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XNAS:BOFI BofI Holding Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2012
 
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-51201
BofI HOLDING, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-0867444
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
12777 High Bluff Drive, Suite 100, San Diego, CA
 
92130
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (858) 350-6200
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
 
Large accelerated filer  o
 
Accelerated filer  x
 
Non-accelerated filer  ¨
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    ¨  Yes    x  No
The number of shares outstanding of the Registrant’s common stock on the last practicable date: 11,431,560 shares of common stock, $0.01 par value per share, as of May 1, 2012.



BofI HOLDING, INC.
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SIGNATURES


PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

BofI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
 
March 31,
2012
 
June 30,
2011
ASSETS
 
 
 
Cash and due from banks
$
7,933

 
$
5,820

Federal funds sold
17,925

 
3,232

Total cash and cash equivalents
25,858

 
9,052

Securities:
 
 
 
Trading
5,983

 
5,053

Available for sale
170,397

 
145,671

Held to maturity (fair value $349,725 as of March 2012, $387,286 as of June 2011)
328,528

 
370,626

Stock of the Federal Home Loan Bank, at cost
16,873

 
15,463

Loans held for sale, carried at fair value
44,286

 
20,110

Loans held for sale, lower of cost or fair value
45,329

 
—

Loans—net of allowance for loan losses of $8,355 (March 2012) and $7,419 (June 2011)
1,595,704

 
1,325,101

Accrued interest receivable
7,599

 
6,577

Furniture, equipment and software—net
4,065

 
3,153

Deferred income tax
9,475

 
9,719

Cash surrender value of life insurance
5,221

 
5,087

Other real estate owned and repossessed vehicles
1,364

 
9,604

Other assets
17,348

 
14,871

TOTAL ASSETS
$
2,278,030

 
$
1,940,087

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
11,363

 
$
7,369

Interest bearing
1,564,110

 
1,332,956

Total deposits
1,575,473

 
1,340,325

Securities sold under agreements to repurchase
120,000

 
130,000

Advances from the Federal Home Loan Bank
359,000

 
305,000

Subordinated debentures and other borrowings
5,155

 
7,655

Accrued interest payable
1,940

 
2,237

Accounts payable and accrued liabilities
13,223

 
7,104

Total liabilities
2,074,791

 
1,792,321

COMMITMENTS AND CONTINGENCIES (Note 8)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock— $0.01 par value; 1,000,000 shares authorized;
 
 
 
Series A—$10,000 stated value and liquidation preference per share; 515 (March 2012) and 515 (June 2011) shares issued and outstanding
5,063

 
5,063

Series B—$1,000 stated value and liquidation preference per share; 22,000 shares authorized; 20,132 (March 2012) shares issued and outstanding
19,439

 
—

Common stock—$0.01 par value; 25,000,000 shares authorized; 12,174,770 shares issued and 11,430,145 shares outstanding (March 2012); 11,151,963 shares issued and 10,436,332 shares outstanding (June 2011);
122

 
112

Additional paid-in capital
104,487

 
88,343

Accumulated other comprehensive loss—net of tax
(696
)
 
(971
)
Retained earnings
80,170

 
60,152

Treasury stock, at cost; 744,625 shares (March 2012) and 715,631 shares (June 2011)
(5,346
)
 
(4,933
)
Total stockholders’ equity
203,239

 
147,766

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
2,278,030

 
$
1,940,087


See accompanying notes to the condensed consolidated financial statements.

1

BofI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2012
 
2011
 
2012
 
2011
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
22,898

 
$
15,811

 
$
65,503

 
$
42,900

Investments
6,450

 
8,117

 
20,226

 
24,703

Total interest and dividend income
29,348

 
23,928

 
85,729

 
67,603

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
6,179

 
5,716

 
19,277

 
16,258

Advances from the Federal Home Loan Bank
1,451

 
1,459

 
4,506

 
4,828

Other borrowings
1,383

 
1,450

 
4,348

 
4,417

Total interest expense
9,013

 
8,625

 
28,131

 
25,503

Net interest income
20,335

 
15,303

 
57,598

 
42,100

Provision for loan losses
2,000

 
1,150

 
5,963

 
4,350

Net interest income, after provision for loan losses
18,335

 
14,153

 
51,635

 
37,750

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Realized gain on securities:
 
 
 
 
 
 
 
Sale of mortgage-backed securities
—

 
1,478

 
—

 
1,960

Total realized gain on securities
—

 
1,478

 
—

 
1,960

Other-than-temporary loss on securities:
 
 
 
 
 
 
 
Total impairment losses
(1,211
)
 
(1,504
)
 
(2,643
)
 
(4,733
)
Loss recognized in other comprehensive income (loss)
—

 
1,331

 
120

 
3,678

Net impairment loss recognized in earnings
(1,211
)
 
(173
)
 
(2,523
)
 
