Axos Financial (AX) 10-Q 2006 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________ to ___________

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 and zip code)

(858) 350-6200

(Registrant’s telephone number and area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter Period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨            Accelerated filer  ¨            Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock on the last practicable date: 8,437,225 shares of common stock as of April 30, 2006.

1

BofI HOLDING, INC.

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements	3
Condensed Consolidated Balance Sheets (unaudited) at March 31, 2006 and June 30, 2005	3
Condensed Consolidated Statements of Income (unaudited) for the three months and nine months ended March 31, 2006 and 2005	4
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) for the nine months ended March 31, 2006	5
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2006 and 2005	6
Notes to Condensed Consolidated Financial Statements	7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Selected Consolidated Financial Information	16
Overview	17
Results of Operations	18
Financial Condition	24
Liquidity	27
Contractual Obligations and Commitments	28
Capital Resources and Requirements	28
Quantitative and Qualitative Disclosures about Market Risk	29
Item 3.    Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.    Controls and Procedures	31
PART II – OTHER INFORMATION
Item 1.    Legal Proceedings	32
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.    Defaults Upon Senior Securities	32
Item 4.    Submission of Matters to a Vote of Securities Holders	32
Item 5.    Other Information	32
Item 6.    Exhibits	32

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BofI HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

	March 31, 2006			June 30, 2005
ASSETS
Cash and due from banks	$	1,834		$	3,047
Money market mutual funds		—			52
Federal funds sold		20,410			20,712
Total cash and cash equivalents		22,244			23,811
Time deposits in financial institutions		15,450			12,185
Investment securities held to maturity		7,616			7,711
Stock of the Federal Home Loan Bank, at cost		10,495			8,126
Mortgage-backed securities available for sale		73,503			62,766
Loans — net of allowance for loan losses of $1,575 in March 2006, $1,415 in June 2005		565,608			486,872
Loans held for sale		—			189
Accrued interest receivable		2,951			2,355
Furniture, equipment and software — net		235			214
Deferred income tax		592			293
Bank-owned life insurance — cash surrender value		4,159			4,047
Other assets		1,814			939
TOTAL	$	704,667		$	609,508
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	1,807		$	8,225
Interest bearing		403,894			352,826
Total deposits		405,701			361,051
Advances from the Federal Home Loan Bank		221,648			172,562
Junior subordinated debentures		5,155			5,155
Accrued interest payable		1,402			653
Income tax payable		—			252
Accounts payable and accrued liabilities		817			1,185
Total liabilities		634,723			540,858
STOCKHOLDERS’ EQUITY:
Convertible preferred stock — $10,000 stated value; 1,000,000 shares authorized; 525 shares issued and outstanding (March 2006) and 675 issued and outstanding (June 2005)		5,163			6,637
Common stock — $.01 par value; 25,000,000 shares authorized; 8,509,312 shares issued and 8,384,812 shares outstanding (March 2006) and 8,299,823 shares issued and outstanding (June 2005)		85			83
Additional paid-in capital		58,941			56,746
Unearned restricted stock awards		(142	)		—
Accumulated other comprehensive income (loss), net of tax		(541	)		6
Retained earnings		7,321			5,178
Treasury stock		(883	)		—
Total stockholders’ equity		69,944			68,650
TOTAL	$	704,667		$	609,508

See condensed notes to consolidated financial statements.

3

BofI HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except earnings per share)

(Unaudited)

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	7,198	$	5,181	$	20,184	$	14,350
Investments		1,212		744		3,445		1,767
Total interest and dividend income		8,410		5,925		23,629		16,117
INTEREST EXPENSE:
Deposits		3,790		2,265		10,662		6,209
Advances from the Federal Home Loan Bank		1,947		1,154		5,199		3,011
Other borrowings		93		162		263		266
Total interest expense		5,830		3,581		16,124		9,486
Net interest income		2,580		2,344		7,505		6,631
Provision for loan losses		15		10		160		185
Net interest income, after provision for loan losses		2,565		2,334		7,345		6,446
NON-INTEREST INCOME:
Prepayment penalty fee income		211		80		578		280
Mortgage banking income		16		30		259		74
Banking service fees and other income		85		73		240		214
Total non-interest income		312		183		1,077		568
NON-INTEREST EXPENSE:
Compensation:
Salaries and benefits		646		541		1,837		1,914
Stock options and stock grants		109		—		304		—
Total compensation		755		541		2,141		1,914
Professional services		116		52		358		201
Occupancy and equipment		88		69		259		197
Data processing and internet		131		92		359		273
Depreciation and amortization		20		26		69		82
Service contract termination		—		—		—		59
Other general and administrative		374		299		1,183		899
Total non-interest expense		1,484		1,079		4,369		3,625
INCOME BEFORE INCOME TAXES		1,393		1,438		4,053		3,389
INCOME TAXES		565		579		1,629		1,355
NET INCOME	$	828	$	859	$	2,424	$	2,034
NET INCOME ATTRIBUTABLE TO COMMON STOCK	$	750	$	758	$	2,143	$	1,730
COMPREHENSIVE INCOME	$	679	$	571	$	1,877	$	1,620
Basic earnings per share	$	0.09	$	0.14	$	0.26	$	0.36
Diluted earnings per share	$	0.09	$	0.13	$	0.25	$	0.32

See condensed notes to consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands, except earnings per share)

(Unaudited)

	Convertible Preferred Stock					Common Stock							Additional Paid in Capital		Unearned Restricted Stock Awards			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Tax			Treasury Stock			Total
						Number of Shares
	Shares		Amount			Issued	Treasury		Outstanding		Amount
BALANCE — July 1, 2005	675		$	6,637		8,299,823	—		8,299,823		$	83	$	56,746	$	—		$	5,178		$	6		$	—		$	68,650
Comprehensive income:
Net income	—			—		—	—		—			—		—		—			2,424			—			—			2,424
Net unrealized loss from available for sale securities — net of income tax benefit	—			—		—	—		—			—		—		—			—			(547	)		—			(547	)
Total comprehensive income																												1,877
Purchase of treasury stock	—			—		—	(107,000	)	(107,000	)		—		—		—			—			—			(883	)		(883	)
Conversion of preferred to common stock	(150	)		(1,474	)	142,800			142,800			1		1,473														—
Exercise of common stock options	—			—		49,189	—		49,189			1		276		—			—			—			—			277
Cash dividends on convertible preferred stock	—			—		—			—					—		—			(281	)		—			—			(281	)
Restricted stock awards	—			—		17,500	—					—		166		(166	)		—			—			—			—
Restricted stock compensation expense	—			—		—	—		—			—		—		24			—			—			—			24
Stock option compensation expense	—			—		—	—		—			—		280		—			—			—			—			280
BALANCE — March 31, 2006	525		$	5,163		8,509,312	(107,000	)	8,384,812		$	85	$	58,941	$	(142	)	$	7,321		$	(541	)	$	(883	)	$	69,944

See condensed notes to consolidated financial statements.

5

BofI HOLDING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended March 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,424		$	2,034
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums on securities		179			75
Amortization of premiums and deferred loan fees		1,500			470
Amortization of debt issue costs		86			87
Accrued stock option and stock grant compensation		304			—
Provision for loan losses		160			185
Deferred income taxes		65			191
Origination of loans held for sale		(20,968	)		(14,787	)
Gain on sales of loans held for sale		(105	)		(74	)
Proceeds from sale of loans held for sale		21,262			15,296
Loss on disposal of furniture, equipment, and software		(10	)		—
Depreciation and amortization		69			82
Stock dividends from the Federal Home Loan Bank		(284	)		(187	)
Net changes in assets and liabilities which provide (use) cash:
Accrued interest receivable		(596	)		(560	)
Other assets		(976	)		(611	)
Accrued interest payable		749			435
Accounts payable and accrued liabilities		(620	)		1,117
Net cash provided by operating activities		3,239			3,753
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale		(33,127	)		(83,313	)
Purchases of investment securities held to maturity and time deposits		(10,992	)		(8,853	)
Proceeds from repayments of available for sale securities		21,279			5,718
Proceeds from repayments of investment securities held to maturity and time deposits		7,843			5,470
Purchase of stock of Federal Home Loan Bank		(2,085	)		(2,022	)
Origination of loans		(6,934	)		(32,141	)
Purchases of loans		(166,004	)		(70,872	)
Principal repayments and participation sales on loans		92,542			53,860
Purchases of furniture, equipment and software		(80	)		(40	)
Net cash used in investing activities		(97,558	)		(132,193	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		44,650			53,552
Proceeds from Federal Home Loan Bank advances		49,000			33,000
Proceeds from revolving line term loan facility		—			3,700
Repayment of notes payable		—			(5,000	)
Proceeds from exercise of common stock options and warrants		277			3,106
Proceeds from issuance of common stock, net of costs		—			31,434
Purchase of treasury stock		(883	)		—
Proceeds from the issuance of junior subordinated debentures		—			5,155
Costs of issuance of junior subordinated debentures		(11	)		—
Cash dividends on convertible preferred stock		(281	)		(304	)
Net cash provided by financing activities		92,752			124,643
NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,567	)		(3,797	)
CASH AND CASH EQUIVALENTS — Beginning of year		23,811			24,859
CASH AND CASH EQUIVALENTS — End of period	$	22,244		$	21,062
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds	$	15,289		$	8,964
Income taxes paid	$	1,975		$	1,192

See condensed notes to consolidated financial statements.

