News Column

BOFI HOLDING, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 28, 2014

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 over $4.4 billion in assets that provides innovative banking and lending products and services to customers nationwide through scalable low cost distribution channels. BofI Holding, Inc.'s common stock is listed on the NASDAQ Global Select Market and is a component of the Russell 2000® Index and the S&P SmallCap 600® Index. Net income for the fiscal year ended June 30, 2014 was $56.0 million compared to $40.3 million and $29.5 million for the fiscal years ended June 30, 2013 and 2012, respectively. Net income attributable to common stockholders for the fiscal year ended June 30, 2014 was $55.6 million, or $3.85 per diluted share compared to $39.5 million, or $2.89 per diluted share and $28.2 million, or $2.33 per diluted share for the years ended June 30, 2013 and 2012, respectively. Growth in our interest earning assets, particularly the loan portfolio, was the primary driver of the increase in our net income from fiscal 2012 to fiscal 2014. Net interest income increased $35.5 million for the year ended June 30, 2014 compared to the year ended June 30, 2013. We define net income without the after-tax impact of realized and unrealized securities gains and losses as adjusted earnings ("core earnings"), a non-GAAP financial measure, which we believe provides useful information about the Bank's operating performance. Core earnings for the fiscal years ended 2014, 2013, and 2012 were $56.9 million, $41.5 million, and $30.7 million, respectively. 32



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Below is a reconciliation of net income to core earnings (non-GAAP):

For the Fiscal Years Ended June 30, (Dollars in Thousands) 2014 2013 2012 Net Income $ 55,956$ 40,291$ 29,476 Realized securities losses (gains) (208 ) (212 ) - Unrealized securities losses 1,848 2,227 2,018 Tax provision (666 ) (825 ) (817 ) Core Earnings $ 56,930$ 41,481$ 30,677 Net interest income for the year ended June 30, 2014 was $137.1 million compared to $101.6 million and $79.2 million for the years ended June 30, 2013 and 2012, respectively. The increase was due to growth in our loan portfolio and the increase in our net interest margin from fiscal years 2012 through 2014. Provision for loan losses for the year ended June 30, 2014 was $5.4 million, compared to $7.6 million and $8.1 million for the years ended June 30, 2013 and 2012, respectively. The decrease of $2.2 million for fiscal year 2014 is the result of lower charge-offs partially offset by additional provisions needed for growth in the loan portfolio. Mortgage banking income was $10.2 million compared to $23.0 million and $16.7 million for the years ended June 30, 2014, 2013, and 2012. The decrease was a result of lower loan Agency refinance and originations for sale of $741.5 million compared to $1,085.9 million for the years ended June 30, 2014 and 2013, respectively. Non-interest expense for the fiscal year ended June 30, 2014 was $59.9 million compared to $53.6 million and $38.0 million for the years ended June 30, 2013 and 2012 respectively. The increase was primarily due to increased staffing levels in order to support growth in lending and deposit operations. Our staffing rose to 366 full-time equivalents compared to 312 and 230 at June 30, 2014, 2013, and 2012, respectively. Total assets were $4,403.0 million at June 30, 2014 compared to $3,090.8 million at June 30, 2013. Assets grew $1,312.2 million or 42.5% during the last fiscal year, primarily due to an increase in the origination of single family and multifamily mortgage loans. These loans were funded primarily with growth in deposits and to a lesser extent capital transactions. 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."



MERGERS AND ACQUISITIONS

From time to time we undertake acquisitions or similar transactions consistent with the Bank's operating and growth strategies. During the fiscal year ended June 30, 2014, there were two transactions, which are discussed below. Principal Bank In September 2013, the Bank announced the completion of the acquisition of approximately $173 million in deposits from Principal Bank, which included $142 million in checking, savings and money market accounts and $31 million in time deposit accounts. H&R Block Bank In April, 2014, the Bank entered into a Purchase and Assumption Agreement (the "Agreement") with H&R Block Bank, a federal savings bank ("HRBB"), and its parent company Block Financial LLC. Block Financial LLC is a wholly-owned subsidiary of H&R Block, Inc. Pursuant to the Agreement, the Bank agreed to purchase certain assets and assume certain liabilities of HRBB. The assumed liabilities at closing are projected to include approximately $450 to $550 million in customer deposits of HRBB and balances on prepaid cards, including HRBB's Emerald Cards, gift cards and incentive cards. The amount is subject to change 33



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based on such factors as the timing of the closing. Substantially all of the assets transferred to the Bank will consist of cash equal to the face amount of deposits and other liabilities transferred to the Bank at closing. The Bank will also acquire a de-minimis amount of non-cash assets at zero cost. The consummation of the transaction contemplated by the Agreement is subject to regulatory approvals and waivers and other customary closing conditions. Upon regulatory approval of the Agreement and concurrent with closing of the transactions contemplated by the Agreement, the Bank also intends to enter into a Program Management Agreement with Emerald Financial Services, LLC, a subsidiary of H&R Block, Inc., under which the Bank will provide H&R Block-branded financial services products through H&R Block's retail and online channels. These products will include Emerald Prepaid MasterCard®, Refund Transfers, and Emerald Advance® lines of credit. 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. Currently, we classify securities as either trading, available-for-sale or held-to-maturity. Trading securities are those securities for which we have elected fair value accounting. Trading securities are recorded at fair value with changes in fair value recorded in earnings each period. Securities available-for-sale are reported at estimated fair value, with unrealized gains and losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted prices in active markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. To determine the performance of the underlying mortgage loan pools, we consider where appropriate borrower prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. We input for each security our projections of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by (or decreased by) the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (or decreased by) the forecasted decrease or increase in the national home price appreciation (HPA) index. To determine the discount rates used to compute the present value of the expected cash flows for these non-agency 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 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. 34



