BofI Holding (BOFI)

Net Interest Income

Net interest income for the quarter ended March 31, 2009 totaled $8.5 million, an 80.9% increase compared to net interest income of $4.7 million for the quarter ended March 31, 2008. For the nine months ended March 31, 2009, net interest income was $25.1 million, up $14.0 million or 126.1% compared to the $11.1 million for the nine months ended March 31, 2008.

Total interest and dividend income during the quarter ended March 31, 2009 increased 14.2% to $18.5 million, compared to $16.2 million during the quarter ended March 31, 2008. For the nine months ended March 31, 2009, total interest and dividend income increased 27.7% to $57.2 million, compared to $44.8 million for the nine months ended in 2008. The increase in interest and dividend income for the quarter and the nine months was attributable primarily to growth in average earning assets from purchases of investment securities and loans. The average balance of investment securities (primarily mortgage-backed securities) increased 13.6% and 18.5% when compared for the three-month and the nine-month periods ended March 31, 2009 and 2008, respectively. The increase in interest income was also the result of our higher rates earned on new loans originated and purchased, amortization of discounts on purchases of loan pools as well as higher rates on new non-agency mortgage-backed securities purchased. The loan portfolio yield for the quarter ended March 31, 2009 increased 63 basis points offset by the investment security portfolio yield decrease of 41 basis points. The net growth in average earning assets for the three-month and the nine-month periods was funded largely by increased demand and savings accounts and increased short-term borrowings. Total interest expense decreased 12.2% to $10.1 million for the quarter ended March 31, 2009 compared with $11.5 million for the quarter ended March 31, 2008. For the nine months ended March 31, 2009, total interest expense decreased 4.5% to $32.2 million compared to $33.7 million for the nine months ended in 2008. The average funding rate decreased by 89 basis points for the nine-month comparison, despite a 17.3% growth in average balances. Contributing to the decrease in the average funding rate were decreases in the average rates for time deposits of 53 basis points, decreases in the average funding rates of demand and savings accounts of 82 basis points and decreases in the average rates of FHLB advances of 109 basis points when compared for the nine-month periods ended March 31, 2009 and 2008. Net interest margin, defined as net interest income divided by average earning assets, increased by 106 basis points to 2.82% for the quarter ended March 31, 2009, compared with 1.76% for the quarter ended March 31, 2008.

The improvement in the net interest margin has resulted from specific actions we have taken to manage our assets and liabilities, as well as general changes in the U.S. Treasury yield curve and loan risk premiums. Our specific actions include selling our agency mortgage-backed securities and replacing them with higher yielding loans and non-agency mortgage backed securities. In addition, we have lowered our deposit offering rates in an effort to take advantage of lower borrowing rates tied to U.S. Treasury rates. Since March of 2008, the Federal Reserve has reduced the short-term Fed funds rate by 200 basis points, to a range of 0.00 to 0.25% as of March 31, 2009. The rate cuts have reduced and will likely continue to reduce both our cost of funding through lower short-term borrowing rates and interest income on floating rate loans and securities.

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Net Interest Income

Net interest income for the quarter ended December 31, 2008 totaled $8.8 million, a 158.8% increase compared to net interest income of $3.4 million for the quarter ended December 31, 2007. For the six months ended December 31, 2008, net interest income was $16.6 million, up $10.2 million or 159.4% compared to the $6.4 million for the six months ended December 31, 2007.

