EVANS BANCORP INC - Quarter Report: 2007 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, 2007

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.)

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer o                Accelerated filer o                Non-accelerated filer 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 2,747,675 shares as of August 1, 2007

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets – June 30, 2007 and December 31, 2006			1
Unaudited Consolidated Statements of Operations — Three months ended June 30, 2007 and 2006			2
Unaudited Consolidated Statements of Income-Six months ended June 30, 2007 and 2006			3
Unaudited Consolidated Statements of Stockholders’ Equity-Six months ended June 30, 2007 and 2006			4
Unaudited Consolidated Statements of Cash Flows–Six months ended June 30, 2007 and 2006			5
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 6. Exhibits			29
SIGNATURES			30
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND DECEMBER 31, 2006
(in thousands, except share and per share amounts)

		June 30,				December 31,
		2007				2006
ASSETS
Cash and due from banks		$	13,907			$	11,710
Interest-bearing deposits at banks			568				882
Securities:
Available for sale, at fair value			115,387				133,519
Held to maturity, at amortized cost			2,387				4,211
Loans and leases, net of allowance for loan and lease losses of $3,866 in 2007 and $3,739 in 2006			298,452				285,367
Properties and equipment, net			8,536				8,743
Goodwill			10,006				10,003
Intangible assets			2,012				2,298
Bank-owned life insurance			10,457				10,140
Other assets			7,780				7,021
TOTAL ASSETS		$	469,492			$	473,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	74,434			$	72,125
NOW			10,178				11,253
Regular savings			87,771				85,084
Muni-vest			45,162				31,240
Time			155,582				156,047
Total deposits			373,127				355,749
Securities sold under agreement to repurchase			6,622				8,954
Other short-term borrowings			5,800				24,753
Other liabilities			9,457				9,089
Junior subordinated debentures			11,330				11,330
Long-term borrowings			22,095				24,476
Total liabilities			428,431				434,351
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS’ EQUITY:
Common stock, $.50 par value; 10,000,000 shares authorized; 2,753,321 and 2,745,338 shares issued, respectively, and 2,747,675 and 2,733,056 shares outstanding, respectively			1,377				1,373
Capital surplus			26,283				26,160
Retained earnings			14,416				14,196
Accumulated other comprehensive loss, net of tax			(906	)			(1,917	)
Less: Treasury stock, at cost (5,646 and 12,282 shares, respectively)			(109	)			(269	)
Total stockholders’ equity			41,061				39,543
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	469,492			$	473,894

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands, except share and per share amounts)

		Three Months Ended
		June 30,
		2007				2006
INTEREST INCOME
Loans and leases		$	6,094			$	4,942
Interest bearing deposits at banks			10				19
Securities:
Taxable			861				1,075
Non-taxable			435				483
Total interest income			7,400				6,519
INTEREST EXPENSE
Deposits			2,670				2,126
Other borrowings			313				557
Junior subordinated debentures			223				206
Total interest expense			3,206				2,889
NET INTEREST INCOME			4,194				3,630
PROVISION FOR LOAN AND LEASE LOSSES			345				228
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES			3,849				3,402
NON-INTEREST INCOME:
Bank charges			548				477
Insurance service and fees			1,423				1,510
Net loss on sales of securities			(2,302	)			—
Premium on loans sold			4				1
Bank-owned life insurance			177				128
Other			439				373
Total non-interest income			289				2,489
NON-INTEREST EXPENSE:
Salaries and employee benefits			2,621				2,440
Occupancy			525				501
Supplies			73				83
Repairs and maintenance			140				134
Advertising and public relations			133				190
Professional services			273				251
Amortization of intangibles			142				135
Other insurance			90				90
Other			715				660
Total non-interest expense			4,712				4,484
(LOSS) INCOME BEFORE INCOME TAXES			(574	)			1,407
INCOME TAX (BENEFIT) PROVISION			(435	)			336
NET (LOSS) INCOME		$	(139	)		$	1,071
Net (loss) income per common share-basic		$	(0.05	)		$	0.39
Net (loss) income per common share-diluted		$	(0.05	)		$	0.39
Cash dividends per common share		$	0.00			$	0.00
Weighted average number of common shares			2,743,819				2,724,710
Weighted average number of diluted shares			2,743,819				2,727,803

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, 2007 AND 2006
(in thousands, except share and per share amounts)