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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 Losses. The allowance for loan losses is maintained at a level estimated to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is 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 loss 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 borrowers 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 loss and is determined by adding the results of a quantitative and a qualitative analysis to all other loans not measured for impairment at the reporting date. The quantitative analysis determines the Bank's actual annual historic charge-off rates and applies the average historic rates to the outstanding loan balances in each 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. USE OF NON-GAAP FINANCIAL MEASURES In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as core earnings. Core earnings exclude realized and unrealized gains and losses associated with our securities portfolios, net of tax. Excluding these gains and losses provides investors with an understanding of our Bank's core lending and mortgage banking business performance. 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 consider in isolation, or as a substitute for GAAP basis financial measures. 35



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AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID

The following tables set forth, for the periods indicated, information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin:



For the Fiscal Years Ended June 30,

2014 2013 2012 Average Average Average Interest Yields Interest Yields Interest Yields Average Income / Earned / Average Income / Earned / Average Income / Earned / (Dollars in thousands) Balance1 Expense Rates Paid Balance1 Expense Rates Paid Balance1 Expense Rates Paid Assets: Loans2,3 $ 2,850,600$ 147,664 5.18 % $ 2,157,974$ 113,503 5.26 % $ 1,607,523$ 89,308 5.56 % Federal funds sold - - - % 17,017 30 0.18 % 12,297 10 0.08 % Interest-earning deposits in other financial institutions 107,534 275 0.26 % 23,632 47 0.20 % 295 - - % Mortgage-backed and other investment securities4 480,940 22,566 4.69 % 462,946 21,588 4.66 % 506,223 26,353 5.21 % Stock of the FHLB, at cost 32,115 2,373 7.39 % 22,594 486 2.15 % 16,683 62 0.37 % Total interest-earning assets 3,471,189 172,878 4.98 % 2,684,163 135,654 5.05 % 2,143,021 115,733 5.40 % Non-interest-earning assets 58,953 70,896 46,464 Total assets $ 3,530,142$ 2,755,059$ 2,189,485 Liabilities and Stockholders' Equity: Interest-bearing demand and savings $ 1,522,884$ 10,723 0.70 % $ 826,797$ 6,399 0.77 % $ 504,835$ 4,388 0.87 % Time deposits 876,621 14,094 1.61 % 1,065,669 16,469 1.55 % 1,003,728 20,501 2.04 % Securities sold under agreements to repurchase 85,726 3,840 4.48 % 114,247 5,068 4.44 % 125,820 5,552 4.41 % Advances from the FHLB 576,307 6,981 1.21 % 436,383 5,939 1.36 % 333,866 5,955 1.78 % Other borrowings 5,155 143 2.77 % 5,155 151 2.93 % 5,155 149 2.89 % Total interest-bearing liabilities 3,066,693 35,781 1.17 % 2,448,251 34,026 1.39 % 1,973,404 36,545 1.85 % Non-interest-bearing demand deposits 123,859 45,299 13,796 Other non-interest-bearing liabilities 23,549 18,681 16,152 Stockholders' equity 316,041 242,828 186,133 Total liabilities and stockholders' equity $ 3,530,142$ 2,755,059$ 2,189,485 Net interest income $ 137,097$ 101,628$ 79,188 Interest rate spread5 3.81 % 3.66 % 3.55 % Net interest margin6 3.95 % 3.79 % 3.70 % 1 Average balances are obtained from daily data. 2 Loans include loans held for sale, loan premiums and unearned fees. 3 Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant. Also includes $32.1 million as of June 30, 2014, $32.8 million as of June 30, 2013 and $33.4 million as of June 30, 2012 of Community Reinvestment Act loans which are taxed at a reduced rate. 4 Includes $5.5 million of municipal securities which are taxed at a reduced rate. 5 Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities. 6 Net interest margin represents net interest income as a percentage of average interest-earning assets. 36



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RESULTS OF OPERATIONS Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth in our assets and increases in our net interest margin. Our net interest income is reduced by our estimate of loss provisions for our impaired loans. We also earn non-interest income primarily from mortgage banking activities, 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 312 full time employees at June 30, 2013 to 366 full time equivalent employees at June 30, 2014. We are subject to federal and state income taxes, and our effective tax rates were 40.64%, 40.92% and 40.50% for the fiscal years ended June 30, 2014, 2013, and 2012, respectively. Other factors that affect our results of operations include expenses relating to professional services, occupancy, data processing, advertising and other miscellaneous expenses.



COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2014 AND JUNE 30, 2013

Net Interest Income. Net interest income totaled $137.1 million for the fiscal year ended June 30, 2014 compared to $101.6 million for the fiscal year ended June 30, 2013. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume): Fiscal Year Ended June 30, 2014 vs 2013 Increase (Decrease) Due to Total Rate/ Increase (Dollars in thousands) Volume Rate Volume (Decrease) Increase (decrease) in interest income: Loans $ 36,432$ (1,726 )$ (545 )$ 34,161 Federal funds sold (31 ) (31 ) 31 (31 ) Interest-earning deposits in other financial institutions 168 14 46 228 Mortgage-backed and other investment securities 839 139 - 978 Stock of the FHLB, at cost 205 1,184 499 1,888 Total increase (decrease) in interest income $ 37,613$ (420 )$ 31$ 37,224 Increase (decrease) in interest expense: Interest-bearing demand and savings $ 5,360$ (579 )$ (457 )$ 4,324 Time deposits (2,930 ) 639 (84 ) (2,375 ) Securities sold under agreements to repurchase (1,266 ) 46 (8 ) (1,228 ) Advances from the FHLB 1,903 (655 ) (206 ) 1,042 Other borrowings - (8 ) - (8 ) Total increase (decrease) in interest expense $ 3,067$ (557 )