6

BofI HOLDING, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2006 AND 2005

(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, Bank of Internet USA (the “Bank” and collectively with BofI Holding, the “Company”). All significant intercompany balances have been eliminated in consolidation.

The accompanying interim condensed consolidated financials 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, 2006 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 annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended June 30, 2005 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

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

Under the allowance for loan loss policy, impairment calculations are determined based on general portfolio data for general reserves and loan level data for specific reserves. Specific loans are evaluated for impairment and are classified as nonperforming or in foreclosure when they are 90 days or more delinquent. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if repayment of the loan is expected primarily from the sale of collateral.

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. Loan-to-value ratios are calculated using the loan principal balance at period end and the loan valuation at the time of origination or purchase of loan. 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. Specific reserves 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 is based on discounted cash flows, observable market prices or the estimated value of underlying collateral.

Derivatives and Hedging Activities — Derivative contracts, such as an interest rate cap, are recorded on the balance sheet, either as an asset or a liability or as a component of the hedged item, at their fair value. On the date that we enter into a derivative contract, we designate the derivative as (1) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge); (2) a hedge of (a) the exposure to changes in the fair value of a recognized asset or liability or (b) an unrealized firm commitment; or (3) an instrument that is held for trading or non-hedging purposes (a “trading” or “non-hedging” instrument). Changes in the fair value of derivative trading and non-hedging instruments are reported in current-period earnings. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions.

7

The fair value of derivative instruments is based on quoted market prices received from independent sources. Active markets may not exist for our derivative instruments. Consequently, the independent sources we use to obtain quoted market prices may be using estimating techniques, such as discounted cash flow analysis and comparison to similar instruments to determine the fair value of our derivative instruments. Estimates developed by these independent sources are subjective and require the judgment of the independent sources regarding significant matters such as the amount, timing and probabilities of potential future cash flows. Since these estimates are made as of a specific point in time, they are susceptible to material change over time.

Stock-Based Compensation — Prior to July 1, 2005, the Company accounts for its stock-based employee compensation under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in the income statements for periods ending June 30, 2005, or before. Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),Share-based Payment,and has included the stock-based employee compensation expense in its income statement for the three months and nine months ended March 31, 2006. Refer to Note 6, Stock Options, Stock Grant and Stock Purchase Plans below, for additional disclosures.

New Accounting Pronouncements — During the quarter ended December 31, 2005, the FASB issued FSP FAS 115-1,The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments. FSP FAS 115-1 clarifies that an investor in debt or equity securities should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 is effective for other-than-temporary impairment analyses conducted in periods beginning after December 15, 2005. The adoption of FSP FAS 115-1 did not have a material impact on the Company’s financial position and results of operations.

3. INVESTMENT SECURITIES

The following table sets forth the amortized cost and the estimated fair values of investment securities available for sale as of March 31, 2006:

	March 31, 2006
Available for sale	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Mortgage-backed securities (GNMA, FNMA, FHLMC)	$	74,404	$	50	$	(951	)	$	73,503
	$	74,404	$	50	$	(951	)	$	73,503

The following table sets forth the amortized cost and the estimated fair values of investment securities held to maturity as of March 31, 2006:

	March 31, 2006
Held to maturity	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Mortgage-backed securities (FHLMC, FNMA)	$	4,150	$	—	$	(84	)	$	4,066
U.S. Government agency debt		3,466		—		(49	)		3,417
	$	7,616	$	—	$	(133	)	$	7,483

8

The Bank intends to hold its investment securities held to maturity until the amortized cost is realized. The unrealized losses are due primarily to interest rate fluctuations.

4. LOANS

The following table sets forth the composition of the portfolio of loans held for investment as of the dates indicated:

	March 31, 2006					June 30, 2005
	Amount			Percent		Amount			Percent
Residential real estate loans:
Single family (one to four units)	$	128,860		23.0	%	$	62,403		12.9	%
Multifamily (five units or more)		417,941		74.4	%		406,660		84.2	%
Commercial real estate and land		14,569		2.6	%		14,181		2.9	%
Consumer loans and other		74		0.0	%		40		0.0	%
Total loans		561,444		100.0	%		483,284		100.0	%
Allowance for loan losses		(1,575	)				(1,415	)
Unamortized premiums, net of deferred loan fees		5,739					5,003
Net loans	$	565,608				$	486,872

In the ordinary course of business, the Bank has made loans collateralized by real property to principal officers, directors and their affiliates and employees with interest rates at 5.50%. At March 31, 2006, these loans amounted to $4,068.

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. Through March 31, 2006, the net amount of deferred interest on these loan types was not material to the financial position or operating results of the Company.

5. STOCKHOLDERS’ EQUITY

Common Stock — The Company had 8,384,812 and 8,299,823 shares of common stock outstanding at March 31, 2006 and June 30, 2005, respectively. During the nine months ended March 31, 2006, the Company reduced its common shares outstanding by purchasing 107,000 shares of treasury stock for $883 under the Company’s common stock buy back program approved on June 30, 2005. Also during the nine months ended March 31, 2006, the Company added issued and outstanding shares totaling 49,189 from the exercise of stock options. The Company had issued 8,509,312 and 8,299,823 shares of common stock at March 31, 2006 and June 30, 2005, respectively. The Company granted 19,300 shares of common stock, subject to restrictions, in connection with the Company’s 2004 Stock Incentive Plan. Of the 19,300 shares granted, 1,800 shares were forfeited during the nine months ending March 31, 2006. Of the net 17,500 shares remaining, none of the shares were vested and none were considered outstanding at March 31, 2006.

Common Stock Warrants — Warrants to purchase 59,950 shares of the Company’s common stock that were outstanding at June 30, 2005, all expired without being exercised on July 31, 2005. The Company had no outstanding warrants to purchase common stock at March 31, 2006.

Convertible Preferred Stock — Effective January 1, 2006, holders of 150 shares ($1,500,000 face value) of the Company’s Series A – 6% Cumulative Nonparticipating Perpetual Preferred Stock, Convertible through January 1, 2009 elected to convert to 142,800 shares of the Company’s common stock at a price of approximately $10.50 per share.

6. STOCK OPTIONS, STOCK GRANT AND STOCK PURCHASE PLANS

Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),Share-based Payment, and has included the stock-based employee compensation cost in its income statements for the three month and nine month periods ended March 31, 2006. Prior periods have not been restated.

9

Share Based Payment Arrangements— At March 31, 2006, the Company has three share-based payment plans for employees, which are described below. Amounts recognized in the financial statements with respect to these plans are as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005
Amounts charged against income, before tax benefit	$	109	$	—	$	304	$	—
Amount of related income tax benefit recognized in income	$	44	$	—	$	123	$	—

1999 Stock Option Plan— In July 1999, the Company’s Board of Directors approved the 1999 Stock Option Plan (the “1999 Plan”). In August 2001, the Company’s shareholders approved an amendment to the 1999 Plan such that 15% of the outstanding shares of the Company would always be available for grants under the 1999 Plan (1,316,432 shares at June 30, 2005). The 1999 Plan is designed to encourage selected employees and directors to improve operations and increase profits, to accept or continue employment or association with the Company through participation in the growth in the value of the common stock. The 1999 Plan provisions require that option exercise prices be not less than fair market value per share of common stock on the option grant date for incentive and nonqualified options. The options issued under the 1999 Plan generally vest in four years. Option expiration dates are established by the plan administrator but may not be later than 10 years after the date of the grant.

Prior to March 15, 2005, when the Company’s common stock began trading publicly, the Company’s stock options were valued without consideration of a volatility factor. All of the options granted under the 1999 Plan were granted prior to March 15, 2005. The weighted-average fair value at grant date for options granted during the nine months ended March 31, 2005 and the years ended June 30, 2005, 2004 and 2003 were $2.37, $2.37, $2.52, and $1.83 per share, respectively.

The following assumptions were used to determined the weighted-average grant-date fair values of options granted:

	Nine Months Ended March 31,		Year Ended June 30
	2005		2005		2004		2003
Risk-free interest rates	3.9	%	3.9	%	4.2	%	4.3	%
Dividends	—		—		—		—
Volatility	0.0	%	0.0	%	0.0	%	0.0	%
Weighted-average expected life	7 years		7 years		7 years		7 years

No stock options were granted under the 1999 Plan during the three months ended March 31, 2005.