(1,055
)
Fair value gain on trading securities
305

 
42

 
930

 
67

Total unrealized loss on securities
(906
)
 
(131
)
 
(1,593
)
 
(988
)
Prepayment penalty fee income
189

 
25

 
315

 
1,025

Mortgage banking income
4,399

 
444

 
12,215

 
3,630

Banking service fees and other income
174

 
108

 
475

 
346

Total non-interest income
3,856

 
1,924

 
11,412

 
5,973

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries, employee benefits and stock-based compensation
5,270

 
3,833

 
14,952

 
10,240

Professional services
365

 
525

 
1,542

 
1,544

Occupancy and equipment
301

 
257

 
856

 
606

Data processing and internet
666

 
216

 
1,649

 
693

Advertising and promotional
788

 
261

 
1,852

 
592

Depreciation and amortization
347

 
181

 
977

 
364

Real estate owned and repossessed vehicles
(25
)
 
796

 
2,003

 
1,248

FDIC and regulator fees
422

 
559

 
1,088

 
1,474

Other general and administrative
1,056

 
801

 
3,027

 
2,107

Total non-interest expense
9,190

 
7,429

 
27,946

 
18,868

INCOME BEFORE INCOME TAXES
13,001

 
8,648

 
35,101

 
24,855

INCOME TAXES
5,283

 
3,373

 
14,190

 
9,819

NET INCOME
$
7,718

 
$
5,275

 
$
20,911

 
$
15,036

NET INCOME ATTRIBUTABLE TO COMMON STOCK
$
7,331

 
$
5,198

 
$
20,018

 
$
14,804

COMPREHENSIVE INCOME
$
6,139

 
$
3,437

 
$
21,186

 
$
10,270

Basic earnings per share
$
0.62

 
$
0.48

 
$
1.72

 
$
1.38

Diluted earnings per share
$
0.58

 
$
0.48

 
$
1.68

 
$
1.37

See accompanying notes to the condensed consolidated financial statements.

2

BofI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
Convertible
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
Net of Income Tax
 
Treasury
Stock
 
Comprehensive
Income
 
Total
 
Number of Shares
 
 
 
 
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
BALANCE—July 1, 2011
515

 
$
5,063

 
11,151,963

 
(715,631
)
 
10,436,332

 
$
112

 
$
88,343

 
$
60,152

 
$
(971
)
 
$
(4,933
)
 
 
 
$
147,766

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
20,911

 
—

 
—

 
$
20,911

 
20,911

Net unrealized gain from investment securities—net of income tax expense
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
275

 
—

 
275

 
275

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
21,186

 
 
Cash dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(893
)
 
—

 
—

 
 
 
(893
)
Issuance of convertible preferred stock
20,182

 
19,487

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
19,487

Issuance of common stock
—

 
—

 
862,500

 
—

 
862,500

 
9

 
13,335

 
—

 
—

 
—

 
 
 
13,344

Convert preferred stock to common stock
(50
)
 
(48
)
 
3,096

 
 
 
3,096

 
1

 
47

 
 
 
 
 
 
 
 
 
—

Stock-based compensation expense
—

 
—

 
—

 
—

 
—

 
—

 
1,850

 
—

 
—

 
—

 
 
 
1,850

Restricted stock grants
—

 
—

 
87,889

 
(28,994
)
 
58,895

 
—

 
167

 
—

 
—

 
(413
)
 
 
 
(246
)
Stock option exercises and tax benefits of equity compensation
—

 
—

 
69,322

 
—

 
69,322

 
—

 
745

 
—

 
—

 
—

 
 
 
745

BALANCE—March 31, 2012
20,647

 
$
24,502

 
12,174,770

 
(744,625
)
 
11,430,145

 
$
122

 
$
104,487

 
$
80,170

 
$
(696
)
 
$
(5,346
)
 
 
 
$
203,239


See accompanying notes to the condensed consolidated financial statements.

3

BofI HOLDING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) 
 
Nine Months Ended
 
March 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
20,911

 
$
15,036

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Accretion of discounts on securities
(8,830
)
 
(13,084
)
Net accretion of discounts on loans
(1,232
)
 
(3,358
)
Amortization of borrowing costs
—

 
1

Stock-based compensation expense
1,850

 
1,536

Valuation of financial instruments carried at fair value
(930
)
 
(67
)
Net gain on sale of investment securities
—

 
(1,960
)
Impairment charge on securities
2,523

 
1,055

Provision for loan losses
5,963

 
4,350

Deferred income taxes
1,276

 
(1,194
)
Origination of loans held for sale
(497,578
)
 
(162,991
)
Unrealized gain on loans held for sale
(533
)
 
(73
)
Gain on sales of loans held for sale
(11,682
)
 