$ (755 )$ 1,755

Interest Income. Interest income for the fiscal year ended June 30, 2014 totaled $172.9 million, an increase of $37.2 million, or 27.4%, compared to $135.7 million in interest income for the fiscal year ended June 30, 2013 primarily due to growth of interest-earning assets. Average interest-earning assets for the fiscal year ended June 30, 2014 increased by $787.0 million compared to the fiscal year ended June 30, 2013 due to the origination of loans for investment, which increased $1,243.4 million during the year ended June 30, 2014 compared to 2013. For the fiscal year ended June 30, 2014, the growth in average balances contributed additional interest income of $37.6 million, which was offset by the decrease in average rate which resulted in a net $0.4 million decrease in interest income. The average yield earned on our interest-earning assets decreased to 4.98% for the fiscal year ended June 30, 2014, down from 5.05% for the same period in 2013. During fiscal 2014, our new portfolio loans were added at market rates, which were below the average of our portfolio. Interest Expense. Interest expense totaled $35.8 million for the fiscal year ended June 30, 2014, an increase of $1.8 million, compared to $34.0 million in interest expense during the fiscal year ended June 30, 2013. Average interest-bearing liabilities for the fiscal year ended June 30, 2014 increased $618.4 million compared to the same period in 2013, due to increased demand and savings accounts and advances from the FHLB. The average interest-bearing balances of demand and savings increased $696.1 37



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million and the average interest-bearing balances of advances from the FHLB increased $139.9 million. The average rate paid on all of our interest-bearing liabilities decreased to 1.17% for the fiscal year ended June 30, 2014 from 1.39% for the fiscal year ended June 30, 2013. The maturity of higher-rate term deposits and the addition of lower rate demand and savings deposits was the primary reason for the decrease in average rate paid year over year. During fiscal 2014, we continued to benefit from low U.S. Treasury interest rates, which reduced our interest rates on deposits and borrowings. Provision for Loan Losses. Provision for loan losses was $5.4 million for the fiscal year ended June 30, 2014 and $7.6 million for fiscal 2013. The provisions are made to maintain our allowance for loan losses at levels which management believes to be adequate. The assessment of the adequacy of our allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss history and changes in the volume and mix of loans and collateral values. See "Asset Quality and Allowance for Loan Loss" for discussion of our allowance for loan loss and the related loss provisions. Non-interest Income. The following table sets forth information regarding our non-interest income: For the Fiscal Year Ended June 30, (Dollars in Thousands) 2014 2013 Realized gain on securities: Sale of mortgage-backed securities $ 208 $



212

Total realized gain on securities 208



212

Unrealized loss on securities: Total impairment losses (2,359 ) (8,080 ) (Gain) loss recognized in other comprehensive loss (443 )



4,579

Net impairment loss recognized in earnings (2,802 ) (3,501 ) Fair value gain on trading securities 954



1,274

Total unrealized loss on securities (1,848 ) (2,227 ) Prepayment penalty fee income 2,687 1,742 Gain on sale - other 6,658 1,130 Mortgage banking income 10,170 22,953 Banking service fees and other income 4,580 3,900 Total non-interest income $ 22,455$ 27,710 Non-interest income totaled $22.5 million for the fiscal year ended June 30, 2014 compared to non-interest income of $27.7 million for fiscal 2013. The decrease was primarily the result of a decline in mortgage banking income of $12.8 million, partially offset by an increase of $5.5 million from other gains on sales, a $0.9 million increase in prepayment penalty fee income, and a $0.7 million increase in banking service fees and other income. The decrease in mortgage banking income was due to a decrease in origination volume of loans held for sale from $1,085.9 million to $741.5 million due primarily to the nationwide decline in Agency mortgage refinancing activity. Banking service fees and other income includes deposit and loans fees as well as fee income from prepaid card sponsors. Included in gain on sale - other are sales of structured settlement annuity 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. 38



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Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods shown:

For the Fiscal Year Ended June 30, (Dollars in thousands) 2014 2013 Salaries and related costs $ 32,240 $ 28,874 Professional services 5,421 3,531 Occupancy and equipment 2,324 2,086 Data processing and internet 5,373 2,773 Advertising and promotional 3,724 4,084 Depreciation and amortization 2,874 1,904 Real estate owned and repossessed vehicles (149 ) 505 FDIC and regulator fees 2,343 2,125 Other general and administrative 5,783 7,705 Total non-interest expenses $ 59,933 $ 53,587 Non-interest expense totaled $59.9 million for the fiscal year ended June 30, 2014, an increase of $6.3 million compared to fiscal 2013. Salaries and related costs increased $3.4 million, or 11.7%, in fiscal 2014 due to increased staffing levels to support growth in deposit and lending activities. Our staff increased to 366 from 312 or 17.3% between fiscal 2014 and 2013. Professional services, which include accounting and legal fees, increased $1.9 million in fiscal 2014 compared to 2013. The increase in professional services was primarily due to legal fees related to loan acquisition and other contracts, contract underwriters, and business expansion costs. Advertising and promotion expense decreased $0.4 million, primarily due to decreases in lead generation costs for our single family Agency mortgage refinance business. Data processing and internet expense increased $2.6 million, primarily due to growth in the number of customer accounts and costs for special enhancements to the Bank's core processing system. Occupancy and equipment expense increased $0.2 million, in order to support increased account volume and office space for additional employees. Other expense categories such as FDIC and regulator fees increased by $0.2 million in fiscal 2014 compared to fiscal 2013, due to increased deposit balances. Real estate owned, repossessed RV losses and collection expenses decreased by $0.7 million due to fewer foreclosures and repossessions. Other general and administrative costs decreased $1.9 million in fiscal 2014 as a result of the cost management initiative implemented in the first quarter of fiscal 2014 to improve the efficiency and effectiveness of people, vendors and other costs. Income Tax Expense. Income tax expense was $38.3 million for the fiscal year ended June 30, 2014 compared to $27.9 million for fiscal 2013. Our effective tax rates were 40.64% and 40.92% for the fiscal year ended June 30, 2014 and 2013, respectively. 39



