and values, highly questionable and improbable.
F-45
The Company reviews and grades loans and leases following a continuous loan and lease review process, featuring coverage
of all loan and lease types and business lines at least quarterly. Continuous reviewing provides more effective risk monitoring because
it immediately tests for potential impacts caused by changes in personnel, policy, products or underwriting standards.
The following tables present the composition of our loan and lease portfolio by credit quality indicator as of the dates
indicated:
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Warehouse and other
In-house originated
Multifamily real estate secured
In-house originated
Purchased
Commercial real estate secured
In-house originated
Purchased
Auto and RV secured
In-house originated
Factoring
Commercial & Industrial
Other
Total
Pass
Special
Mention
Substandard
Doubtful
Total
June 30, 2018
$
4,113,537
36,024
$
19,403
461
$
26,264
3,252
$
— $
—
4,159,204
39,737
2,290
412,085
1,731,068
64,663
212,235
6,226
213,455
169,885
1,471,433
18,369
8,451,270
$
$
—
—
3,983
—
—
1,918
—
—
5,460
118
31,343
$
16
—
—
1,205
—
—
67
—
1,969
111
32,884
—
—
—
—
—
—
—
—
2,189
—
2,189
$
$
2,306
412,085
1,735,051
65,868
212,235
8,144
213,522
169,885
1,481,051
18,598
8,517,686
As of % of gross loans and leases
99.2%
0.4%
0.4%
—%
100.0%
F-46
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Warehouse and other
In-house originated
Multifamily real estate secured
In-house originated
Purchased
Commercial real estate secured
In-house originated
Purchased
Auto and RV secured
In-house originated
Factoring
Commercial & Industrial
Other
Total
Pass
Special
Mention
Substandard
Doubtful
Total
June 30, 2017
$
3,808,886
49,893
$
18,763
538
$
19,320
4,354
$
— $
—
3,846,969
54,785
2,076
452,390
1,526,931
84,775
150,880
9,868
153,994
160,674
991,918
3,480
7,395,765
$
$
—
—
1,981
452
—
1,967
77
—
—
—
23,778
$
16
—
3,978
1,287
—
—
175
—
314
274
29,718
$
—
—
—
—
—
—
—
—
—
—
— $
—%
2,092
452,390
1,532,890
86,514
150,880
11,835
154,246
160,674
992,232
3,754
7,449,261
100.0%
As of % of gross loans and leases
99.3%
0.3%
0.4%
The Company considers the performance of the loan and lease portfolio and its impact on the allowance for loan and lease
losses. The Company also evaluates credit quality based on the aging status of its loans and leases. During the year, the Company
holds certain short-term loans that do not have a fixed maturity date that are treated as delinquent if not paid in full 90 days after the
origination date.
The following tables provide the outstanding unpaid balance of loans and leases that are past due 30 days or more by portfolio
class as of the dates indicated:
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Multifamily real estate secured
In-house originated
Auto and RV secured
In-house originated
Commercial & Industrial
Other
Total
As a % of gross loans and leases
30-59 Days Past
Due
60-89 Days Past
Due
90+ Days Past
Due
Total
June 30, 2018
$
$
$
7,830
354
$
3,240
105
$
22,009
1,183
33,079
1,642
—
410
284
300
79
$
9,257
0.11%
—
—
22
—
111
$
3,478
0.04%
16
—
9
2,362
111
16
410
315
2,662
301
25,690
$
38,425
0.30%
0.45%
F-47
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Multifamily real estate secured
In-house originated
Auto and RV secured
In-house originated
Commercial & Industrial
Other
Total
As a % of gross loans and leases
30-59 Days Past
Due
60-89 Days Past
Due
90+ Days Past
Due
Total
June 30, 2017
$
$
$
4,892
244
$
2,325
101
19,297
1,751
$
—
—
149
—
—
5,285
0.07%
$
—
—
77
—
—
2,503
0.03%
$
16
3,978
3
314
274
25,633
$
26,514
2,096
16
3,978
229
314
274
33,421
0.35%
0.45%
6. FURNITURE, EQUIPMENT AND SOFTWARE
A summary of the cost and accumulated depreciation and amortization for leasehold improvements, furniture, equipment and
software is as follows:
(Dollars in thousands)
Leasehold improvements
Furniture and fixtures
Computer hardware and equipment
Software
Total
Less accumulated depreciation and amortization
Furniture, equipment and software—net
At June 30,
2018
2017
$
1,953
5,418
13,863
27,605
48,839
(27,385)
21,454
$
1,983
5,083
14,254
17,228
38,548
(21,889)
16,659
$
$
Depreciation and amortization expense in respect of leasehold improvements, furniture, equipment and software for the years
ended June 30, 2018, 2017 and 2016 was $7,923, $6,094 and $4,795, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company recorded goodwill on April 4, 2018 incident to its acquisition of the bankruptcy trustee and fiduciary
services business of Epiq. At the time of acquisition a fair value study was conducted to determine the goodwill created as part
of the transaction.
Management has evaluated and continues to monitor all key factors impacting the carrying value of the Company’s
recorded goodwill and long-lived assets. Adverse changes in the Company’s actual or expected operating results, market
capitalization, business climate, economic factors or other negative events that may be outside the control of management could
result in material non-cash impairment charges in the future.
The following table summarizes the activity in the Company’s goodwill balance as of the dates indicated:
(Dollars in thousands)
Balance at July 1, 2017
Goodwill incident to acquisition
Balance at June 30, 2018
Total
—
35,719
35,719
$
$
F-48
The Company’s acquired intangible assets are summarized as follows as of the dates indicated:
(Dollars in thousands)
Covenant not to compete
Customer relationships
Developed technologies
Trade name
Total intangible assets
$
$
June 30, 2018
June 30, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
930
9,820
21,680
290
32,720
$
$
58
243
326
24
651
$
$
872
9,577
21,354
266
32,069
$
$
— $
—
—
—
— $
— $
—
—
—
— $
—
—
—
—
—
The weighted-average useful lives of intangible assets at the time of acquisition were as follows:
Covenant not to compete
Customer relationships
Developed technologies
Trade name
Weighted-Average
Useful Lives (Years)
4
12
5
3
The amortization expense for intangible assets that are subject to amortization was $651 for the year ended June 30, 2018.
Each intangible asset subject to amortization is amortized using the straight-line method over the estimated useful life of the asset.
