9th annual Spring value investing congress

April 3, 2014 Las Vegas, NV

Kerrisdale Capitals Top Equity Investment for 2014 Sahm Adrangi, Kerrisdale Capital Management

www.ValueInvestingCongress.com

Value Investing Congress

April 2014
Kerrisdale Capital Management, LLC 1212 Avenue of the Americas, 3rd Floor New York, NY 10036 Tel: 212.792.7999 Fax: 212.531.6153 Email: info@kerrisdalecap.com

CONFIDENTIAL INVESTOR PRESENTATION

Once one of our largest long positions

Today, we present a short idea on a company that was once one of our favorite long positions
What originally attracted us to the opportunity years ago Small business with negligible market share with good management We acquired the business at a low P/EPS, P/TBV, PEG, etc. We were investors in the business for several years, and are now short Companys shares have appreciated by 1500% in the past 5 years! Numerous competitors are copying the companys low-cost model and entering the market with the same products We believe the companys margins are significantly inflated due to several factors that will reverse in the coming years By all valuation metrics, company now trades at a significant premium to its competitors, and to our estimate of reasonable profit potential

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BofI Holding Inc. (Nasdaq: BOFI)

BOFI is a branchless online bank that operates a variety of online bank brands, including Bank of Internet, NetBank, Bank X and others Loans are made via branded websites such as apartmentbank.com, via relationships with affinity groups, call centers, as well as through wholesale and correspondent channels $3.6bn total assets, $312m TBV, $47m LTM Net Income

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Capitalization
We recommend a short position in BofI Holding Inc. (BOFI or the Company), one of the most expensive banks in the US BOFI has earned investors nearly 1600% in the past 5 years, and now trades at ~4.0x TBV, far higher than its banking sector peers
Investors expect rapid earnings growth; we believe future earnings are likely to materially disappoint as interest rates rise

We believe BOFIs investors are extrapolating results that will be difficult to achieve going forward as interest rates rise
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Strategy in a nutshell
BOFI has no branches and attracts depositors by offering high interest rates
BOFI can afford high cost of funding due to its low operating costs: no branches and low employees / assets ratio (only 312 full time employees at 6/30/13)

Source: BOFI March 2014 investor presentation

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We think BOFI is over-earning

BOFI has a great historical track record, but it is not a great business
BOFIs Net Interest Margin (NIM) is not likely to be sustainable Liabilities: BOFI has one of the largest negative interest gaps amongst public banks; when rates rise, its deposit costs will rise significantly
New competition: numerous players are replicating BOFIs online business model, which will either slow deposit growth or increase funding costs

Assets: BOFI is temporarily earning far higher returns on its assets than its peers because it made a large, timely bet in high-yield distressed MBS; these assets are rolling off and will be difficult to replicate Valuation: BOFI is one of the most expensive publicly traded banks in the US 4.0x TBV and 23x PE Investors have mistakenly assumed current profitability and growth is sustainable despite the forward yield indicating otherwise

This presentation will illustrate why we believe BOFIs current earnings are unsustainable given the forward rate curve
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BOFIs asset yields are likely not sustainable

BOFI management made some astute investment decisions during the financial crisis, allowing the company to sustain very attractive interest income despite a falling rate environment

BOFI has no competitive advantage on the asset side of its balance sheet; management will find it difficult to sustain yields with a growing balance sheet
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Why is asset yield high? Nonrecurring bets on MBS!

BOFIs asset yields are far higher than peers due to opportunistic bets on distressed MBS during the financial crisis
BOFIs loan yield and other asset yields are largely in line
As the securities portfolio matures and rolls over, BOFIs asset yield should decline to a level on par with its peers

During the financial crisis, management made some astute once-in-a-lifetime investments in distressed MBS, which greatly enhanced asset yields
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BOFIs asset yield compared to peers

As outlined earlier, BOFI and other internet banks have no advantage from a capital deployment perspective As its balance sheet grows, and as its high-return securities portfolio rolls over, BOFIs profits will fall significantly
Asset yield in line with peers (as defined by BOFI proxy) would imply ~20% downside to LTM EPS
BOFI Average Securities Yield Incremental BOFI yield Average Securities Balance ($mm) Excess BOFI Net Income ($mm) Excess BOFI EPS % Downside to LTM EPS 4.74% 478 3.1 $0.22 (7%) 7.0 $0.49 (17%) 4.0 $0.28 (9%) 7.3 $0.51 (18%) WFC 3.65% 1.09% USB 2.29% 2.45% FITB 3.32% 1.42% Peer Avg. 2.19% 2.55%

Source: company filings, FDIC Statistics on Depository Institutions, Kerrisdale analysis

As BOFIs balance sheet grows, and its opportunistic securities portfolio rolls over, BOFIs asset yields will fall closer to peer average
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Comparison of BOFI to Everbank Confirms View

Everbank is a similar online-only bank Comparing the two firms, BOFIs NIMs are significantly enhanced by the yield on its securities portfolio
BOFI EVER Diff.