(3,557
)
Proceeds from sale of loans held for sale
437,865

 
168,480

Loss on sale of other real estate and foreclosed assets
1,802

 
1,159

Depreciation and amortization of furniture, equipment and software
977

 
364

Net changes in assets and liabilities which provide (use) cash:
 
 
 
Accrued interest receivable
(1,022
)
 
(674
)
Other assets
(4,408
)
 
2,800

Accrued interest payable
(297
)
 
116

Accounts payable and accrued liabilities
5,404

 
1,857

Net cash provided by (used) in operating activities
$
(47,941
)
 
$
9,796

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities
(72,605
)
 
(284,033
)
Proceeds from sale of available for sale mortgage-backed-securities
—

 
8,910

Proceeds from repayment of securities
96,742

 
303,710

Purchase of stock of Federal Home Loan Bank
(3,656
)
 
—

Proceeds from redemption of stock of Federal Home Loan Bank
2,246

 
2,061

Origination of loans, net
(530,091
)
 
(361,126
)
Proceeds from sale of loans held for investment
83,985

 
—

Proceeds from sales of repossessed assets
7,284

 
3,198

Purchases of loans, net of discounts and premiums
—

 
(110,682
)
Principal repayments on loans
172,931

 
121,917

Net purchases of furniture, equipment and software
(1,889
)
 
(2,592
)
Net cash used in investing activities
$
(245,053
)
 
$
(318,637
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
235,148

 
297,617

Proceeds from the Federal Home Loan Bank advances
130,000

 
164,000

Repayment of the Federal Home Loan Bank advances
(76,000
)
 
(161,000
)
Repayment of other borrowings and securities sold under agreements to repurchase
(12,500
)
 
—

Proceeds from exercise of common stock options
676

 
573

Proceeds from issuance of common stock
13,344

 
2

Proceeds from issuance of preferred stock
19,487

 
—

Tax benefit from exercise of common stock options and vesting of restricted stock grants
236

 
357

Cash dividends on preferred stock
(591
)
 
(232
)
Net cash provided by financing activities
309,800

 
301,317

NET CHANGE IN CASH AND CASH EQUIVALENTS
16,806

 
(7,524
)
CASH AND CASH EQUIVALENTS—Beginning of year
9,052

 
18,205

CASH AND CASH EQUIVALENTS—End of period
$
25,858

 
$
10,681

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Interest paid on deposits and borrowed funds
$
28,427

 
$
25,595

Income taxes paid
$
12,039

 
$
11,293

Transfers to other real estate and repossessed vehicles
$
846

 
$
10,356

Transfers from loans held for investment to loans held for sale
$
85,825

 
$
—

Transfers from loans held for sale to loans held for investment
$
4,796

 
$
—

Preferred stock dividends declared but not paid
$
302

 
$
—

See accompanying notes to the condensed consolidated financial statements.

4

BofI HOLDING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2012 AND 2011
(Dollars in thousands, except per share data)
(Unaudited)

1.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of BofI Holding, Inc. and its wholly owned subsidiary, BofI Federal Bank (formerly Bank of Internet USA, the “Bank” and collectively with BofI Holding, Inc., the “Company”). All significant intercompany balances have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the nine months ended March 31, 2012 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2011 included in our Annual Report on Form 10-K.
Certain reclassifications have been made to the prior-period financial statements to conform to the current period presentation.

2.
SIGNIFICANT ACCOUNTING POLICIES
Securities. We classify investment 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 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 value from our internal pricing models. 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. Other-than-temporary credit impairment losses are recognized in non-interest income and non-credit impairment losses are recognized through other comprehensive income, with a corresponding reduction in the carrying value of the investment.
Loans Held for Sale. Loans originated and intended for sale in the secondary market are carried at fair value and lower of cost or fair value. For loans held at fair value net unrealized gains and losses are recognized through the income statement. Loans carried at fair value are identified on a loan level basis while loans held for sale at lower of cost or market are identified as a percentage of the origination pool. Non-agency mortgage loans originated are pooled by collateral type, loan terms, interest rates and loan-to-values. Pools are selected for percentage allocation during the quarter. Individual loan sales are applied to pool allocations based on loan characteristics until the allocation is reduced to zero or a portion remains unsold. A percentage of these originations is allocated to held for sale lower of cost or fair value based upon the loan to value of the original appraised value, interest rate and months to re-price on adjustable rate loans. The Bank generally sells its loans with the servicing released to the buyer. Gains and losses on loan sales are recorded as income, based on the difference between sales proceeds and carrying value.
Loans that were originated with the intent and ability to hold for the foreseeable future (loans held in portfolio) but which have been subsequently designated as being held for sale for risk management or liquidity needs are carried at the lower of cost or fair value calculated on an individual loan by loan basis and unrealized losses are recognized through the income statement.
There may be times when loans have been classified as held for sale and for some reason cannot be sold. Loans transferred to a long-term-investment classification from held for sale are transferred at the lower of cost or fair value value on