Estimated future amortization expense related to finite-lived intangible assets at June 30, 2018 is as follows:
(Dollars in thousands)
For the fiscal year ending June 30,
2019
2020
2021
2022
2023
Thereafter
Total
Amortization Expense
$
$
5,270
6,158
5,808
4,698
4,525
5,610
32,069
F-49
8. DEPOSITS
Deposit accounts are summarized as follows:
(Dollars in thousands)
Non-interest bearing
Interest bearing:
Demand
Savings
Time deposits:
$250 and under2
Greater than $250
Total time deposits
Total interest bearing2
Total deposits
At June 30,
2018
2017
Amount
Rate1
Amount
Rate1
$
1,015,355
—% $
848,544
—%
2,519,845
2,482,430
5,002,275
1,837,274
130,446
1,967,720
6,969,995
1.60%
1.31%
1.46%
2.34%
2.05%
2.32%
1.70%
2,593,491
2,651,176
5,244,667
774,627
31,669
806,296
6,050,963
$
7,985,350
1.48% $
6,899,507
0.89%
0.81%
0.85%
2.54%
0.39%
2.46%
1.06%
0.93%
1 Based on weighted-average stated interest rates at end of period.
The total interest-bearing includes brokered deposits of $2,055.9 million and $1,104.3 million as of June 30, 2018 and June 30, 2017, respectively, of which $1,692.8
2
million and $611.0 million, respectively, are time deposits classified as $250 and under.
The scheduled maturities of time deposits are as follows:
(Dollars in thousands)
Within 12 months
13 to 24 months
25 to 36 months
37 to 48 months
49 to 60 months
Thereafter
Total
At June 30,
2018
$
1,259,119
97,226
11,118
35,981
84,538
479,738
1,967,720
$
At June 30, 2018 and 2017, the Company had deposits from principal officers, directors and their affiliates in the amount of
$4,964 and $1,220, respectively.
F-50
9. ADVANCES FROM THE FEDERAL HOME LOAN BANK
At June 30, 2018 and 2017, the Company’s fixed-rate FHLB advances had interest rates that ranged from 1.36% to 3.32% with
a weighted average of 2.14% and ranged from 1.00% to 4.32% with a weighted average of 1.79%, respectively.
Fixed-rate advances from FHLB are scheduled to mature as follows:
(Dollars in thousands)
Within one year1
After one but within two years
After two but within three years
After three but within four years
After four but within five years
After five years
Total
1. Within one year category includes $147,500 of term advances.
At June 30,
2018
2017
Amount
Weighted-
Average Rate
Amount
Weighted-
Average Rate
$
229,500
55,000
65,000
50,000
27,500
30,000
2.02% $
1.79%
2.30%
2.47%
2.08%
2.82%
265,000
147,500
55,000
65,000
50,000
57,500
$
457,000
2.14% $
640,000
1.28%
1.98%
1.79%
2.30%
2.47%
2.47%
1.79%
The Company’s advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid balance of
$4,687,166 and $3,989,070 at June 30, 2018 and 2017, respectively, by the Company’s investment in capital stock of the FHLB of San
Francisco and by its investment in mortgage-backed securities. Generally, each advance carries a prepayment penalty and is payable in
full at its maturity date.
The maximum amounts advanced at any month-end during the period from the FHLB were $2,240,000, $1,317,000, and
$1,129,000 during the years ended June 30, 2018, 2017, and 2016, respectively. At June 30, 2018, the Company had $1,616,243 available
immediately being fully collateralized for advances from the FHLB for terms up to ten years.
10. SUBORDINATED NOTES AND DEBENTURES
Subordinated Notes. In March 2016, the Company completed the sale of $51,000 aggregate principal amount of its 6.25%
Subordinated Notes due February 28, 2026 (the “Notes”). The Company received $51,000 in gross proceeds as a part of this transaction,
before the 3.15% underwriting discount and other offering expenses. The Notes mature on February 28, 2026 and accrue interest at a rate
of 6.25% per annum, with interest payable quarterly. The Notes may be redeemed on or after March 31, 2021, which date may be extended
at the Company’s discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions.
Junior Subordinated Debentures. On December 13, 2004, the Company entered into an agreement to form an unconsolidated
trust which issued $5,000 of trust preferred securities in a transaction that closed on December 16, 2004. The net proceeds from the
offering were used to purchase $5,155 of junior subordinated debentures (“Debentures”) of the 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. The Company has 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% for a rate of 4.73% as of June 30, 2018, with interest paid quarterly
starting February 16, 2005.
The Bank has the ability to borrow short-term from the Federal Reserve Bank Discount Window. At June 30, 2018 and 2017
there were no amounts outstanding and the available borrowings from this source were $917,017 and $1,251,526, respectively. The 2018
available borrowings would be collateralized by residential real estate loans, certain C&I loans, and mortgage-backed securities totaling
$1,230,054 and $1,543,751, respectively. The Bank has additional unencumbered collateral that could be pledged to the Federal Reserve
Bank Discount Window to increase borrowing liquidity.
The Bank has federal funds lines of credit with two major banks totaling $35,000. At June 30, 2018 and 2017 the Bank had no
outstanding balances on these lines.
F-51
11. INCOME TAXES
The provision for income taxes is as follows:
(Dollars in thousands)
Current:
Federal
State
Deferred:
Federal
State
Total
2018
At June 30,
2017
2016
$
50,170
$
74,053
$
20,084
70,254
15,509
1,525
17,034
$
87,288
$
26,120
100,173
(1,886)
(334)
(2,220)
97,953
$
67,773
24,478
92,251
(5,363)
(1,284)
(6,647)
85,604
The differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
Statutory federal tax rate
Increase (decrease) resulting from:
State taxes—net of federal tax benefit
Tax reform deferred tax remeasurement
Cash surrender value
Tax credits
Non-taxable income
Excess benefit RSU vesting
Other
Effective tax rate
2018
At June 30,
2017
2016
28.10 %
35.00 %
35.00 %
7.85 %
3.83 %
(0.02)%
(2.38)%
(0.19)%
(1.00)%
0.23 %
36.42 %
7.23 %
— %
(0.03)%
(0.19)%
(0.28)%
— %
0.37 %
42.10 %
7.31 %
— %
(0.03)%
(0.18)%
(0.36)%
— %
0.04 %
41.78 %
F-52
The components of the net deferred tax asset are as follows:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses and charge-offs
State taxes
Stock-based compensation expense
Unrealized net (gains) losses on securities
Deferred bonus / vacation
Securities impaired
Deferred loan fees
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividend
Other assets—prepaids
Depreciation and amortization
Total deferred tax liabilities
Net deferred tax asset
At June 30,
2018
2017
$
$
$
15,829
2,164
3,432
225
761
—
1,372
23,783
(833)
(1,513)
(3,480)
(5,826)
17,957
$
18,845
6,893
2,703
(385)
959
8,395
2,377
39,787
(1,181)
(1,363)
(2,902)
(5,446)
34,341
The Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. As of June 30, 2018 and 2017, the Company believes that it will have
sufficient earnings to realize its deferred tax asset and has not provided an allowance.