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COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2013 AND JUNE 30, 2012

Net Interest Income. Net interest income totaled $101.6 million for the fiscal year ended June 30, 2013 compared to $79.2 million for the fiscal year ended June 30, 2012. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume): Fiscal Year Ended June 30, 2013 vs 2012 Increase (Decrease) Due to Total Rate/ Increase (Dollars in thousands) Volume Rate Volume (Decrease) Increase/(decrease) in interest income: Loans $ 30,605$ (4,823 )$ (1,587 )$ 24,195 Federal funds sold 4 12 4 20 Interest-earning deposits in other financial institutions - 1 47 48 Mortgage-backed and other investment securities (2,255 ) (2,784 ) 274 (4,765 ) Stock of the FHLB, at cost 22 297 105 424 Total increase/(decrease) in interest income $ 28,376$ (7,297 )$ (1,157 )$ 19,922 Increase/(decrease) in interest expense: Interest-bearing demand and savings $ 2,801$ (505 )$ (285 )$ 2,011 Time deposits 1,264 (4,918 ) (378 ) (4,032 ) Securities sold under agreements to repurchase (510 ) 38 (12 ) (484 ) Advances from the FHLB 1,825 (1,402 ) (439 ) (16 ) Other borrowings - 2 - 2 Total increase/(decrease) in interest expense $ 5,380$ (6,785 ) $



(1,114 ) $ (2,519 )

Interest Income. Interest income for the fiscal year ended June 30, 2013 totaled $135.7 million, an increase of $19.9 million, or 17.2%, compared to $115.7 million in interest income for the fiscal year ended June 30, 2012 primarily due to growth of interest-earning assets. Average interest-earning assets for the fiscal year ended June 30, 2013 increased by $541.1 million compared to the fiscal year ended June 30, 2012 due to the origination of loans which increased $743.1 million during the year ended June 30, 2013 compared to 2012. For the fiscal year ended June 30, 2013, the growth in average balances contributed additional interest income of $28.4 million, which was offset by the decrease in average rate which resulted in a net $7.3 million decrease in interest income. The average yield earned on our interest-earning assets decreased to 5.05% for the fiscal year ended June 30, 2013, down from 5.40% for the same period in 2012. During fiscal 2013, our new portfolio loans were added at market rates, which were below the average of our portfolio. Interest Expense. Interest expense totaled $34.0 million for the fiscal year ended June 30, 2013, a decrease of $2.5 million, compared to $36.5 million in interest expense during the fiscal year ended June 30, 2012. Average interest-bearing liabilities for the fiscal year ended June 30, 2013 increased $474.8 million compared to the same period in 2012, due to increased demand and savings accounts and advances from the FHLB. The average interest-bearing balances of advances from the FHLB increased $102.5 million. The average rate paid on all of our interest-bearing liabilities decreased to 1.39% for the fiscal year ended June 30, 2013 from 1.85% for the fiscal year ended June 30, 2012. The maturity of higher-rate term deposits and the addition of new lower rate time deposits caused the average term deposit rates to decrease to 1.55% in fiscal 2013 from 2.04% in fiscal 2012. These rate changes in fiscal 2013 were accompanied by declines in market interest rates which also caused our borrowing rates to decrease by 38 basis points between fiscal 2013 and 2012. During fiscal 2013, we continued to benefit from the low U.S. Treasury interest rates, which reduced our interest rates on deposits and borrowings. Provision for Loan Losses. Provision for loan losses was $7.6 million for the fiscal year ended June 30, 2013 and $8.1 million for fiscal 2012. The provisions are made to maintain our allowance for loan losses at levels which management believes to be adequate. The assessment of the adequacy of our allowance for loan losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss history and changes in the volume and mix of loans and collateral values. 40



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See "Asset Quality and Allowance for Loan Loss" for discussion of our allowance for loan loss and the related loss provisions. Non-interest Income. The following table sets forth information regarding our non-interest income: For the Fiscal Year Ended June 30, (Dollars in Thousands) 2013 2012 Realized gain on securities: Sale of mortgage-backed securities $ 212 $



-

Total realized gain on securities 212



-

Unrealized loss on securities: Total impairment losses (8,080 ) (3,583 ) Loss recognized in other comprehensive loss 4,579



780

Net impairment loss recognized in earnings (3,501 ) (2,803 ) Fair value gain (loss) on trading securities 1,274



785

Total unrealized loss on securities (2,227 ) (2,018 ) Prepayment penalty fee income 1,742 863 Gain on sale-other 1,130 - Mortgage banking income 22,953 16,708 Banking service fees and other income 3,900 817 Total non-interest income $ 27,710$ 16,370 Non-interest income totaled $27.7 million for the fiscal year ended June 30, 2013 compared to non-interest income of $16.4 million for fiscal 2012. The increase was the result of higher mortgage banking income of $6.2 million, $1.1 million from other gains on sales, a $0.9 million increase in prepayment penalty fee income, and a $3.1 million increase in banking service fees and other income. The increase in mortgage banking income was due to an increase in origination volume of loans held for sale from $664.6 million to $1,085.9 million. Gain on sale - other includes gains from the sale of non-mortgage loans, which started in fiscal 2013. Banking service fees and other income includes deposit and loans fees as well as fee income from prepaid card sponsors starting in fiscal 2013. Non-interest Expense. The following table sets forth information regarding our non-interest expense: For the Fiscal Year Ended June 30, (Dollars in thousands) 2013 2012 Salaries and related costs $ 28,874 $ 20,339 Professional services 3,531 2,213 Occupancy and equipment 2,086 1,133 Data processing and internet 2,773 2,251 Advertising and promotional 4,084 2,703 Depreciation and amortization 1,904 1,316 Real estate owned and repossessed vehicles 505 2,382 FDIC and regulator fees 2,125 1,527 Other general and administrative 7,705 4,094 Total non-interest expenses $ 53,587 $ 37,958 Non-interest expense totaled $53.6 million for the fiscal year ended June 30, 2013, an increase of $15.6 million compared to fiscal 2012. Salaries and related costs increased $8.5 million, or 42.0%, in fiscal 2013 due to increased staffing levels to support growth in deposit and lending activities. Our staff increased to 312 from 230 or 35.7% between fiscal 2013 and 2012. Professional services, which include accounting and legal fees, increased $1.3 million in fiscal 2013 compared to 2012. The increase in professional services was primarily due to legal fees related to loan acquisition and other contracts, contract underwriters, and business expansion costs. Advertising and promotion expense increased $1.4 million, primarily due to increases in lead generation costs for our single family loan origination program as a result of higher mortgage refinance volume. 41