10

A summary of share option activity under this plan for the nine months ended March 31, 2006 and for four years prior is presented below:

	Number of Shares		Weighted Average Exercise Price Per Share
Outstanding—June 30, 2002	620,030		$	5.23
Granted	1,750		$	11.00
Forfeited/canceled	(3,322	)	$	6.98
Outstanding—June 30, 2003	618,458		$	5.24
Granted	132,036		$	10.00
Exercised	(23,423	)	$	4.74
Forfeited/canceled	(6,554	)	$	8.22
Outstanding—June 30, 2004	720,517		$	6.10
Granted	2,000		$	10.00
Forfeited/canceled	(500	)	$	10.00
Outstanding—June 30, 2005	722,017		$	6.11
Forfeited/canceled	(25,138	)	$	9.96
Exercised	(49,189	)	$	4.19
Outstanding—March 31, 2006	647,690		$	6.10
Options exercisable—June 30, 2003	444,642		$	4.71
Options exercisable—June 30, 2004	499,705		$	4.94
Options exercisable—June 30, 2005	593,042		$	5.34
Options exercisable—March 31, 2006	576,054		$	5.63

Options Outstanding at March 31, 2006						Options Exercisable
Exercise Prices		Number Outstanding	Weighted- Average Remaining Contractual Life (Years)	Exercise Price		Number Exercisable	Weighted- Average Exercise Price
$	4.19	434,571	3.5	$	4.19	433,914	$	4.19
	10.00	211,619	6.7		10.00	141,015		10.00
	11.00	1,500	6.3		11.00	1,125		11.00
		647,690	4.5	$	6.10	576,054	$	5.63

The aggregate intrinsic value of options outstanding and options exercisable under the 1999 Plan at March 31, 2006 were $1,438 and $1,436, respectively. The aggregate intrinsic value of options exercised for the nine months ended March 31, 2006 was $182. The Company recorded stock option compensation expense related to the 1999 Plan of $36 and $110 for the three months and the nine months ended March 31, 2006, respectively.

2004 Stock Incentive Plan—In October 2004, the Company’s Board of Directors and the stockholders approved the 2004 Stock Incentive Plan (“2004 Plan”), which provides for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights and dividend equivalent rights to employees, directors and consultants. The maximum number of shares of common stock available for issuance under the 2004 Plan, plus the number of shares of common stock available for issuance under the 1999 Plan will be equal to 14.8% of the Company’s outstanding common stock at any time. However, the number of shares available for issuance as restricted stock grants may not exceed 5% of the Company’s outstanding common stock (subject to the overall maximum of 14.8% of the outstanding shares of common stock). Each share of restricted stock that is issued under the 2004 Plan and vests will be deemed to be the issuance of three shares for purposes of calculating the overall maximum number of shares of common stock available for issuance under the 2004 Plan but not for purposes of calculating the above 5% limit applicable to the issuance of restricted stock.

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Stock Options Granted—In July 2005, the Company’s Board of Directors approved the first grant of stock options under the 2004 Plan. The non-qualified stock options were issued with grant-day exercise prices equal to market prices and vesting periods of three years for directors and four years for employees with no vesting until after 12 months. The following assumptions were used to determine the weighted-average grant-date fair values of options granted:

	Nine Months Ended March 31, 2006
Risk-free interest rates	4.10% to 4.46%
Dividends	0%
Volatility	35.14% to 35.41%
Weighted-average expected life	6.0 to 6.25 years

There were no options granted during the quarter ended March 31, 2006. The weighted-average fair value was $3.95 per share for options granted under the 2004 Plan during the nine months ended March 31, 2006. A forfeiture rate of 1.50% was estimated based upon past experience. A summary of share option activity under the 2004 Plan for the nine months ended March 31, 2006 is presented below:

	Number of Shares			Weighted- Average Exercise Price Per Share
Outstanding— June 30, 2005		—
Granted		247,900		$	9.32
Forfeited / Cancelled		(11,900	)	$	9.50
Outstanding—March 31, 2006		236,000		$	9.31
Options exercisable—March 31, 2006		—
Aggregate intrinsic value- March 31, 2006	$	—

Range of Exercise Prices		Number Outstanding	Remaining Contractual Life (Years)	Average Exercise Price		Number Exercisable
$	8.10	20,000	9.7	$	8.10	—
$	8.50	15,000	9.7	$	8.50	—
$	9.20	7,500	9.4	$	9.20	—
$	9.50	193,500	9.3	$	9.50	—
		236,000	9.4	$	9.31

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For the three months and the nine months ended March 31, 2006, stock option compensation expense of $59 and $157 was recognized in connection with the 2004 Plan. At March 31, 2006, compensation expense related to non-vested stock option grants aggregated to $762 and is expected to be recognized as follows:

	Compensation Expense
Remainder of fiscal 2006	$	62
For the fiscal year ended June 30,:
2007		249
2008		249
2009		185
2010		17
Total	$	762

Restricted Stock Grants—In July 2005, the Company’s Board of Directors approved the first restricted stock grants under the 2004 Plan. Restricted stock totaling 19,300 shares were granted to directors and an employee on July 25, 2005 when the closing market price was $9.50. At March 31, 2006, 17,500 of the restricted stock grants remain as 1,800 shares were forfeited by a former director. The restricted stock vests one-third on each one-year anniversary of the grant date and no shares were vested at March 31, 2006. Compensation expense of $14 and $38 were recognized for the three months and nine months ended March 31, 2006, respectively, based upon grantee service period. The remaining compensation cost of $128 will be recognized $14, $56, $56 and $2 during each of the fiscal years ended June 30, 2006, 2007, 2008 and 2009.

2004 Employee Stock Purchase Plan—In October 2004, the Company’s Board of Directors and stockholders approved the 2004 Employee Stock Purchase Plan, which is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code. An aggregate of 500,000 shares of the Company’s common stock has been reserved for issuance and will be available for purchase under the 2004 Employee Stock Purchase Plan. No shares have been issued under the 2004 Employee Stock Purchase Plan.

Period of Adoption Disclosures— Under the 1999 Stock Option Plan, the Company had share-based payment arrangements with employees accounted for under the intrinsic value method. The following presents information as if the fair value method had applied to all awards:

	Three Months Ended March 31, 2005			Nine Months Ended March 31, 2005			Year Ended June 30,
							2005			2004			2003
Net income attributable to common	$	758		$	1,730		$	2,464		$	2,035		$	1,730
Deduct:
Total stock-based employee compensation expense determined under fair-value-based method for all awards—net of related tax effect		(23	)		(68	)		(91	)		(107	)		(112	)
Pro forma net income	$	735		$	1,662		$	2,373		$	1,928		$	1,618
Earnings per share
Basic—as reported	$	0.14		$	0.36		$	0.43		$	0.45		$	0.39
Basic—pro forma	$	0.14		$	0.34		$	0.42		$	0.43		$	0.36
Diluted—as reported	$	0.13		$	0.32		$	0.40		$	0.39		$	0.34
Diluted—pro forma	$	0.12		$	0.31		$	0.38		$	0.37		$	0.32

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7. EARNINGS PER SHARE

Information used to calculate earnings per share was as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005
Net income	$	828	$	859	$	2,424	$	2,034
Dividends on preferred stock		78		101		281		304
Net income attributable to common	$	750	$	758	$	2,143	$	1,730
Weighted-average shares:
Basic weighted-average number of common shares outstanding and average common shares earned on restricted stock awards		8,382,751		5,433,075		8,315,219		4,829,371
Dilutive effect of stock options		153,554		231,784		185,084		225,195
Dilutive effect of warrants		—		231,729		—		359,530
Dilutive weighted-average number of common shares outstanding		8,536,305		5,896,588		8,500,303		5,414,096
Net income per common share:
Basic	$	0.09	$	0.14	$	0.26	$	0.36
Diluted	$	0.09	$	0.13	$	0.25	$	0.32

Options and stock grants of 744,352 and 490,233 shares for the three months ended March 31, 2006 and 2005, respectively, were not included in determining diluted earnings per share, as they were antidilutive. For the nine months ended March 31, 2006 and 2005, options and grants of 714,288 and 496,822 shares, respectively, were antidilutive and were not included in determining diluted earnings per share.

8. COMMITMENTS AND CONTINGENCIES

Operating Leases — On April 25, 2005, the Company entered into an operating lease for its new corporate office, which commenced on June 15, 2005 and will expire on October 31, 2012. Under the lease terms, the Company leases 12,364 square feet and pays utilities and its proportional share of “Common Operating Costs”. The future minimum lease payments under this noncancelable lease as of June 30, 2005 are: $198, $306, $315, $323, and $1,154 for the years ending June, 30, 2006, 2007, 2008, 2009, and thereafter, respectively. The Company’s operating lease for its former corporate office expired on June 30, 2005.