The following is a reconciliation of the beginning and ending amount of unrecognized tax positions for the periods presented:
(Dollars in thousands)
Balance—beginning of period
Additions—current year tax positions
Additions—prior year tax positions
Reductions—prior year tax positions
Total liability for unrecognized tax positions—end of period
2018
2017
2016
$
$
865
142
149
(21)
1,135
$
$
880
180
17
(212)
865
$
$
779
181
—
(80)
880
The Company is subject to federal income tax and income tax of state taxing authorities. The Company’s federal income tax
returns for the years ended June 30, 2015, 2016, and 2017 and its state taxing authorities income tax returns for the years ended June 30,
2014, 2015, 2016 and 2017 are open to audit under the statutes of limitations by the Internal Revenue Service and state taxing authorities.
As a result of legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on December 22,
2017, during the quarter ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in the
federal statutory rate from 35.0% to 21.0%. The Tax Act makes broad and complex changes to the U.S. tax code that affect the Company’s
fiscal year ended June 30, 2018, including reducing the U.S. federal corporate statutory tax rate to 21.0% beginning January 1, 2018,
which results in a blended federal corporate statutory tax rate of 28.1% for the Company’s fiscal year ended June 30, 2018 that is based
on the applicable tax rates before and after the Tax Act and the number of days in the fiscal year.
During the quarter ended December 31, 2017, the Company revalued the deferred tax balance to reflect the new corporate tax
rate, which resulted in a decrease in net deferred tax assets of $9,189. As a result, income tax expense reported for the fiscal year ended
June 30, 2018 was adjusted to reflect the effects of the change in the tax law and the application of the newly enacted rates to existing
deferred balances.
The SEC has issued Staff Accounting Bulletin (“SAB”) No. 118, which permits the recording of provision amounts related to
the impact of the Tax Act during a measurement period, which is not to exceed one year from the enactment date of the Tax Act. The
Company has not recorded provision amounts for the other provisions of the Tax Act, as the Company continues to analyze the impacts
of the Act. The Company is still analyzing the existing officer’s compensation plans to determine if they qualify for the grandfather rules
with respect to DTAs on the books (for plans in existence as of November 2, 2017).
F-53
Additionally, the Company received tax credits for the year ended June 30, 2018. These tax credits reduced the effective tax rate
by approximately 2.38%. Lastly, the Company adopted ASU 2016-09 effective July 1, 2017. As a result of the adoption, the Company
recorded $2.4 million of income tax benefits for the fiscal year ended June 30, 2018, respectively, related to excess tax benefits from
stock compensation. Prior to 2018, such excess tax benefits were generally recorded directly in stockholders’ equity. This new accounting
standard may potentially increase the volatility in the Company’s effective tax rates.
12. STOCKHOLDERS’ EQUITY
Common Stock. Changes in common stock issued and outstanding were as follows:
2018
At June 30,
2017
Issued
Outstanding
Issued
Outstanding
Beginning of year:
65,115,932
63,536,244
64,513,494
63,219,392
2016
Issued1
63,145,364
Outstanding1
62,075,004
Common stock issued through
option exercise or exchange
Common stock issued through
public offering
Repurchase of treasury stock
Common stock issued through
grants of restricted stock units
End of year:
—
—
—
—
—
(1,233,491)
—
—
—
—
—
—
82,400
82,400
723,808
723,808
—
—
680,128
65,796,060
385,311
62,688,064
602,438
65,115,932
316,852
63,536,244
561,922
64,513,494
338,180
63,219,392
1
Common stock amounts have been retroactively restated for the period July 1, 2015 through November 16, 2015 to reflect the four-for-one forward split of the Company’s
common stock effected in the form of a stock dividend that was distributed on November 17, 2015. The par value of common stock remains unchanged at $0.01 per share
after the aforementioned forward stock split.
On February 23, 2015, we entered into an ATM Equity Distribution Agreement with FBR Capital Markets & Co., Sterne, Agee
& Leach, Inc. and Raymond James & Associates, Inc. (the “2015 Distribution Agents”) pursuant to which we may issue and sell through
the 2015 Distribution Agents from time to time shares of our common stock in at the market offerings with an aggregate offering price
of up to $50,000 (the “2015 ATM Offering”). The sales of shares of our common stock under the Equity Distribution Agreement are to
be made in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on
the NASDAQ Global Select Market (the principal existing trading market for our common stock), or sales made through a market maker
or any other trading market for our common stock, or (with our prior consent) in privately negotiated transactions at negotiated prices.
The aggregate compensation payable to the 2015 Distribution Agents under the Distribution Agreement will not exceed 2.5%
of the gross sales price of the shares sold under the agreement. We also agreed to reimburse the 2015 Distribution Agents for up to $75
in their expenses through September 30, 2015 and up to $25 thereafter and provided the 2015 Distribution Agents with customary
indemnification rights.
F-54
In February 2015, we commenced sales of common stock through the 2015 ATM Offering. The details of the shares of common
stock sold through the 2015 ATM Offering through December 31, 2015 are as follows (dollars in thousands, except per share data):
Distribution Agent
Month
FBR Capital Markets & Co.
February 2015
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
FBR Capital Markets & Co.
March 2015
April 2015
May 2015
June 2015
July 2015
August 2015
September 2015
Weighted Average
Per Share Price1
Number of
Shares Sold1
Net Proceeds
Compensation to
Distribution Agent
$
$
$
$
$
$
$
$
22.68
23.38
23.10
23.69
24.69
27.37
32.81
30.99
40,000 $
518,528 $
265,088 $
122,800 $
251,592 $
280,000 $
40,000 $
240,000 $
884 $
11,818 $
5,971 $
2,837 $
6,057 $
7,471 $
1,279 $
7,252 $
23
303
153
73
155
192
33
186
FBR Capital Markets & Co.
