Bancorp, Inc. - Quarter Report: 2008 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: March 31, 2008

OR

For the transition period from:              to             

Commission file number: 51018

THE BANCORP, INC.

(Exact name of registrant as specified in its charter)

405 Silverside Road

Wilmington, DE 19809

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (302) 385-5000

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, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 2, 2008 there were 14,562,196 outstanding shares of Common Stock, $1.00 par value.

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THE BANCORP, INC

Form 10-Q Index

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PART I – FINANCIAL INFORMATION

THE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(in thousands)

The accompanying notes are an integral part of these statements.

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THE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of these statements.

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THE BANCORP INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2007

( Dollars and share information in thousands)

(unaudited)

The accompanying notes are an integral part of these statements.

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THE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

The accompanying notes are an integral part of these statements.

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THE BANCORP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Basis of Presentation

The financial statements of The Bancorp, Inc. (Company) as of March 31, 2008 and for the three month periods ended March 31, 2008 and 2007 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the three month periods ended March 31, 2008 may not necessarily be indicative of the results of operations for the full year ending December 31, 2007.

Note 2. Stock-based Compensation

The Company accounts for its stock options and phantom stock units under Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options and phantom stock units, would be treated the same as other forms of compensation by recognizing the related cost in income. The expense of the award would generally be measured at fair value at the grant date. The impact of this standard is reflected in the net earnings and related per share amounts for the quarters ended March 31, 2008 and 2007. At March 31, 2008, the Company has two stock-based compensation plans, which are more fully described in its Form 10-K report.

The fair value of each option, phantom stock unit, and stock appreciation right is estimated on the date of grant using the Black-Scholes option-pricing model. The significant assumptions utilized in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield, and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used in the assumption for the model. The expected term of an option, phantom award, or stock appreciation right is based on historical experience of similar awards. The dividend yield is determined by dividing per share and phantom stock unit dividend by the grant date stock price. The expected volatility is based on the volatility of the Company’s stock price over a historical period comparable to the expected term. During the first quarter of 2008, the Company granted 60,000 stock appreciation rights that vest in March, 2012. The fair value of the grant based on the Black-Sholes pricing model, based on the inputs shown blow, was $4.90. The Company issued 140,000 performance based shares at a fair value of $11.41, which was the market price on the day of grant, were issued during the first quarter of 2008. Compensation expense of $1.6 million is expected to be realized across three years should our performance base be met. The weighted-average assumptions used in the Black-Sholes valuation model for the stock-based compensation are shown below.

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As of March 31, 2008 there was $354,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s plans; that cost is expected to be recognized over an average of 2.2 years. Cash received from option exercises for the periods ending March 31, 2008 and 2007 was -$0- and $658,000 respectively. Included in net income for the three months ended March 31, 2008 and 2007 was compensation expense of $15,000 and $29,000 respectively. The following tables are a summary of activity in the plans as of March 31, 2008 and changes during the period then ended:

Options:

Stock appreciation rights:

Note 3. Earnings Per Share

Basic earnings per share for a particular period of time is calculated by dividing net income by the weighted average number of common shares outstanding during that period.

Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares and common share equivalents. The Company’s only outstanding “common share equivalents” are phantom stock units, stock appreciation rights, and options to purchase its common stock.

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The following table shows the Company’s earnings per share for the periods presented:

Stock options for 499,375 shares, exercisable at prices between $14.24 and $25.43 per share, were outstanding at March 31, 2008 but were not included in the weighted-average shares because the exercise price was greater than the market price.

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Note 4. Investment securities

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities available-for-sale at March 31, 2008 and December 31, 2007 are summarized as follows (in thousands):

The amortized cost and fair value of the Company’s investment securities available-for-sale at March 31, 2008, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Note 5. Loans

Major classifications of loans are as follows (in thousands):

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Note 6. Transaction with affiliates

The Company entered into a sublease for office space in Philadelphia, Pennsylvania and a technical support agreement with RAIT Investment Trust (RAIT) commencing in October 2000. The Chairman of RAIT is the Chairman and Chief Executive Officer of the Bank and Chief Executive Office of the Company. The Chief Executive Officer of RAIT is the Chairman of the Company. Under the sublease, RAIT pays the Company rent equal to 45% of the rent paid by the Company and an allocation of common area expenses. Under the technical support agreements, which commenced in January 2001, the Company also provides technical support for RAIT for a fee of $6,500 a month. RAIT paid the Bank $19,500 for such services for the three months ended March 31, 2008 and 2007. RAIT paid the Company approximately $94,600 for rent for the first three months of 2008 and $124,000 for the first three months of 2007.

