EVANS BANCORP INC - Quarter Report: 2005 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended September 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-18539

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)

New York		16-1332767
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(Zip Code)

(716) 926-2000

Not applicable

     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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ

     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— 2,595,876 shares as of October 26, 2005

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

				PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
		Unaudited Consolidated Balance Sheets–September 30, 2005 and December 31, 2004			1
		Unaudited Consolidated Statements of Income-Three months ended September 30, 2005 and 2004			2
		Unaudited Consolidated Statements of Income- Nine months ended September 30, 2005 and 2004			3
		Unaudited Consolidated Statements of Stockholders’ Equity–Nine months ended September 30, 2005 and 2004			4
		Unaudited Consolidated Statements of Cash Flows–Nine months ended September 30, 2005 and 2004			5
		Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					13
Item 3. Quantitative and Qualitative Disclosures About Market Risk					20
Item 4. Controls and Procedures					21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings				None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds					22
Item 3. Defaults upon Senior Securities				None
Item 4. Submission of Matters to a Vote of Security Holders				None
Item 5. Other Information				None
Item 6. Exhibits					22
SIGNATURES					23
EX-31.1 Certification Pursuant to Section 302-PEO
EX-31.2 Certification Pursuant to Section 302-PFO
EX-32.1 Certification Pursuant to Section 906-PEO
EX-32.2 Certification Pursuant to Section 906-PFO

 1

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(in thousands, except share and per share amounts)

		September 30,				December 31,
		2005				2004
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	11,366			$	8,124
Interest bearing deposits at other banks			—				984
Securities:
Available-for-sale, at fair value			160,405				166,817
Held-to-maturity, at amortized cost			4,367				3,062
Loans, net of allowance for loan losses of $3,326 in 2005 and $2,999 in 2004			248,711				217,599
Properties and equipment, net			8,248				7,747
Goodwill			9,639				9,219
Intangible assets			2,900				3,170
Bank-owned life insurance			7,675				7,943
Other assets			6,189				4,377
TOTAL ASSETS		$	459,500			$	429,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	66,046			$	54,013
NOW			12,581				11,650
Regular savings			92,701				101,540
Muni-Vest savings			47,245				40,235
Time deposits			136,303				94,490
Total deposits			354,876				301,928
Other borrowed funds			46,386				68,034
Junior subordinated debentures			11,330				11,330
Securities sold under agreements to repurchase			4,679				7,306
Other liabilities			6,208				4,970
Total liabilities			423,479				393,568
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS’ EQUITY:
Common stock, $.50 par value; 10,000,000 shares authorized; 2,615,123 and 2,615,123 shares issued, respectively, and 2,589,111 and 2,592,423 shares outstanding, respectively			1,307				1,307
Capital surplus			23,509				23,361
Retained earnings			12,716				10,808
Accumulated other comprehensive (loss) income, net of tax			(876	)			563
Less: Treasury stock, at cost (26,012 and 22,700 shares, respectively)			(635	)			(565	)
Total stockholders’ equity			36,021				35,474
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	459,500			$	429,042

See Notes to Unaudited Consolidated Financial Statements

 2

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(in thousands, except share and per share amounts)

		Three Months Ended
		September 30,
		2005				2004
INTEREST INCOME
Loans		$	4,307			$	3,006
Federal funds sold/Interest on deposits at other banks			13				23
Securities:
Taxable			1,154				926
Non-taxable			478				524
Total interest income			5,952				4,479
INTEREST EXPENSE
Deposits			1,653				1,049
Borrowings			368				183
Junior subordinated debentures			173				—
Total interest expense			2,194				1,232
NET INTEREST INCOME			3,758				3,247
PROVISION FOR LOAN LOSSES			215				121
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			3,543				3,126
NON-INTEREST INCOME:
Bank service charges			558				484
Insurance service and fees			1,508				1,143
Net gain on sales of securities			2				24
Premium on loans sold			4				3
Bank-owned life insurance			96				101
Life insurance proceeds			15				—
Other			322				275
Total non-interest income			2,505				2,030
NON-INTEREST EXPENSE:
Salaries and employee benefits			2,296				1,920
Occupancy			497				529
Supplies			73				66
Repairs and maintenance			136				124
Advertising and public relations			105				90
Professional services			237				170
Amortization of intangibles			132				86
Other Insurance			86				85
Other			732				645
Total non-interest expense			4,294				3,715
INCOME BEFORE INCOME TAXES			1,754				1,441
INCOME TAXES			498				367
NET INCOME		$	1,256			$	1,074
Net income per common share-basic		$	0.48			$	0.41
Net income per common share-diluted		$	0.48			$	0.41
Weighted average number of common shares			2,592,031				2,595,815
Weighted average number of diluted shares			2,594,545				2,596,487