1
Amounts have been retroactively restated to reflect the four-for-one forward split of the Company’s common stock effected in the form of a stock dividend that was
distributed on November 17, 2015.
October 2015
163,808 $
5,181 $
32.43
132
$
As of December 31, 2015, the total gross sales were $50,000, which completed this offering.
Common Stock Repurchases. On March 17, 2016, the Board of Directors of the Company, authorized a program to repurchase
up to $100 million of common stock. The new share repurchase authorization replaces the previous share repurchase plan approved on
July 5, 2005. The Company may repurchase shares on the open market or through privately negotiated transactions at times and prices
considered appropriate, at the discretion of the Company, and subject to its assessment of alternative uses of capital, stock trading price,
general market conditions and regulatory factors. The repurchase program does not obligate the Company to acquire any specific number
of shares. The share repurchase program will continue in effect until terminated by the Board of Directors of the Company. As of June 30,
2018, the Company has repurchased a total of $35.2 million, or 1,233,491 common shares at an average price of $28.49 per share
with $64.8 million remaining under the current board authorized stock repurchase program. The Company accounts for treasury stock
using the cost method as a reduction of shareholders’ equity in the accompanying unaudited condensed consolidated financial statements.
Preferred Stock. On October 28, 2003, the Company commenced a private placement of Series A-6% Cumulative
Nonparticipating Perpetual Preferred Stock (the “Series A preferred stock”). The rights, preferences and privileges of the Series A preferred
stock were established in a certificate filed by the Company with the State of Delaware on October 27, 2003, and generally include the
holder’s right to a six percent (6%) per annum cumulative dividend payable quarterly and the Company’s right to redeem some or all of
the remaining 515 shares at $10,000 face value outstanding shares. The holder’s right to convert to the Company’s common stock expired
on January 1, 2009.
During the fiscal year ended June 30, 2004, the Company issued $6,750 of Series A preferred stock, convertible through January 1,
2009, representing 675 shares at $10,000 face value, less issuance costs of $113. Before the expiration of the conversion right, holders
of the Series A converted 160 shares of Series A preferred to common stock. The Company has declared dividends to holders of its Series
A preferred stock totaling $309 for each of the years ended June 30, 2018, 2017, and 2016, respectively.
13. STOCK-BASED COMPENSATION
On October 22, 2015, the stockholders of the Company approved and in November 2015 the Company’s Board of Directors
adopted an amendment to the Company’s certificate of incorporation (the “Amendment”) to increase the number of authorized shares of
common stock available for issuance from 50,000,000 to 150,000,000 shares. The purpose for the Amendment was to accommodate a
forward stock split through a stock dividend whereby each share of common stock would effectively be split into four shares of common
stock (the “Stock Split”). On October 26, 2015, the Board of Directors approved the Stock Split. The Company issued a dividend of three
shares of common stock for every one share issued and outstanding as of November 6, 2015. The stock dividend was paid on November
17, 2015, and BOFI common stock began trading on a split-adjusted basis on November 18, 2015. Common stock share, per-share, option
and restricted stock unit amounts for the fiscal year ended June 30, 2015 and prior periods presented have been retroactively restated to
reflect the effects of the Stock Split.
The Company has two equity incentive plans, the 2014 Stock Incentive Plan (“2014 Plan”) and the 2004 Stock Incentive Plan
(“2004 Plan” and collectively, the “Plans”), which provide for the granting of non-qualified and incentive stock options, restricted stock
and restricted stock units, stock appreciation rights and other awards to employees, directors and consultants. The Plans are designed to
encourage selected employees and directors to improve operations and increase profits, and to accept or continue employment or association
with the Company through participation in the growth in the value of the common stock. The Plans require that option exercise prices
be not less than fair market value per share of common stock on the option grant date for incentive and non-qualified options. The options
F-55
issued under the Plans generally vest in between three and five years. Option expiration dates are established by the Plans’ administrator
but may not be later than ten years after the date of the grant.
2004 Stock Incentive Plan. In October 2004, the Company’s Board of Directors and the stockholders approved the 2004 Plan.
In November 2007, the 2004 Plan was amended and approved by the Company’s stockholders. The maximum number of shares of
common stock available for issuance under the 2004 Plan is 14.8% of the Company’s outstanding common stock measured from time to
time. In addition, the number of shares of the Company’s common stock reserved for issuance will also automatically increase by an
additional 1.5% on the first day of each of four fiscal years starting July 1, 2007. With the stockholders approving the 2014 Plan in October
2014, no further awards will be made under the 2004 Plan and the 2004 Plan will remain in effect only so long as awards made thereunder
remain outstanding.
2014 Stock Incentive Plan. In September and October 2014, the Company’s Board of Directors and stockholders approved the
2014 Plan, respectively. The maximum number of shares of common stock available for issuance under the 2014 Plan is 3,680,000.
Stock Options. A summary of stock option activity under the Plans during the periods indicated is presented below:
Outstanding—June 30, 2015
Granted
Exercised
Canceled
Outstanding—June 30, 2016
Granted
Exercised
Canceled
Outstanding—June 30, 2017
Granted
Exercised
Canceled
Outstanding—June 30, 2018
Options exercisable—June 30, 2016
Options exercisable—June 30, 2017
Options exercisable—June 30, 2018
Number
of Shares 1
Weighted-
Average
Exercise Price
Per Share1
$
82,400
—
(82,400)
—
— $
—
—
—
— $
— $
— $
— $
— $
— $
— $
— $
1.84
—
1.84
—
—
—
—
—
—
—
—
—
—
—
—
—
1
Amounts have been retroactively restated for the fiscal year ended June 30, 2015 presented to reflect the four-for-one forward split of the Company’s common stock
effected in the form of a stock dividend that was distributed on November 17, 2015.
The aggregate intrinsic value of options exercised or converted during the years ended June 30, 2018, 2017 and 2016 was $0,
$0, and $2,656, respectively.
Restricted Stock Units. During the fiscal year ended June 30, 2016, the Company’s Board of Directors granted 615,834 restricted
stock units to employees and directors. The chief executive officer received 288,000 restricted stock units, which vest ratably on each of
the four fiscal year ends after the issue date. All other restricted stock unit awards granted during the year ended June 30, 2016, vest over
three years, one-third on each anniversary of the grant date and 596,871 shares were vested and issued and 94,325 shares were canceled
as of June 30, 2016.