		Six Months Ended
		June 30,
		2007				2006
INTEREST INCOME
Loans and leases		$	11,694			$	9,567
Interest bearing deposits at banks			97				30
Securities:
Taxable			1,873				2,179
Non-taxable			878				957
Total interest income			14,542				12,733
INTEREST EXPENSE
Deposits			5,373				4,021
Other borrowings			663				1,040
Junior subordinated debentures			441				398
Total interest expense			6,477				5,459
NET INTEREST INCOME			8,065				7,274
PROVISION FOR LOAN AND LEASE LOSSES			660				510
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES			7,405				6,764
NON-INTEREST INCOME:
Bank charges			1,019				975
Insurance service and fees			3,552				3,687
Net loss on sales of securities			(2,303	)			—
Premium on loans sold			5				4
Bank-owned life insurance			317				233
Other			843				736
Total non-interest income			3,433				5,635
NON-INTEREST EXPENSE:
Salaries and employee benefits			5,289				4,941
Occupancy			1,128				1,033
Supplies			151				168
Repairs and maintenance			279				271
Advertising and public relations			220				261
Professional services			525				395
Amortization of intangibles			286				265
Other insurance			180				177
Other			1,586				1,459
Total non-interest expense			9,644				8,970
INCOME BEFORE INCOME TAXES			1,194				3,429
INCOME TAXES			46				952
NET INCOME		$	1,148			$	2,477
Net income per common share-basic		$	0.42			$	0.91
Net income per common share-diluted		$	0.42			$	0.91
Cash dividends per common share		$	0.34			$	0.34
Weighted average number of common shares			2,737,232				2,723,835
Weighted average number of diluted shares			2,737,914				2,725,870

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, 2007 AND 2006
(in thousands, except share and per share amounts)

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive				Treasury
		Stock				Surplus				Earnings				(Loss)				Stock				Total
Balance, January 1, 2006		$	1,373			$	26,155			$	11,087			$	(1,387	)		$	(352	)		$	36,876
Impact of adopting SAB 108, net of tax $12											43												43
Comprehensive income:
Net Income											2,477												2,477
Net unrealized loss on available-for-sale securities, net of tax effect of $737															(1,156	)							(1,156	)
Total comprehensive income																							1,364
Cash dividends ($0.34 per common share)											(928	)											(928	)
Stock options expense							60																60
Reissued 9,642 shares treasury stock under dividend reinvestment plan							(33	)											219				186
Reissued 5,773 shares treasury stock under employee stock purchase plan							(29	)											129				100
Purchased 18,050 shares for treasury																			(386	)			(386	)
Balance, June 30, 2006		$	1,373			$	26,153			$	12,679			$	(2,543	)		$	(390	)		$	37,272
Balance, January 1, 2007		$	1,373			$	26,160			$	14,196			$	(1,917	)		$	(269	)		$	39,543
Comprehensive income:
Net Income											1,148												1,148
Net unrealized gain on available-for sale securities, net of reclassification of loss of $1,413 (after tax) and tax effect of ($629)															985								985
Amortization of prior service cost and net loss, net of tax effect ($17)															26								26
Total comprehensive income																							2,159
Cash dividends ($0.34 per common share)											(928	)											(928	)
Stock options expense							56																56
Reissued 8,747 shares treasury stock under dividend reinvestment plan							(21	)											195				174
Reissued 2,500 shares of restricted stock							(53	)											53				—
Issued 7,983 shares treasury stock			4				161																165
Reissued 4,689 shares treasury stock under employment stock purchase plan							(20	)											101				81
Purchased 9,300 shares for treasury																			(189	)			(189	)
Balance, June 30, 2007		$	1,377			$	26,283			$	14,416			$	(906	)		$	(109	)		$	41,061

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
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands)