See Notes to Unaudited Consolidated Financial Statements

 3

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(in thousands, except share and per share amounts)

		Nine Months Ended
		September 30,
		2005				2004
INTEREST INCOME
Loans		$	11,721			$	8,661
Federal funds sold/Interest on deposits at other banks			112				74
Securities:
Taxable			3,556				2,508
Non-taxable			1,456				1,617
Total interest income			16,845				12,860
INTEREST EXPENSE
Deposits			4,502				2,907
Borrowings			1,154				546
Junior subordinated debentures			474				—
Total interest expense			6,130				3,453
NET INTEREST INCOME			10,715				9,407
PROVISION FOR LOAN LOSSES			554				394
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			10,161				9,013
NON-INTEREST INCOME:
Bank service charges			1,546				1,394
Insurance service and fees			5,084				3,539
Net gain on sales of securities			107				168
Premium on loans sold			16				11
Bank-owned life insurance			302				303
Life insurance proceeds			95				—
Other			890				886
Total non-interest income			8,040				6,301
NON-INTEREST EXPENSE:
Salaries and employee benefits			6,943				5,775
Occupancy			1,485				1,335
Supplies			270				222
Repairs and maintenance			430				334
Advertising and public relations			378				263
Professional services			785				533
Amortization of intangibles			386				258
Other Insurance			282				257
Other			2,122				1,918
Total non-interest expense			13,081				10,895
INCOME BEFORE INCOME TAXES			5,120				4,419
INCOME TAXES			1,427				1,098
NET INCOME		$	3,693			$	3,321
Net income per common share-basic		$	1.42			$	1.28
Net income per common share-diluted		$	1.42			$	1.28
Weighted average number of common shares			2,592,338				2,597,742
Weighted average number of diluted shares			2,595,948				2,599,245

See Notes to Unaudited Consolidated Financial Statements

 4

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(in thousands, except share and per share amounts)

 

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive				Treasury
		Stock				Surplus				Earnings				Income				Stock				Total
Balance, January 1, 2004		$	1,230			$	19,359			$	11,145			$	1,918			$	(328	)		$	33,324
Comprehensive income:
Net income											3,321												3,321
Unrealized loss on available-for-sale securities, net of tax effect of $601 and reclassification adjustment of $(168)															(943	)							(943	)
Total comprehensive income																							2,378
Cash dividends ($0.64 per common share)											(1,658	)											(1,658	)
Stock options expense							127																127
Reissued 7,472 shares treasury stock under dividend reinvestment plan											16								164				180
Reissued 4,247 shares treasury stock under employee stock purchase plan											(9	)							93				84
Issued 31,942 shares for purchase of insurance agencies			15				708																723
Purchased 15,900 shares for treasury																			(386	)			(386	)
Balance, September 30, 2004		$	1,245			$	20,194			$	12,815			$	975			$	(457	)		$	34,772
Balance, January 1, 2005		$	1,307			$	23,361			$	10,808			$	563			$	(565	)		$	35,474
Comprehensive income:
Net Income											3,693												3,693
Unrealized loss on available-for-sale securities, net of tax effect of $918 and reclassification adjustment of $(107)															(1,439	)							(1,439	)
Total comprehensive income																							2,254
Cash dividends ($0.68 per common share)											(1,762	)											(1,762	)
Stock options expense							148																148
Reissued 7,391 shares treasury stock under dividend reinvestment plan											2								176				178
Reissued 4,817 shares treasury stock under employee stock purchase plan											(23	)							115				92
Reissued 800 shares treasury stock under director stock option plan											(2	)							19				17
Purchased 16,400 shares for treasury																			(380	)			(380	)
Balance, September 30, 2005		$	1,307			$	23,509			$	12,716			$	(876	)		$	(635	)		$	36,021

