The following discussion and analysis contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements due to various important factors, including those set forth under "Factors that May Affect Our Performance" and elsewhere in this Form 10-K. The following discussion and analysis should be read together with the "Selected Financial Data" and consolidated financial statements, including the related notes included elsewhere in this Form 10-K.

Overview

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 generate retail deposits in all 50 states and originate loans for our customers directly through our websites, including www.bankofinternet.com, www.bofi.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 OTS.

Net income for the fiscal year ended June 30, 2009 was $7.1 million, or $0.78 per diluted share, as compared to $4.2 million, or $0.46 per diluted share, in fiscal 2008 and $3.3 million, or $0.36 per diluted share, in 2007. Growth in our interest earning assets, particularly our loans and investment securities, has been the primary driver of the increase in net income. Higher interest earning assets caused net interest income (interest income from loans and investments minus interest expense from deposits and borrowings) to grow to $36.4 million for the fiscal year ended June 30, 2009 compared to $18.0 million for fiscal 2008 and $10.8 million for 2007.

During the fiscal year ended June 30, 2009, our net interest margin (net interest income divided by average interest earning assets) increased 132 basis points to 3.04% compared to 1.72% for the fiscal year ended June 30, 2008. The improvement in our net interest margin was due to decreases in the cost of our deposits and borrowings and increases in the yields of our loans and securities. During fiscal 2009, we benefited from declines in U.S. Treasury interest rates generally due to actions taken by the Federal Reserve to lower the discount rate, which reduced our interest expense on deposits and borrowings. As a result of the nationwide housing downturn and the disruptions in the mortgage markets, credit spreads on mortgage loans and mortgage securities increased allowing us to purchase higher yielding loans and mortgage-backed securities during fiscal 2009. We also sold lower yielding agency mortgage-backed securities and replaced them with higher yielding non-agency securities.

Total assets at June 30, 2009 were $1,302.2 million as compared to $1,194.2 million at June 30, 2008 and $947.2 million at June 30, 2007. Assets grew $108.0 million or 9.0% during the last fiscal year primarily due to the purchase of mortgage-backed securities and mortgage loan pools. These investments were funded with growth in deposits, and borrowings from the FRB discount Window. Assets grew $247.0 million or 26.1% in fiscal 2008 primarily due to the purchase of mortgage-backed securities and mortgage loan pools, and the origination of RV and home equity loans. These investments were funded with growth in deposits, advances from the FHLB, and borrowings from securities sold under agreements to repurchase.

On September 7, 2008, the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that the FHFA was putting Fannie Mae and Freddie Mac under conservatorship and giving management control to their regulator, the FHFA. The U.S. Treasury also announced that dividends on Fannie Mae and Freddie Mac common and preferred stock were eliminated. Based upon the government announcement, we sold our investment in Fannie Mae Preferred stock on September 8, 2008 at a significant loss. The book value of our Fannie Mae preferred stock investment was $9.1 million at June 30, 2008 and the loss realized after the sale in the first quarter of fiscal 2009 was $7.9 million pretax or approximately $4.7 million after tax.

Our future performance will also depend on many factors, including changes in interest rates, competition for deposits and quality loans, the credit performance of our assets, regulatory actions and our ability to improve operating efficiencies. (See "Factors that May Affect our Performance").

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

Securities. Currently, we classify securities as either trading, available for sale or held to maturity. Trading securities are those securities for which we have elected fair value accounting in accordance with SFAS No. 159. Trading securities are recorded at fair value with changes in fair value recorded in earnings each period. Securities available for sale are reported at estimated fair value, with unrealized gains and losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted prices in active markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. To determine the performance of the underlying mortgage loan pools, we consider where appropriate borrower prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. We input for each security our projections of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by (and decreased by) the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (and decreased by) the forecasted decrease or increase in the national home price appreciation (HPA) index. To determine the discount rates used to compute the present value of the expected cash flows for these non-agency MBS securities, we separate the securities by the borrower characteristics in the underlying pool. For example, non-agency RMBS "prime" securities generally have borrowers with higher FICO scores and better documentation of income. "Alt-A" securities generally have borrowers with a little lower FICO and a little less documentation of income. "Pay-option ARMs" are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). In this example, we calculate separate discount rates for prime, Alt-A and Pay-option ARM non-agency MBS securities using market-participant assumptions for risk, capital and return on equity.

Securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Amortization of purchase premiums and accretion of discounts on securities are recorded as yield adjustments on such securities using the effective interest method. The specific identification method is used for purposes of determining cost in computing realized gains and losses on investment securities sold.

At each reporting date, we monitor our available for sale and held to maturity securities for other-than-temporary impairment. The Company adopted the FASB issued Staff Position (FSP) No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2) as of April 1, 2009. In accordance with FSP FAS 115-2, the Company measures its debt securities in an unrealized loss position at the end of the reporting period for other-than-temporary impairment by comparing the present value of the cash flows currently expected to be collected from the security with its amortized cost basis. If the calculated present value is lower than the amortized cost, the difference is the credit component of an other-than-temporary impairment of its debt securities. The difference between the present value and the fair value of the security (if any) is the noncredit component of the impairment, only if the Company does not intend to sell the security and will not be required to sell the security before recovery of its amortized cost basis. The credit component of the other-than-temporary-impairment is recorded as a loss in earnings and the noncredit component is recorded as a charge to other comprehensive income, net of the related income tax benefit.

