Evans Bancorp - 10-Q quarterly report FY

 

(Mark One)

(Exact name of registrant as specified in its charter)

14 - 16 North Main Street, Angola, New York 14006
(Address of principal executive offices)
(Zip Code)

(716) 926-2000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed
since last report)

     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 þ No o

     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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Common Stock, $.50 par value 2,748,699 shares as of May 1, 2008

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

(in thousands, except share and per share amounts)

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

4

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(in thousands)

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(in thousands)

 6

PART 1 — FINANCIAL INFORMATION

EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007

FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161 in an effort to improve the transparency of financial reporting of derivative and hedging activities. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133, Reporting Comprehensive Income and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not currently engage in derivative and hedging activities.

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Report on Form 10-Q, as well as in the Company’s

periodic reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are beyond the Company’s control and are difficult to predict.

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation, to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.

The Company’s Unaudited Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principals and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. Refer to Note 3 in Item 1 of this report for further detail on fair value measurement.

The most significant accounting policies followed by the Company are presented in Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K. These policies, along with the disclosures presented in the other Notes to the Company’s Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are valued in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new information becomes available.

The allowance for loan and lease losses represents management’s estimate of probable losses in the Company’s loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.

The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be

tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.

      Total loans and leases grew to $339.7 million at March 31, 2008, reflecting a $15.6 million or 4.8% increase from December 31, 2007. Gross loans and leases are net of $9.8 million and $9.7 million of unearned income on direct financing leases as of March 31, 2008 and December 31, 2007. Commercial loans and leases totaled $242.8 million at March 31, 2008, reflecting a $14.4 million or 6.3% increase from December 31, 2007. Growth in commercial real estate loans of $11.4 million or 7.7% was largely responsible for the increase from December 31, 2007 to March 31, 2008. Direct finance leases increased $2.3 million or 5.1% from December 31, 2007. Direct finance leases are sold through a national channel of brokers with whom the Company has had long standing relations and finance small commercial equipment. Direct leases carry a higher risk than the rest of the loan portfolio, but also provide a higher return. Management employs strict underwriting standards in selecting credits for this portion of the portfolio. The loan composition strategy is to maintain the direct lease portfolio at an optimum percentage of the loan portfolio that weights the risk involved in this type of credit.

      Consumer loans totaled $95.9 million at March 31, 2008, reflecting a $1.0 million, or 1.1%, increase from December 31, 2007. Real estate loans increased $0.6 million, or 1.1%, from December 31, 2007 to March 31, 2008. The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month periods ended March 31, 2008 and 2007, the Bank sold mortgages to FNMA totaling $0.5 million. At March 31, 2008, the Bank had a loan servicing portfolio principal balance of $28.2 million upon which it earns servicing fees, as compared to $28.4 million at December 31, 2007.

      The following table presents selected information on the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated.

     Net loan and lease charge-offs were $360 thousand in the three month period ended March 31, 2008 as compared to $169 thousand in the same period of 2007, largely due to the seasoning of the lease portfolio. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.13% of total loans and leases outstanding at March 31, 2008 as compared to 0.22% at December 31, 2007. The allowance for loan and lease losses totaled $4.8 million or 1.40% of total loans and leases outstanding at March 31, 2008 as compared to $4.6 million or 1.41% of total loans and leases at December 31, 2007.

     The adequacy of the Company’s allowance for loan and lease losses is reviewed quarterly by the Company’s management with consideration given to loan and lease concentrations, charge-off history, delinquent loan and lease percentages, and general economic conditions. Management believes the allowance for loan and lease losses is adequate for losses from existing loans and leases.

     The following table sets forth information regarding non-performing loans and leases as of the dates specified.

     For the three month period ended March 31, 2008, gross interest income that would have been reported on non-accruing loans and leases had they been current was $10 thousand. There was $10 thousand of interest income included in net income for the three month periods ended March 31, 2008, on non-accruing loans and leases.

     Total securities increased to $73.6 million at March 31, 2008, reflecting a $1.2 million or 1.7% change from December 31, 2007. Securities and interest-bearing deposits at banks made up 18.0% of the Bank’s total average interest earning assets in the first quarter of 2008 compared to 33.2% in the first quarter of 2007. The decline in the securities portfolio is a result of the Company’s strategy to de-lever a portion of its balance sheet. The Company sold $45 million in securities in June 2007.

     The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 51.5% of the portfolio at March 31, 2008 compared with 52.3% at December 31, 2007; and U.S. government-sponsored agency bonds of various types, which comprise 27.3% of the portfolio at March 31, 2008 versus 19.6% at December 31, 2007. Mortgage-backed securities comprise 16.5% at March 31, 2008 compared with 23.2% as of December 31, 2007. As a member of both the Federal Reserve System and the Federal Home Loan Bank of New York, the Bank is required to hold stock in those entities. These investments made up 4.7% of the portfolio at March 31, 2008 versus 4.9% of the portfolio at December 31, 2007. The credit quality of the securities portfolio is believed to be strong, with 97.0% of the securities portfolio carrying the equivalent of a Moody’s rating of Aaa.