Total interest and dividend income during the quarter ended December 31, 2008 increased 30.0% to $19.5 million, compared to $15.0 million during the quarter ended December 31, 2007. For the six months ended December 31, 2008, total interest and dividend income increased 35.3% to $38.7 million, compared to $28.6 million for the six months ended in 2007. The increase in interest and dividend income for the quarter and the six months was attributable primarily to growth in average earning assets from purchases of investment securities and loans. The average balance of investment securities (primarily mortgage-backed securities) increased 11.4% and 21.2% when compared for the three-month and the six-month periods ended December 31, 2008 and 2007. The increase in interest income was also the result of our higher rates earned on new loans originated and purchased as well as higher rates on new non-agency mortgage-backed securities purchased. The loan portfolio yield for the quarter ended December 31, 2008 increased 46 basis points and the investment security portfolio yield increased 150 basis points. The net growth in average earning assets for the three-month and the six-month periods was funded largely by increased short-term borrowings. Total interest expense decreased 7.0% to $10.7 million for the quarter ended December 31, 2008 compared with $11.5 million for the quarter ended December 31, 2007. For the six months ended December 31, 2008, total interest expense was flat at $22.1 million, compared to $22.2 million for the six months ended in 2007. The interest expense for the six-month comparison was flat due to 18.7% growth in average balances, offset by a 78 basis point decrease in the average funding rate. Contributing to the decrease in the average funding rate were decreases in the average rates for time deposits of 40 basis points and decreases in the average rates of FHLB advances of 110 basis points when compared for the six-month periods ended December 31, 2008 and 2007. Net interest margin, defined as net interest income divided by average earning assets, increased by 164 basis points to 2.98% for the quarter ended December 31, 2008, compared with 1.34% for the quarter ended December 31, 2007.

The improvement in the net interest margin has resulted from specific actions we have taken to manage our assets and liabilities, as well as general changes in the U.S. Treasury yield curve and loan risk premiums. Our specific actions include selling our agency mortgage-backed securities and replacing them with higher yielding loans and non-agency mortgage backed securities. In addition, we have lowered our deposit offering rates in an effort to take advantage of lower borrowing rates tied to U.S. Treasury rates. Since December of 2007, the Federal Reserve has reduced the short-term Fed funds rate by 400 basis points, to a range of 0.00 to 0.25% as of December 31, 2008. The rate cuts have reduced and will likely continue to reduce both our cost of funding through lower short-term borrowing rates and interest income on floating rate loans and securities.

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Net Interest Income

Net interest income for the quarter ended September 30, 2008 totaled $7.8 million, a 160.0% increase compared to net interest income of $3.0 million for the quarter ended September 30, 2007.

Total interest and dividend income during the quarter ended September 30, 2008 increased 41.2% to $19.2 million, compared to $13.6 million during the quarter ended September 30, 2007. The increase in interest and dividend income for the quarter was attributable primarily to growth in average earning assets, primarily investment securities and loans. During the quarter ended September 30, 2008, the average balance of investment securities (primarily mortgage-backed securities) increased 32.7% when compared to the average for the quarter ended September 30, 2007. The increase in interest income was also the result of our higher rates earned on new loans originated and purchased as well as new non-agency mortgage backed securities purchased. The loan portfolio yield for the quarter ended September 30, 2008 increased 38 basis points and the investment security portfolio yield increased 148 basis points when compared to the quarter ended September 30, 2007. The net growth in average earning assets for the three-month period ended September 30, 2008 was funded largely by increased short-term borrowings, which account for the majority of the increase in interest expense. Total interest expense increased 6.5% to $11.4 million for the quarter ended September 30, 2008 compared with $10.7 million for the quarter ended September 30, 2007. The cost of funds increased due to 22.7% growth in average balances, partially offset by a 62 basis point decrease in the average funding rate. Contributing to the decrease in the average funding rate were decreases in average rates for time deposits and reverse repurchase agreements of 27 and 10 basis points, respectively. Similarly, lower rates paid on FHLB advances used to replace maturing advances and new advances used to purchase whole loan pools and mortgage backed securities led to a decrease in FHLB advance funding cost of 90 basis points during the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007.

Net interest margin, defined as net interest income divided by average earning assets, increased by 144 basis points to 2.68% for the quarter ended September 30, 2008, compared with 1.24% for the quarter ended September 30, 2007.