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Data processing and internet expense increased $0.5 million, primarily due to growth in the number of customer accounts and costs for special enhancements to the Bank's core processing system. Occupancy and equipment expense increased $1.0 million in order to support increased account volume and office space for additional employees. Other expense categories such as FDIC and regulator fees increased by $0.6 million in fiscal 2013, due to increased deposit balances. Real estate owned, repossessed RV losses and collection expenses decreased by $1.9 million due to the management and disposition of loan collateral. Other general and administrative costs increased $3.6 million in fiscal 2013 relative to the increase in deposit and loan activity as well as the number of staff. Income Tax Expense. Income tax expense was $27.9 million for the fiscal year ended June 30, 2013 compared to $20.1 million for fiscal 2012. Our effective tax rates were 40.92% and 40.50% for the fiscal year ended June 30, 2013 and 2012, respectively.



COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2014 AND JUNE 30, 2013

Our total assets increased $1,312.2 million, or 42.5%, to $4,403.0 million, as of June 30, 2014, up from $3,090.8 million at June 30, 2013. The loan portfolio increased a net $1,275.9 million, primarily from portfolio loan originations of $2,298.0 million less principal repayments of $990.3 million. Loans held for sale increased $58.4 million from June 30, 2013 to June 30, 2014. Total liabilities increased by $1,209.7 million or 42.9%, to $4,032.2 million at June 30, 2014, up from $2,822.5 million at June 30, 2013. The increase in total liabilities resulted primarily from growth in demand and savings deposits of $1,217.7 million and growth in FHLB borrowings of $319.6 million. Stockholders' equity increased by $102.5 million, or 38.2%, to $370.8 million at June 30, 2014, up from $268.3 million at June 30, 2013. The increase was the result of $56.0 million in net income for the fiscal year, sale of common stock of $41.6 million, vesting and issuance of RSU's and exercise of stock options of $4.9 million, $0.4 million unrealized gain in other comprehensive income, less $0.3 million in dividends declared on preferred stock. 42



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ASSET QUALITY AND ALLOWANCE FOR LOAN LOSS

Non-performing loans and foreclosed assets or "non-performing assets" consisted of the following: At June 30, (Dollars in thousands) 2014 2013 2012 2011 2010 Non-performing assets: Non-accrual loans: Single family real estate secured: Mortgage $ 12,396$ 11,353$ 10,099$ 6,586$ 5,841 Home equity 168 37 102 157 87 Warehouse and other - - - - -



Multifamily real estate secured 4,302 2,882 5,757

2,744 4,675 Commercial real estate secured 2,985 3,559 425 - - Total non-accrual loans secured by real estate 19,851 17,831 16,383 9,487 10,603 Auto and recreational vehicle secured 534 472 739 125 1,084 Factoring - - - - - Commercial & Industrial - - - - - Other - - - - 16 Total non-performing loans 20,385 18,303 17,122 9,612 11,703 Foreclosed real estate - 1,865 457 7,678 2,354 Repossessed vehicles 75 141 700 1,926 347 Total non-performing assets $ 20,460$ 20,309$ 18,279$ 19,216$ 14,404 Total non-performing loans as a percentage of total loans 0.57 % 0.80 % 0.98 % 0.72 % 1.48 % Total non-performing assets as a percentage of total assets 0.46 % 0.66 % 0.77 %