     The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 2.4 years as of March 31, 2008 which is consistent with expected life of the portfolio as of December 31, 2007. Available-for-sale securities with a total fair value of $66.6 million at March 31, 2008 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

     Total deposits at March 31, 2008 were $343.6 million, reflecting a $17.7 million or 5.4% increase from December 31, 2007. Demand deposit growth from December 31, 2007 of $4.0 million, or 5.8%, to $73.3 million is largely based on fluctuation due to customers’ funding needs on a daily basis. The loss of average demand deposits in the three month period ended March 31, 2008 from the first quarter of 2007 reflects the difficulty in growing core deposits in the current competitive environment. Much of the overall deposit increase is attributable to an increase in time deposits of $18.0 million, or 14.0%, to $147.1 million at March 31, 2008. In the latter part of the quarter, the Company purchased $9.2 million in brokered certificates of deposit in an attempt to lock in low rates for extended terms. Also, as interest rates declined in the first quarter, customers shifted from lower rate savings deposits to higher rate time deposits in an attempt to earn better yields. Savings deposits declined $6.8 million, or 7.3%, from December 31, 2007 to $86.1 million at March 31, 2008. Muni-vest balances increased $2.7 million, or 11.1%, from December 31, 2007 to $27.3 million at March 31, 2008 due to seasonal fluctuations.

     Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York decreased from $34.0 million at December 31, 2007 to $27.4 million at March 31, 2008, while long-term borrowings increased from $14.1 million to $18.4 million. The Federal Reserve continued to cut its target rate for federal funds in the first quarter of 2008 in light of a sluggish economy. By the end of the first quarter, the target rate stood at 2.25%. Compared to historical norms, interest rates were at a lower than usual level in the first quarter, prompting the Company to lock in relatively low rates for a longer period of time, resulting in the increase in long-term borrowings and the decrease in short-term borrowings.

     The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan and lease balances include both performing and non-performing loans and leases. Investments are included at amortized cost. Yields are presented on a non-tax-equivalent basis.

Net income for the first quarter of 2008 was $1.59 million, or $0.58 per diluted share, up $0.31 million, or 23.8%, from net income of $1.29 million, or $0.47 per diluted share, in the first quarter of 2007. Return on average equity improved to 14.45% for the quarter compared with 12.85% in last year’s first quarter. The results included a one-time gain for the curtailment of the Company’s defined benefit pension plan of $0.33 million ($0.20 million after-tax), or $0.07 per diluted share. The plan was frozen in the first quarter and the Company enhanced the benefits offered in its 401(k) savings plan. The rest of the increase in net income is largely attributable to net interest income growth.

“Net operating” income (as defined in the following supplemental non-GAAP disclosure) is net income adjusted for what management considers to be “non-operating” items. Net operating income for the first quarter of 2008 was $1.69 million, or $0.62 per diluted share, up $0.32 million, or 23.0%, from net operating income of $1.38 million, or $0.50 per diluted share, in the first quarter of 2007.

To provide investors with greater visibility of the Company’s operating results, in addition to the results measured in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company provides supplemental reporting on “net operating income”, which excludes items that management believes to be non-operating in nature. Specifically, “net operating income” excludes gains and losses on the sale of securities and the amortization of acquisition-related intangible assets. This non-GAAP information is being disclosed because management believes that providing these non-GAAP financial measures provides investors with information useful in understanding the Company’s financial performance, its performance trends, and financial position. While the Company’s management uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it necessarily comparable with non-GAAP measures which may be presented by other companies.

See the reconciliation of net operating income and diluted net operating earnings per share to net income and diluted earnings per share in the following table:

Net interest income for the three month period ended March 31, 2008 was $4.4 million, an increase of $0.5 million, or 12.6% over the same period in 2007. There are several factors driving the increase. First, there has been strong growth in the Company’s commercial loan portfolio, particularly its leasing portfolio. Second, there has been a benefit to net interest income from the de-leverage of the balance sheet in June 2007 of low-earning investment securities and high-cost borrowings. Third, the Company has benefited from a decline in market interest rates as the Federal Reserve has cut its target federal funds rate by 300 bps since September 2007 to 2.25% at the end of March 2008.

The net interest margin for the three month period ended March 31, 2008 was 4.44%, compared to 4.36% in the linked quarter and 3.60% in the first quarter of 2007. The return on interest earning assets in the three month period ended March 31, 2008 decreased 15 basis points from the linked quarter, but increased 38 basis points compared to the prior year first quarter. The decrease from the fourth quarter of 2007 is due to the decreased yield earned on variable rate loans and short-term investment securities. The increase over the prior year first quarter of 2007 is due to the reduction in lower-yielding investment securities and a greater concentration of the loan portfolio being in higher-yielding direct financing leases. The cost of interest-bearing liabilities was 3.20% in the first quarter of 2008, compared to 3.52% in the linked quarter and 3.65% in the first quarter of 2007. The drop in market interest rates resulted in lower rates paid on most funding sources, particularly muni-vest savings, time deposits, and short-term borrowings. Interest free funds contributed 61 basis points to the net interest margin in the three month period ended March 31, 2008, compared to 70 basis points in the fourth quarter of 2007, and 60 basis points in the first quarter of 2007. Year-over-year, the Company’s average demand deposits are slightly down by $0.9 million to $70.0 million. On a linked quarter basis, demand deposits are down $6.9 million. In the fourth quarter, the Company had a temporary influx of demand deposits from a municipality, resulting in the more significant decrease from the linked quarter.