Credit-Related Financial Instruments — The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. At March 31, 2006, the Company had $1,351 commitments to fund loans.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items, contractual obligations and capital resources of BofI Holding, Inc. and subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our Annual Report on Form 10-K and the accompanying interim unaudited condensed consolidated financial statements and notes thereto.

Certain matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as “estimate,” “project,” “anticipate,” “expect,” “intends,” “believe,” “will,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which the Company operates and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include economic conditions, changes in the interest rate environment, changes in the competitive marketplace, risks associated with credit quality and other risk factors discussed under the heading “Risk Factors” in our Prospectus dated March 14, 2005, and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Our Performance” in our Annual Report on Form 10-K for the year ended June 30, 2005, both of which have been filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.

General

Our company, BofI Holding, Inc., is the holding company for Bank of Internet USA, a consumer-focused, nationwide savings bank operating primarily over the Internet. We offer loans and deposits in all 50 states to our customers directly through our websites, including www.BankofInternet.com, www.BofI.com, www.SeniorBofI.com and www.Apartmentbank.com. We are a unitary savings and loan holding company and, along with Bank of Internet USA, are subject to primary federal regulation by the Office of Thrift Supervision.

Using online applications on our websites, our customers apply for deposit products, including time deposits, interest-bearing demand accounts (including interest-bearing checking accounts) and savings accounts (including money market savings accounts). We specialize in originating and purchasing small- to medium-size multifamily mortgage loans. We manage our cash and cash equivalents based upon our need for liquidity, and we seek to minimize the assets we hold as cash and cash equivalents by investing our excess liquidity in higher yielding assets such as loans or securities.

Critical Accounting Policies

Our consolidated financial statements and the notes thereto, 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.

Our significant accounting policies and practices are described in greater detail in Note 1 to our June 30, 2005 audited consolidated financial statements and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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Selected Financial Data

The following tables set forth certain selected financial data concerning the periods indicated:

BofI HOLDING, INC.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(Dollars in thousands, except per share data)

	March 31, 2006		June 30, 2005		March 31, 2005
Selected Balance Sheet Data:
Total assets	$	704,667	$	609,508	$	532,941
Loans - net of allowance for loan losses		565,608		486,872		403,759
Loans held for sale		—		189		—
Allowance for loan losses		1,575		1,415		1,230
Mortgage-backed securities available for sale		73,503		62,766		76,812
Investment securities held to maturity		7,616		7,711		7,950
Total deposits		405,701		361,051		323,393
Advances from the FHLB		221,648		172,562		134,533
Junior subordinated debentures		5,155		5,155		5,155
Total stockholders’ equity		69,944		68,650		67,615

	At or For the Three Months Ended March 31,				At or For the Nine Months Ended March 31,
	2006		2005		2006		2005
Selected Income Statement Data:
Interest and dividend income	$	8,410	$	5,925	$	23,629	$	16,117
Interest expense		5,830		3,581		16,124		9,486
Net interest income		2,580		2,344		7,505		6,631
Provision for loan losses		15		10		160		185
Net interest income after provision for loan losses		2,565		2,334		7,345		6,446
Non-interest income		312		183		1,077		568
Non-interest expense		1,484		1,079		4,369		3,625
Income before income tax expense		1,393		1,438		4,053		3,389
Income tax expense		565		579		1,629		1,355
Net income	$	828	$	859	$	2,424	$	2,034
Net income attributable to common stock	$	750	$	758	$	2,143	$	1,730
Per Share Data:
Net income:
Basic	$	0.09	$	0.14	$	0.26	$	0.36
Diluted	$	0.09	$	0.13	$	0.25	$	0.32
Book value per common share	$	7.73	$	7.35	$	7.73	$	7.35
Tangible book value per common share	$	7.73	$	7.35	$	7.73	$	7.35
Weighted average number of common shares outstanding:
Basic		8,382,751		5,433,075		8,315,219		4,829,371
Diluted		8,536,305		5,896,588		8,500,303		5,414,096
Common shares outstanding at end of period		8,384,812		8,299,823		8,384,812		8,299,823
Common shares issued at end of period		8,509,312		8,299,823		8,509,312		8,299,823

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BofI HOLDING, INC.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(Dollars in thousands, except per share data)

	At or For the Three Months Ended March 31,						At or For the Nine Months Ended March 31,
	2006			2005			2006			2005
Performance Ratios and Other Data:
Loan originations	$	2,398		$	4,585		$	6,934		$	32,141
Loan originations for sale		3,081			4,993			20,968			14,787
Loan purchases		50,888			—			166,004			70,872
Return on average assets		0.49	%		0.68	%		0.49	%		0.58	%
Return on average common stockholders’ equity		4.65	%		9.19	%		4.52	%		8.16	%
Interest rate spread(1)		1.17	%		1.66	%		1.16	%		1.73	%
Net interest margin(2)		1.54	%		1.88	%		1.55	%		1.94	%
Efficiency ratio(3)		51.3	%		42.7	%		50.9	%		50.4	%
Capital Ratios:
Equity to assets at end of period		9.93	%		12.69	%		9.93	%		12.69	%
Tier 1 leverage (core) capital to adjusted tangible assets(4)		9.20	%		10.16	%		9.20	%		10.16	%
Tier 1 risk-based capital ratio(4)		14.40	%		16.67	%		14.40	%		16.67	%
Total risk-based capital ratio(4)		14.75	%		17.05	%		14.75	%		17.05	%
Tangible capital to tangible assets(4)		9.20	%		10.16	%		9.20	%		10.16	%
Asset Quality Ratios:
Net charge-offs to average loans outstanding(5)		—			—			—			—
Nonperforming loans to total loans(5)		—			—			—			—
Allowance for loan losses to total loans held for investment at end of period		0.28	%		0.31	%		0.28	%		0.31	%
Allowance for loan losses to nonperforming loans(5)		—			—			—			—

(1) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3) Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.

(4) Reflects regulatory capital ratios of Bank of Internet USA only.

(5) At March 31, 2006 and 2005, we had no nonperforming loans, no foreclosures and no specific loan loss allowances.

OVERVIEW

During the quarter ended March 31, 2006, we earned $828,000, or $0.09 per diluted share compared to $859,000, or $0.13 per diluted share for the three months ended March 31, 2005. Our quarterly net income decreased 3.6% and our earnings per share decreased 30.8% in the 2006 quarter compared to 2005. During the quarter ended March 31, 2005, we completed our initial public offering and issued 3,052,174 common shares adding $31.3 million in equity capital for growth. The percentage decline in diluted earnings per share for the 2006 quarter compared to 2005 was larger than the percentage decline in net income primarily due to our initial public offering shares added late in the 2005 quarter, and not fully included in the weighted average outstanding shares for the 2005 quarter. Similarly, the increased equity from our initial public offering was added late in the 2005 quarter contributing to a larger percentage decline in the annualized return on average equity which decreased to 4.65% for 2006, down from 9.19% for March 2005. Key comparisons between our operating results for the quarter ended March 2006 compared to March 2005 are:

• net interest income increased $236,000 in 2006 due to a 34.2% increase in average interest earning assets, partially offset by a 34 basis point decrease in our net interest margin;

• non-interest income increased $129,000 due to higher mortgage loan prepayment penalty income;

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• non interest expense for the 2006 quarter increased $405,000 primarily due to increases in compensation expense, including an additional $109,000 in compensation expense for stock options and stock grants from the recent change in the stock option accounting rules, and increases in professional services and other expenses generally related to public company operating costs not required for the March 2005 quarter. Our efficiency ratio was 51.3% in the 2006 quarter compared to 42.7% for 2005;

For the nine months ended March 31, 2006, net income increased $0.4 million to $2.4 million or $0.25 per diluted share, compared to $2.0 million, or $0.32 per diluted share for the nine months ended March 31, 2005. The 19.2% increase in net income was primarily the result of a 42.0% increase in average interest earning assets, partially offset by a 39 basis point decrease in our net interest margin, which increased net interest income $874,000. Our annualized return on average equity was 4.52% for the nine months ended March 31, 2006, down from 8.16% for 2005. The timing of our initial public offering also contributed to the percentage decrease in diluted earnings per share and annualized return on equity for the nine months ended March 31, 2006 compared to 2005.

Our earnings rely on our net interest income and our net interest income has been negatively impacted by the flattening yield curve. Our net interest margin declined to 1.54% and to 1.55% for the three months and the nine months ended March 31, 2006 from 1.88% and 1.94% for the three months and the nine months ended March 31, 2005. The flattening yield curve has caused our deposit rates and interest expense to increase without a proportional increase in our interest earned on our loan originations and purchases. Recently the yield curve slope has minimally increased. This trend of increased yield curve slope must continue or our net interest margin will continue to decrease and our ability to grow the assets and the liabilities of the Bank could be adversely affected.

