EVANS BANCORP INC - Quarter Report: 2005 June (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 June 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                     

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

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 an accelerated filer (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— 2,592,311 shares as of July 27, 2005

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets–June 30, 2005 and December 31, 2004		1
Unaudited Consolidated Statements of Income-Three months ended June 30, 2005 and 2004		2
Unaudited Consolidated Statements of Income- Six months ended June 30, 2005 and 2004		3
Unaudited Consolidated Statements of Stockholders’ Equity–Six months ended June 30, 2005 and 2004		4
Unaudited Consolidated Statements of Cash Flows–Six months ended June 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		12
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3. Defaults upon Senior Securities		None
Item 4. Submission of Matters to a Vote of Security Holders		21
Item 5. Other Information		None
Item 6. Exhibits		21
SIGNATURES		22

 1

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(in thousands, except share and per share amounts)

		June 30,				December 31,
		2005				2004
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	14,311			$	8,124
Interest bearing deposits at other banks			—				984
Securities:
Available-for-sale, at fair value			169,147				166,817
Held-to-maturity, at amortized cost			4,481				3,062
Loans, net of allowance for loan losses of $3,165 in 2005 and $2,999 in 2004			240,457				217,599
Properties and equipment, net			8,310				7,747
Goodwill			9,532				9,219
Intangible assets			2,916				3,170
Bank-owned life insurance			7,580				7,943
Other assets			5,806				4,377
TOTAL ASSETS		$	462,540			$	429,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	63,508			$	54,013
NOW			11,904				11,650
Regular savings			93,111				101,540
Muni-Vest savings			55,393				40,235
Time deposits			138,130				94,490
Total deposits			362,046				301,928
Other borrowed funds			40,391				68,034
Junior subordinated debentures			11,330				11,330
Securities sold under agreements to repurchase			5,640				7,306
Other liabilities			6,347				4,970
Total liabilities			425,754				393,568
CONTINGENT LIABILITIES AND COMMMITMENTS
STOCKHOLDERS’ EQUITY:
Common stock, $.50 par value; 10,000,000 shares authorized; 2,615,123 and 2,615,123 shares issued, respectively, and 2,594,311 and 2,592,423 shares outstanding, respectively			1,307				1,307
Capital surplus			23,455				23,361
Retained earnings			12,365				10,808
Accumulated other comprehensive income, net of tax			176				563
Less: Treasury stock, at cost (20,812 and 22,700 shares, respectively)			(517	)			(565	)
Total stockholders’ equity			36,786				35,474
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	462,540			$	429,042

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands, execept share and per share amounts)

		Three Months Ended
		June 30,
		2005				2004
INTEREST INCOME
Loans		$	3,886			$	2,885
Federal funds sold/Interest on deposits at other banks			63				30
Securities:
Taxable			1,257				904
Non-taxable			488				539
Total interest income			5,694				4,358
INTEREST EXPENSE
Deposits			1,599				1,012
Borrowings			342				183
Junior subordinated debentures			158				—
Total interest expense			2,099				1,195
NET INTEREST INCOME			3,595				3,163
PROVISION FOR LOAN LOSSES			188				136
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			3,407				3,027
NON-INTEREST INCOME:
Bank service charges			500				480
Insurance service and fees			1,549				1,094
Net gain on sales of securities			12				—
Premium on loans sold			3				2
Bank-owned life insurance			103				101
Life insurance proceeds			80				—
Other			260				261
Total non-interest income			2,507				1,938
NON-INTEREST EXPENSE:
Salaries and employee benefits			2,280				1,876
Occupancy			480				397
Supplies			92				69
Repairs and maintenance			146				109
Advertising and public relations			112				89
Professional services			259				187
Amortization of intangibles			127				84
Other Insurance			102				86
Other			704				648
Total non-interest expense			4,302				3,545
INCOME BEFORE INCOME TAXES			1,612				1,420
INCOME TAXES			437				342
NET INCOME		$	1,175			$	1,078
Net income per common share-basic		$	0.45			$	0.41
Net income per common share-diluted		$	0.45			$	0.41
Weighted average number of common shares			2,593,944				2,598,098
Weighted average number of diluted shares			2,596,751				2,599,901

See notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands, execept share and per share amounts)

		Six Months Ended
		June 30,
		2005				2004
INTEREST INCOME
Loans		$	7,414			$	5,656
Federal funds sold/Interest on deposits at other banks			99				51
Securities:
Taxable			2,402				1,581
Non-taxable			978				1,093
Total interest income			10,893				8,381
INTEREST EXPENSE
Deposits			2,849				1,858
Borrowings			786				363
Junior subordinated debentures			301				—
Total interest expense			3,936				2,221
NET INTEREST INCOME			6,957				6,160
PROVISION FOR LOAN LOSSES			339				272
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			6,618				5,888
NON-INTEREST INCOME:
Bank service charges			988				910
Insurance service and fees			3,576				2,483
Net gain on sales of securities			105				144
Premium on loans sold			12				7
Bank-owned life insurance			206				172
Life insurance proceeds			80				—
Other			568				553
Total non-interest income			5,535				4,269
NON-INTEREST EXPENSE:
Salaries and employee benefits			4,647				3,855
Occupancy			988				806
Supplies			197				156
Repairs and maintenance			294				211
Advertising and public relations			273				173
Professional services			548				363
Amortization of intangibles			254				172
Other Insurance			196				173
Other			1,390				1,271
Total non-interest expense			8,787				7,180
INCOME BEFORE INCOME TAXES			3,366				2,977
INCOME TAXES			929				730
NET INCOME		$	2,437			$	2,247
Net income per common share-basic		$	0.94			$	0.86
Net income per common share-diluted		$	0.94			$	0.86
Weighted average number of common shares			2,592,494				2,598,722
Weighted average number of diluted shares			2,595,630				2,600,725

See notes to Unaudited Consolidated Financial Statements

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 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											2,247												2,247
Unrealized loss on available-for-sale securities, net of tax effect of $1,574 and reclassification adjustment of $(143)															(2,467	)							(2,467	)
Total comprehensive income																							(220	)
Cash dividends ($0.31 per common share)											(818	)											(818	)
Stock options expense							81																81
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 15,500 shares for treasury																			(377	)			(377	)
Balance, June 30, 2004		$	1,245			$	20,148			$	12,581			$	(549	)		$	(448	)		$	32,977
Balance, January 1, 2005		$	1,307			$	23,361			$	10,808			$	563			$	(565	)		$	35,474
Comprehensive income:
Net Income											2,437												2,437
Unrealized loss on available-for-sale securities, net of tax effect of $247 and reclassification adjustment of $(105)															(387	)							(387	)
Total comprehensive income																							2,050
Cash dividends ($0.33 per common share)											(857	)											(857	)
Stock options expense							94																94
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 11,200 shares for treasury																			(262	)			(262	)
Balance, June 30, 2005		$	1,307			$	23,455			$	12,365			$	176			$	(517	)		$	36,786

See Notes to Unaudited Consolidated Financial Statements

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands)

		Six Months Ended
		June 30,
		2005				2004
OPERATING ACTIVITIES:
Interest received		$	11,080			$	8,443
Fees received			5,145				4,016
Interest paid			(3,717	)			(2,211	)
Cash paid to employees and suppliers			(7,499	)			(6,604	)
Income taxes paid			(702	)			(871	)
Net cash provided by operating activities			4,307				2,773
INVESTING ACTIVITIES:
Available-for-sales securities:
Purchases			(23,085	)			(66,938	)
Proceeds from sales			7,062				12,266
Proceeds from maturities			13,871				15,258
Held to maturity securities:
Purchases			(1,799	)			(3,237	)
Proceeds from maturities			344				1,194
Additions to properties and equipment			(969	)			(1,511	)
Increase in loans, net of repayments			(25,015	)			(14,305	)
Proceeds from sales of loans			1,808				1,254
Proceeds from sales of other real estate owned			—				(6	)
Additions to goodwill and intangibles			(313	)			—
Acquisitions			—				(98	)
Net cash used in investing activities			(28,096	)			(56,123	)
FINANCING ACTIVITIES:
Proceeds from borrowings			—				7,158
Repayments of borrowings			(26,766	)			(5,762	)
Repayments of long-term borrowings			(2,543	)			(134	)
Increase in deposits			60,117				55,031
Dividends paid, net			(857	)			(818	)
Purchase of treasury stock			(262	)			(377	)
Re-issuance of treasury stock			287				264
Net cash provided by financing activities			29,976				55,362
Net increase in cash and equivalents			6,187				2,012
CASH AND CASH EQUIVALENTS:
Beginning of period			8,124				8,509
End of period		$	14,311			$	10,521