See Notes to Unaudited Consolidated Financial Statements

 5

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(in thousands)

		Nine Months Ended
		September 30,
		2005				2004
OPERATING ACTIVITIES:
Interest received		$	16,901			$	12,709
Fees received			7,314				5,972
Interest paid			(5,967	)			(3,472	)
Cash paid to employees and suppliers			(10,913	)			(9,958	)
Income taxes paid			(1,571	)			(1,289	)
Net cash provided by operating activities			5,764				3,962
INVESTING ACTIVITIES:
Available-for-sales securities:
Purchases			(23,077	)			(97,447	)
Proceeds from sales			7,067				15,807
Proceeds from maturities			20,545				22,357
Held-to-maturity securities:
Purchases			(1,891	)			(3,873	)
Proceeds from maturities			695				1,572
Cash paid for BOLI			—				(264	)
Additions to properties and equipment			(1,119	)			(1,984	)
Increase in loans, net of repayments			(34,257	)			(20,264	)
Proceeds from sales of loans			2,569				1,677
Proceeds from life insurance			665				—
Additions to goodwill and intangibles			(420	)			—
Acquisitions			(117	)			(138	)
Net cash used in investing activities			(29,340	)			(82,557	)
FINANCING ACTIVITIES:
Proceeds from borrowings			—				43,867
Repayments of borrowings			(15,202	)			(13,450	)
Repayments of long-term borrowings			(9,072	)			(5,488	)
Increase in deposits			52,947				66,723
Dividends paid, net			(1,762	)			(816	)
Purchase of treasury stock			(380	)			(386	)
Re-issuance of treasury stock			287				264
Net cash provided by financing activities			26,818				90,714
Net increase in cash and equivalents			3,242				12,119
CASH AND CASH EQUIVALENTS:
Beginning of period			8,124				8,509
End of period		$	11,366			$	20,628
		(continued)

 6

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(in thousands)

		Nine Months Ended
		September 30,
		2005				2004
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income		$	3,693			$	3,321
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,405				1,192
Provision for loan losses			554				394
Net gain on sales of assets			(107	)			(168	)
Premiums on loans sold			(16	)			(11	)
Stock options expense			148				127
Changes in assets and liabilities affecting cash flow:
Other assets			(1,110	)			(1,392	)
Other liabilities			1,197				499
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	5,764			$	3,962
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of insurance agencies:
Fair value of:
Assets acquired, non-cash		$	—			$	861
Liabilities assumed		$	—			$	—
Securities issued		$	—			$	723
		(concluded)