RESULTS OF OPERATIONS – Comparison of Three Months and Nine Months Ended March 31, 2006 and 2005

Net income for the three months ended March 31, 2006 decreased $31,000 to $828,000 or $0.09 per diluted share, compared to $859,000 or $0.13 per diluted share for the three months ended March 31, 2005. Net income before income tax for the three months ended March 31, 2006 decrease by approximately $45,000 to $1,393,000 compared to $1,438,000 for the three months ended March 31, 2005. The decrease resulted primarily from the $405,000 increase in non-interest expense partially offset by a $236,000 increase in net interest income and a $129,000 increase in non-interest income.

Net income for the nine months ended March 31, 2006 increased $0.4 million to $2.4 million or $0.25 per diluted share, compared to $2.0 million, or $0.32 per diluted share for the nine months ended March 31, 2005. Net income before income tax for the nine months ended March 31, 2006 increase by $0.7 million to $4.1 million compared to $3.4 million for the nine months ended March 31, 2005. The increase resulted primarily from an $874,000 increase in net interest income and a $509,000 increase in non-interest income, partially offset by an increase in non-interest expense of $744,000.

Net Interest Income

Net interest income for the quarter ended March 31, 2006 totaled $2.6 million, a 13.0% increase over net interest income of $2.3 million for the quarter ended March 31, 2005. Net interest income for the nine months ended March 31, 2006 increased 13.6% to $7.5 million, up from $6.6 million for the nine months ended March 31, 2005.

Total interest and dividend income during the quarter ended March 31, 2006 increased 42.4% to $8.4 million, compared with $5.9 million during the quarter ended March 31, 2005. For the nine months, total interest and dividend income increased 46.6% to $23.6 million, compared with $16.1 million for the nine months ended March 31, 2005. The increases in interest and dividend income for the quarter and for the nine months are attributable to growth in average earning assets, primarily average loans held for investment and average investment securities (primarily mortgage-back securities). Comparing average balances for the quarters, March 2006 compared to 2005, loans held for investment and investment securities grew 33.5% and 45.6%, respectively. Comparing average balances for the nine months ended March 31, 2006 to 2005, loans held for investment and investment securities grew 38.2% and 98.6%, respectively. Higher rates on new loans and rate adjustments in the loan portfolio caused the loan portfolio yield for the 2006 quarter to increase 21 basis points and to increase 9 basis points for the nine months of 2006 compared with the same period in 2005, contributing to the increase in interest income. The net growth in average earning assets for the three month and nine month periods was funded largely by increases in time deposits and advances from the FHLB, which account for the majority of the increases in interest expense. Total interest expense during the quarter ended March 31, 2006 increased 61.1% to $5.8 million, compared with $3.6 million during the quarter ended March 31, 2005. For the nine months, interest expense increased 69.5% to $16.1 million, compared with $9.5 million for the nine months ended March 31, 2005. Comparing average balances for the quarter ended March 2006 to 2005; time deposits and advances from the FHLB grew 50.3% and 49.6%, respectively. Comparing average balances for the

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nine months ended March 31, 2006 to 2005; time deposits and advances from the FHLB grew 65.9% and 58.7%, respectively. Higher rates paid on new time deposits caused the time deposit rate for the 2006 quarter to increase 76 basis points and to increase 61 basis points for the nine months of 2006 compared with same period in 2005. Similarly, higher rates paid on new FHLB advances caused the rate for the 2006 quarter to increase 43 basis points and to increase 30 basis points for the nine months of 2006 compared with same period in 2005. The combined rate and rate / volume variance (primarily from increases in time deposits and FHLB advance rates) accounted for 45.1% and 35.3% of the total increase in interest expense for the quarter and for the nine month comparisons, respectively.

Net interest margin, defined as net interest income divided by average earning assets, decreased by 34 basis points to 1.54% for the quarter ended March 31, 2006, compared with 1.88% for the quarter ended March 31, 2005. Similarly, the net interest margin decreased by 39 basis points to 1.55% for the nine months ended March 31, 2006, compared with 1.94% for the nine months ended March 31, 2005. The net interest margin declined for the quarter and for the nine months as a result of the flattening of the yield curve and the addition of lower-rate mortgage-backed securities. During the first quarter of fiscal 2005, we increased our investment in mortgage-backed securities, because we believed they offered better relative credit risk compared to the pricing levels of mortgage whole loans. The mortgage-backed securities we purchased provide a guarantee from a government sponsored entity like FNMA, while single-family whole loan originations and purchases do not have a credit guarantee. Generally, the credit risk premiums on mortgage whole loans (the difference between the interest rate earned on a whole loan and the rate earned on a long-term U.S. Treasury) have decreased due to the strong housing market and the lower mortgage default levels over the last few years. As result, high quality mortgage loan rates remain relatively low, contributing to our decrease in net interest margin.

Our net interest margin has also been negatively influenced by the flattening of the yield curve. The interest rates we pay on our deposits generally move with short-term rates and the interest yield on our loans generally moves with long-term rates. Increases in the Fed Funds rates over the past two years have caused short-term rates to rise, without corresponding increases in long-term rates causing the yield curve to flatten. Our cost of funds (primarily deposit interest) for the quarter and for the nine-month period ended March 31, 2006, increased 77 basis points and 72 basis points, respectively. Our yield on earning assets (primarily loan interest) for the quarter and for the nine-month period ended March 31, 2006, increased only 28 basis points and 15 basis points,respectively. Recently the yield curve slope has minimally increased and we believe that the slope will continue to increase, although there can be no assurances that this will occur. If the slope of the yield curve does not continue to increase, we may not be able to grow the size of our earning assets at the same rate we have experienced over the past four years and our net interest margin may continue to decline and remain below historic levels.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table presents 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 three months ended March 31, 2006 and 2005:

	For the Three Months Ended March 31,
	2006						2005
	Average Balance		Interest Income / Expense		Rates Earned / Paid(1)		Average Balance		Interest Income / Expense		Rates Earned / Paid(1)
	(Dollars in thousands)
Assets
Loans (2) (3)	$	550,908	$	7,198	5.23	%	$	412,703	$	5,181	5.02	%
Federal funds sold		8,314		92	4.43	%		11,588		71	2.45	%
Interest-bearing deposits in other financial institutions		14,975		165	4.41	%		9,064		71	3.13	%
Investment securities (3) (4)		85,166		827	3.88	%		58,484		523	3.58	%
Stock of FHLB, at cost		10,042		128	5.10	%		6,998		79	4.52	%
Total interest-earning assets		669,405		8,410	5.03	%		498,837		5,925	4.75	%
Noninterest-earning assets		9,272						9,439
Total assets	$	678,677					$	508,276
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings	$	68,194	$	498	2.92	%	$	100,331	$	491	1.96	%
Time deposits		328,963		3,292	4.00	%		218,899		1,774	3.24	%
Advances from the FHLB		202,116		1,947	3.85	%		135,137		1,154	3.42	%
Other borrowings		5,155		93	7.22	%		9,266		162	6.99	%
Total interest-bearing liabilities		604,428		5,830	3.86	%		463,633		3,581	3.09	%
Noninterest-bearing demand deposits		2,058						3,080
Other interest-free liabilities		2,445						1,924
Stockholders’ equity		69,746						39,639
Total liabilities and stockholders’ equity	$	678,677					$	508,276
Net interest income			$	2,580					$	2,344
Net interest spread (5)					1.17	%					1.66	%
Net interest margin (6)					1.54	%					1.88	%

(1) Annualized

(2) Loans include loans held for sale, allowance for loan losses, 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. The rate earned on loans does not include loan prepayment penalty income, which is classified as non-interest income.

(4) All investments are taxable.

(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.

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The following table presents 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 nine months ended March 31, 2006 and 2005.

	For the Nine Months Ended March 31,
	2006						2005
	Average Balance		Interest Income / Expense		Rates Earned / Paid(1)		Average Balance		Interest Income / Expense		Rates Earned / Paid(1)
	(Dollars in thousands)
Assets
Loans (2) (3)	$	527,323	$	20,184	5.10	%	$	381,614	$	14,350	5.01	%
Federal funds sold		6,122		187	4.07	%		13,251		184	1.85	%
Interest-bearing deposits in other financial institutions		14,541		455	4.17	%		9,518		196	2.75	%
Investment securities (3) (4)		89,156		2,466	3.69	%		44,882		1,200	3.57	%
Stock of FHLB, at cost		9,315		337	4.82	%		5,941		187	4.20	%
Total interest-earning assets		646,457		23,629	4.87	%		455,206		16,117	4.72	%
Noninterest-earning assets		9,337						8,681
Total assets	$	655,794					$	463,887
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings	$	74,279	$	1,524	2.74	%	$	111,384	$	1,568	1.88	%
Time deposits		314,425		9,138	3.88	%		189,475		4,641	3.27	%
Advances from the FHLB		185,291		5,199	3.74	%		116,746		3,011	3.44	%
Other borrowings		5,155		263	6.80	%		5,380		266	6.59	%
Total interest-bearing liabilities		579,150		16,124	3.71	%		422,985		9,486	2.99	%
Noninterest-bearing demand deposits		4,817						4,571
Other interest-free liabilities		2,467						1,424
Stockholders’ equity		69,360						34,907
Total liabilities and stockholders’ equity	$	655,794					$	463,887
Net interest income			$	7,505					$	6,631
Net interest spread (5)					1.16	%					1.73	%
Net interest margin (6)					1.55	%					1.94	%

(1) Annualized

(2) Loans include loans held for sale, allowance for loan losses, 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. The rate earned on loans does not include loan prepayment penalty income, which is classified as non-interest income.