5

the transfer date. Transfers may be made in the form of an individual loan or as an unsold portion of a pool. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. A loan cannot be classified as a long-term investment unless the Bank has both the ability and the intent to hold the loan for the foreseeable future or until maturity.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level to provide for probable incurred losses within the loan portfolio based on evaluating known and inherent risks in the loans held for investment and upon management's continuing analysis of the factors underlying the quality of the loans held for investment. 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. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the control of the Bank.
The allowance for loan loss includes specific and general reserves. The allowance is increased by the provision for loan losses, which is charged against current period operating results and recoveries of loans previously charged-off. The allowance is decreased by the amount of charge-offs of loans deemed uncollectible. Specific reserves are provided for impaired loans considered TDRs, RV's and auto that are greater than 90 days past due and other limited circumstances. All other impaired loans 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 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 agreement. Loans 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 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 loan's effective rate at inception to the carrying value of the loan. If the loan is collateral dependent, the net proceeds from the sale of the collateral is compared to the carrying value of the loan. If the calculated amount is less than the carrying value of the loan, the loan has impairment.
A general reserve is included in the allowance for loan loss and is determined by adding the results of a quantitative and a qualitative analysis to all other loans not measured for impairment at the reporting date. The quantitative analysis determines the Bank's actual annual historic charge-off rates and applies the average historic rates to the outstanding loan balances in each pool, the product of which is the general reserve amount. The qualitative analysis considers one or more of the following factors: changes in lending policies and procedures, changes in economic conditions, changes in the content of the portfolio, changes in lending management, changes in the volume of delinquency rates, changes to the scope of the loan review system, changes in the underlying collateral of the loans, changes in credit concentrations and any changes in the requirements to the credit loss calculations. A loss rate is estimated and applied to those loans affected by the qualitative factors.
General loan loss reserves are calculated by grouping each loan by collateral type and by grouping the loan-to-value ratios of each loan within the collateral type. An estimated allowance rate for each loan-to-value group within each type of loan is multiplied by the total principal amount in the group to calculate the required general reserve attributable to that group. Management uses an allowance rate that provides a larger loss allowance for loans with greater loan-to-value ratios. General loan loss reserves for consumer loans are calculated by grouping each loan by credit score (e.g. according to the model of the Fair Isaac Corporation or “FICO” score) 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 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 charge-offs on impaired loans are recorded as a write-off and a decrease to the allowance in the period the impairment is identified. A loan is classified as a TDR when management determines that an existing borrower is in financial distress and the borrower's loan 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 troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
If the present value of estimated cash flows under the modified terms of a TDR discounted at the original loan effective rate is less than the book value of the loan before the TDR, the excess is specifically allocated to the loan in the allowance for loan losses.

6

Recently Issued Accounting Pronouncements. In April 2011, the FASB issued an ASU No. 2011-02 (Topic 310), “A Creditor's Determination of whether a Restructuring is a Troubled Debt Restructuring.” This updated guidance is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring. In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the update are effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the ASU had no material impact on the Company’s financial position, results of operations or cash flows.

In April 2011, the FASB issued ASU No. 2011-03, "Reconsideration of Effective Control for Repurchase Agreements." ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU did not have a material impact on the Company's financial condition, cash flows, or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure requirements in U.S. GAAP and IFRSs." ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards ("IFRS"). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (l) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements;     (3) an exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity's net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity's shareholders' equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04 are effective for the Company's interim period beginning on or after December 15, 2011. The provisions of ASU No. 2011-04 did not have to have a material impact on the Company's financial condition, cash flows, or results of operations.

Future Application of Accounting Pronouncements. In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income with a total for other comprehensive income, a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provision of ASU No. 2011-05 are effective for the Company's interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Company's statements of income and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 will have no impact on the Company's financial condition, cash flows, or results of operations.


7


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:
Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 1 assets and liabilities include debt and equity securities that are actively traded in an exchange or over-the-counter market and are highly liquid, such as, among other assets and securities, certain U.S. treasury and other U.S Government and agency mortgage-backed debt.
Level 2:
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include securities with quoted prices that are traded less frequently than exchange-traded instruments and whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models such as discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
    
When available, the Company generally uses quoted market prices to determine fair value, in which case the items are classified in Level 1. In some cases where a market price is available, the Company will make use of acceptable practical expedients (such as matrix pricing) to calculate fair value, in which case the items are classified in Level 2.