The Company also has a sublease for office space in Philadelphia, Pennsylvania with Cohen Bros. & Company d/b/a Cohen & Company (Cohen & Company) commencing in July 2002. While the agreements were terminated in June 2006, the agreement continued on a month to month basis through June of 2007. Cohen & Company paid $18,604 in rent for the three months ended March 31, 2007. Telephone support fees paid for the period ended March 31, 2007 were $13,308.00. The Chairman of the Company is the principal of Cohen Bros. Financial LLC which owns 100% of Cohen & Company.

The Company maintains deposits for various companies affiliated with its directors and executive officers totaling approximately $53,903,000 and $115,794,000 as of March 31, 2008 and December 31, 2007, respectively. The majority of these deposits are short-term in nature and rates are consistent with market rates.

The Company has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on the same terms as those prevailing for comparable transactions with other borrowers. At March 31, 2008, these loans were current as to principal and interest payments and, in the opinion of management, do not involve more than normal risk of collectibility. At March 31, 2008 loans to these related parties amounted to $3,529,000.

The Bank participated in two loans in 2008 that were originated by RAIT. The outstanding loans amounted to $43.7 million. The Bank has a senior position on both loans.

Note 7. Fair Value Measurements

The Company adopted SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 (a) establishes a common definition for fair value to be applied to assets and liabilities, where required or permitted by accounting standards; (b) establishes a framework for measuring fair value; and (c) expands disclosures concerning fair value measurements. SFAS No. 157 does not extend the required use of fair value to any new circumstances. The effective date of the application of SFAS 157 is for fiscal years beginning after November 15, 2008. Fair value measurements are established according to a three level hierarchy, using the highest level possible (Level 1) if such inputs are available. Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from or corroborated through observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” that are the best information available in the circumstances. Fair value for certain of our Level 3 financial instruments is derived using internal valuation methods, including discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument and other market data for securities that do not actively trade. Assets measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:

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The Company’s Level 3 assets are listed below.

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

Assets measures at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the period ended March 31, 2008 are summarized below:

Impaired loans that are collateral dependent are written down to their fair value, less costs to sell, of $7.5 million through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds the fair value. Valuation techniques consistent with the market approach, and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy.

Note 8. Acquisitions

On November 30, 2007, the Company and the Bank completed the acquisition of the Stored Value Solutions division of Marshall BankFirst. The Company recorded the transaction under the purchase method of accounting. The total purchase price of the acquisition was $62.5 million which included $2.0 million in transaction costs. The total shares of common stock issued were 722,733 shares at a price of $16.76 per share, or $12.1 million.

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Note 9. Goodwill and Other Identifiable Intangible Assets

The Company accounts for goodwill in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company did not identify any impairment on its outstanding goodwill and its identifiable intangible assets from its most recent testing, performed at December 31, 2007 and no events have occurred subsequent to this evaluation to require additional testing. Goodwill resulting from the acquisition of Mears Motor Livery Corporation (Mears) totaled $4.0 million. Goodwill resulting from the acquisition of the Stored Value Solutions division of Marshall BankFirst was $46.2 million. Amortization is provided using the straight-line method over the estimated useful life of the customer list intangible, which management estimates at 12 years. The company amortized $250,000 for our customer list intangible for the period ending March 31, 2008. The Company is in the process of evaluating and finalizing the identifiable assets and purchase accounting adjustments; accordingly, the allocation of the purchase price is subject to adjustment.

Note 10. Reclassifications

Certain prior period amounts have been reclassified to conform to the current year’s presentation.

Note 11. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), “Business Combinations.” The purpose of this statement is to improve the greater consistency, relevance, and comparability of the information provided in financial reports about business combinations and its effects. To accomplish that, the statement establishes principles and requirements for the acquirer on recognition and measurement of identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiring company; establishes the acquisition-date fair value as the measurement objective for all assets acquired; and requires disclosure of the basis of information needed to understand the financial effect of the business combination.

SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 31, 2008. An entity may not elect to apply the statement prior to this date. Any future impact will only be for acquisitions of other companies completed after the date of these financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS No. 157 are effective as of the beginning of our 2008 fiscal year. We adopted the provisions of SFAS No. 157 on January 1, 2008. Details related to the adoption of SFAS No. 157 and the impact on our financial statements are more fully discussed in Note 7 – Fair Value Measurements.

In February 2008, FASB issued FASB Staff Position No. FAS 140-3, “Accounting for Transfer of Financial Assets and Repurchase Financing Transactions,” (FSP FAS 140-3). The purpose of FSP FAS 140-3 is to address whether transactions where assets are purchased from a buyer and financed through a repurchase agreement with the same buyer can be considered and accounted for as separate transactions, or are required to be “linked” transactions and may be considered derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, (SFAS 133). FSP FAS 140-3 requires purchases and subsequent financing through repurchase agreements to be considered linked transactions unless all of the following conditions apply: initial transfer and the repurchase financing can not be contractually contingent on one another, the repurchase financing provides the initial transferor with recourse to the initial transferee upon default, the financial asset is readily obtainable in the market, and the financial instrument and the repurchase agreement are not coterminous. This FSP is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating FSP FAS 140-3 but does not expect its application to have a significant impact on its reporting.

In March 2008, FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The Company is assessing the potential disclosure effects on its financial statements but does not expect the provisions of SFAS No. 161 to have a material impact on our financial statements.

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Forward-Looking Statements

When used in this Form 10-Q, the words “believes” “anticipates” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1A, under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events except as required by applicable law.

In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

We believe that the determination of our allowance for loan and lease losses involves a higher degree of judgment and complexity than our other significant accounting policies. We determine our allowance for loan and lease losses with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from our estimates, we may need additional provisions for loan losses that would adversely impact our earnings.

We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

Results of Operations

Net Income: Net income for the first quarter of 2008 was $2.8 million, compared to net income of $3.6 million for the first quarter of 2007. Diluted earnings per share were $0.19 in the first quarter of 2007 as compared to $0.25 for the first quarter of 2007. Return on average assets was .71% and return on average equity was 6.37% for the first quarter of 2008, as compared to 1.08% and 9.54%, respectively for the first quarter of 2007.

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Net Interest Income: Our interest income for the first quarter of 2008 decreased to $25.2 million from $25.5 million in the first quarter of 2007, while our net interest income increased to $12.9 million from $12.6 million. Our average loans increased to $1.330 billion for the first quarter of 2008 from $1.072 billion for the first quarter of 2007. The primary reason for the decreases in our interest income was the reductions in rates by the Federal Reserve Board, or FRB, beginning in the second half of 2007 through the first quarter of 2008. The reduction in interest income was offset by the organic growth of our loan portfolio.

Our net interest margin for the first quarter 2008 decreased to 3.45% from 3.87% for the first quarter of 2007, a decrease of 42 basis points (.42%). The margin decline was due to the rate reductions by the FRB, as a significant portion of our loans are tied to prime and reprice at each rate reduction, while our ability to reprice our liabilities (principally, deposits and debt facilities) typically lags behind the reductions by the FRB.

For the first quarter of 2008, the average yield on our interest-earning assets decreased to 6.75% from 7.88% for the first quarter of 2007, a decrease of 113 basis points (1.13%). Cost of interest-bearing deposits decreased to 3.93% for the first quarter of 2008 from 4.73% for the first quarter of 2007, a decrease of 80 basis points (.80%). Average interest-bearing deposits increased to $1.130 billion from $1.022 billion, an increase of $108.7 million or 10.6%.

Average Daily Balances. The following table presents the average daily balances of assets, liabilities and stockholders’ equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average rates, for the periods indicated:

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In the first quarter of 2008, average interest-earning assets increased to $1.495 billion, an increase of $198.1 million, or 15.3%, from the first quarter of 2007.

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $1.4 million for the first quarter of 2008 compared to $750,000 for the first quarter of 2007. For more information about our provisions and allowance for loan and lease losses and our loss experience see “Financial Condition – Allowance for Loan and Lease Losses” below.