See Notes to Unaudited Consolidated Financial Statements

 7

PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004

1.		ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: Evans National Bank (the “Bank”), and its subsidiaries, Evans National Leasing, Inc. (“ENL”) and Evans National Holding Corp. (“ENHC”); and Evans National Financial Services, Inc. (“ENFS”), and its subsidiary ENB Insurance Agency, Inc. (“ENBI”) and its subsidiaries, Frontier Claims Services, Inc., (“FCS”) and ENB Associates Inc. (“ENB”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with accounting principles generally accepted in the United States of America and with general practice within the banking industry. On July 1, 2005, 100% of the outstanding stock of ENB was paid as a dividend-in-kind to the Company, which subsequently contributed such stock to ENBI to facilitate a corporate reorganization to operate business lines in a more conducive manner. Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”
		The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature.
		The results of operations for the nine month period ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.
2.		SECURITIES
		Securities which the Company has the positive ability and intent to hold to maturity are stated at amortized cost. Securities which the Company has identified as available-for-sale are stated at fair value with changes in fair value included as a component of stockholders’ equity.
3.		ALLOWANCE FOR LOAN LOSSES
		The allowance for loan losses represents the amount charged against the Bank’s earnings to establish an allowance for probable loan losses based on the Bank’s management’s evaluation of the loan portfolio. Factors considered by the Bank’s management in establishing the allowance include: the collectibility of individual loans, current loan concentrations, charge-off history, delinquent loan percentages, input from regulatory agencies and general economic conditions.
		On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan losses. In making this determination, the Bank’s management analyzes the ultimate collectibility of the loans in its portfolio by incorporating feedback provided by the Bank’s internal loan staff, an independent internal loan review function and information provided by examinations performed by regulatory agencies.
		The analysis of the allowance for loan losses is composed of three components: specific credit allocation, general portfolio allocation and subjectively by determined allocation. The specific credit allocation includes a detailed review of the credit in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and No. 118, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures,” and allocation is made based on this analysis. The general portfolio allocation consists of an assigned reserve percentage based on the actual credit rating of the loan.
		The subjective portion of the allowance reflects management’s evaluation of various conditions, and involves a higher degree of uncertainty because this component of the allowance is not identified with specific problem credits of portfolio segments. The conditions evaluated in connection with this component include

 8

		the following: industry and regional conditions; seasoning of the loan portfolio and changes in the composition of and growth in the loan portfolio; the strength and duration of the business cycle; existing general economic and business conditions in the lending areas; credit quality trends in nonaccruing loans; historical loan charge-off experience; and the results of bank regulatory examinations.
		The following table sets forth information regarding the allowance for loan losses for the nine month periods ended September 30, 2005 and 2004.

Allowance for loan losses

		Nine months ended September 30,
		2005				2004
		(In thousands)
Beginning balance, January 1		$	2,999			$	2,539
Charge-offs:
Commercial			(175	)			—
Real estate mortgages			(2	)			—
Installment loans			(84	)			(8	)
Overdrafts			(23	)			—
Direct financing leases			(50	)			—
Total charge-offs			(334	)			(8	)
Recoveries:
Commercial			40				48
Real estate mortgages			—				8
Installment loans			10				3
Overdrafts			6				—
Direct financing leases			51				—
Total recoveries			107				59
Net (chargeoffs) recoveries			(227	)			51
Provision for loan losses			554				394
Ending balance, September 30		$	3,326			$	2,984
Ratio of net charge-offs to average net loans outstanding (annualized)			0.1	%			(0.0	)%

4.		REVENUE RECOGNITION
		The Bank’s primary sources of revenue are interest income from loans and investments and service charge income from loans and deposits. ENBI’s revenue is derived mainly from insurance commissions. Revenue is recognized in the period in which it is earned. The revenue is recognized on the accrual basis of accounting in accordance with the accounting principles generally accepted in the United States of America.
5.		PER SHARE DATA
		The common stock per share information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. The Company’s potential dilutive securities included 2,514 and 3,610 dilutive shares for the three and nine month periods ended September 30, 2005, respectively. There were 672 and 1,503 dilutive shares for the three and nine month periods ended September 30, 2004, respectively. On August 18, 2005, the Company declared a cash dividend of $0.35 per share payable on October 3, 2005 to shareholders of record as of September 9, 2005. All share and per share amounts have been adjusted to reflect a 5% stock dividend paid in December 2004.

 9

		On October 20, 2005, the Company announced a 5% stock dividend payable on December 7, 2005 to shareholders of record on November 15, 2005. Share and per share amounts have not been adjusted to reflect the effect of this subsequent event.
6.		TREASURY STOCK
		During the quarter ended September 30, 2005 the Company repurchased 5,200 shares of common stock at an average cost of $22.66 per share, pursuant to the Company’s publicly announced common stock repurchase program.
7.		GOODWILL
		The Company applies the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” and discloses goodwill separate from other intangible assets in the consolidated balance sheets. The Company evaluates the carrying amount of goodwill for potential impairment on at least an annual basis. Changes in the carrying amount of goodwill of $0.4 million for the nine-month period ended September 30, 2005 are due to contingent payouts made from previous acquisitions.
8.		SEGMENT INFORMATION
		The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and nine month periods ended September 30, 2005 and 2004.