The Company considers relevant and observable market prices in its valuations where possible. The frequency of transactions, the size of the bid-ask spread and the nature of the participants are some of the factors the Company uses to help determine whether a market is active and orderly or inactive and not orderly. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, credit spreads, housing value forecasts, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure various financial instruments at fair value, including an indication of the level in the fair-value hierarchy in which each instrument is generally classified:
Securities—trading. Trading securities are recorded at fair value. The trading portfolio consists of two different issues of floating-rate debt securities collateralized by pools of bank trust preferred securities. Recent liquidity and economic uncertainty have made the market for collateralized debt obligations less active or inactive. As quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying assets. The Company’s expected cash flows are calculated for each security and include the impact of actual and forecasted bank defaults within each collateral pool as well as structural features of the security’s tranche such as lock outs, subordination and overcollateralization. The forecast of underlying bank defaults in each pool is based upon a quarterly financial update including the trend in non-performing assets, the allowance for loan loss and the underlying bank’s capital ratios. Also a factor is the Company’s loan loss experience in the local economy in which the bank operates. At March 31, 2012, the Company’s forecast of cash flows for both securities includes actual and forecasted defaults totaling 34.70% of all banks in the collateral pools, compared to 28.55% of the banks actually in default. The expected cash flows reflect the Company’s best estimate of all pool losses which are then applied to the overcollateralization reserve and the subordinated tranches to determine the cash flows. The Company selects a discount rate margin based upon the spread between U.S. Treasury rates and the market rates for active credit grades for financial companies. The discount margin when added to the U.S. Treasury rate determines the discount rate, reflecting primarily market liquidity and interest rate risk since expected credit loss is included in the cash flows. At March 31, 2012, the Company used a weighted average discount margin of 425 basis points above U.S. Treasury rates to calculate the net present value of the expected cash flows and the fair value of its trading securities.

8

The Level 3 fair values determined by the Company for its trading securities rely heavily on management’s assumptions as to the future credit performance of the collateral banks, the impact of the global and regional recession, the timing of forecasted defaults and the discount rate applied to cash flows. The fair value of the trading securities at March 31, 2012 is sensitive to an increase or decrease in the discount rate. An increase in the discount margin of 100 basis points would have reduced the total fair value of the trading securities and decreased net income before income tax by $740. A decrease in the discount margin of 100 basis points would have increased the total fair value of the trading securities and increased net income before income tax by $880.
Securities—available for sale and held to maturity. Available for sale securities are recorded at fair value and consist of residential mortgage-backed securities (RMBS) and debt securities issued by U.S. agencies as well as RMBS issued by non-agencies. Held to maturity securities are recorded at amortized cost and consist of RMBS issued by U.S. agencies as well as RMBS issued by non-agencies. Fair value for U.S. agency securities is generally based on quoted market prices of similar securities used to form a dealer quote or a pricing matrix. There continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the availability and reliability of transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. The Company computes Level 3 fair values for each non-agency RMBS in the same manner (as described below) whether available for sale or held to maturity.
To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. 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 (and decreased by) the forecasted decrease or increase in the national home price appreciation (HPA) index. The largest factor influencing the Company’s modeling of the monthly default rate is unemployment. The most updated national unemployment rate announced prior to the end of the period covered by this report (reported in February 2012) was 8.3%, down from the high of 10.1% in October 2009. Consensus estimates for unemployment are that the rate will continue to decline. Going forward, the Company is projecting lower monthly default rates. The range of loss severity rates applied to each default used in the Company’s projections at March 31, 2012 are from 22.43% up to 78.12% based upon individual bond historical performance. The default rates and the severities are projected for every non-agency RMBS security held by the Company and will vary monthly based upon the actual performance of the security and the macroeconomic factors discussed above.
To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime” securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally have borrowers with a little lower FICO and a little less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at March 31, 2012 are from 1.5% up to 24.08% with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range. The Company applies its discount rates to the projected monthly cash flows which already reflect the full impact of all forecasted losses using the assumptions described above. When calculating present value of the expected cash flows at March 31, 2012, the Company computed its discount rates as a spread between 222 and 368 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.
Loans Held for Sale. Loans held for sale at fair value are primarily single-family and multi-family residential loans. The fair value of loans held for sale is determined, by pricing for comparable assets or by existing forward sales commitment prices with investors.
Impaired Loans. Impaired loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or of the collateral pledged and the accrual of interest income has been discontinued. The impaired loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Bank assesses loans individually and identifies impairment when the loan is classified as impaired or been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. The fair value of an impaired loan is determined based on an observable market price or current appraised value of the underlying collateral. The fair value of impaired loans with specific write-offs or allocations of the allowance for loan and lease losses are generally based on recent real estate appraisals or other third-party valuations and analysis of cash flows. These appraisals and analysis may utilize a

9

single valuation approach or a combination of approaches including comparable sales and income approaches. Adjustments are routinely made in the process by the appraisers to adjust for differences between the comparable sales and income data available. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining fair value.
Other Real Estate Owned. Nonrecurring 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.
Mortgage Banking Derivatives. Level 3 fair values for mortgage banking derivatives are either based upon prices in active secondary markets for identical securities or based on quoted market prices of similar assets used to form a dealer quote or a pricing matrix. If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment. These fair values are then adjusted for items such as fallout and estimated costs to originate the loan.