		Six Months Ended
		June 30,
		2007				2006
OPERATING ACTIVITIES:
Interest received		$	13,748			$	13,025
Fees received			5,367				5,413
Interest paid			(6,416	)			(5,523	)
Cash paid to employees and suppliers			(8,525	)			(7,806	)
Income taxes paid			(1,069	)			(897	)
Proceeds from sale of loans held for resale			1,117				684
Originations of loans held for resale			(1,385	)			(887	)
Net cash provided by operating activities			2,837				4,009
INVESTING ACTIVITIES:
Available for sales securities:
Purchases			(66,937	)			(333	)
Proceeds from sales			45,653				—
Proceeds from maturities			39,733				10,328
Held to maturity securities:
Purchases			(93	)			(2,052	)
Proceeds from maturities			1,917				1,861
Additions to properties and equipment			(193	)			(409	)
Increase in loans, net of repayments			(13,676	)			(12,943	)
Sale of other real estate			(6	)			—
Acquisitions			—				(184	)
Cash paid on earn-out agreements			(202	)			(57	)
Net cash provided by used in investing activities			6,196				(3,789	)
FINANCING ACTIVITIES:
Repayments of short-term borrowings			(21,285	)			(5,458	)
Repayments of long-term borrowings			(2,381	)			(2,459	)
Increase in deposits			17,378				6,200
Dividends paid			(928	)			(928	)
Purchase of treasury stock			(189	)			(386	)
Re-issuance of treasury stock			255				286
Net cash used in financing activities			(7,150	)			(2,745	)
Net increase (decrease) in cash and equivalents			1,883				(2,525	)
CASH AND CASH EQUIVALENTS:
Beginning of period			12,592				15,635
End of period		$	14,475			$	13,110

PART I—FINANCIAL INFORMATION
ITEM I—FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands)

		Six Months Ended
		June 30,
		2007				2006
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income		$	1,148			$	2,477
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			856				861
Deferred tax expense (benefit)			91				(303	)
Provision for loan and lease losses			660				510
Net loss on sales of assets			2,309				—
Premiums on loans sold			(5	)			(4	)
Stock options expense			56				60
Proceeds from sale of loans held for resale			1,117				684
Originations of loans held for resale			(1,385	)			(887	)
Changes in assets and liabilities affecting cash flow:
Other assets			(2,968	)			(122	)
Other liabilities			958				733
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	2,837			$	4,009
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of shares for earn out agreement		$	165			$	—

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, 2007 AND 2006

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: (i) Evans National Bank (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”) and Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, Inc. (“ENFS”), and ENFS’s subsidiary ENB Insurance Agency, Inc. (“ENBI”) and ENBI’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENB”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles 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 the Company’s 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 three and six month period ended June 30, 2007 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, 2006.
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 unrealized gains and losses excluded from earnings and reported net of deferred income taxes, in accumulated other comprehensive loss, a component of stockholders’ equity. Available-for-sale securities are net of unrealized losses of $0.3 million, $1.5 million and $1.9 million as of June 30, 2007, March 31, 2007, and December 31, 2006, respectively. As of June 30, 2007 the securities portfolio did not contain any other than temporary declines in fair value.
3.		ALLOWANCE FOR LOAN AND LEASE LOSSES
		The allowance for loan and lease losses represents the amount charged against the Bank’s earnings to establish an allowance for probable loan and lease losses based on the management of the Bank’s evaluation of the loan and lease portfolio. Factors considered by the Bank’s management in establishing the allowance include: the collectibility of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease 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 and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectibility of the loans and leases 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 and lease losses is composed of three components: specific credit allocation, general portfolio allocation and a subjective 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 historical loss experience of the loan or lease category.
		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 and lease portfolio and changes in the composition of and growth in the loan and lease 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 and leases; historical loan and lease charge-off experience; and the results of bank regulatory examinations.
		The following table sets forth information regarding the allowance for loan and lease losses for the six month periods ended June 30, 2007 and 2006.

Allowance for loan and lease losses

		Six months ended June 30,
		2007				2006
		(in thousands)
Beginning balance, January 1		$	3,739			$	3,211
Charge-offs:
Commercial			(153	)			(105	)
Real estate			(5	)			—
Installment loans			(4	)			(28	)
Overdrafts			(16	)			(14	)
Direct financing leases			(400	)			(105	)
Total charge-offs			(578	)			(252	)
Recoveries:
Commercial			9				41
Real estate			—				—
Installment loans			1				56
Overdrafts			8				9
Direct financing leases			27				29
Total recoveries			45				135
Net charge-offs			(533	)			(117	)
Provision for loan and lease losses			660				510
Ending balance, June 30		$	3,866			$	3,604
Ratio of net charge-offs to average net loans and leases outstanding (annualized)			0.37	%			0.09	%

4.		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 682 dilutive shares for the six month periods ended June 30, 2007. There were no dilutive securities for the three months ended June 30, 2007. There were 3,093 and 2,035 dilutive shares for the three and six month periods ended June 30, 2006. On February 23, 2007, the Company declared a cash dividend of $0.34 per share payable on April 2, 2007 to shareholders of record as of March 12, 2007.
		Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive. In accordance with SFAS No. 128, “Earnings Per Share,” these shares were not included in calculating diluted earnings per share. As of the three and six month periods ended June 30, 2007, there were approximately 74 thousand and 61 thousand shares, respectively, that are not included in calculating diluted earnings per share because their effect was anti-dilutive. As of the three and six month periods ended June 30, 2006, there were approximately 46 thousand and 59 thousand shares that are not included in calculating diluted earnings per share because their effect was anti-dilutive.
5.		TREASURY STOCK
		During the quarter ended June 30, 2007 the Company repurchased 5,800 shares of common stock at an average cost of $20.14 per share, pursuant to the Company’s publicly announced common stock repurchase program.
6.		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, 2007 and 2006.