For non-agency RMBS we determine the cash flow expected to be collected and calculate the present value for purposes of testing for other-than-temporary impairment, by utilizing the same industry-standard tool and the same cash flows as those calculated for fair values (discussed above). We compute cash flows based upon the underlying mortgage loan pools and our estimates of prepayments, defaults, and loss severities. We input our projections for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The discount rates used to compute the present value of the expected cash flows for purposes of testing for the credit component of the other-than-temporary impairment are different from those used to calculate fair value and are either the implicit rate calculated in each of our securities at acquisition (as prescribed by FASB 114 Accounting by Creditors for Impairment of a Loan) or the last accounting yield (as prescribed in EITF 99-20). For securities recorded under FASB 115, we calculate the implicit rate at acquisition based on the contractual terms of the security, considering scheduled payments (and minimum payments in the case of pay-option ARMs) without prepayment assumptions. We use this discount rate in the industry-standard model to calculate the present value of the cash flows for purposes of measuring the credit component of an other-than-temporary impairment of our debt securities.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level estimated to provide for probable 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 generally 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. 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.

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

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

                                                                               For the Fiscal Years Ended June 30,
                                                    2009                                      2008                                      2007
                                                                 Average                                   Average                                  Average
                                                                 Yields                                    Yields                                    Yields
                                                    Interest     Earned/                      Interest     Earned/                     Interest     Earned /
                                       Average       Income/      Rates          Average       Income/      Rates         Average       Income/      Rates
                                      Balance 1      Expense      Paid          Balance 1      Expense      Paid         Balance 1      Expense       Paid
                                                                                     (Dollars in thousands)
Assets:

Loans 2, 3                           $   635,780    $  41,782       6.57 %     $   550,307    $  33,499       6.09 %     $  512,599    $  29,370        5.73 %

Federal funds sold                         4,008           34       0.85 %          23,147        1,013       4.38 %         11,755          614        5.22 %
Interest-earning deposits in
other financial institutions                 442           15       3.39 %           7,821          457       5.84 %         14,333          791        5.52 %
Mortgage-backed and other
investment securities 4                  535,918       35,753       6.67 %         451,846       27,524       6.09 %        249,128       13,164        5.28 %

Stock of the FHLB, at cost                19,036          194       1.02 %          14,205          808       5.69 %         12,084          647        5.35 %


Total interest-earning assets          1,195,184       77,778       6.51 %       1,047,326       63,301       6.04 %        799,899       44,586        5.57 %

Noninterest-earning assets                24,930                                    14,681                                   11,738


Total assets                         $ 1,220,114                               $ 1,062,007                               $  811,637


Liabilities and Stockholders'
Equity:

Interest-bearing demand and
savings                              $   186,309    $   4,583       2.46 %     $    76,028    $   2,726       3.59 %     $   60,007    $   2,025        3.37 %

Time deposits                            433,410       19,400       4.48 %         506,761       25,632       5.06 %        399,855       19,542        4.89 %
Securities sold under agreements
to repurchase                            130,000        5,677       4.37 %         118,497        5,137       4.34 %         30,648        1,352        4.41 %

Advances from the FHLB                   333,327       11,385       3.42 %         270,022       11,417       4.23 %        239,742       10,406        4.34 %

Other borrowings                          43,679          374       0.86 %           5,155          369       7.16 %          5,155          413        8.01 %


Total interest-bearing
liabilities                            1,126,725       41,419       3.68 %         976,463       45,281       4.64 %        735,407       33,738        4.59 %


Noninterest-bearing demand
deposits                                   4,170                                     3,144                                    1,052

Other noninterest-bearing
liabilities                                6,014                                     5,553                                    3,219

Stockholders' equity                      83,205                                    76,847                                   71,959

Total liabilities and
stockholders' equity                 $ 1,220,114                               $ 1,062,007                               $  811,637


Net interest income                                 $  36,359                                 $  18,020                                $  10,848


Interest rate spread 5                                              2.83 %                                    1.40 %                                    0.98 %

Net interest margin 6                                               3.04 %                                    1.72 %                                    1.36 %

(1) Average balances are obtained from daily data.

(2) Loans include loans held for sale, loan premiums and unearned fees.

(3) Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant.

(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.

Results of Operations

Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth in our assets and increases in our net interest margin. Our net interest income is reduced by our estimate of loss provisions for our impaired loans. We also earn non-interest income primarily from mortgage banking activities, prepayment fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of investment securities. The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased from 44 full time employees at June 30, 2008 to 57 full time equivalent employees at June 30, 2009. We are subject to federal and state income taxes, and our effective tax rates were 40.72%, 40.15% and 40.80% for the fiscal years ended June 30, 2009, 2008, and 2007, respectively. Other factors that affect our results of operations include expenses relating to occupancy, data processing and other miscellaneous expenses.