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

10

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and June 30, 2011. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Dollars in thousands)
 
March 31, 2012
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Collateralized Debt Obligations
$
—

 
$
—

 
$
5,983

 
$
5,983

Securities—Available for Sale:
 
 
 
 
 
 
 
Agency Debt
—

 
10,037

 
—

 
10,037

Agency RMBS
—

 
62,497

 
—

 
62,497

Non-Agency RMBS
—

 
—

 
90,419

 
90,419

Non-Agency Other
—

 
7,444

 
—

 
7,444

Total—Securities—Available for Sale
$
—

 
$
79,978

 
$
90,419

 
$
170,397

Loans Held for Sale
$
—

 
$
44,286

 
$
—

 
$
44,286

Other assets—Derivative instruments
$
—

 
$
—

 
$
971

 
$
971

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Other liabilities—Derivative instruments
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
June 30, 2011
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Collateralized Debt Obligations
$
—

 
$
—

 
$
5,053

 
$
5,053

Securities—Available for Sale:
 
 
 
 
 
 
 
Agency Debt
$
—

 
$
—

 
$
—

 
$
—

Agency RMBS
—

 
61,919

 
—

 
61,919

Non-Agency RMBS
—

 
—

 
83,752

 
83,752

Total—Securities—Available for Sale
$
—

 
$
61,919

 
$
83,752

 
$
145,671

Loans Held for Sale
$
—

 
$
20,110

 
$
—

 
$
20,110

Other assets—Derivative instruments
$
—

 
$
—

 
$
543

 
$
543

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Other liabilities—Derivative instruments
$
—

 
$
—

 
$
125

 
$
125



11

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:
 
 
For the three month period ended
 
March 31, 2012
 
Available for
Sale Securities:
RMBS
Non-Agency
 
Trading
Securities
Other  Debt Securities:
Non-Agency
 
Derivative Instruments, net
 
Total
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Opening Balance
$
95,409

 
$
5,678

 
$
1,094

 
$
102,181

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

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

 
—

 
—

 
—

Included in earnings—Fair value gain on trading securities
—

 
305

 
—

 
305

Included in earnings—Mortgage banking
—

 
—

 
(123
)
 
(123
)
Included in other comprehensive income
2,678

 
—

 
—

 
2,678

Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

Issues
—

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

Settlements
(7,404
)
 
—

 
—

 
(7,404
)
Other than temporary impairment
(264
)
 
—

 
—

 
(264
)
Closing balance
$
90,419

 
$
5,983

 
$
971

 
$
97,373

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

 
$
305

 
$
(123
)
 
$
182



 
For the nine month period ended
 
March 31, 2012
 
Available for
Sale Securities:
RMBS
Non-Agency
 
Trading
Securities
Other  Debt Securities:
Non-Agency
 
Derivative Instruments, net
 
Total
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Opening Balance
$
83,752

 
$
5,053

 
$
418

 
$
89,223

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Total gains or losses for the period:
 
 
 
 
 
 

Included in earnings—Sale of mortgage-back securities
—

 
—

 
—

 
—

Included in earnings—Fair value gain on trading securities
—

 
930

 
—

 
930

Included in earnings—Mortgage banking
—

 
—

 
553

 
553

Included in other comprehensive income
909

 
—

 
—

 
909

Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases
19,999

 
—

 
—

 
19,999

Issues
—

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

Settlements
(13,765
)
 
—

 
—

 
(13,765
)
Other than temporary impairment
(476
)
 
—

 
—

 
(476
)
Closing balance
$
90,419

 
$
5,983

 
$
971

 
$
97,373

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

 
$
930

 
$
553

 
$
1,483



12


 
For the three month period ended
 
March 31, 2011
 
Available for
Sale Securities:
RMBS
Non-Agency
 
Trading
Securities
Other  Debt Securities:
Non-Agency
 
Derivative Instruments, net
 
Total
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Opening Balance
$
110,548

 
$
4,428

 
$
786

 
$
115,762

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Sale of mortgage-back securities
1,308

 
—

 
—

 
1,308

Included in earnings—Fair value gain on trading securities
—

 
41

 
—

 
41

Included in earnings—Mortgage banking
—

 
—

 
488

 
488

Included in other comprehensive income
(1,732
)
 
—

 
—

 
(1,732
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

Issues
—

 
—

 
—

 
—

Sales
(6,938
)
 
—

 
—

 
(6,938
)
Settlements
(7,162
)
 
—

 
—

 
(7,162
)
Other than temporary impairment
(716
)
 
—

 
—

 
(716
)
Closing balance
$
95,308

 
$
4,469

 
$
1,274

 
$
101,051

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

 
$
41

 
$
488

 
$
529




 
For the nine month period ended
 
March 31, 2011
 
Available for
Sale Securities:
RMBS
Non-Agency
 
Trading
Securities
Other  Debt Securities:
Non-Agency
 
Derivative Instruments, net
 
Total
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Opening Balance
$
123,186