Three Months Ended
June 30, 2007
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	4,297			$	(103	)		$	4,194
Provision for loan and lease losses			345				—				345
Net interest income (expense) after provision for loan and lease losses			3,952				(103	)			3,849
Non-interest income			(1,134	)			—				(1,134	)
Insurance service and fees			—				1,423				1,423
Non-interest expense			3,577				1,135				4,712
(Loss) income before income taxes			(759	)			185				(574	)
Income tax (benefit) provision			(509	)			74				(435	)
Net (loss) income		$	(250	)		$	111			$	(139	)

Six Months Ended
June 30, 2007
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	8,288			$	(223	)		$	8,065
Provision for loan and lease losses			660				—				660
Net interest income (expense) after provision for loan and lease losses			7,628				(223	)			7,405
Non-interest income			(119	)			—				(119	)
Insurance service and fees			—				3,552				3,552
Non-interest expense			7,360				2,284				9,644
Income before income taxes			149				1,045				1,194
Income tax (benefit) provision			(372	)			418				46
Net income		$	521			$	627			$	1,148

Three Months Ended
June 30, 2006
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	3,744			$	(114	)		$	3,630
Provision for loan and lease losses			228				—				228
Net interest income (expense) after provision for loan and lease losses			3,516				(114	)			3,402
Non-interest income			979				—				979
Insurance service and fees			—				1,510				1,510
Non-interest expense			3,369				1,115				4,484
Income before income taxes			1,126				281				1,407
Income taxes			224				112				336
Net income		$	902			$	169			$	1,071

 11

Six Months Ended
June 30, 2006
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	7,506			$	(232	)		$	7,274
Provision for loan and lease losses			510				—				510
Net interest income (expense) after provision for loan and lease losses			6,996				(232	)			6,764
Non-interest income			1,948				—				1,948
Insurance service and fees			—				3,687				3,687
Non-interest expense			6,651				2,319				8,970
Income before income taxes			2,293				1,136				3,429
Income taxes			498				454				952
Net income		$	1,795			$	682			$	2,477

7.		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, 2007 and 2006 is as follows:

		2007				2006
		(in thousands)
Commitments to extend credit		$	57,662			$	54,966
Standby letters of credit			2,089				2,080
Total		$	59,751			$	57,046

		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 Activities.” The changes in the fair value of these commitments due to interest rate risk are not recorded on the consolidated balance sheets as the fair value of these derivatives are not considered material.

The Company is subject to possible litigation proceedings in the normal course of business. As of June 30, 2007, there were no claims pending against the Company that management considered to be material.

8. RECLASSIFICATIONS AND ERROR CORRECTION

Certain reclassifications have been made to the 2006 unaudited consolidated financial statements to conform with the presentation used in 2007.

In the second quarter of 2007, the Company identified an error in its amortization of deferred loan fees in accordance with SFAS 91. The amortization of these fees was understated by $173 thousand ($106 thousand after tax) due to a systems error in 2005, 2006 and the first quarter of 2007. The correction of this error was recorded in the three months ended June 30, 2007 as a $173 thousand increase to loan interest income. Income tax expense was increased by $67 thousand, resulting in an increase in net income of $106 thousand. Neither the origination nor the correction of the error was material to our financial statements.