(continued)

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands)

		Six Months Ended
		June 30,
		2005				2004
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income		$	2,437			$	2,247
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			978				778
Provision for loan losses			339				272
Net (gain) loss on sales of assets			(105	)			(138	)
Premiums on loans sold			(12	)			(7	)
Stock options expense			94				81
Changes in assets and liabilities affecting cash flow:
Other assets			(765	)			(767	)
Other liabilities			1,341				307
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	4,307			$	2,773
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTMENTS AND FINANCIAL 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

PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 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, ENB Associates Inc. (“ENB”), 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 subsidiary, Frontier Claims Services, Inc., (“FCS”) 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. 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 six month period ended June 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 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 six month periods ended June 30, 2005 and 2004.

Allowance for loan losses

		Six months ended June 30,
		2005				2004
		(In thousands)
Beginning balance, January 1		$	2,999			$	2,539
Charge-offs:
Commercial			(175	)			—
Real estate mortgages			(1	)			—
Installment loans			(42	)			(5	)
Direct financing leases			—				—
Total charge-offs			(218	)			(5	)
Recoveries:
Commercial			—				48
Real estate mortgages			—				8
Installment loans			—				2
Direct financing leases			45				—
Total recoveries			45				58
Net (chargeoffs) recoveries			(173	)			53
Provision for loan losses			339				272
Ending blanace, June 30			3,165				2,864
Ratio of net charge-offs to average net loans outstanding (annualized)			0.3	%			(0.1	)%

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 2,807 and 3,136 dilutive shares for the three and six month periods ended June 30, 2005, respectively. There were 1,803 and 2,003 dilutive shares for the three and six month periods ended June 30, 2004, respectively. On February 16, 2005, the Company declared a cash dividend of $0.33 per share paid on April 4, 2005 to shareholders of record as of March 14, 2005. All share and per share amounts have been adjusted to reflect a 5% stock dividend paid in December 2004.
6.		TREASURY STOCK
		During the quarter ended June 30, 2005 the Company repurchased 8,600 shares of common stock at an average cost of $23.40 per share, pursuant to the Company’s publicly announced repurchase program.

7.		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 six month periods ended June 30, 2005 and 2004.

		Three Months Ended
		June 30, 2005
		(in thousands)
						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	3,691				($96	)		$	3,595
Provision for loan losses			188				—				188
Net interest income (expense) after provision for loan losses			3,503				(96	)			3,407
Non-interest income			958				—				958
Insurance commission and fees			—				1,549				1,549
Non-interest expense			3,203				1,099				4,302
Income before income taxes			1,258				354				1,612
Income taxes			296				141				437
Net income		$	962			$	213			$	1,175

		Six Months Ended
		June 30, 2005
		(in thousands)
						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	7,140				($183	)		$	6,957
Provision for loan losses			339				—				339
Net interest income (expense) after provision for loan losses			6,801				(183	)			6,618
Non-interest income			1,959				—				1,959
Insurance commission and fees			—				3,576				3,576
Non-interest expense			6,443				2,344				8,787
Income before income taxes			2,317				1,049				3,366
Income taxes			510				419				929
Net income		$	1,807			$	630			$	2,437