Comparison of the Fiscal Year Ended June 30, 2009 and June 30, 2008

Net Interest Income. Net interest income totaled $36.4 million for the fiscal year ended June 30, 2009 compared to $18.0 million for the fiscal year ended June 30, 2008. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to
(i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume) for the fiscal year ended June 30, 2009 compared to the fiscal year ended June 30, 2008:

                                                      Fiscal Year Ended June 30, 2009 vs. 2008
                                                             Increase (Decrease) Due to
                                                                                                   Total
                                                                                                  Increase
                                          Volume             Rate           Rate/Volume          (Decrease)
                                                               (Dollars in thousands)
Increase/(decrease) in interest
income:
Loans                                   $    5,203         $  2,656        $         424        $      8,283
Federal funds sold                            (838 )           (816 )                675                (979 )
Interest-earning deposits in other
financial institutions                        (431 )           (192 )                181                (442 )
Mortgage-backed and other
investment securities                        5,121            2,614                  494               8,229
Stock of the FHLB, at cost                     275             (663 )               (226 )              (614 )

                                        $    9,330         $  3,599        $       1,548        $     14,477

Increase/(decrease) in interest
expense:
Interest-bearing demand and savings     $    3,954         $   (856 )      $      (1,241 )      $      1,857
Time deposits                               (3,710 )         (2,929 )                407              (6,232 )
Securities sold under agreements to
repurchase                                     499               41                   -                  540
Advances from the FHLB                       2,677           (2,182 )               (527 )               (32 )
Other borrowings                             2,758             (325 )             (2,428 )                 5

                                        $    6,178         $ (6,251 )      $      (3,789 )      $     (3,862 )

Interest Income. Interest income for the year ended June 30, 2009 totaled $77.8 million, an increase of $14.5 million, or 22.9%, compared to $63.3 million in interest income for the year ended June 30, 2008 primarily due to interest-earning asset growth. Average interest-earning assets for the year ended June 30, 2009 increased by $147.9 million compared to the year ended June 30, 2008 due to the purchase of mortgage-backed and investment securities which increased $84.1 million during the year ended June 30, 2009 compared to 2008. Also increasing by $85.5 million was the average balance of the loan portfolio, primarily the result of our purchase of pools of multifamily and single family loans. Average interest earning balances associated with our stock of the FHLB increased by $4.8 million in the year ended June 30, 2009 compared to the year ended June 30, 2008 because our required minimum investment increased, in line with our increased advances from the FHLB. Unlike fiscal 2008, the FHLB only paid us a dividend in the first quarter of our 2009 fiscal year. For the year ended June 30, 2009, the growth in average balances contributed additional interest income of $9.3 million, and the average rate increase resulted in a net $3.6 million increase in interest income. The average yield earned on our interest-earning assets increased to 6.51% for the year ended June 30, 2009, up from 6.04% for the same period in 2008 due primarily to the nationwide housing downturn and the disruptions in the mortgage markets which allowed us to acquire new loans and mortgage-backed securities at higher yields.

Interest Expense. Interest expense totaled $41.4 million for the year ended June 30, 2009; a decrease of $3.9 million, compared to $45.3 million in interest expense during the year ended June 30, 2008. Average interest-bearing balances for the year ended June 30, 2009 increased $150.3 million compared to the same period in 2008, due to higher average deposits per customer account and additional borrowings from the FHLB and FRB. The average interest-bearing balances of advances from the FHLB and the FRB discount window increased $63.3 million and $38.5 million because we elected to fund our asset growth with more short term advances and borrowings to help lower our cost of funds as our interest rate exposure was minimal. For the year ended June 30, 2009, the growth in the average balance of interest bearing liabilities resulted in additional interest expense of $6.2 million, and decreases in interest rates resulted in a net decrease of $6.3 million in interest expense. The average rate paid on all of our interest-bearing liabilities decreased to 3.68% for the year ended June 30, 2009 from 4.64% for the year ended June 30, 2008. The maturity of higher-rate term deposits caused the average term deposit rates to decrease to 4.48% in fiscal 2009 from 5.06% in fiscal 2008. The new low-rate short-term FHLB advances added during fiscal 2009 caused the average FHLB advance rate to decrease to 3.42% in fiscal 2009 from 4.23% in fiscal 2008. These rate changes in fiscal 2009 were accompanied by a decrease in the weighted average rate paid on interest-bearing demand and savings accounts, which decreased to 2.46% from 3.59% as a result of declines in market interest rates which also caused our average time deposit rates to decrease by 58 basis points between fiscal 2009 and 2008. The average rate paid or other borrowings including short-term FRB discount window borrowings decreased to 0.86% in fiscal 2009 from 7.16% in fiscal 2008. During fiscal 2009, we benefited from declines in U.S. Treasury interest rates due to actions taken by the Federal Reserve to lower the discount rate, which reduced our interest rates on deposits and borrowings.

Provision for Loan Losses. Provision for loan losses was $4.7 million for the year ended June 30, 2009 and $2.2 million for fiscal 2008. The provisions were . . .