The provision for loan and lease losses for the three month period ended March 31, 2008 increased to $557 thousand from $315 thousand in 2007 as a result of increased charge-offs, additional reserves needed for the growth in the leasing portfolio, and loan growth. The ratio of net charge-offs to average loans and leases increased from 0.23% in the first quarter of 2007, and from 0.33% in the fourth quarter of 2007, to 0.44% in the first quarter of 2008. Nearly all of the charge-offs were in the leasing portfolio. This increase in charge-offs was expected to occur as the leasing portfolio seasoned since the formation of ENL in 2005. As charge-offs have increased, the Company has also increased the reserve for leases.

Non-interest income was $3.5 million for the three month period ended March 31, 2008. This is an increase of $0.4 million from $3.1 million in the same period of 2007. Much of the increase was a result of the recognition of gain on the curtailment of the Company’s pension plan of $0.3 million after freezing its defined benefit pension plan effective January 31, 2008. The Company also had an increase in deposit service charges of $61 thousand, or 13.0%, to $532 thousand and in other income of $74 thousand, or 18.3%. The increase in other income was largely due to fees from the cashing of tax refund checks for customers. These increases were offset by a decline in bank-owned life insurance (“BOLI”) income from $140 thousand in the first quarter of 2007 to $57 thousand in the three month period ended March 31, 2008. BOLI income declined due to the worsening performance of the equity investments insurance companies use to back the policies. The largest component of non-interest income is the Company’s insurance fee revenue, which was $2.1 million in the first quarter of 2008. This was flat to the amount of revenue earned in the same period of the prior year.

Non-interest expense was $5.1 million for three month period ended March 31, 2008, an increase of $0.2 million, or 3.2%, from the same period in 2007. Salary and employee benefit expense for the three month period ended March 31, 2008 increased $0.2 million, or 7.6%, to $2.9 million for the quarter due to merit increases, an enhanced incentive compensation system, increased contributions to the 401(k) savings plan and the addition of new employees in sales and retail operations as well as through the acquisition of an insurance agency in July 2007, somewhat offset by savings related to the freezing of the defined benefit pension plan. Other expenses decreased for the three month period ended March 31, 2008 largely as a result of a loss related to a branch operational error in processing checks incurred in the first quarter of 2007.

Income tax expense totaled $651 thousand for the three month period ended March 31, 2008. The effective tax rate

for the period was 29.0%, compared with 27.2% in the prior year. The increase in the effective rate is a result of tax-exempt income such as interest earned on municipal bonds and the increase in value of bank-owned life insurance being a smaller portion of total income. The Company records an effective tax rate for the period that will be reflective of the projected annual tax rate based on expected supportable tax positions.

The Company has consistently maintained regulatory capital ratios at, or above, federal “well capitalized” standards. Equity as a percentage of assets was 9.6% at March 31, 2008, down slightly from 9.8% at December 31, 2007. Book value per outstanding common share was $16.07 at March 31, 2008, compared to $15.74 at December 31, 2007. Total stockholders’ equity was $44.0 million at March 31, 2008, up from $43.3 million at December 31, 2007. The increase is primarily attributable to total comprehensive income of $1.9 million in the first three months of 2008, offset by $1.0 million in dividends.

The Company utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. As a member of the Federal Home Loan Bank (“FHLB”) the Bank is able to borrow funds at competitive rates. Advances of up to $35.0 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. An amount equal to 25% of the Bank’s total assets could be borrowed through the advance programs under certain qualifying circumstances. The Bank also has the ability to purchase up to $14.0 million in federal funds from its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Company’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market. Additionally, the Company has access to capital markets as a funding source.

The cash flows from the investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At March 31, 2008, approximately 25.8% of the Bank’s securities had contractual maturity dates of one year or less and approximately 51.9% had maturity dates of five years or less. At March 31, 2008, the Company had net short-term liquidity of $17.0 million as compared to $28.2 million at December 31, 2007. Available assets of $76.4 million, divided by public and purchased funds of $160.2 million, resulted in a long-term liquidity ratio of 48% at March 31, 2008, compared to 51% at December 31, 2007.

The Company believes that the Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for municipal deposits.

     Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.

     Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in the future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans and deposits. Management

supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.

     The Bank’s Asset Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a computer model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and other financial instruments used for interest rate risk management purposes.

     The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12 month period of time:

SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES

     Many assumptions were utilized by management to calculate the impact that changes in the interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the event that the 200 basis point rate changes cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.

     The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of March 31, 2008 (the end of the period covered by this Report) have been designed and are functioning effectively to provide reasonable assurance that the information required to be

disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

     No changes in the Company’s internal control over financial reporting were identified in the fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The following table includes all Company repurchases of its common stock, made on a monthly basis during the period covered by this Report, including those made pursuant to publicly announced plans or programs.