(4) All investments are taxable.

(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.

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Analysis of Changes in Net Interest Income

Changes in net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table presents information regarding changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning asset and interest-bearing liability is segmented into the change attributable to changes in volume (changes in volume multiplied by prior rate), the change attributable to variations in interest rates (changes in rates multiplied by old volume) and the change attributable to changes in rate/volume (change in rate multiplied by the change in volume):

	For the Three Months Ended March 31,											For the Nine Months Ended March 31,
	2006 vs. 2005											2006 vs. 2005
	Increase (decrease) due to											Increase (decrease) due to
	Volume			Rate		Rate / Volume			Total net Increase (Decrease)			Volume			Rate		Rate / Volume			Total net Increase (Decrease)
	(In Thousands)
Increase / (decrease) in interest income:
Loans	$	1,735		$	211	$	71		$	2,017		$	5,479		$	257	$	98		$	5,834
Federal funds sold		(20	)		57		(16	)		21			(99	)		221		(119	)		3
Interest-bearing deposits in other financial institutions		46			29		19			94			103			102		54			259
Investment securities		239			45		20			304			1,186			40		40			1,266
Stock of FHLB, at cost		34			10		5			49			106			28		16			150
	$	2,034		$	352	$	99		$	2,485		$	6,775		$	648	$	89		$	7,512
Increase / (decrease) in interest expense:
Interest-bearing demand and savings	$	(157	)	$	242	$	(78	)	$	7		$	(522	)	$	717	$	(239	)	$	(44	)
Time deposits		892			417		209			1,518			3,061			866		570			4,497
Advances from the FHLB		572			148		73			793			1,768			265		155			2,188
Other borrowings		(72	)		5		(2	)		(69	)		(11	)		8		—			(3	)
	$	1,235		$	812	$	202		$	2,249		$	4,296		$	1,856	$	486		$	6,638

Provision for Loan Losses

The provision for loan losses amounted to $15,000 for the quarter ended March 31, 2006, compared to $10,000 for the quarter ended March 31, 2005. For the nine months ended March 31, 2006, loan loss provisions amounted to $160,000, compared to $185,000 for the nine months ended March 31, 2005. Provisions for loan losses are charged to income to bring the allowance for credit losses to a level deemed appropriate by management based on the factors discussed under the “Allowance for Loan Losses” section of this report.

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Non-interest Income

The following table sets forth information regarding our non-interest income for the periods shown:

	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
	2006		2005		2006		2005
	(In Thousands)
Prepayment penalty fee income	$	211	$	80	$	578	$	280
Mortgage banking fee income		16		30		259		74
Banking service fees and other income		85		73		240		214
Total non-interest income	$	312	$	183	$	1,077	$	568

Non-interest income for the quarter ended March 31, 2006 increased $129,000, or 70.5% to $312,000 compared to $183,000 for the quarter ended March 31, 2005. For the nine months ended March 31, 2006, non-interest income increased 89.6% to $1,077,000 compared to $568,000 for the period in 2005. Increases in prepayment penalty fee income and mortgage banking income are the primary reasons for the increase in non-interest income. Higher fee income from mortgage loan prepayments is the result of more multifamily loans repaying earlier in the loan life. This increase is generally due to the increase in the size of the multifamily loan portfolio, however, there are many factors influencing borrowers’ to payoff loans early, making prepayment penalty fee income somewhat unpredictable. During the first quarter of this fiscal year, we implemented a new correspondent program, which added $16,000 in fee income for the quarter and $259,000 in fee income for the nine months ended March 31, 2006. This new correspondent program, plus an increase in single-family loan sales increased mortgage banking fee income in 2006 compared to 2005.

Non-interest Expense

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

	For the Three Months Ended March 31,						For the Nine Months Ended March 31,
	2006			2005			2006			2005
	(In Thousands)
Compensation:
Salaries and benefits	$	646		$	541		$	1,837		$	1,914
Stock option and stock grants		109			—			304			—
Total compensation		755			541			2,141			1,914
Professional services		116			52			358			201
Occupancy and equipment		88			69			259			197
Data processing and internet		131			92			359			273
Depreciation and amortization		20			26			69			82
Other general and administrative		374			299			1,183			958
Total	$	1,484		$	1,079		$	4,369		$	3,625
Efficiency ratio (1)		51.30	%		42.70	%		50.90	%		50.40	%
Noninterest expense as annualized % of average assets		0.87	%		0.85	%		0.89	%		1.04	%

(1) Represents non-interest expense divided by the aggregate of net interest income before provision for loan losses and non-interest income.

Non-interest expense, which is comprised primarily of compensation, data processing and internet expenses, occupancy and other operating expenses, was $1.5 million for the three months ended March 31, 2006 and $1.1 million for the three months ended March 31, 2005. Non-interest expense increased 22.2% to $4.4 million for the nine months ended 2006 compared to $3.6 million for the nine months ended 2005.

Total compensation increased $214,000 to $755,000 for the quarter ended March 31, 2006, compared to $541,000 for the same quarter last year. For the nine months ended in 2006, compensation increased $0.2 million to $2.1 million, compared with $1.9 million for the same period ended March 31, 2005. Effective July 1, 2005, the Company adopted SFAS No. 123(R),Share-based Payment,and has included the stock-based employee compensation expense of $109,000 and $304,000 in its compensation expense –

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stock option and stock grants - for the three months and nine months ended March 31, 2006. Salaries and benefits increased $105,000 for the three months ended March 31, 2006 due primarily to certain employee relocation and temporary labor costs. Salaries and benefits included $280,000 of one-time bonus accruals for executives for the nine months ended March 31, 2005. Without the one-time bonus amounts in 2005, salaries and employee benefits for the nine months ended March 31, 2006, would have increased approximately 12.4% for salary increases and staff additions.

Professional services which includes accounting and legal fees, increased $64,000 and $157,000 for quarter and the nine months ended March 31, 2006, respectively. The increases in professional services were primarily due to increased compliance costs associated with public company filings, audits and other routine work, not required for part of 2005, before we became a public entity.

Occupancy and equipment expense increased in 2006 compared to 2005 due to the relocation of the corporate office in June 2005 to a larger office with increased rent.

Data processing and internet expense increased in 2006 compared to 2005 generally due to the increase in the number of deposit customers and due to new website development costs.

Other general and administrative expenses include advertising and promotion, telephone, postage, supplies, insurance and other miscellaneous deposit and loan related expenses. Other general and administrative expenses increased $75,000 and $225,000 for the quarter and nine months ended March 31, 2006, respectively. The primary reasons for these increases in other general and administrative expenses relate to increased levels of corporate insurance, franchise tax and, to a lesser extent, higher levels of deposit and loan customers.

Our efficiency ratio was 51.3% for the three months ended March 31, 2006, compared to 42.7% for the corresponding period in 2005. Our non-interest expense as a percent of average assets (G & A ratio) was 0.87% for the three months ended March 31, 2006, compared to 0.85% for the corresponding period in 2005. Without the new requirement to expense stock options, our efficiency ratios would have been 47.5% and 47.4% for the three months and the nine months ended March 31, 2006 and our G&A ratios would have improved to 0.81% and 0.83% for the three months and the nine months ended March 31, 2006, when compared to 2005 ratios.

Provision for Income Taxes

Our effective income tax rates (income tax provision divided by net income before income tax) for the three months ended March 31, 2006 and 2005 were 40.56% and 40.26%, respectively. Our effective income tax rates for the nine months ended March 31, 2006 and 2005 were 40.19% and 39.98%, respectively. The variations in our effective tax rate have been primarily related to our investment in bank-owned life insurance (BOLI), which generates non-taxable income.

FINANCIAL CONDITION

Balance Sheet Analysis

Our total assets increased $95.2 million, or 15.6%, to $704.7 million, as of March 31, 2006, up from $609.5 million at June 30, 2005. The increase in total assets was primarily due to the purchase and origination of new loans, which contributed to the $78.7 million net increase in loans held for investment. The purchase of mortgage-backed securities contributed to a net increase in mortgage-backed securities available for sale of $10.7 million. The asset growth was funded by a net increase in deposits totalling $44.7 million and a net increase in FHLB advances of $49.1 million.