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The improvement in the net interest margin has resulted from specific actions we have taken to manage our assets and liabilities, as well as general changes in the U.S. Treasury yield curve and loan risk premiums. Our specific actions include selling our agency mortgage-backed securities and replacing them with higher yielding loans and non-agency mortgage backed securities. In addition, we have lowered our deposit offering rates in an effort to take advantage of lower borrowing rates tied to U.S. Treasury rates. Since September of 2007, the Federal Reserve has reduced the short-term Fed funds rate by 275 basis points, to 2.00% as of September 30, 2008. The rate cuts have reduced and will likely continue to reduce our cost of funding through lower short-term borrowing rates.

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Net Interest Income

Net interest income for the quarter ended March 31, 2008 totaled $4.7 million, a 62.1% increase compared to net interest income of $2.9 million for the quarter ended March 31, 2007. Net interest income for the nine months ended March 31, 2008 increased 42.3% to $11.1 million up from the $7.8 million for the nine months ended March 31, 2007.

Total interest and dividend income during the quarter ended March 31, 2008 increased 43.4% to $16.2 million, compared to $11.3 million during the quarter ended March 31, 2007. For the nine months ended March 31, 2008, total interest and dividend income increased 40.0% to $44.8 million, compared to $32.0 million for the nine months ended in 2007. The increase in interest and dividend income for the quarter and the nine months was attributable primarily to growth in average earning assets, primarily investment securities and loans. The average balance of investment securities (primarily mortgage-backed securities) increased 68.8% and 98.1% when compared for the three-month and the nine-month periods ended March 31, 2008 and 2007, respectively. The increase in interest income was also the result of our higher rates earned on new loans originated and purchased as well as new non-agency mortgage backed securities purchased. The loan portfolio yield increased 37 and 39 basis points when compared for the three-month and nine-month periods. The investment security portfolio yield increased 82 and 64 basis points when compared for the three-month and nine-month periods. The net growth in average earning assets for the three-month and the nine-month periods was funded largely by increases in time deposits and securities sold under agreements to repurchase, which account for the majority of the increases in interest expense. Total interest expense increased 35.3% to $11.5 million for the quarter ended March 31, 2008 compared with $8.5 million for the quarter ended March 31, 2007. For the nine months ended March 31, 2008, total interest expense increased 39.3% to $33.7 million, compared to $24.2 million for the nine months ended in 2007. The average balances for time deposits and securities sold under agreements to repurchase increased 49.1% and 56.5 % when compared for the three-month and the nine-month periods ended March 31, 2008 and 2007, respectively. Also contributing to the increase in total interest expense were higher funding rates for time deposits and FHLB advances. The average time deposit rate increased 13 and 26 basis points when compared for the three-month and the nine-month periods ended March 31, 2008 and 2007, respectively. Similarly, higher rates paid on FHLB advances used to replace maturing advances caused an increase of 7 and 14 basis points when compared for the three-month and the nine-month periods ended March 31, 2008 and 2007, respectively.

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Net interest margin, defined as net interest income divided by average earning assets, increased by 34 basis points to 1.76% for the quarter ended March 31, 2008, compared with 1.42% for the quarter ended March 31, 2007. For the nine-month period, the net interest margin increased 11 basis points.

The improvement in the net interest margin has resulted from specific actions we have taken to manage our assets and liabilities, as well as general changes in the U.S. Treasury yield curve and loan risk premiums. Our specific actions include selling our agency mortgage-backed securities and replacing them with higher yielding loans and non-agency mortgage backed securities. In addition, we have lowered our deposit offering rates in an effort to take advantage of lower borrowing rates tied to U.S. Treasury rates. Since August of 2007, the Federal Reserve has reduced the short-term Fed funds rate by 375 basis points, including a series of rate cuts totaling 225 basis points in the quarter ended in March 2008. The rate cuts have reduced and will likely continue to reduce our cost of funding through lower borrowing and deposit rates. The yield on our loans and on certain investment securities we have acquired have not declined because we have significantly expanded the reach of our wholesale banking operations, re-entered the multifamily asset class, and taken advantage of wider credit spreads. Additionally, although we have significantly reduced our interest rate risk in the most recent quarter, the steeper yield curve may also provide us opportunities to increase our net interest margin. As a result, it is likely our net interest margin will continue to increase in the short-term.