 
$
4,402

 
$
199

 
$
127,787

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Sale of mortgage-back securities
1,790

 
—

 
—

 
1,790

Included in earnings—Fair value gain on trading securities
—

 
67

 
—

 
67

Included in earnings—Mortgage banking
—

 
—

 
78

 
78

Included in other comprehensive income
(3,870
)
 
—

 
—

 
(3,870
)
Purchases, issues, sales and settlements:
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

Issues
—

 
—

 
—

 
—

Sales
(7,110
)
 
—

 
—

 
(7,110
)
Settlements
(17,017
)
 
—

 
—

 
(17,017
)
Other than temporary impairment
(1,671
)
 
—

 
—

 
(1,671
)
Closing balance
$
95,308

 
$
4,469

 
$
277

 
$
100,054

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

 
$
67

 
$
78

 
$
145


13

The Table below summarizes the quantitative information about level 3 fair value measurements at the periods indicated:

 
Fair Value at
 
 
 
 
March 31, 2012
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Securities - Trading
$
5,983

Discounted Cash Flow
Total projected defaults
29 to 40% (33.3%)
Securities - Non agency MBS
$
90,419

Discounted Cash Flow
Constant Prepayment Rate, Constant Default Rate,
Loss Severity
2.5 to 69.5% (15.2%)
1.5 to 50.6% (12.5%)
1.6 to 78.1% (56.1%)
Derivative Instruments
$
971

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

 
 
Fair Value at
 
 
 
 
June 30, 2011
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Securities - Trading
$
5,053

Discounted Cash Flow
Projected Total Default
31 to 46% (35.0%)
Securities - Non agency MBS
$
83,752

Discounted Cash Flow
Constant Prepayment Rate, Constant Default Rate,
Loss Severity
2.5 to 62.7% (14.0%)
0.7 to 22.1% (10.4%)
1.6 to 76.1% (56.2%)
Derivative Instruments
$
418

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

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

The Table below summarizes changes in unrealized gains and losses and interest income recorded in earnings for level 3 assets and liabilities that are still held at the periods indicated:
 
 
For the Three Months Ended March 31,
 
For the Nine Months Ended March 31,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in thousands)
Interest income on investments
$
63

 
$
28

 
$
122

 
$
91

Fair value adjustment
305

 
42

 
930

 
67

Total
$
368

 
$
70

 
$
1,052

 
$
158



14

The Table below summarizes assets measured for impairment on a non-recurring basis was as follows:
 
Fair Value Measurements Using
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
 
(Dollars in thousands)
 
March 31, 2012
Impaired Loans:
 
 
 
 
 
 
 
Single Family
$
—

 
$
—

 
$
5,983

 
$
5,983

Multifamily
—

 
—

 
1,731

 
1,731

Commercial
 
 
 
 
279

 
279

RV/Auto
—

 
—

 
644

 
644

Total
—

 
—

 
8,637

 
8,637

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single Family
—

 
—

 
737

 
737

Multifamily
—

 
—

 
—

 
—

RV/Auto
—

 
—

 
627

 
627

Total
$
—

 
$
—

 
$
1,364

 
$
1,364

HTM Securities-Non Agency MBS
$
—

 
$
—

 
$
115,781

 
$
115,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011
Impaired Loans:
 
 
 
 
 
 
 
Single Family
$
—

 
$
—

 
$
3,812

 
$
3,812

Multifamily
—

 
—

 
611

 
611

Total
—

 
—

 
4,423

 
4,423

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single Family
—

 
—

 
1,779

 
1,779

Multifamily
—

 
—

 
5,899

 
5,899

RV/Auto
—

 
—

 
1,926

 
1,926

Total
$
—

 
$
—

 
$
9,604

 
$
9,604

HTM Securities-Non Agency MBS
$
—

 
$
—

 
$
108,354

 
$
108,354

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Impaired loans measured for impairment on a non-recurring basis using the fair value of the collateral for collateral-dependent loans have a carrying amount of $8,637after a charge-off of $3,220, and a no valuation allowance at March 31, 2012, resulting in an additional provision for loan losses of $2,405 during the nine months ended March 31, 2012 and $865 for the nine months ended March 31, 2011. At June 30, 2011, our collateral-dependent loans had a carrying amount of $4,423 after a charge-off of $1,207.
Other real estate owned and foreclosed assets, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $1,364, with a valuation allowance of $62 and $77for the three and nine months ended March 31, 2012. Our other real estate owned and foreclosed assets had a net carrying amount of 8,700 after a valuation allowance of $387 and $437during the three and nine months ended March 31, 2011.
Held to maturity securities measured for impairment on a non-recurring basis had a carrying amount of $115,781 at March 31, 2012, after net impairment charge to income of $1,211 and other comprehensive loss of zero during the three months ended March 31, 2012. During the nine months ended March 31, 2012, the Company recognized a net impairment charge to income of $2,523 and other comprehensive income of $120. These held to maturity securities are valued using Level 3 inputs.