During the fiscal year ended June 30, 2017, the Company’s Board of Directors granted 555,611 restricted stock units to employees
and directors. The chief executive officer received 288,000 restricted stock units, which vest ratably on each of the four fiscal year ends
after the issue date. All other restricted stock unit awards granted during the year ended June 30, 2017, vest over three years, one-third
on each anniversary of the grant date and 570,764 shares were vested and issued and 92,251 shares were canceled as of June 30, 2017.
During the fiscal year ended June 30, 2018, the Company’s Board of Directors granted 587,022 restricted stock units to employees
and directors. The chief executive officer received 160,000 restricted stock units, which vest ratably on each of the four fiscal year ends
after the issue date. All other restricted stock unit awards granted during the year ended June 30, 2018, vest over three years, one-third
on each anniversary of the grant date and 629,755 shares were vested and issued and 123,858 shares were canceled as of June 30, 2018.
F-56
Effective July 1, 2017 the Company entered into an employment agreement with its Chief Executive Officer (the “Agreement”)
that authorizes an award of restricted stock units (the “RSU award”) to the Chief Executive Officer. The RSU award is an equity-based
award and carries a service condition and a market condition that incorporates a measurement of the Company’s total stock return to
shareholders in comparison to the total stock return of the ABA Nasdaq Community Bank Index. The accounting grant date of the RSU
award is July 1, 2017 and expensing of the RSU award began on this date at the fair value measurement amount as determined by the
Company’s valuation process. The Company utilized a Monte Carlo simulation to estimate the value of path-dependent options and
determined the fair value of the RSU award as of July 1, 2017 to be $20.5 million, which will vest in five tranches over a total period of
nine years. Unrecognized compensation expense to be expensed over the remaining eight years related to the non-vested RSU award is
$17.2 million at June 30, 2018 and is included in the table below. The actual RSU award in future years is determined by the actual
performance of Company’s total stock return in comparison to the total stock return of the ABA Nasdaq Community Bank Index.
The Company’s income before income taxes and net income for the years ended June 30, 2018, 2017 and 2016 included stock
compensation expense of $20,399, $14,535 and $11,326, respectively. The income tax benefit was $7,429, $6,119 and $4,509, respectively.
The Company recognizes compensation expense based upon the grant-date fair value divided by the service period between each vesting
date. At June 30, 2018, expense related to stock option grants has been fully recognized.
At June 30, 2018 unrecognized compensation expense related to non-vested awards aggregated to $40,588 and is expected to
be recognized in future periods as follows:
(Dollars in thousands)
For the fiscal year ending June 30:
2019
2020
2021
2022
2023
Thereafter
Total
Stock Award
Compensation Expense
$
$
18,592
11,871
5,351
2,226
1,382
1,166
40,588
The following table presents the status and changes in restricted stock units for the periods indicated:
Restricted Stock
Units1
Weighted-Average
Grant-Date Fair Value1
Non-vested balance at June 30, 2015
Granted
Vested
Canceled
Non-vested balance at June 30, 2016
Granted
Vested
Canceled
Non-vested balance at June 30, 2017
Granted
Vested
Canceled
Non-vested balance at June 30, 2018
1,135,088
$
615,834
(536,528)
(154,668)
1,059,726
843,611
(570,764)
(92,251)
1,240,322
747,022
(629,755)
(123,858)
1,233,731
$
$
$
17.01
26.60
16.14
18.70
22.53
21.13
20.86
20.26
22.52
26.53
22.55
23.38
24.84
1
Amounts have been retroactively restated for the period June 30, 2015 through November 17, 2015 to reflect the four-for-one forward split of the Company’s common
stock effected in the form of a stock dividend that was distributed on November 17, 2015.
The total fair value of shares vested during the years ended June 30, 2018, 2017 and 2016 was $20,866, $12,941 and $13,256,
respectively.
F-57
14. EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted EPS:
(Dollars in thousands, except per share data)
Earnings Per Common Share
Net income
Preferred stock dividends
Net income attributable to common shareholders
Average common shares issued and outstanding
Average unvested RSUs (as revised for 2017 and 2016)
Total qualifying shares (as revised for 2017 and 2016)
Earnings per common share (as revised for 2017 and 2016)
Diluted Earnings Per Common Share
Dilutive net income attributable to common shareholders
Average common shares issued and outstanding (as revised for 2017 and
2016)
Dilutive effect of stock options
Dilutive effect of average unvested RSUs (as revised for 2017 and 2016)
Total dilutive common shares outstanding (as revised for 2017 and 2016)
Diluted earnings per common share (as revised for 2017 and 2016)
2018
At June 30,
2017
152,411
(309)
152,102
63,058,854
77,378
63,136,232
2.41
152,102
$
$
$
$
134,740
(309)
134,431
63,358,886
297,656
63,656,542
2.11
134,431
$
$
$
$
2016
119,291
(309)
118,982
62,909,411
687,848
63,597,259
1.87
118,982
63,136,232
63,656,542
63,597,259
—
1,010,988
—
258,558
5,845
69,176
64,147,220
63,915,100
63,672,280
2.37
$
2.10
$
1.87
$
$
$
$
$
15. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases office space under operating lease agreements scheduled to expire at various dates. The
Company pays property taxes, insurance and maintenance expenses related to its leases. Rent expense for the years ended June 30, 2018,
2017, and 2016 was $5,429, $5,108, and $3,901, respectively.
Pursuant to the terms of these non-cancelable lease agreements in effect at June 30, 2018, future minimum lease payments are
as follows:
(Dollars in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Future minimum
lease payments
$
$
4,573
6,652
6,266
7,415
7,667
54,551
87,124
F-58
Litigation. On October 15, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants
in a putative class action lawsuit styled Golden v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern
District of California (the “Golden Case”). On November 3, 2015, the Company, its Chief Executive Officer and its Chief Financial
Officer were named defendants in a second putative class action lawsuit styled Hazan v. BofI Holding, Inc., et al, and also brought in the
United States District Court for the Southern District of California (the “Hazan Case”). On February 1, 2016, the Golden Case and the
Hazan Case were consolidated as In re BofI Holding, Inc. Securities Litigation, Case #: 3:15-cv-02324-GPC-KSC (the “Class Action”),
and the Houston Municipal Employees Pension System was appointed lead plaintiff. The plaintiffs allege that the Company and other
named defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder,
by failing to disclose wrongful conduct that was alleged in a complaint filed in connection with a wrongful termination of employment
lawsuit filed on October 13, 2015 (the “Employment Matter”) and that as a result the Company’s statements regarding its internal controls,
as well as portions of its financial statements, were false and misleading. On March 21, 2018, the Court entered a final order dismissing
the Class Action with prejudice. On March 28, 2018, the plaintiff filed a notice of appeal.