0.99 % 1.01 %

Our non-performing assets increased $0.2 million to $20.5 million at June 30, 2014 compared to $20.3 million at June 30, 2013. The increase in non-performing assets during the fiscal year ended June 30, 2014 was composed of an increase in non-performing loans of $2.1 million partially offset by a decrease in foreclosed real estate of $1.9 million. The increase in non-performing assets during the fiscal year ended June 30, 2013 was comprised of an increase in non-performing loans of $1.2 million and an increase of $1.4 million in foreclosed real estate partially offset by a decrease in repossessed vehicles of $0.6 million. Approximately 19.60% of our non-performing loans at June 30, 2014 were considered TDRs, compared to 28.87% at June 30, 2013. 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 category to performing and any previously deferred interest income is recognized. Approximately 60.81% of the Bank's non-performing loans are single family first mortgages already written down in aggregate to 48.02% of the original appraisal value of the underlying properties. Previously, these loans had experienced longer delays completing the foreclosure process due to the servicing practices of one of our seller servicers. At June 30, 2014, our $12.4 million in single family non-performing loans represented 36 loans in 17 states ranging in amounts from $38,000 to $1.4 million. At June 30, 2013, our $11.4 million in single family non-performing loans represented 36 loans in 14 states ranging in amounts from $0.1 million to $2.2 million. The Bank has already taken impairment charge-offs of $1.8 million on the non-performing single family loans at June 30, 2014. At June 30, 2014, our $4.3. million in multifamily non-performing loans represents five loans in four states with impairment charge-offs taken in the amount of $0.5 million. At June 30, 2013 the $2.9 million of non-performing multifamily loans represents four loans in four states, with impairment charge-offs taken in the amount of $0.5 million. At June 30, 2014, our $3.0 million in commercial non-performing loans represents three loans in three states with impairment charge-offs taken in the amount of $1.2 million. At June 30, 2013, our $3.6 million in commercial non-performing loans represents two loans in two states with impairment charge-offs taken in the amount of $0.9 million. The $534,000 in non-performing recreational vehicle ("RV") and automobile loans represents 54 RVs ranging in amounts from $1,000 to $69,000 at June 30, 2014. The $472,000 in non-performing RV/automobile loans represents 41 RVs ranging in amounts from $1,000 to $72,000 at June 30, 2013. There was no foreclosed real estate at June 30, 2014. Foreclosed real estate of $1.9 million at June 30, 2013 represented two single family homes and two multifamily properties. All foreclosed real estate is shown at the lower of cost or fair value. Repossessed vehicles of $75,000 includes 14 RVs with fair values ranging in amounts from $1,000 to $14,000 at June 30, 2014, compared to $141,000 at June 30, 2013, which includes 8 RVs with fair values ranging in amounts from $1,000 to $32,000. Impaired loans are generally adjusted through charge-offs against the allowance for loan losses. Declines in residential housing values and increases in unemployment experienced over the last three years have begun to stabilize, although whether such stabilization is merely temporary cannot be foreseen. We have experienced growth in our non-performing single family mortgage loans over the last three years and we believe that the write-downs taken as of June 30, 2014 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 foreclosed and repossessed vehicles in future periods. Allowance for Loan Losses. We maintain an allowance for loan losses in an amount that we believe is sufficient to provide adequate protection against probable incurred losses in our loan portfolio. We evaluate quarterly the adequacy of the allowance based upon reviews of individual loans, recent loss experience, current economic conditions, risk characteristics of the various categories of loans and other pertinent factors. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is charged against current period operating results. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible and increased by recoveries of loans previously charged off. The allowance for loan losses includes specific and general reserves. Specific reserves are provided for impaired loans considered TDRs. All other impaired loans are written down through charge-offs to their realizable value and no specific or general reserve is provided. A loan is measured for impairment generally two different ways. If the loan is primarily dependent upon the borrower to make payments, then impairment is calculated by comparing the present value of the expected future payments discounted at the effective loan rate to the carrying value of the loan. If the loan is collateral dependent, the net proceeds from the sale of the collateral is compared to the carrying value of the loan. If the calculated amount is less than the carrying value of the loan, the loan has impairment. A general reserve is included in the allowance for loan 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 pool, the product of which is the general reserve amount. The qualitative analysis considers one or more of the following factors: changes in lending policies and procedures, changes in economic conditions, changes in the content of the portfolio, changes in lending management, changes in the volume of delinquency rates, changes to the scope of the loan review system, changes in the underlying collateral of the loans, changes in credit concentrations and any changes in the requirements to the credit loss calculations. A loss rate is estimated and applied to those loans affected by the qualitative factors. The assessment of the adequacy of the Company's allowance for loan losses is based upon a range of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, change in volume and mix of loans, collateral values and charge-off history. The Company provides general loan loss reserves for its RV and auto 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 recreational vehicle 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, but does recalculate the LTV based upon principal payments made during each quarter. The allowance for loan losses for the RV and auto loan portfolio at June 30, 2014 was determined by classifying each outstanding loan according to the original FICO score and providing loss rates. The Company had $14,206 (dollars in thousands) of RV and auto loan balances subject to general reserves as follows: FICO greater than or equal to 770: $3,653; 715 -769: $4,655; 700 - 714: $1,081; 660 -699: $2,467 and less than 660: $2,350. 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 ("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, 2014, the LTV groupings for each significant mortgage class were as follows (dollars in thousands): The Company had $1,905,241 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $1,158,319; 61% -70%: $626,465; 71% -80%: $103,895; and greater than 80%: $16,562. 43



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The Company had $974,210 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $470,436; 56% -65%: $306,419; 66% -75%: $184,923; 76%-80%: $10,578 and greater than 80%: $1,854. 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. In fiscal year 2011, the Company's total volume of originated multifamily loans was equal to 27% of its average loan portfolio balance. 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, 2014 and June 30, 2013, all of the qualitative components of the general loan loss allowance for multifamily loans accounted for 76% and 68% 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 Internal Asset Review Committee monitors and performs reviews of interest only loans. Adverse trends reflected in the Company's delinquency statistics, grading and classification of interest only loans would be reported to management and the Board of Directors. As of June 30, 2014, the Company had $524.6 million of interest only loans and $6.0 million of option ARM mortgage loans. Through June 30, 2014, 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 $19,685 of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $11,591; 51% -60%: $5,752; 61%-70%: $1,431; 71%-80%: $911 and greater than 80%: $0. The Company's commercial secured portfolio consists of business loans well-collateralized by residential real estate. The Company's other portfolio consists of receivables factoring for businesses and consumers. The Company allocates its allowance for loan 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, 2014 of 55.98% 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. 44



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The following table sets forth the changes in our allowance for loan losses, by portfolio class for the dates indicated:

Single Family Real Estate Secured: Commercial Total Allowance (Dollars in Home Warehouse and Multi-family Real Real Estate Auto and RV Commercial & as a % of Total thousands) Mortgage Equity Other



Estate Secured Secured Secured Factoring Industrial Other Total

Loans Balance at June 30, 2009 $ 1,113$ 280 $ - $



1,680 $ 179$ 1,475$ 24 $

- $ 3$ 4,754 0.76 %



Provision

for loan losses 1,868 146 - 717 34 3,002 5 - 3 5,775 Charge-offs (1,260 ) (221 ) - (537 ) - (2,618 ) - - - (4,636 ) Balance at June 30, 2010 1,721 205 - 1,860 213 1,859 29 - 6 5,893 0.75 % Provision (benefit) for loan losses 1,688 40 7 1,179 (46 ) 2,897 3 10 22 5,800 Charge-offs (1,132 ) (87 ) - (713 ) - (2,315 ) - - (27 ) (4,274 ) Balance at June 30, 2011 2,277 158 7 2,326 167 2,441 32 10 1 7,419 0.56 %