9. 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
		2007				2006				2007				2006
Service cost		$	91			$	79			$	15			$	29
Interest cost			61				49				40				38
Expected return on plan assets			(62	)			(58	)			—				—
Amortization of prior service cost			(4	)			(4	)			14				14
Amortization of the net loss			7				6				4				4
Net periodic benefit cost		$	93			$	72			$	73			$	85

		Six months ended June 30, (in thousands)
										Supplemental Executive
		Pension Benefits								Retirement Plan
		2007				2006				2007				2006
Service cost		$	183			$	158			$	29			$	58
Interest cost			121				98				80				76
Expected return on plan assets			(123	)			(116	)			—				—
Amortization of prior service cost			(8	)			(8	)			28				28
Amortization of the net loss			15				12				9				8
Net periodic benefit cost		$	188			$	144			$	146			$	170

10. INCOME TAXES

Income tax expense totaled $46 thousand for the six month period ended June 30, 2007 for an effective tax rate of 3.9%. There was an income tax benefit of $(435) thousand for the second quarter. The low effective tax rate for the year-to-date and the income tax benefit for the quarter were due to the loss on sale of securities of $2.3 million incurred in the second quarter. Excluding the loss on sale of securities, the effective tax rate on all other income for the three-month and six-month periods ended June 30, 2007 was 26.3% and 26.7%, respectively, compared to 23.9% and 27.8% in the prior year. Excluding the loss on sale of securities, 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.

11. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting for Uncertainty in Income Taxes – In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” to set out a consistent framework for tax preparers to use to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50 percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company adopted FIN 48 as of January 1, 2007. There were no unrecognized tax benefits or penalties at the date of adoption.

The Internal Revenue Service (IRS) commenced examinations of the Company’s U.S. Federal income tax returns for 2003, 2004, and 2005 in the first quarter of 2007. It is anticipated that the examination related to these returns will be completed within the next twelve months. To date, there are no proposed adjustments that will have a material impact on the Company’s financial position or results of operations. All penalties or interest on adjustments, if any, will be expensed as income tax expense.

Fair Value Measurements (SFAS 157) – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). This standard defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In addition, SFAS 157 precludes the use of block discounts and supersedes the guidance in EITF 02-3, which prohibited the recognition of day-1 gains on certain derivative trades when determining the fair value of instruments not traded in an active market. With the adoption of this standard, these changes will be reflected as a cumulative effect adjustment to the opening balance of retained earnings. The standard also requires the Company to reflect its own credit standing when measuring the fair value of debt it has issued that is carried at fair value, including derivatives, prospectively from the date of adoption.

SFAS 157 is effective for the Company’s fiscal year beginning January 1, 2008, with earlier adoption permitted for the Company’s fiscal year beginning January 1, 2007. The Company did not early adopt FAS 157. The Company is currently evaluating the potential impact of adopting this standard.

Fair Value Option (SFAS 159) – On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). Under this Standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met.

SFAS 159 is effective for years beginning after November 15, 2007. Early adoption within 120 days of the beginning of a company’s 2007 fiscal year is permissible, provided the company has not yet issued interim financial statements for 2007 and has adopted SFAS 157. The Company did not early adopt FAS 159. The Company is currently evaluating the potential impact of adopting this standard.

Split-Dollar Life Insurance - At its September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or Accounting Principles Board Opinion (“APB”) No. 12, “Omnibus Opinion — 1967.” The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The provisions of Issue 06-06 should be applied through either a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or retrospective application. The Company has endorsement split-dollar life insurance policies covering certain directors and employees.

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 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.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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.

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.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents management’s estimate of probable losses in the Bank’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.

Goodwill

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.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

     Total gross loans and leases grew to $302.3 million at June 30, 2007, reflecting a $7.9 million or 2.7% increase from March 31, 2007 and a $13.2 million or 4.6% increase from December 31, 2006. Gross loans and leases are net of $8.5 million, $8.2 million of unearned income and $7.8 million unearned income on direct financing leases as of June 30, 2007, March 31, 2007 and December 31, 2006, respectively. Commercial loans and leases totaled $213.5 million at June 30, 2007, reflecting a $6.5 million or 3.1% increase from March 31, 2007, and an $11.8 million or 5.9% increase from December 31, 2006. Growth in direct financing leases of $2.9 million or 8.6%, commercial installment loans of $1.9 million or 10.6%, and commercial lines of credit of $1.1 million or 8.6%, were largely responsible for the increase from March 31, 2007 to June 30, 2007. Growth in direct financing leases of $5.4 million or 17.0%, commercial installment loans of $3.1 million or 18.2%, and commercial lines of credit of $2.0 million or 16.8% were largely responsible for the increase from December 31, 2006 to June 30, 2007. Consumer loans totaled $88.0 million at June 30, 2007, reflecting a $1.2 million or 1.4% increase from March 31, 2007 and a $1.2 million or 1.4% increase from December 31, 2006. Real estate loans accounted for most of the increase as those loans increased $0.8 million or 1.6% from March 31, 2007 to June 30, 2007 and $1.5 million or 3.0% from December 31, 2006 to June 30, 2007. 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 period ended June 30, 2007, the Bank sold mortgages to FNMA totaling $0.8 million, as compared to $0.2 million during the three month period ended June 30, 2006. During the six month period ended June 30, 2007, the Bank sold mortgages to FNMA totaling $1.1 million, as compared to $0.7 million during the six month period ended June 30, 2006. At June 30, 2007, the Bank had a loan servicing portfolio principal balance of $28.4 million upon which it earns servicing fees, as compared to $28.9 million at March 31, 2007, and $28.7 million at December 31, 2006.