On April 3, 2017, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a putative
class action lawsuit styled Mandalevy v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern District
of California (the “Mandalevy Case”). The Mandalevy Case seeks monetary damages and other relief on behalf of a putative class that
has not been certified by the Court. The complaint in the Mandalevy Case (the “Mandalevy Complaint”) alleges a class period that differs
from that alleged in the First Class Action, and that the Company and other named defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a
March 2017 media article. The Mandalevy Case has not been consolidated into the First Class Action.
The Company and the other named defendants dispute the allegations of wrongdoing advanced by the plaintiffs in the Class
Action, the Mandalevy Case, and in the Employment Matter, as well as those plaintiffs’ statement of the underlying factual circumstances,
and are vigorously defending each case.
In addition to the First Class Action and the Mandalevy Case, two separate shareholder derivative actions were filed in December,
2015, purportedly on behalf of the Company. The first derivative action, Calcaterra v. Garrabrants, et al, was filed in the United States
District Court for the Southern District of California on December 3, 2015. The second derivative action, Dow v. Micheletti, et al, was
filed in the San Diego County Superior Court on December 16, 2015. A third derivative action, DeYoung v. Garrabrants, et al, was filed
in the United States District Court for the Southern District of California on January 22, 2016, a fourth derivative action, Yong v.
Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 29, 2016, a fifth
derivative action, Laborers Pension Trust Fund of Northern Nevada v. Allrich et al, was filed in the United States District Court for the
Southern District of California on February 2, 2016, and a sixth derivative action, Garner v. Garrabrants, et al, was filed in the San Diego
County Superior Court on August 10, 2017. Each of these six derivative actions names the Company as a nominal defendant, and certain
of its officers and directors as defendants. Each complaint sets forth allegations of breaches of fiduciary duties, gross mismanagement,
abuse of control, and unjust enrichment against the defendant officers and directors. The plaintiffs in these derivative actions seek damages
in unspecified amounts on the Company’s behalf from the officer and director defendants, certain corporate governance actions, and an
award of their costs and attorney’s fees.
The United States District Court for the Southern District of California ordered the four above-referenced derivative actions
pending before it to be consolidated and appointed lead counsel in the consolidated action. On June 7, 2018, the Court entered an order
granting defendant’s motion for judgment on the pleadings, but giving the plaintiffs limited leave to amend by June 28, 2018. The plaintiffs
failed to file an amended complaint, and instead plaintiffs filed on June 28, 2018 a motion to stay the case pending resolution of the
securities class action and Employment Matter. On August 10, 2018, defendants filed an opposition to plaintiffs’ motion.
The two derivative actions pending before the San Diego County Superior Court have been consolidated and have been stayed
by agreement of the parties.
In view of the inherent difficulty of predicting the outcome of each legal action, particularly since claimants seek substantial
or indeterminate damages, it is not possible to reasonably predict or estimate the eventual loss or range of loss, if any, related to each
legal action.
16. OFF-BALANCE-SHEET ACTIVITIES
Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend
credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows
the same credit policies in making commitments as it does for on-balance-sheet instruments.
F-59
At June 30, 2018, the Company had fixed and variable rate commitments to originate or purchase loans and leases with an
aggregate outstanding principal balance of $86,453 and $720,582 for total commitments to originate of $785,980. For June 30, 2018, the
Company’s fixed rate commitments to originate had a weighted-average rate of 4.68%. For June 30, 2017, the Company had fixed and
variable rate commitments to originate or purchase loans and leases with an aggregate outstanding principal balance of $78,113 and
$417,028 for total commitments to originate of $495,141. For June 30, 2017, the Company’s fixed rate commitments to originate had a
weighted average rate of 3.81%. At June 30, 2018, the Company also had fixed and variable rate commitments to sell loans with an
aggregate outstanding principal balance of $86,453 and $1,131 for total commitments to sell of $87,584. For June 30, 2017, the Company
had fixed and variable rate commitments to sell of $59,786 and $6,259 for total commitments to sell of $66,045. At June 30, 2018 and
2017, 61.9% and 75.4% of the commitments to originate loans are matched with commitments to sell related to conforming single family
loans classified as held for sale, respectively.
Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The
commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s
credit evaluation of the customer.
17. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company and Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory
agencies. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary
actions by regulators that could have a material adverse effect on the consolidated financial statements. The Federal Reserve establishes
capital requirements for the Company and the OCC has similar requirements for the Bank. The following tables present regulatory
capital information for the Company and Bank. Information presented for June 30, 2018, reflects the Basel III capital requirements
that became effective January 1, 2015 for both the Company and Bank. Under these capital requirements and the regulatory framework
for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the
Company and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation require the Company and Bank to maintain certain minimum capital amounts
and ratios. Federal bank regulators require the Company and Bank maintain minimum ratios of core capital to adjusted average assets
of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0% and total risk-
based capital to risk-weighted assets of 8.0%. At June 30, 2018, the Company and Bank met all the capital adequacy requirements to
which they were subject. At June 30, 2018, the Company and Bank were “well capitalized” under the regulatory framework for prompt
corrective action. To be “well capitalized,” the Company and Bank must maintain minimum leverage, common equity tier 1 risk-
based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. Management believes
that no conditions or events have occurred since June 30, 2018 that would materially adversely change the Company’s and Bank’s
capital classifications. From time to time, we may need to raise additional capital to support the Company’s and Bank’s further growth
and to maintain their “well capitalized” status.
F-60
The Bank’s capital amounts, capital ratios and capital requirements under Basel III were as follows:
(Dollars in thousands)
Regulatory Capital:
Tier 1
Common equity tier 1
BofI Holding, Inc.