Loans Securities & other assets Total earnings assets Cost of funding NIM Average balances Loans Other earning assets Total earnings assets

5.25% 4.07% 5.03% 1.02% 4.01%

4.75% 2.74% 4.35% 0.98% 3.37%

0.50% 1.34% <--- BOFI's main advantage is securities 0.68% 0.04% <--- Both firms pay similar funding cost 0.64%

$2,664 $12,735 $613 $3,154 $3,276 $15,889

Excess earnings appear to be driven by a maturing securities portfolio and longer duration, riskier, loan book
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BOFIs loan portfolio is going roll into lower yield

BOFIs historical loan yields are supported by focus on jumbo loans, which today have far lower excess yield

BOFI Loan Pipeline

Source: BOFI investor presentation March 2014

Source: Financial Times

Jumbo loans, which form the largest segment of BOFIs loan pipeline, are facing increased competition and declining yields
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Asset yields supported by extending duration

BOFI has benefitted from a huge bet on declining rates; it has held assets with a longer duration and higher yield than most of its peers
BOFI WFC USB FITB 57% 3% 6% 11% 14% 9% 100% 33% Peer Avg. 21% 11% 19% 24% 19% 6% 100% 49% % of Loans with Remaining Maturity or Next Repricing Date of: 3 Months 8% 52% 46% > 3 Months, 1 Year 7% 3% 5% >1 Year, 3 Years 15% 8% 9% >3 Years, 5 Years 50% 8% 12% >5 Year, 15 Years 15% 11% 14% >15 Years 5% 18% 15% Total 100% 100% 100% Total >3 Years 70% 37% 40%

Source: FFIEC call reports as of 12/31/13, Kerrisdale analysis Note: BOFI's peer group comes from its latest proxy statement, adjusted for subsequent acquisitions. It includes BNCN, TBBK, EGBN, FMBC, IBCA, EBSB, NBBC, and OCFC.

BOFIs loan portfolio maturity is an outlier; BOFIs liabilities will re-price relatively quickly, but its assets will take longer to roll over than its competitors
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BOFI made a large bet on declining rates

BOFI has one of the largest negative interest funding gaps among publicly traded banks and is particularly vulnerable to rate shocks
Deposits will re-price quickly if rates rise, but assets are longer duration; this will create a significant headwind for NIMs in the near term
Online Bank One Year Rate Gap

Source: Sterne Agee report, March 2014

Even among branch-light banks, BOFIs loan book is particularly poorly positioned for a rising rate environment
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BOFIs depositors are less sticky

BOFI has a relatively price-sensitive and less-sticky deposit base Deposit inflows exploded after recession (note ~50% increase in year ending June 2010)
As more internet-banking competitors arise, and as rates increase, BOFIs relative attractiveness weakens considerably

BOFI has targeted a more price-sensitive depositor base; this has been beneficial during once-in-generation rate environment
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New competition is weakening BOFIs position

BOFIs offering is undifferentiated and facing considerable competition:
Large lenders: GE Capital, Ally Financial, CIT, Barclays

US online banks: Everbank, First Internet Bank of Indiana

Online divisions of US banks: IncredibleBank (River Valley Bank), Doral Direct Online subsidiaries of foreign banks: Virtual Bank (Banco de Sabadell), BAC Florida (Grupo Pellas)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 1-Year Certificate of Deposits Bank GE Capital Bank My e-BAnC by BAC Florida Bank VirtualBank AloStar Bank of Commerce Colorado Federal Savings Bank The Palladian PrivateBank California First National Bank Ally Bank Home Savings Bank Discover Bank Doral Direct E-LOAN Barclays Pentagon Federal Credit Union USAA ableBanking, a division of Northeast Bank First Internet Bank of Indiana Pacific Mercantile Bank TAB Bank Lone Star Bank Bank of Internet USA Rate 1.05% 1.01% 1.01% 1.01% 1.00% 1.00% 1.00% 0.99% 0.98% 0.98% 0.95% 0.94% 0.91% 0.80% 0.80% 0.71% 0.65% 0.65% 0.65% 0.60% 0.55%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 MMA and Savings Accounts Bank Type CIT Savings GE Capital Rate Bank Savings GE Capital Bank Savings Ally Bank Savings EverBank MMA Ally Bank MMA GE Capital Rate Bank MMA American Express Savings Capital One Savings Barclays Savings Sallie Mae MMA Palladian PrivateBank Savings Union Federal Savings Bank MMA Colorado Federal Savings Bank Savings Discover Bank Savings FNBO Direct Savings Mutual of Omaha Bank MMA ableBanking, a division of Northeast Bank MMA First Internet Bank of Indiana MMA Bank of Internet USA MMA Rate 0.95% 0.95% 0.90% 0.87% 0.86% 0.85% 0.85% 0.80% 0.75% 0.90% 0.90% 0.90% 0.90% 0.85% 0.85% 0.85% 0.85% 0.80% 0.80% 0.75%