15

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:
 
Fair Value at
 
 
 
 
March 31, 2012
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
Impaired loans:
 
 
 
 
Single Family
$
5,983

Sales comparison approach
Adjustment for differences between the comparable sales
-26.6 to 36.5% (5.1%)
Multifamily
$
1,731

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations Capitalization rate
-23.4 to -6.5% (-15.6%)
Commercial
$
279

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations Capitalization rate
-31.1 to -31.1% (-31.1%)
RV/Auto
$
644

Sales comparison approach
Adjustment for differences between the comparable sales
-45.9 to 36.6% (-5.1%)
Other real estate owned:
 
 
 
 
Single Family
$
737

Sales comparison approach
Adjustment for differences between the comparable sales
-2.8 to 3.6% (-.6%)
RV/Auto
$
627

Sales comparison approach
Adjustment for differences between the comparable sales
-45.9 to 36.6% (-5.1%)
 
Fair Value at
 
 
 
 
June 30, 2011
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
Impaired loans:
 
 
 
 
Single Family
$
3,812

Sales comparison approach
Adjustment for differences between the comparable sales
-14.6 to 31.9% (4.3%)
Multifamily
$
611

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations Capitalization rate
0 to .7% (.5%)
Commercial
$
—

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations Capitalization rate
—
RV/Auto
$
—

Sales comparison approach
Adjustment for differences between the comparable sales
—
Other real estate owned:
 
 
 
 
Single Family
$
1,779

Sales comparison approach
Adjustment for differences between the comparable sales
-18.3 to15.4% (-9.8%)
Multifamily
$
5,899

Sales comparison approach
Adjustment for differences between the comparable sales
-34.3 to 4.9% (-20.7%)
RV/Auto
$
1,926

Sales comparison approach
Adjustment for differences between the comparable sales
-29.1 to 27.5% (-2.3%)

16

Fair value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments at the periods indicated:
 
March 31, 2012
 
 
 
Fair Value
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
 
(Dollars in Thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
25,858

 
$
25,858

 
$
—

 
$
—

 
$
25,858

Securities trading
5,983

 
—

 
—

 
5,983

 
5,983

Securities available for sale
170,397

 
—

 
79,978

 
90,419

 
170,397

Securities held to maturity
328,528

 
—

 
114,936

 
234,790

 
349,726

Stock of the Federal Home Loan Bank
16,873

 
—

 
—

 
—

 
N/A

Loans held for sale, at fair value
44,286

 
—

 
44,286

 
—

 
44,286

Loans held for sale, at lower of cost or market
45,329

 
—

 
—

 
46,925

 
46,925

Loans held for investment—net
1,595,704

 
—

 
—

 
1,640,520

 
1,640,520

Accrued interest receivable
7,599

 
—

 
7,599

 
—

 
7,599

Financial liabilities:
 
 
 
 
 
 
 
 


Time deposits and savings
1,575,473

 
587,638

 
1,003,233

 
—

 
1,590,871

Securities sold under agreements to repurchase
120,000

 
—

 
132,093

 
—

 
132,093

Advances from the Federal Home Loan Bank
359,000

 
—

 
368,721

 
—

 
368,721

Subordinated debentures and other borrowings
5,155

 
—

 
5,155

 
—

 
5,155

Accrued interest payable
1,940

 
—

 
1,940

 
—

 
1,940






17

Carrying amount and estimated fair values of financial instruments at period-end were as follows:
 
 
March 31, 2012
 
June 30, 2011
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(Dollars in Thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
25,858

 
$
25,858

 
$
9,052

 
$
9,052

Securities trading
5,983

 
5,983

 
5,053

 
5,053

Securities available for sale
170,397

 
170,397

 
145,671

 
145,671

Securities held to maturity
328,528

 
349,725

 
370,626

 
387,286

Stock of the Federal Home Loan Bank
16,873

 
N/A

 
15,463

 
N/A

Loans held for sale, at fair value
44,286

 
44,286

 
20,110

 
20,110

Loans held for sale, at lower of cost or market
45,329

 
46,925

 
—

 
—

Loans held for investment—net
1,595,704

 
1,640,520

 
1,325,101

 
1,372,243

Accrued interest receivable
7,599

 
7,599

 
6,577

 
6,577

Financial liabilities:
 
 
 
 
 
 
 
Time deposits and savings
1,575,473

 
1,590,871

 
1,340,325

 
1,347,951

Securities sold under agreements to repurchase
120,000

 
132,093

 
130,000

 
142,881

Advances from the Federal Home Loan Bank
359,000

 
368,721