Provision

for loan losses 3,775 409 101 1,871 325 1,432 54 92 4 8,063 Charge-offs (2,028 ) (375 ) - (1,469 ) (94 ) (1,714 ) - - (2 ) (5,682 ) Transfers to held for sale (43 ) - - (170 ) - - - - - (213 ) Recoveries 49 - - - - - - - - 49 Balance at June 30, 2012 4,030 192 108 2,558 398 2,159 86 102 3 9,636 0.55 %



Provision

for loan losses 1,469 229 1,142 858 1,958 131 115 1,521 127 7,550 Charge-offs (730 ) (257 ) - (420 ) (1,496 ) (867 ) - - (137 ) (3,907 ) Recoveries 43 19 - 190 518 113 - - 20 903 Balance at June 30, 2013 4,812 183 1,250 3,186 1,378 1,536 201 1,623 13 14,182 0.62 % Provision (benefit) for loan losses 3,214 3 9 708 12 (142 ) 78 1,425 43 5,350 Charge-offs (125 ) (98 ) - (359 ) (355 ) (620 ) - - (34 ) (1,591 ) Recoveries 58 46 - 250 - 38 - - 40 432 Balance at June 30, 2014 $ 7,959$ 134 $ 1,259 $ 3,785 $ 1,035$ 812$ 279$ 3,048$ 62$ 18,373 0.51 % At June 30, 2014, the entire allowance for loan losses for each portfolio class was calculated as a contingent impairment (ASC 450, Contingencies for Gain and Loss). When specific loan impairment analysis is performed under ASC 310-10, the impairment is either recorded as a charge-off to the loan loss allowance or, if such loan is a TDR, the impairment is recorded as a specific loan loss allowance. 45



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The following table sets forth our allowance for loan losses by portfolio class: At June 30, 2014 2013 2012 2011 2010 Loan Loan Loan Loan Loan Category Category Category Category Category as a % as a % as a % as a % as a % Amount of of Total Amount of of Total Amount of of Total Amount of of Total Amount of of Total (Dollars in thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans Single family real estate secured: Mortgage $ 7,959 53.4 % $ 4,812 46.5 % $ 4,030 46.5 % $ 2,277 38.7 % $ 1,721 32.9 % Home equity 134 0.4 % 183 1.0 % 192 1.7 % 158 2.7 % 205 2.9 % Warehouse & Other 1,259 10.3 % 1,250 8.9 % 108 3.5 % 7 0.2 % - - %



Multifamily real estate secured 3,785 27.2 % 3,186

33.4 % 2,558 39.5 % 2,326 48.4 %

1,860 46.9 % Commercial real estate secured 1,035 0.7 % 1,378 1.3 % 398 2.0 % 167 2.8 % 213 4.3 % Auto & RV secured 812 0.4 % 1,536 0.8 % 2,159 1.4 % 2,441 2.4 % 1,859 5.0 % Factoring 279 3.3 % 201 4.7 % 86 2.8 % 32 2.0 % 29 3.4 % Commercial & Industrial 3,048 4.2 % 1,623 3.4 % 102 2.6 % 10 2.8 % - 4.6 % Other 62 0.1 % 13 - % 3 - % 1 - % 6 - % Total $ 18,373 100.0 % $ 14,182 100.0 % $ 9,636 100.0 % $ 7,419 100.0 % $ 5,893 100.0 % Our Bank's allowance for loan losses increased $4.2 million or 29.6% from June 30, 2013 to June 30, 2014. As a percent of the outstanding loan balance our Bank's loan loss allowance was 0.51% at June 30, 2014 and 0.62% at June 30, 2013. Provisions for loan loss were $5.4 million for fiscal 2014 and $7.6 million for fiscal 2013. The Bank's loan loss provisions for fiscal 2014 compared to 2013 decreased by $2.2 million as a result of lower charge-offs partially offset by loan portfolio growth. Charge-offs, net of recoveries, for fiscal 2014 decreased $0.6 million, $0.1 million and $0.6 million for single family, multifamily and commercial real estate secured loans, respectively. Charge-offs, net of recoveries, for the RV portfolio decreased $0.2 million for fiscal 2014. For fiscal 2013 charge-offs, net of recoveries, decreased $1.4 million and $1.2 million for the single family and multifamily secured loans, respectively. Charge-offs, net of recoveries, attributed to the RV portfolio decreased $1.0 million, for fiscal 2013. The Bank stopped originating RV loans in January 2009 and the balance of outstanding RV loans declined $3.8 million, or 20.5% during this fiscal year. As a result of the management and disposition of collateral, the Auto and RV loan loss allowance as a percent of the outstanding Auto and RV loan balance decreased from 8.29% at June 30, 2013 to 5.51% at June 30, 2014. Between June 30, 2013 and 2014, the Bank's total allowance for loan losses as a percent of the loan portfolio decreased 11 basis points due to a change of the portfolio mix, primarily due to the increase in the single family loan portfolio. 46



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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, 2014, we had a total borrowing availability of approximately $1,661.5 million, of which $910.0 million was outstanding with $751.5 million available immediately, which reflects a fully collateralized position. The Bank can also borrow from the discount window at the FRB. FRB borrowings are collateralized by consumer loans and mortgage-backed securities pledged to the FRB. Based on loans and securities pledged at June 30, 2014, we had a total borrowing capacity of approximately $16.6 million, all of which was available for use. At June 30, 2014, we also had $20.0 million in unsecured fed funds purchase lines with two major banks under which there were no borrowings outstanding. 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. On December 16, 2004, we completed a transaction in which we formed a trust and issued $5.0 million of trust-preferred securities. The net proceeds from the offering were used to purchase approximately $5.2 million of junior subordinated debentures of our company with a stated maturity date of February 23, 2035. The debentures are the sole assets of the trust. The trust preferred securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indenture. We have the right to redeem the debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indenture plus any accrued but unpaid interest through the redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%, which was 2.63% at June 30, 2014, 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 November 2009, we filed a shelf registration with the SEC which allows us to raise capital up to $125.0 million through the sale of debt securities, common or preferred stock and warrants. For example, in April 2010, we issued 1.2 million shares of common stock under the shelf registration for net proceeds of $15.1 million. In March 2012, we filed a shelf registration with the SEC which allows us to raise capital up to $250.0 million through the sale of debt securities, common stock, preferred stock and warrants.