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More internet bank competition today

When we made our initial investment in BOFI in 2009, it had amongst the highest rates for CDs and savings accounts according to www.bankrate.com
Today, numerous competitors have become more aggressive in the internetonly market, with BOFI ranking far lower than many competing firms
BOFI Ranking 13th 24th 25th 22nd 17th

Product 3-Month CD 6-Month CD 1-Year CD 5-Year CD 1-Year Jumbo CD

Top 10 Banks (highest to lowest APY on 3/31/14) AloStar, VirtualBank, Barclays, Discover, EverBank Zions Direct, Doral Direct, AloStar, GE Capital Bank, My e-BAnC GE Capital Bank, My e-BAnC, Virtual Bank, AloStar, Colorado Federal Savings Bank EverBank, Barclays, iGObanking.com, GE Capital Bank, State Farm Bank My E-BAnC, GE Capital Bank, VirtualBank, AloStar, Home Savings Bank

MMA/Savings 20th GE Capital Bank, CIT Bank, Barclays, GE Capital Bank, Sallie Mae MMA/10K Savings 13th GE Capital Bank, Sallie Mae, Palladian PrviateBank, EverBank, Colorado Federal Savings Bank MMA/Jumbo Savings not listed GE Capital Bank, Sallie Mae, Colorado Federal Savings, Discover Bank, FNBO Direct

Competition from Other Online Banks Will Pressure NIMs and Growth

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Organic account growth has stalled

BOFI made a small acquisition in 2013 which increased number of accounts
Adjusting for this acquisition, number of accounts has recently declined

6/30/10

6/30/11

3/31/12

6/30/12

Quarter Ending 9/30/12 12/31/12

3/30/13

6/30/13

9/30/13

12/31/13

Accounts at Beginning Acquisitions Net Additions Accounts at End

27,746 5,152 32,898

32,898 (65) 32,833

32,833 (561) 32,272

32,272 1,040 33,312

33,312 1,884 35,196

35,196 218 35,414

35,414 (744) 34,670

27,746

34,670 8,400 (2,127) 40,943

40,943 (1,852) 39,091

Adjusting for a recent acquisition, BOFI has not grown net customers over the past year
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Rapid deposit growth triggered by declining rates

BOFI deposit growth has been driven by low-interest environment
their ~1% deposit rate is attractive when competitors offer ~0%
~50% deposit growth in fiscal 2010 coinciding with 150bps drop in deposit costs

BOFIs relative value proposition improved significantly when competing brickand-mortar banks lowered rates to near-zero
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Forward curve is not looking good for BOFI

Based on todays forward yield curve, BOFIs NIMs will likely revert back to long-term normalized profitability in coming years
BOFI 1 Asset Yield Funding Cost Net Interest Margin Earning Assets Net Interest Income % Change Net Income 3 % Change 5.03% 1.02% 4.01% $3,276 $131 $52 Change '17 Curve2 1.12% 2.88% (1.76%) $0 ($58) ($35) 6.15% <--- Based on forward 10-year curve, asset yields will rise 3.90% <--- Based on forward 1-year rates, BOFI's funding cost will rise more 2.25% $3,276 $74 (44%) $18 (66%) <--- Illusrtrative net income impact from forward rate curve

1. Based on quarter ending December 31, 2013 2. Based on forward yield curve for 2017 3. Adjusted for 40% tax rate

The forward yield curve is flattening; for a bank with a large negative rate gap and long duration assets like BOFI, this implies a reduction in profitability
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Putting it all together: BOFI NIM going to fall