Net Interest Income

Net interest income for the quarter ended December 31, 2007 totaled $3.4 million, a 36.0% increase compared to net interest income of $2.5 million for the quarter ended December 31, 2006. Net interest income for the six months ended December 31, 2007 increased 30.6% to $6.4 million up from the $4.9 million for the six months ended December 31, 2006.

Total interest and dividend income during the quarter ended December 31, 2007 increased 40.2% to $15.0 million, compared with $10.7 million during the quarter ended December 31, 2006. For the six months ended December 31, 2007, total interest and dividend income increased 38.2% to $28.6 million, compared to $20.7 million for the six months ended in 2006. The increase in interest and dividend income for the quarter and the six months is attributable to growth in average earning assets, primarily investment securities and higher rates earned on loans. The average balance of investment securities (primarily mortgage-backed securities) increased 108.1% and 119.1% when compared for the three-month and the six-month periods ended December 31, 2007 and 2006, respectively. The increase in interest income was also the result of our higher rates earned on new loans including recreational vehicles and home equity loans. The loan portfolio yield increased 46 and 39 basis points when compared with the three-month and six-month periods. The net growth in average earning assets for the three-month and the six-month periods was funded largely by increases in time deposits and securities sold under agreements to repurchase, which account for the majority of the increases in interest expense. Total interest expense increased 40.2% to $11.5 million for the quarter ended December 31, 2007 compared with $8.2 million for the quarter ended December 31, 2006. For the six months ended December 31, 2007, total interest expense increased 40.5% to $22.2 million, compared to $15.8 million for the six months ended in 2006. The average balances for time deposits and securities sold under agreements to repurchase increased 62.6% and 60.7 % when compared for the three-month and the six-month periods ended December 31, 2007 and 2006, respectively. Also contributing to the increase in total interest expense were higher funding rates for time deposits and FHLB advances. The average time deposit rate increased 22 and 33 basis points when compared with the three-month and the six-month periods ended December 31, 2007 and 2006, respectively. Similarly, higher rates paid on FHLB advances used to replace maturing advances caused an increase of 18 and 19 basis points when compared with the three-month and the six-month periods ended December 31, 2007 and 2006, respectively.

Net interest margin, defined as net interest income divided by average earning assets, increased by 5 basis points to 1.34% for the quarter ended December 31, 2007, compared with 1.29% for the quarter ended December 31, 2006. The net interest margin increase was the result of growth in the yield of our investment securities and the yield on our new originations of recreational vehicles and home equity loans.

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Net Interest Income

Net interest income for the quarter ended September 30, 2007 totaled $3.0 million, a 25.0% increase compared to net interest income of $2.4 million for the quarter ended September 30, 2006.

Total interest and dividend income during the quarter ended September 30, 2007 increased 36.0% to $13.6 million, compared with $10.0 million during the quarter ended September 30, 2006. The increase in interest and dividend income for the quarter is attributable to growth in average earning assets, primarily mortgage-back securities. Comparing average balances for the quarters, September 2007 compared to 2006, investment securities grew 133.5%. Also contributing to the increase in interest income was higher rates on new loans and loan rate adjustments, which caused the loan portfolio yield for the 2007 quarter to increase 33 basis points. The net growth in average earning assets for the three-month was funded largely by increases in time deposits and securities sold under agreements to repurchase, which account for the majority of the increases in interest expense. Total interest expense during the quarter ended September 30, 2007 increased 42.7% to $10.7 million, compared with $7.5 million during the quarter ended September 30, 2006. Comparing average balances for the quarter, time deposits and securities sold under agreements to repurchase grew 61.8% compared to the 2006 quarter. Higher rates paid on new time deposits caused the time deposit rate for the 2007 quarter to increase 36 basis points compared with the same period in 2006. Similarly, higher rates paid on new FHLB advances caused the rate for the 2007 quarter to increase 19 basis points compared with the same period in 2006.