AT-THE-MARKET OFFERING

On March 11, 2013, we entered into an At-the-Market ("ATM") Equity Distribution Agreement with each of Raymond James & Associates, Inc., JMP Securities LLC, Liquidnet, Inc., and Sandler O'Neill + Partners L.P. (the "Distribution Agents") pursuant to which we may issue and sell through the Distribution Agents from time to time shares of our common stock in at the market offerings with an aggregate offering price of up to $50.0 million (the "ATM Offering"). The sales of shares of our common stock under the Equity Distribution Agreement are to be made in "at the market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on the NASADAQ Global Select Market (the principal existing trading market for our common stock), or sales made through a market maker or any other trading market for our common stock, or (with our prior consent) in privately negotiated transactions at negotiated prices. The aggregate compensation payable to the Distribution Agents under the Distribution Agreement is 2.5% of the gross sales price of the shares sold under the agreement. We have also agreed to reimburse the Distribution Agents for up to $125,000 in their expenses and have provided the Distribution Agents with customary indemnification rights. 47



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In fiscal year 2013, the Company commenced sales of common stock through the ATM Offering. The details of the shares of common stock sold through the ATM Offering through June 30, 2014 are as follows (dollars in thousands, except per share data, per share price is net of commissions): Compensation to Per Share Price and Number of Shares Distribution Distribution Agent Month Sold Net Proceeds Agent Raymond James & Associates March 2013 $ 35.25 200,000 $ 6,874 $ 176 Raymond James & Associates October 2013 $ 68.76 49,580 $ 3,409 $ 87 Raymond James & Associates November 2013 $ 70.56 147,820 $ 10,431 $ 267 Raymond James & Associates December 2013 $ 77.32 38,599 $ 2,984 $ 77 Raymond James & Associates January 2014 $ 78.38 90,000 $ 7,054 $ 181 Raymond James & Associates February 2014 $ 79.47 49,608 $ 3,942 $ 101 Sandler O'Neill & Partners, L.P. May 2014 $ 75.88 124,000 $ 9,409 $ 241 Sandler O'Neill & Partners, L.P. June 2014 $ 76.56 60,694 $ 4,647 $ 119 As of June 30, 2014, the total gross sales the Company completed under the ATM Offering was $50.0 million. Off-Balance Sheet Commitments. At June 30, 2014, we had commitments to originate loans with an aggregate outstanding principal balance of $174.0 million, commitments to sell loans with an aggregate outstanding principal balance at the time of sale of $54.9 million, and no commitments to purchase loans, investment securities or any other unused lines of credit. Contractual Obligations. The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs. Our time deposits due within one year of June 30, 2014 totaled $363.9 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, 2014 Payments Due by Period Less than One to Three to More than (Dollars in thousands) Total One Year Three Years Five Years Five Years Long-term debt obligations1, 2 $ 998,782$ 574,326$ 160,979$ 193,335$ 70,142 Time deposits2 800,110 368,292 202,117 37,567 192,134 Operating lease obligations3 15,430 2,251 4,928 5,378 2,873 Total $ 1,814,322$ 944,869$ 368,024$ 236,280$ 265,149 1 Long-term debt includes advances from the FHLB and borrowings under repurchase agreements. 2 Amounts include principal and interest due to recipient. 3 Payments are for the lease of real property. Capital Requirements. BofI Federal Bank is subject to various regulatory capital requirements set by the federal banking agencies. Failure by our bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our bank must meet specific capital guidelines that involve quantitative measures of our bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation require our bank to maintain certain minimum capital amounts and ratios. Our federal regulators require our bank to maintain minimum ratios of tangible capital to tangible assets of 1.5%, core capital to tangible assets of 4.0% and total risk-based capital to risk-weighted assets of 8.0%. At June 30, 2014, our bank met all the capital adequacy requirements to which it was subject. At June 30, 2014, our bank was "well-capitalized" under the regulatory framework for prompt corrective action. To be well-capitalized, our bank must maintain minimum leverage, Tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 48



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6.0% and 10.0%, respectively. No conditions or events have occurred between that date and the date of this annual report on Form 10-K that management believes would change the Bank's capital levels. To maintain its status as a well-capitalized financial institution under applicable regulations and to support additional growth, we will need to raise additional capital to support our bank's further growth. BofI Federal Bank's capital amounts, ratios and requirements were as follows: At June 30, 2014 To be "well-capitalized" For Capital Under Prompt Adequacy Corrective Actual Purposes Action Regulations

(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Tier 1 leverage (core) capital: Amount and ratio to adjusted tangible assets $ 382,441 8.66 % $ 176,639 4.00 % $ 220,799 5.00 % Tier 1 capital: Amount and ratio to risk-weighted assets $ 382,441 14.42 % N/A N/A $ 159,181 6.00 % Total capital: Amount and ratio to risk-weighted assets $ 400,814 15.11 % $ 212,241 8.00 % $ 265,302 10.00 % Tangible capital: Amount and ratio to tangible assets $ 382,441 8.66 % $ 66,240 1.50 % N/A N/A


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Source: Edgar Glimpses


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