During the nine months ended March 31, 2006, our asset and liability mix changed primarily two ways. First, time deposits increased to 83.0% of total deposits, up from 74.6% at June 30, 2005. We expect this trend to continue as the rise in short-term rates has increased bank competition for time deposits making time deposit rates more attractive to many consumers. Second, we increased our single family loan portfolio to 23.0% of total loans, up from 12.9% at June 30, 2005. During the nine months we purchased $166.0 million in whole loans and $33.1 million in mortgage-backed securities. Our decision to invest in either whole loans or mortgage-backed securities depends on a number of factors which often change from day to day including the number of opportunities to originate and purchase loan pools, the credit risk of certain loan pools compared to mortgage-backed securities, changing mortgage repayment rates and the flattening in the yield curve. Furthermore, until the trends toward a flattening or inverting yield curve reverse, our ability to obtain loans and mortgage-backed securities that meet our yield requirements will be adversely affected.

Loans

Net loans held for investment increased $78.7 million, or 16.2% to $565.6 million at March 31, 2006 from $486.9 million at June 30, 2005. The growth in loans during the nine months was primarily due to purchases of single-family and multifamily loans, which, net of repayments, increased our single-family portfolio by $66.5 million and our multifamily portfolio by $11.3 million at March 31, 2006. Total loan purchases and originations for the nine months ended March 31, 2006 were $166.0 million and $6.9 million, respectively. Loan repayments were $92.5 million for the nine months ended March 31, 2006.

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The following table sets forth the composition of the loan portfolio as of the dates indicated:

	March 31, 2006					June 30, 2005
	Amount			Percent		Amount			Percent
Residential real estate loans:
Single family (one to four units)	$	128,860		23.0	%	$	62,403		12.9	%
Multifamily (five units or more)		417,941		74.4	%		406,660		84.1	%
Commercial real estate and land		14,569		2.6	%		14,181		2.9	%
Consumer loans and other		74		0.0	%		40		0.0	%
Total loans		561,444		100.0	%		483,284		100.0	%
Allowance for loan losses		(1,575	)				(1,415	)
Unamortized premiums, net of deferred loan fees		5,739					5,003
Net loans	$	565,608				$	486,872

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, loans past due 90 days or more but not on nonaccrual, restructured loans and other real estate owned, net. There were no nonperforming assets on March 31, 2006.

Allowance for Loan Losses

We are committed to maintaining the allowance for loan losses at a level that is considered to be commensurate with estimated and known risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, our management performs an ongoing assessment of the risks inherent in the portfolio. While we believe that the allowance for loan losses is adequate at March 31, 2006, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio.

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, change in volume and mix of loans and collateral values. We did not have any nonperforming loans at March 31, 2006 or 2005. We believe that our history is limited and it is unlikely that every loan in our investment portfolio will continue to perform without exception so we provide general allowances based upon the overall volume of loans, the loan types and the estimated collateral values.

The provision for loan losses amounted to $15,000 for the quarter ended March 31, 2006, compared to $10,000 for the quarter ended March 31, 2005. For the nine months ended March 31, 2006, the provision for loan losses amounted to $160,000 compared to $185,000 for the nine months ended March 31, 2005. General reserves are a function of our portfolio loan balance. Generally, the larger the increase in our loans held for investment the higher loan loss provisions. The loss provision for the nine-month 2005 period was higher than the 2006 period because more multifamily loans were added in 2005.

The following table summarizes activity in the allowance for loan losses for the nine months ended March 31, 2006:

	Single Family		Multifamily		Commercial Real Estate and Land			Consumer		Total		Total Allowance as a Percentage of Total Loans
	(Dollars in thousands)
Balance at July 1, 2005	$	143	$	1,215	$	57		$	—	$	1,415	0.29	%
Provision for loan loss		89		74		(3	)		—		160
Balance at March 31, 2006	$	232	$	1,289	$	54		$	—	$	1,575	0.28	%

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The following table reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:

	March 31, 2006				June 30, 2005
	(Dollars in thousands)
	Amount of Allowance		Loan Category as a % of Total Loans		Amount of Allowance		Loan Category as a % of Total Loans
Single family	$	232	14.73	%	$	143	10.10	%
Multifamily		1,289	81.84	%		1,215	85.87	%
Commercial real estate and land		54	3.43	%		57	4.03	%
Consumer		—	0.00	%		—	0.00	%
Total	$	1,575	100.0	%	$	1,415	100.0	%

Investment Securities

Total mortgage-backed securities available for sale was $73.5 million as of March 31, 2006, compared with $62.8 million at June 30, 2005. During the nine months ended March 31, 2006, we purchased $33.1 million in mortgage-backed securities and received principal repayments of approximately $21.4 million.

The following table sets forth the amortized cost and the estimated fair values of investment securities available for sale as of March 31, 2006:

	March 31, 2006
Available for sale	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(In thousands)
Mortgage-backed securities (GNMA, FNMA, FHLMC)	$	74,404	$	50	$	(951	)	$	73,503
	$	74,404	$	50	$	(951	)	$	73,503

The following table sets forth the amortized cost and the estimated fair values of investment securities held to maturity as of March 31, 2006:

	March 31, 2006
Held to maturity	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(In thousands)
Mortgage-backed securities (FHLMC, FNMA)	$	4,150	$	—	$	(84	)	$	4,066
U.S. Government agency debt		3,466		—		(49	)		3,417
	$	7,616	$	—	$	(133	)	$	7,483

The Bank intends to hold its held to maturity securities until the amortized cost is realized. The unrealized losses are due primarily to interest rate fluctuations.

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Deposits

Deposits increased a net $44.6 million, or 12.4%, to $405.7 million at March 31, 2006, from $361.1 million at June 30, 2005. Our deposit growth was comprised of increases in time deposit accounts of $67.3 million offset by a decline in checking, savings, and money market accounts of $22.7 million. Our growth in deposits was the result of increased promotion and competitive pricing on time deposits. Our money market savings decreased as a result of less competitive rate pricing resulting in customer transfers to our higher rate time deposits or withdrawals.

The following table sets forth the number of deposit accounts by type at the date indicated:

	March 31, 2006	June 30, 2005	March 31, 2005
Checking and savings accounts	8,005	8,829	8,085
Time deposits	13,602	10,998	8,995
Total number of deposit accounts	21,607	19,827	17,080

FHLB Advances

We regularly use FHLB advances to manage our interest rate risk and, to a lesser extent, manage our liquidity position. FHLB advances increased 28.4% to $221.6 million as of March 31, 2006, representing an increase of $49.1 million from June 30, 2005. FHLB advances with terms between two and five years were used to fund the purchase of single family and multifamily mortgages and to provide us with interest rate risk protection should rates rise. We also had outstanding short-term advances (less than 30 days) of $5.0 million and $23.0 million at March 31, 2006 and June 30, 2005, respectively. Typically, we use short-term advances to temporarily fund loan purchases and then repay the advances with customers’ deposits as they are received.

Stockholders’ Equity

Stockholders’ equity increased $1.3 million to $69.9 million at March 31, 2006 compared to $68.6 million at June 30, 2005. The increase was the result of our net income for the nine months of $2.4 million and $0.6 million for paid in capital from exercise of stock option and stock option expense, partially offset by a $0.5 million unrealized loss from our available for sale securities, a $0.3 million reduction for dividends paid to holders of our convertible preferred stock and a $0.9 million reduction for our buyback of 107,000 shares of our common stock. During the quarter ended March 31, 2006, 150 shares of preferred stock were converted into common shares.

LIQUIDITY

During the nine months ended March 31, 2006, we had net cash inflows from operating activities of $3.2 million compared to $3.8 million for the nine months ended March 31, 2005. Net cash inflows for the periods ended in 2006 and 2005 were primarily due to net income earned during the period and the timing of loan funding and loan sales in our originated for sale portfolio.

Net cash outflows from investing activities totaled $97.6 million and $132.2 million for the nine months ended March 31, 2006 and 2005, respectively. Net cash outflows from investing activities decreased $34.6 million for the nine months ended March 31, 2006 due to higher loan principal repayments, which reduced cash outflow by $38.7 million, and increased proceeds from maturing investments which reduced cash outflow by $17.9 million, partially offset by net changes in the mix of activities to purchase securities, and to originate and purchase loans.

Our net cash provided by financing activities totaled $92.8 million and $124.6 million for the nine months ended March 31, 2006 and 2005, respectively. Net cash provided from financing activities decreased $31.8 million for the nine months ended March 31, 2006 primarily due to the $31.4 million from issuance of common stock and $5.2 million in proceeds from the issuance of junior subordinated debentures that were received in 2005 offset by cash inflows from FHLB advances of $16.0 million and a reduction in deposits of $8.9 million.