Net interest margin, defined as net interest income divided by average earning assets, decreased by 7 basis points to 1.24% for the quarter ended September 30, 2007, compared with 1.31% for the quarter ended September 30, 2006. The net interest margin decline for the quarter was the result of unusually high borrower prepayments of seasoned multifamily loans purchased at a premium in 2004 and 2005. As result, loan premium amortization as an annual percent of the average multifamily loan balance for the quarter ended September 30, 2007 was 67 basis points, up 27 basis points from the 40 basis points charged on average over the last four quarters. The higher premium amortization reduced net interest margin by 9 basis points.

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Net Interest Income

Net interest income for the quarter ended March 31, 2007 totaled $2.9 million, a 11.2% increase compared to net interest income of $2.6 million for the quarter ended March 31, 2006. Net interest income for the nine months ended March 31, 2007 increased 4.1% to $7.8 million up from the $7.5 million for the nine months ended March 31, 2006.

Total interest and dividend income during the quarter ended March 31, 2007 increased 34.8% to $11.3 million, compared with $8.4 million during the quarter ended March 31, 2006. For the nine months ended March 31, 2007, total interest and dividend income increased 35.6% to $32.0 million, compared to $23.6 million for the nine months ended in 2006. The increase in interest and dividend income for the quarter and the nine months is attributable to growth in average earning assets, primarily mortgage-back securities. Comparing average balances for the quarters and the nine months, March 2007 compared to 2006, investment securities grew 222.4% and 146.6%, respectively. Also contributing to the increase in interest income, higher rates on new loans and loan rate adjustments which caused the loan portfolio yield for the 2007 quarter and the nine months to increase 52 and 55 basis points, respectively. The net growth in average earning assets for the three-month and the nine-month periods was funded largely by increases in time deposits, securities sold under agreements to repurchase 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, 2007 increased 45.2% to $8.5 million, compared with $5.8 million during the quarter ended March 31, 2006. For the nine months ended March 31, 2007, total interest expense increased 50.3% to $24.2 million, compared to $16.1 million for the nine months ended in 2006. Comparing average balances for the quarter, time deposits and advances from the FHLB grew 20.9% and 19.7%, respectively, compared to the 2006 quarter. Comparing average balances for the nine months, time deposits and advances from the FHLB grew 23.5% and 29.9%, respectively, compared to the 2006 period. During the three months and nine months of fiscal 2007, securities sold under agreements to repurchase were also used to fund asset growth, averaging $37.5 million and $15.8 million, respectively. Higher rates paid on new time deposits caused the time deposit rate for the 2007 quarter and the nine months to increase 91 and 96 basis points, respectively, compared with same periods in 2006. Similarly, higher rates paid on new FHLB advances caused the rate for the 2007 quarter and the nine months to increase 42 and 58 basis points, respectively, compared with same periods in 2006.

Net interest margin, defined as net interest income divided by average earning assets, decreased by 12 basis points to 1.42% for the quarter ended March 31, 2007, compared with 1.54% for the quarter ended March 31, 2006. Similarly, the net interest margin decreased by 21 basis points to 1.34% for the nine months ended March 31, 2007 compared to 1.55% for the nine months ended March 31, 2006. The net interest margin declined for the quarter and the nine months generally as a result of the flattening and the inversion of the yield curve. During 2007, 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 over the last year. As result, high quality mortgage loan rates remain relatively low, contributing to our decrease in net interest margin. In October of 2006, we started originating second lien home equity loans and in March 2007 we began originating RV loans with higher yields to increase the loan portfolio yield. We do not originate or invest in higher yielding subprime mortgage loans or mortgage-backed securities.

Our net interest margin has also been negatively influenced by the flattening and the inversion 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 ended March 31, 2007, increased 70 basis points compared to the quarter ended March 31, 2006. Our yield on earning assets (primarily loan interest) for the quarter ended March 31, 2007, increased only 59 basis points. If the slope of the yield curve does not 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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Net Interest Income

Net interest income for the quarter ended December 31, 2006 totaled $2.5 million, a 1.8% increase compared to net interest income of $2.5 million for the quarter ended December 31, 2005.