		Three Months Ended
		June 30, 2004
		(in thousands)
						Insurance
		Banking Activities				Agency Activities				Total
Net interest income (expense)		$	3,168				($5	)		$	3,163
Provision for loan losses			136				—				136
Net interest income (expense) after provision for loan losses			3,032				(5	)			3,027
Non-interest income			844				—				844
Insurance commissions and fees			—				1,094				1,094
Non-interest expense			2,692				853				3,545
Income before income taxes			1,184				236				1,420
Income taxes			248				94				342
Net income		$	936			$	142			$	1,078

		Six Months Ended
		June 30, 2004
		(in thousands)
						Insurance
		Banking Activities				Agency Activities				Total
Net interest income (expense)			6,170				(10	)			6,160
Provision for loan losses			272				—				272
Net interest income (expense) after provision for loan losses			5,898				(10	)			5,888
Non-interest income			1,786				—				1,786
Insurance commissions and fees			—				2,483				2,483
Non-interest expense			5,387				1,793				7,180
Income before income taxes			2,297				680				2,977
Income taxes			458				272				730
Net income			1,839				408				2,247

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.

8.		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 June 30, 2005 and 2004 is as follows:

		2005				2004
		(in thousands)
Commitments to extend credit		$	65,716			$	44,777
Standby letters of credit			2,244				1,640
Total		$	67,960			$	46,417

Commitments to extend credit and standby letters of credit include exposure to some 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 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
June 30, 2005, there were no claims pending against the Company that management considered to be significant.

9.		RECLASSIFICATIONS
		Certain reclassifications have been made to the 2004 consolidated financial statements to conform with the presentation used in 2005.
10.		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 June 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

		Six months ended June 30,
		(in thousands)
										Supplemental Executive
		Pension Benefits								Retirement Plan
		2005				2004				2005				2004
Service cost		$	144			$	108			$	52			$	44
Interest cost			88				76				74				70
Expected return on plan assets			(96	)			(84	)			—				—
Amortization of prior service cost			(8	)			(8	)			30				48
Amortization of the net loss			2				2				8				6
Net periodic benefit cost		$	130			$	94			$	164			$	168

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 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.

     The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements in the Company’s 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 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.

 14

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
						June 30, 2005												June 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		$	232,111			$	3,886				6.70	%		$	192,691			$	2,885				5.99	%
Taxable securities			134,612				1,257				3.74	%			106,238				904				3.40	%
Tax-exempt securities			46,371				488				4.21	%			49,821				539				4.33	%
Time deposits-other banks			—				—				0.00	%			1,083				4				1.63	%
Federal funds sold			3,988				63				6.39	%			9,268				26				1.11	%
Total interest-earning assets			417,082				5,694				5.46	%			359,101				4,358				4.85	%
Non interest-earning assets
Cash and due from banks			10,101												10,642
Premises and equipment, net			8,326												6,516
Other assets			26,157												16,506
Total Assets		$	461,666											$	392,765
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
NOW		$	12,165			$	5				0.18	%		$	12,195			$	6				0.20	%
Regular savings			94,666				194				0.82	%			81,643				90				0.44	%
Muni-Vest savings			64,377				437				2.71	%			82,142				298				1.45	%
Time deposits			128,648				963				2.99	%			98,925				618				2.50	%
Fed funds purchased			1,645				15				3.76	%			551				1				0.89	%
Securities sold U/A to repurchase			5,324				10				0.73	%			6,269				13				0.82	%
FHLB advances			40,460				314				3.10	%			18,526				164				3.54	%
Junior subordinated debentures			11,330				158				5.58	%			—				—				0.00	%
Notes Payable			506				3				2.29	%			724				5				2.63	%
Total interest-bearing liabilities			359,121			$	2,099				2.34	%			300,975			$	1,195				1.59	%
Noninterest-bearing liabilities
Demand deposits			60,958												53,936
Other			5,962												4,443
Total liabilities		$	426,041											$	359,354
Stockholders’ equity			35,625												33,411
Total Liabilities and Equity		$	461,666											$	392,765
Net interest earnings						$	3,595											$	3,163
Net yield on interest earning assets											3.45	%											3.52	%
Interest rate spread											3.12	%											3.26	%