Non-Interest Income. Non-interest income was $3.5 million for the first quarter of 2008 as compared to $1.5 million for the first quarter of 2007, an increase of $2.0 million or 130.8%. The principal reason for the increase in non-interest income is a result of $2.5 million of earnings for prepaid card fees as the result of our acquisition of the Stored Value Solutions (SVS) division of Marshall BankFirst on November 30, 2007. Leasing income decreased to $216,000 from $569,000, a decrease of $353,000 or 62.0%. The income in the first quarter of 2007 was impacted by gains from a large leasing relationship that ended in 2007. ACH processing fees decreased to $58,000 during the first quarter of 2008 from $113,000 during the first quarter of 2007, a decrease of $55,000 or 48.7%. The decrease in ACH processing fees is a result of an evaluation of risk performed on the portfolio resulting in some discontinued business relationships.

Non-Interest Expense. Total non-interest expense was $10.4 million for the first quarter of 2008, as compared to $7.4 million for first quarter of 2007, an increase of $2.9 million or 39.4%. Salaries and employee benefits amounted to $5.0 million for the first quarter of 2008 as compared to $3.6 million for the first quarter of 2007, an increase of $1.3 million or 35.7%. Our increase in salaries reflects our increased staff as a result the addition of SVS. Occupancy expense increased to $1.1 million from $726,000 for the first quarter of 2008, an increase of $349,000 or 48.1%. The increase is a result of two new office space leases for approximately $124,000 as a result of our acquisition of SVS and an increase in depreciation as a result of $2.5 million in fixed assets obtained as part of that acquisition. Data processing expense increased $294,000 from $682,000 during the first quarter of 2007 to $976,000 during the first quarter of 2008. This increase is a result of growth in our account base, in particular health savings accounts in our affinity group programs. Other expense increased $791,000 to $2.4 million during the first quarter of 2008 from $1.6 million during the first quarter of 2007, or 49.1%. This is a result of increases in telephone expense, cost of loans, and FDIC insurance expense. FDIC insurance increased 591.8% or $147,200, from $24,900 as a result of increased deposit insurance assessments. Our loan-related expenses increased from $51,700 to $199,500 from March 31, 2007 as compared to March 31, 2008. The increase in loan related expenses is primarily due to the increase in costs associated with managing our loan portfolio. Telephone expense increased approximately 22.2%, from approximately $180,700 at March 31, 2007 to $220,800 at March 31, 2008, as a result of the increase in our stored value and health savings portfolios.

Liquidity and Capital Resources

Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. We invest the funds we do not need for operation primarily in overnight federal funds.

The primary source of funds for our financing activities has been cash inflows from net increases in Federal Home Loan Bank advances and Federal Funds purchased. As of March 31, 2008, we had $177.7 million of outstanding short-term borrowings which consisted of $150.0 million of outstanding Federal Home Loan Bank advances, $25.0 million of outstanding Federal Funds purchased, and $2.7 million in repurchase agreements. The increase in advances and Federal Funds purchased is the result of the lower cost of these funds as compared to the brokered deposit market.

Funding was directed primarily at cash outflows required for loans, which were $76.1 million in the first three months of 2008. At March 31, 2008, we had outstanding commitments to fund loans, including unused lines of credit, of $422.6 million.

We must comply with capital adequacy guidelines issued by the Federal Deposit Insurance Corporation; or FDIC. A bank must, in general, have a leverage ratio of 5.0%, a ratio of Tier I capital to risk-weighted assets of 6.0% and a ratio of total capital to risk-weighted assets of 10.0% in order to be considered “well capitalized.” A Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the period. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill. At March 31, 2008 we were “well capitalized” under banking regulations.

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The following table sets forth our regulatory capital amounts and ratios for the periods indicated:

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Asset and Liability Management

The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of a bank’s interest margin resulting from changes in market interest rates.

We monitor and control interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as “gap analysis”). Traditional gap analysis involves arranging our interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or “interest rate sensitivity gap”) between the assets and liabilities that are estimated to reprice during each time period and cumulatively through the end of each time period.

Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely.

The following table sets forth the estimated maturity/repricing structure of our interest-earning assets and interest-bearing liabilities at March 31, 2008. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of interest-bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. Therefore, 50% of the core interest checking deposits and 25% of core savings and money market deposits are shown as maturing or repricing within the “1 – 90 days” column with the remainder shown in the “1 – 3 years” column. We estimate the repricing characteristics of these deposits based on historical performance, past experience at other institutions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Payments of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.