Total interest and dividend income during the quarter ended December 31, 2006 increased 33.7% to $10.7 million, compared with $8.0 million during the quarter ended December 31, 2005. The increase in interest and dividend income for the quarter is attributable to growth in average earning assets, primarily loans and investment securities (primarily mortgage-back securities). Comparing average balances for the quarters, December 2006 compared to 2005, investment securities grew 140.3%. Higher rates on new loans and rate adjustments in the loan portfolio caused the loan portfolio yield for the 2006 quarter to increase 57 basis points 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 period was funded largely by increases in time deposits, securities sold under agreements to repurchase and advances from the FHLB, which account for the majority of the increases in interest expense. Total interest expense during the quarter ended December 31, 2006 increased 47.7% to $8.2 million, compared with $5.6 million during the quarter ended December 31, 2005. Comparing average balances for the quarter ended December 2006 to 2005, time deposits and advances from the FHLB grew 22.3% and 26.9%, respectively. Higher rates paid on new time deposits caused the time deposit rate for the 2006 quarter to increase 103 basis points compared with same period in 2005. Similarly, higher rates paid on new FHLB advances caused the rate for 2006 to increase 56 basis points 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 58.7% of the total increase in interest expense for the quarter comparison.

Net interest margin, defined as net interest income divided by average earning assets, decreased by 20 basis points to 1.29% for the quarter ended December 31, 2006, compared with 1.49% for the quarter ended December 31, 2005. The net interest margin declined for the quarter as a result of the flattening and the inversion of the yield curve. During the second quarter of fiscal 2007, 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 over the last year. As result, high quality mortgage loan rates remain relatively low, contributing to our decrease in net interest margin. In October of 2006, we announced our intent to start originating second lien home equity loans and other consumer loans with higher yields to increase the loan portfolio yield.

Our net interest margin has also been negatively influenced by the flattening and the inversion 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 ended December 31, 2006, increased 86 basis points compared to the quarter ended December 31, 2005. Our yield on earning assets (primarily loan interest) for the quarter ended December 31, 2006, increased only 65 basis points. If the slope of the yield curve does not 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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Net Interest Income

Net interest income for the quarter ended September 30, 2006 totaled $2.4 million, a 1.3% decrease compared to net interest income of $2.5 million for the quarter ended September 30, 2005.

Total interest and dividend income during the quarter ended September 30, 2006 increased 38.9% to $10.0 million, compared with $7.2 million during the quarter ended September 30, 2005. The increase in interest and dividend income for the quarter is attributable to growth in average earning assets, primarily loans and investment securities (primarily mortgage-back securities). Comparing average balances for the quarters, September 2006 compared to 2005, loans and investment securities grew 6.3% and 82.2%, respectively. Higher rates on new loans and rate adjustments in the loan portfolio caused the loan portfolio yield for the 2006 quarter to increase 55 basis points 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 period 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 September 30, 2006 increased 59.6% to $7.5 million, compared with $4.7 million during the quarter ended September 30, 2005. Comparing average balances for the quarter ended September 2006 to 2005, time deposits and advances from the FHLB grew 32.8% and 46.2%, respectively. Higher rates paid on new time deposits caused the time deposit rate for the 2006 quarter to increase 84 basis points compared with same period in 2005. Similarly, higher rates paid on new FHLB advances caused the rate for 2006 to increase 79 basis points 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 59.5% of the total increase in interest expense for the quarter comparison.

Net interest margin, defined as net interest income divided by average earning assets, decreased by 31 basis points to 1.31% for the quarter ended September 30, 2006, compared with 1.62% for the quarter ended September 30, 2005. The net interest margin declined for the quarter as a result of the continued flattening of the yield curve. 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 ended September 30, 2006, increased 95 basis points. Our yield on earning assets (primarily loan interest) for the quarter ended September 30, 2006, increased only 66 basis points. If the slope of the yield curve does not 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.

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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