BofI Federal Bank
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
“Well
Capitalized”
Ratio
Minimum
Capital
Ratio
$ 893,338
$ 833,759
$ 837,985
$ 804,317
$ 888,275
$ 828,696
$ 837,985
$ 804,317
Total capital (to risk-weighted assets)
$ 993,650
$ 925,720
$ 887,297
$ 845,278
Assets:
Average adjusted
Total risk-weighted
Regulatory Capital Ratios:
Tier 1 leverage (core) capital to adjusted
average assets
Common equity tier 1 capital (to risk-
weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
$ 9,450,894
$8,380,909
$9,509,891
$ 8,374,509
$ 6,694,963
$5,651,522
$6,686,634
$ 5,645,112
9.45%
9.95%
8.88%
9.60%
5.00%
4.00%
13.27%
13.34%
14.84%
14.66%
14.75%
16.38%
12.53%
12.53%
13.27%
14.25%
14.25%
14.97%
6.50%
8.00%
10.00%
4.50%
6.00%
8.00%
Beginning January 1, 2016, Basel III implements a requirement for all banking organizations to maintain a capital conservation
buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock
repurchases and discretionary bonus payments to executive officers. The capital conservation buffer will be exclusively composed
of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. At June 30, 2018,
the Company and Bank are in compliance with the capital conservation buffer requirement. The three risk-based capital ratios will
increase by 0.625% each year through 2019, at which point, the common equity tier 1 risk based, tier 1 risk-based and total risk-based
capital ratios will be 7.0%, 8.5% and 10.5%, respectively.
In connection with the approval of the acquisition of the H&R Block Bank deposits on September 1, 2015, the Bank executed
a letter agreement with the OCC (the “letter agreement”) to maintain its Tier 1 leverage capital ratio at a minimum of 8.50% for the
quarters ended in June, September and December and a minimum of 8.00% for the quarter ended in March, subject to certain
adjustments. At June 30, 2018 the Bank is in compliance with this letter agreement. As of August 2018, due to the Bank’s satisfactory
operational performance under the letter agreement, the OCC has removed the additional capital maintenance requirements required
in the letter agreement.
18. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan whereby substantially all of its employees may participate in the plan. Employees may contribute
up to 100% of their compensation subject to certain limits based on federal tax laws. The Company has implemented an employer matching
program whereby employer contributions are made to the 401(k) plan in an amount equal to 50% of the first 8% of an employee’s
designated deferral of their eligible compensation. For the fiscal years ended June 30, 2018, 2017, and 2016, expense attributable to the
plan amounted to $1,501, $1,288, and $801, respectively.
F-61
19. PARENT-ONLY CONDENSED FINANCIAL INFORMATION
The following BofI Holding, Inc. (Parent company only) financial information should be read in conjunction with the consolidated
financial statements of the Company and the other notes to the consolidated financial statements:
BofI Holding, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and cash equivalents
Loans
Investment securities
Other assets
Investment in subsidiary
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Subordinated notes and debentures
Accrued interest payable
Accounts payable and accrued liabilities
Total liabilities
Stockholders’ equity
$
$
$
At June 30,
2018
2017
108,085
$
81,356
20
—
10,238
905,159
1,023,502
54,521
389
8,079
62,989
960,513
$
$
29
13
5,250
804,803
891,451
54,313
339
2,552
57,204
834,247
891,451
Total liabilities and stockholders’ equity
$
1,023,502
$
BofI Holding, Inc. (Parent Company Only)
STATEMENTS OF INCOME
(Dollars in thousands)
Interest income
Interest expense
Net interest (expense) income
Provision for loan losses
Net interest (expense) income, after provision for loan losses
Non-interest income (loss)
Non-interest expense and tax benefit
Income (loss) before dividends from subsidiary and equity in
undistributed income of subsidiary
Dividends from subsidiary
Equity in undistributed earnings of subsidiary
Net income
Comprehensive income
Year Ended June 30,
2018
2017
2016
$
479
3,648
(3,169)
—
(3,169)
153
11,825
(14,841)
69,800
97,452
152,411
151,311
$
$
$
621
3,613
(2,992)
—
(2,992)
—
8,561
(11,553)
6,400
139,893
134,740
142,531
$
$
136
1,275
(1,139)
—
(1,139)
339
7,345
(8,145)
2,900
124,536
119,291
121,386
$
$
$
F-62
BofI Holding, Inc. (Parent Company Only)
STATEMENT OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash used in operating
activities:
2018
Year Ended June 30,
2017
2016
$
152,411
$
134,740
$
119,291
Accretion of discounts on securities
Amortization of borrowing costs
Impairment charge on securities
Accretion of discounts on loans
Net gain on investment securities
Gain on sales of loans held for sale
Stock-based compensation expense
Tax effect from exercise of common stock options and vesting of
restricted stock grants
Equity in undistributed earnings of subsidiary
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities
Proceeds from principal repayments on loans
Investment in subsidiary
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options
Proceeds from issuance of common stock
Tax effect from exercise of common stock options and vesting of
restricted stock units
Tax payments related to the settlement of restricted stock units
Repurchase of treasury stock
Proceeds from issuance of subordinated notes
Cash dividends on preferred stock
Net cash provided by (used in) financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
$
(2)
208
—
—
(153)
—
20,399
—
(97,452)
(4,938)
5,528
76,001
162
9
(4,000)
(3,829)
—
—
7
(9,958)
(35,183)
—
(309)
(45,443)
26,729
81,356
108,085
$
—
208
(1)
—
—
—
14,535
—
(139,893)
469
316
10,374
—
8
—
8
—
—
432
(6,532)
—
—
(309)
(6,409)
3,973
77,383
81,356
$
(50)
72
—
(6)
—
(339)
11,326
—
(124,533)
(1,361)
(1,637)
2,763
531
8
(17,000)
(16,461)
151
21,120
2,531
(6,141)
—
51,000
(309)
68,352
54,654
22,729
77,383
F-63
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share data)
Interest and dividend income
June 30,
March 31,
December 31,
September 30,
$
118,898
$
144,880
$
107,785
$
103,511
Quarters Ended in Fiscal Year 2018
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Net income attributable to common stock
Basic earnings per common share (revised)
Diluted earnings per common share (revised)
(Dollars in thousands, except per share data)
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Net income attributable to common stock
Basic earnings per common share (revised)
Diluted earnings per common share (revised)
21. SUBSEQUENT EVENT
31,850
87,048
3,900
83,148
16,977
49,673
50,452
13,335
37,117
37,040
0.59
0.58
$
$
$
$
28,197
116,683
16,900
99,783
23,525
45,434
77,874
26,621
51,253
51,176
0.82
0.80
$
$
$
$
23,572
84,213
4,000
80,213
17,099
40,809
56,503
24,845
31,658
31,580
0.50
0.49
$
$
$
$
22,961
80,550
1,000
79,550
13,340
38,020
54,870
22,487
32,383
32,306
0.51
0.50
Quarters Ended in Fiscal Year 2017
June 30,
March 31,
December 31,
September 30,
98,543
$
106,962
$
94,301
$
20,016
78,527
200
78,327
13,533
35,979
55,881
23,332
32,549
32,472
0.51
0.51
$
$
$
$
18,403
88,559
4,862
83,697
23,168
35,448
71,417
30,423
40,994
40,917
0.64
0.64
$
$
$
$
17,940
76,361
4,100
72,261
16,700
33,300
55,661
23,361
32,300
32,222
0.51
0.50
$
$
$
$
87,480
17,700
69,780
1,900
67,880
14,732
32,878
49,734
20,837
28,897
28,820
0.45
0.45
$
$
$
$
$
$
$
$
$
On August 3, 2018, the Company announced that the Bank entered into a purchase and assumption agreement
(“Agreement”) with Nationwide Bank to acquire substantially all of the Nationwide deposits at the time of closing, estimated at
approximately $3 billion in deposits, including $1 billion in checking, savings and money market accounts and $2 billion in time
deposit accounts. Under the Agreement, the Bank will receive cash for the deposit balances transferred less a premium
commensurate with the fair market value of the deposits purchased. The deposit transfer transaction is subject to prior approval
by the Office of the Comptroller of the Currency. The closing of the transaction is targeted for November 2018.