As an additional source of funds, Bank of Internet USA can borrow up to 35.0% of its total assets from the FHLB. Borrowings are collateralized by the pledge of certain mortgage loans and investment securities to the FHLB. Based on the loans and securities pledged at March 31, 2006 we had total borrowing capacity of $238.4 million, of which $221.9 million was outstanding and $16.5 million was available. At March 31, 2006, we also had a $10.0 million unsecured federal funds purchase line with a major bank under

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which no borrowings were outstanding. In the past, we have used long-term borrowings to fund our loans and to minimize our interest rate risk.

We believe our liquidity sources to be stable and adequate for our anticipated needs and contingencies. However, during the last two years, interest income earned on loans and interest expense paid on deposits were influenced by the flattening of the yield curve. Recently the yield curve slope has minimally increased however, if the yield curve continues to flatten, we may have more difficulty maintaining our deposits. We believe we can adjust the interest rates we pay on our deposits to reduce deposit outflows should they occur. We can also increase our level of borrowings to address our future liquidity needs.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

At March 31, 2006 we had commitments to fund loans of $1.4 million. Time deposits due within one year of March 31, 2006 totaled $222.4 million. We believe the large percentage of time deposits that mature within one year reflects customers’ hesitancy to invest their funds long term when they expect interest rates to rise. 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, 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 certain of our contractual obligations as of March 31, 2006.

			Payments Due by Period (1)
	Total		Less Than One Year		One To Three Years		Three To Five Years		Than Five Years
	(in thousands)
Long-term debt obligations (2)	$	259,386	$	47,989	$	130,928	$	66,531	$	13,938
Time deposits (2)		351,226		231,562		105,263		14,401		—
Operating lease obligations (3)		1,953		297		593		890		173
Total	$	612,565	$	279,848	$	236,784	$	81,822	$	14,111

(1) Our contractual obligations include long-term debt, time deposits and operating leases as shown. We had no capitalized leases or material commitments for capital expenditures at March 31, 2006.

(2) Amounts include principal and interest due to recipient.

(3) Payments are for a lease of real property.

CAPITAL RESOURCES AND REQUIREMENTS

Bank of Internet USA 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. The Office of Thrift Supervision requires 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 March 31, 2006 our bank met all the capital adequacy requirements to which it was subject.

At March 31, 2006, 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%, 6.0% and 10.0%, respectively. No conditions or events have occurred since that date that management believes would materially adversely change the bank’s capital levels. From time to time, we may need to raise additional capital to support our bank’s further growth and to maintain its “well capitalized” status.

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Bank of Internet capital amounts, ratios and requirements at March 31, 2006 were as follows:

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Tier 1 leverage (core ) capital to adjusted tangible assets	$	64,833	9.20	%	$	28,192	4.00	%	$	35,240	5.00	%
Tier 1 capital (to risk weighted assets)	$	64,833	14.40	%		N/A	N/A			27,022	6.00	%
Total capital (to risk-weighted assets)	$	66,408	14.75	%		36,029	8.00	%		45,036	10.00	%
Tangible capital (to tangible assets)	$	64,833	9.20	%		10,572	1.50	%		N/A	N/A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would result in the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities. During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets mature at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income. The following table sets forth the interest rate sensitivity of our assets and liabilities at March 31, 2006:

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	Term to Repricing, Repayment, or Maturity at March 31, 2006
	One Year or Less			Over One Year Through Five Years			Over Five Years and Insensitive			Total
	(Dollars in thousands)
Interest-earning assets:
Cash and cash equivalents	$	22,244		$	—		$	—		$	22,244
Interest-bearing deposits in other financial institutions		12,774			2,676			—			15,450
Investment securities (1)		18,385			62,734			—			81,119
Stock of the FHLB, at cost		10,495			—			—			10,495
Loans - net of allowance for loan loss (2)		218,129			268,959			78,520			565,608
Loans held for sale		—			—			—			—
Total interest-earning assets		282,027			334,369			78,520			694,916
Non-interest earning assets								9,751			9,751
Total assets	$	282,027		$	334,369		$	88,271		$	704,667
Interest-bearing liabilities:
Interest-bearing deposits (3)	$	289,703		$	114,191		$	—		$	403,894
Advances from the FHLB		39,500			182,148			—			221,648
Other borrowed funds		5,155			—			—			5,155
Total interest-bearing liabilities		334,358			296,339			—			630,697
Other noninterest-bearing liabilities		—			—			4,026			4,026
Stockholders’ equity		—			—			69,944			69,944
Total liabilities and equity	$	334,358		$	296,339		$	73,970		$	704,667
Net interest rate sensitivity gap	$	(52,331	)	$	38,030		$	78,520		$	64,219
Cumulative gap	$	(52,331	)	$	(14,301	)	$	64,219		$	64,219
Net interest rate sensitivity gap - as a % of interest earning assets		-18.56	%		11.37	%		100.00	%		9.24	%
Cumulative gap - as a % of cumulative
Interest earning assets		-18.56	%		-2.32	%		9.24	%		9.24	%

(1) Comprised of U.S. government securities and mortgage-backed securities which are classified as held to maturity and available for sale. The table reflects contractual repricing dates.

(2) The table reflects either contractual repricing dates or maturities.

(3) The table assumes that the principal balances for demand deposit and savings accounts will reprice in the first year.

Although “gap” analysis is a useful measurement device available to management in determining the existence of interest rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment.

We attempt to measure the effect market interest rate changes will have on the net present value of assets and liabilities, which is defined as market value of equity. We use the measurement model developed and maintained by our Bank regulators, the Office of Thrift Supervision. At December 31, 2005 (the most recent period for which data is available), we analyzed the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves. For rising interest rate scenarios, the base market interest rate forecast was increased by 100, 200 and 300 basis points. For the falling interest rate scenarios, we used 100 and 200 basis point decreases due to limitations inherent in the current rate environment. The following table indicates the sensitivity of market value of equity to the interest rate movement described above at December 31, 2005:

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Assumed Interest Rate Change	Sensitivity			Percentage Change from Base		Net Present Value as Percentage of Assets
	($ in thousands)
Up 300 basis points	$	(16,149	)	(26.00	)%	7.14	%
Up 200 basis points	$	(10,201	)	(16.00	)%	7.92	%
Up 100 basis points	$	(4,896	)	(8.00	)%	8.57	%
Base		—		—		9.15	%
Down 100 basis points	$	4,079		7.00	%	9.59	%
Down 200 basis points	$	7,547		12.00	%	9.94	%

The board of directors of our bank establishes limits on the amount of interest rate risk we may assume, as estimated by the net present value model for each 100 basis point movement. As of December 31, 2005 and June 30, 2005, the board’s established minimum was 7.5%, meaning that the net present value after a theoretical instantaneous increase or decrease in interest rates must be greater than 7.5%. The 7.14 % in the table above for a 300 basis point upward movement of interest rate was below the board requirement at December 31, 2005. To mitigate the increased risk, an additional $2.0 million in capital was contributed by BofI Holding, Inc. (parent) to the Bank during the quarter ended March 31, 2006. The additional capital is expected to increase the March 31, 2006 net present value and maintain future compliance with the 7.5% limit.

The computation of the prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of interest rates, asset prepayments, runoffs in deposits and changes in repricing levels of deposits to general market rates, and should not be relied upon as indicative of actual results. Furthermore, these computations do not take into account any actions that we may undertake in response to future changes in interest rates.

Prior to February 2005, we had not entered into any derivative financial instruments such as futures, forwards, swaps and options. On February 15, 2005, we entered into an interest rate cap, with a notional amount of $5.0 million and a term of four years expiring in March 2009, to lower the interest payments on the junior subordinated debentures should the three-month LIBOR increase above 5.25%. We designated this derivative as a non-hedging instrument and we report changes in the fair value of this instrument as charges or credits to current-period earnings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS

For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation referred to above that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

The Company’s size dictates that it conducts business with a minimal number of financial and administrative employees, which inherently results in a lack of documented controls and segregation of duties within the Company. Management will continue to evaluate the employees involved and the controls procedures in place, the risks associated with such lack of segregation and whether the potential benefits of adding employees to clearly segregate duties justifies the expense associated with such added personnel. In addition, management is aware that many of the internal controls that are in place at the Company are undocumented controls. The Company is working to document these controls and take other steps required to be in compliance with Section 404 of the Sarbanes –Oxley Act of 2002 as of June 30, 2008, the Company’s deadline under current implementing rules and regulations.

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The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not involved in any material legal proceedings. From time to time we are a party to claims or litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of our management, the resolution of any such issues would not have a material adverse impact on our financial position, results of operations, or liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no repurchases of our common stock during the quarter ended March 31, 2006.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.	Document
31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
32.1	Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		BofI Holding, Inc.
Dated: May 10, 2006	By:	/s/ Gary Lewis Evans
		Gary Lewis Evans
		Chief Executive Officer
		(Principal Executive Officer)

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