BOFIs NIMs and growth are not evidence of a superior business model, but factors related to todays low interest rate environment
Internet banks generally have lower NIMs than their brick-and-mortar peers because they pay more for deposits and earn less on assets BOFI has benefitted from a negative rate gap and timely bets on MBS
On average, internet banks have higher funding costs, and more price sensitive depositors

and earn lower yields on assets

resulting in lower NIMs than their peers

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Declining mortgage gain on sale

Vast majority of BOFIs non-interest income has been from the gain-on-sale of mortgage securities
Slowing refinancing activity will depress mortgage sales going forward

Unlike marquee brick-and-mortar banks, BOFI earns little in the way of highmargin and high-value service or fee income
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BOFI may be under-reserving NPLs

BOFI provisions are priced for perfection

High growth banks

Internet banks

Marquee banks

BOFIs NPLs leave investors with very asymmetric risk to the downside

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Relative P/TBV
BOFI has among the highest P/TBV multiples in the entire U.S. banking sector

High-Growth Banks P/TBV

Internet Banks P/TBV

Marquee Banks P/TBV

Source: CapitalIQ

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Relative P/EPS
BOFI also has amongst the highest valuations on a P/EPS basis

High-Growth Banks P/EPS

Internet Banks P/EPS

Marquee Banks P/EPS

Source: CapitalIQ

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BOFI P/TBV vs. ROTCE

Source: Sterne Agee report, March 2014

In order to justify valuation, market participants are pricing BOFI to grow multiples in size while maintaining its industry-leading profitability
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Value overwhelmingly attributed to growth

Current loan book is estimated to be worth $410 million vs. market cap of ~$1.3 billion
Thus, 2/3rds of current market value attributable to the NPV of future loans, a surprisingly high number

BOFI asset base is asymmetrically positioned to the downside

200 basis point increase in rates is a 20% decline in NPV of current loan book
(Dollars in thousands, as at December 31, 2013) Net Present Value Percentage Change from Base NPV as a Percentage of Assets

Up 300 basis points $ Up 200 basis points 267,278 (34.8%) 7.83%

331,284
Up 100 basis points 388,060 Base 410,248 Down 100 basis points 445,133 Down 200 basis points 446,566

(19.2%)
(5.4%) 8.5% 8.9%

9.39%
10.69% 11.05% 11.81% 11.75%

By BOFIs own admission, the NPV of its current loan book is only $410 million; 2/3rds of current market cap is attributable to NPV of future loans!
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Backing into BOFI valuation

To justify BOFIs valuation, investors have to make some bold assumptions
~3x deposit base 3.5% NIM forever 35% efficiency 0.5% provisions

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Conclusion
BOFIs valuation requires continued deposit growth despite offering no differentiation, and being able to deploy this growing capital base at industry-leading yields, despite having no loan sourcing advantage

BOFI is one of the highest valued publicly traded banks in the US

P/TBV of ~4.0x vs. industry peers at half that value, because investors have mistakenly assumed BOFIs NIMs and deposit growth are sustainable

Liabilities will face higher costs

BOFI has one of the largest negative funding gaps in US
Deposits may face slower growth, or higher costs, due to competition BOFIs deposits are less sticky, funding cost bias is to the upside

Assets are over-earning

Asset yields supported by opportunistic bets on small asset base; as asset base grows, and high yield securities roll over, BOFI asset returns will face pressure

BOFI profitability is likely to revert closer to industry-peer levels as interest rates revert, and well-financed competitors replicate BOFIs offerings
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Disclaimer
As of the publication date of this report, Kerrisdale Capital Management LLC and its affiliates (collectively "Kerrisdale"), others that contributed research to this report and others that we have shared our research with (collectively, the Authors) have short positions i n and may own options on the stock of the company covered herein (BofI Holding Inc.) and stand to realize gains in the event that the price of the stock decreases. Following publication of the report, the Authors may transact in the securities of the company covered herein. All content in this report represent the opinions of Kerrisdale. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented as is, without warranty of any kind whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report or any information contained herein. This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors views as of this date, all of whic h are accordingly subject to change. The Authors opinions and estimates constitute a best efforts judgment and should be regarded as indicative, prelimin ary and for illustrative purposes only. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This reports estimated fundamental value only represents a best efforts estimate of the potential fundame ntal valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.

This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors abilities and beliefs, all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the companys common equity is lower than prior to the original publication date. These affiliates, offic ers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors operations and their affiliates. The c ompensation structure for the Authors analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas a nd the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors documents.
The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Any or all of the Authors forward -looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the Authors control. Investors should conduct independent due dili gence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

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