Three Months
Ended September 30, 2005
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	3,862			$	(104	)		$	3,758
Provision for loan losses			215				—				215
Net interest income (expense) after provision for loan losses			3,647				(104	)			3,543
Non-interest income			997				—				997
Insurance commission and fees			—				1,508				1,508
Non-interest expense			3,152				1,142				4,294
Income before income taxes			1,492				262				1,754
Income taxes			393				105				498
Net income		$	1,099			$	157			$	1,256

 10

Nine Months Ended
September 30, 2005
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	11,002			$	(287	)		$	10,715
Provision for loan losses			554				—				554
Net interest income (expense) after provision for loan losses			10,448				(287	)			10,161
Non-interest income			2,956				—				2,956
Insurance commission and fees			—				5,084				5,084
Non-interest expense			9,595				3,486				13,081
Income before income taxes			3,809				1,311				5,120
Income taxes			903				524				1,427
Net income		$	2,906			$	787			$	3,693

Three Months Ended
September 30, 2004
(in thousands)

						Insurance
		Banking Activities				Agency Activities				Total
Net interest income (expense)		$	3,251			$	(4	)		$	3,247
Provision for loan losses			121				—				121
Net interest income (expense) after provision for loan losses			3,130				(4	)			3,126
Non-interest income			887				—				887
Insurance commissions and fees			—				1,143				1,143
Non-interest expense			2,862				853				3,715
Income before income taxes			1,155				286				1,441
Income taxes			253				114				367
Net income		$	902			$	172			$	1,074

 11

Nine Months Ended
September 30, 2004
(in thousands)

						Insurance
		Banking Activities				Agency Activities				Total
Net interest income (expense)			9,421				(14	)			9,407
Provision for loan losses			394				—				394
Net interest income (expense) after provision for loan losses			9,027				(14	)			9,013
Non-interest income			2,762				—				2,762
Insurance commissions and fees			—				3,539				3,539
Non-interest expense			8,249				2,646				10,895
Income before income taxes			3,540				879				4,419
Income taxes			746				352				1,098
Net income			2,794				527				3,321

		Starting January 1, 2005, the activities of non-deposit investment service sales were functionally reorganized into the Company’s Insurance Agency Activities and are being internally managed as a segment of ENBI. As a result, beginning January 1, 2005, all such activities are reported as Insurance Agency Activities. Activities of non-deposit investment service sales prior to January 1, 2005 were reclassified as Insurance Agency Activities for comparative purposes.
9.		CONTINGENT LIABILITIES AND COMMITMENTS
		The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at September 30, 2005 and 2004 is as follows:

		2005				2004
		(in thousands)
Commitments to extend credit		$	62,926			$	54,025
Standby letters of credit			1,832				1,810
Total		$	64,758			$	55,835

		Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance of the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank has not incurred any losses on its commitments during the past two years.
		Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging

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		Activities.” The changes in the fair value of these commitments due to interest rate risk are not recorded on the consolidated balance sheets as these derivatives are not considered material.
		The Company is subject to possible litigation proceedings in the normal course of business. As of September 30, 2005, there were no claims pending against the Company that management considered to be significant.
10.		RECLASSIFICATIONS
		Certain reclassifications have been made to the 2004 consolidated financial statements to conform with the presentation used in 2005.
11.		NET PERIODIC BENEFIT COSTS
		The Bank has a defined benefit pension plan covering substantially all Company employees. The plan provides benefits that are based on the employees’ compensation and years of service. The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortized method the Bank is using recognizes the prior service cost and net gains or losses over the average remaining service period of active employees.
		The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.
		The following table represents net periodic benefit costs recognized:

Three months ended September 30,
(in thousands)

										Supplemental Executive
		Pension Benefits								Retirement Plan
		2005				2004				2005				2004
Service cost		$	72			$	54			$	26			$	22
Interest cost			44				38				37				35
Expected return on plan assets			(48	)			(42	)			—				—
Amortization of prior service cost			(4	)			(4	)			15				24
Amortization of the net loss			1				1				4				3
Net periodic benefit cost		$	65			$	47			$	82			$	84

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Nine months ended September 30,
(in thousands)

										Supplemental Executive
		Pension Benefits								Retirement Plan
		2005				2004				2005				2004
Service cost		$	216			$	162			$	78			$	66
Interest cost			132				114				111				105
Expected return on plan assets			(144	)			(126	)			—				—
Amortization of prior service cost			(12	)			(12	)			45				72
Amortization of the net loss			3				3				12				9
Net periodic benefit cost		$	195			$	141			$	246			$	252

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 (“FASB”) 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 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.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

     The Company’s unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America 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 unaudited consolidated financial statements and accompanying 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 than others, and as such have a greater possibility of producing results that could be materially different than originally reported.

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     The most significant accounting policies followed by the Company are presented in Note 1 to the Company’s audited consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2004. These policies provide information on how significant assets and liabilities are valued in the Company’s unaudited consolidated financial statements contained in this Report 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 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 losses represents management’s estimate of probable credit losses in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on the impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheets.

     The amount of goodwill reflected in the Company’s 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 and the use of estimates related to the growth assumptions and market multiples used in the valuation model.

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ANALYSIS OF FINANCIAL CONDITION

Average Balance Sheet

     The following table presents 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 balances include both performing and non-performing loans. Investments are included at amortized cost. Yields are presented on a non-tax-equivalent basis.

		Three Months Ended												Three Months Ended
		September 30, 2005												September 30, 2004
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
		(dollars in thousands)												(dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net		$	245,346			$	4,307				7.02	%		$	200,781			$	3,006				5.99	%
Taxable securities			124,928				1,154				3.69	%			104,882				926				3.53	%
Tax-exempt securities			45,917				478				4.16	%			49,578				524				4.23	%
Time deposits-other banks			—				—				0.00	%			1,071				4				1.49	%
Federal funds sold			2,770				13				1.88	%			5,044				19				1.51	%
Total interest-earning assets			418,961				5,952				5.68	%			361,356				4,479				4.96	%
Non interest-earning assets
Cash and due from banks			10,207												10,471
Premises and equipment, net			8,284												7,318
Other assets			26,083												17,600
Total Assets		$	463,535											$	396,745
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
NOW		$	12,443			$	5				0.16	%		$	11,207			$	6				0.21	%
Regular savings			93,774				200				0.85	%			85,917				127				0.59	%
Muni-Vest savings			50,318				380				3.02	%			69,539				258				1.48	%
Time deposits			135,560				1,068				3.15	%			105,996				658				2.48	%
Fed funds purchased			4,766				42				3.52	%			2,810				11				1.57	%
Securities sold U/A to repurchase			6,070				12				0.79	%			6,997				14				0.80	%
FHLB advances			39,654				311				3.14	%			18,755				153				3.26	%
Junior subordinated debentures			11,330				173				6.11	%			—				—				0.00	%
Notes Payable			453				3				2.65	%			667				5				3.00	%
Total interest-bearing liabilities			354,368			$	2,194				2.48	%			301,888			$	1,232				1.63	%
Noninterest-bearing liabilities
Demand deposits			64,900												55,138
Other			7,362												5,339
Total liabilities		$	426,630											$	362,365
Stockholders’ equity			36,905												34,380
Total Liabilities and Equity		$	463,535											$	396,745
Net interest earnings						$	3,758											$	3,247
Net yield on interest earning assets											3.59	%											3.59	%
Interest rate spread											3.20	%											3.33	%