F-64
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
BofI Holding, Inc.
San Diego, CA
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3ASR (No. 333-223434) and Forms
S-8 (No. 333-199691 and 333-124702) of BofI Holding, Inc. of our reports dated August 23, 2018, relating to the consolidated
financial statements, and the effectiveness of BofI Holding, Inc.’s internal control over financial reporting, which appear in this
Form 10-K.
/s/ BDO USA, LLP
San Diego, California
August 23, 2018
Exhibit 31.1
CERTIFICATION
BOFI HOLDING, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gregory Garrabrants, certify that:
1.
I have reviewed this annual report on Form 10-K of BofI Holding, Inc. (the “registrant”).
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in
this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting or, caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: August 23, 2018
/s/ GREGORY GARRABRANTS
GREGORY GARRABRANTS
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
BOFI HOLDING, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Andrew J. Micheletti, certify that:
1.
I have reviewed this annual report on Form 10-K of BofI Holding, Inc. (the “registrant”).
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in
this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting or, caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: August 23, 2018
/s/ ANDREW J. MICHELETTI
ANDREW J. MICHELETTI
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CEO CERTIFICATION PURSUANT TO SECTION 906
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of BofI Holding, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2018, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory Garrabrants, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of
my knowledge that:
(a)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 23, 2018
/s/ GREGORY GARRABRANTS
GREGORY GARRABRANTS
President and Chief Executive Officer
(Principal Executive Officer)
CFO CERTIFICATION PURSUANT TO SECTION 906
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of BofI Holding, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2018, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew J. Micheletti, Executive Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to
the best of my knowledge that:
(a)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 23, 2018
/s/ ANDREW J. MICHELETTI
ANDREW J. MICHELETTI
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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Banking
Evolved
Axos is a technology-driven financial services
company providing a diverse and ever-growing
range of innovative products and services for
personal, business and institutional clients nationwide.
Axos believes in liberating people from the constraints
of traditional banking. We believe in a bank that is
honest, transparent and fair. A bank that uses
technology with purpose. A bank that supports people
when they need it, and gets out of the way when they
don’t. A bank that is in sync with – and adapting to – a
changing world. By giving our customers the tools, the
information, and the ability to make smarter choices,
Axos empowers them to make real progress toward
their goals, and the freedom to focus on the people,
places and things that matter most to all of us.
Welcome to Axos Bank - Banking Evolved.
Executive Officers
Board of Directors
Gregory Garrabrants
President and
Chief Executive Officer
Eshel Bar-Adon
Executive Vice President
Specialty Finance and
Chief Legal Officer
Jill Bauer
Executive Vice President
Trustee and Fiduciary Services
Matthew Brunsman
Executive Vice President
Chief Digital Officer
Mary Ellen Ciafardini
Executive Vice President
Human Resources
Thomas Constantine
Executive Vice President
Chief Credit Officer
Jan Durrans
Executive Vice President
Chief of Staff and
Chief Performance Officer
James Fraser
Executive Vice President
Specialty Real Estate, C&I Lending
Raymond Matsumoto
Executive Vice President
Chief Operating Officer
Andrew J. Micheletti
Executive Vice President
Chief Financial Officer
Brian Swanson
Executive Vice President
Chief Lending Officer
John Tolla
Executive Vice President
Chief Governance, Risk and
Compliance Officer
Derrick K. Walsh
Senior Vice President
Chief Accounting Officer
Paul J. Grinberg
Chairman
Nicholas A. Mosich
Vice Chairman
James S. Argalas
J. Brandon Black
John Gary Burke
James J. Court
Uzair Dada
Gregory Garrabrants
Edward J. Ratinoff
Corporate Headquarters
Axos Financial, Inc.
Axos Bank
4350 La Jolla Village Drive
Suite 140
San Diego, CA 92122
www.axosfinancial.com
www.axosbank.com
Investor Relations
Johnny Lai
Vice President, Corporate Development
and Investor Relations
(858) 649-2218
jlai@axosfinancial.com
Corporate Secretary
Angela Lopez
Corporate Secretary,
Vice President Corporate Governance
(858) 704-6225
alopez@axosfinancial.com
Transfer Agent
Computershare Investor Services
250 Royall Street
Canton, MA 02021
(800) 962-4284
www-us.computershare.com/investor
Independent Registered
Public Accounting Firm
BDO USA, LLP
San Diego, California
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BOFI HOLDING INC 2018 ANNUAL REPORT
4350 La Jolla Village Drive
Suite 140
San Diego, CA 92122
www.axosfinancial.com