Loan and Lease Portfolio Composition

     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.

		June 30, 2007				Percentage				December 31, 2006				Percentage
		(in thousands)								(in thousands)
Commercial Loans and Leases
Real Estate		$	141,600				46.8	%		$	140,376				48.6	%
Installment			20,410				6.8	%			17,263				6.0	%
Direct Financing Leases			37,145				12.3	%			31,742				11.0	%
Lines of Credit			14,339				4.7	%			12,279				4.2	%
Cash Reserve			50				0.0	%			39				0.0	%
Total Commercial Loans and Leases			213,544				70.6	%			201,699				69.8	%
Consumer Loans
Real Estate			50,343				16.7	%			48,877				16.9	%
Home Equity			34,619				11.4	%			34,453				11.9	%
Installment			2,350				0.8	%			2,621				0.9	%
Overdrafts			270				0.1	%			163				0.1	%
Credit Card			—				0.0	%			298				0.1	%
Other			382				0.1	%			341				0.1	%
Total Consumer Loans			87,964				29.1	%			86,753				30.0	%
Net Deferred Costs & Unearned Discounts			810				0.3	%			654				0.2	%
Total Loans and Leases			302,318				100.0	%			289,106				100.0	%
Allowance for Loan and Lease Losses			(3,866	)							(3,739	)
Loans and Leases, net		$	298,452							$	285,367

     Net loan and lease charge-offs were $365 thousand in the three month period ended June 30, 2007 as compared to net recoveries of $12 thousand in the same period of 2006. Net charge-offs were $533 thousand for the six month period ended June 30, 2007 as compared to $117 thousand in the same period of 2006. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.26% of total loans and leases outstanding at June 30, 2007 as compared to 0.22% at March 31, 2007 and 0.23% at December 31, 2006. The allowance for loan and lease losses totaled $3.9 million or 1.28% of total loans and leases outstanding at June 30, 2007 as compared to $3.9 million or 1.32% of total loans and leases at March 31, 2007 and $3.7 million or 1.29% of total loans and leases outstanding at December 31, 2006.

     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.

		June 30, 2007				December 31, 2006
		(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate
Residential 1-4 family		$	—			$	—
Commercial and multi-family			128				145
Construction			—				—
Second mortgages			—				—
Home equity lines of credit			—				—
Total mortgage loans on real estate			128				145
Direct financing leases			290				—
Commercial loans			256				443
Consumer installment loans
Personal			—				—
Credit cards			—				—
Other			—				—
Total consumer installment loans			—				—
Total non-accruing loans and leases		$	674			$	588
Accruing loans and leases 90+ days past due			98				74
Total non-performing loans and leases			772				662
Total non-performing loans and leases as a percentage of total assets			0.16	%			0.15	%
Total non-performing loans and leases as a percentage of total loans and leases			0.26	%			0.23	%

     For the three and six month periods ended June 30, 2007, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $28 thousand and $46 thousand, respectively. For the three and six month periods ended June 30, 2006, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $20 thousand and $54 thousand, respectively. There was $12 thousand and $18 thousand of interest income included in net income for the three and six month periods ended June 30, 2007, and no interest income for the same periods in 2006 on non-accruing loans and leases.

Investing Activities

     Total securities declined to $117.8 million at June 30, 2007, reflecting a $36.3 million or 23.6% decrease from March 31, 2007, and a $19.9 million or 14.5% decrease from December 31, 2006. The decline in the securities portfolio is a result of the Company’s sale of $45 million in securities in June 2007 as it initiates its strategy to de-lever a portion of its balance sheet. The decline was less than the amount sold because the Company needed to purchase short-term discount notes to pledge as collateral against its remaining municipal deposits. As some of those municipal deposits continue to roll off, the Company will allow some of its short-term discount notes to mature without being replaced. The Company monitors extension and prepayment risk in the portfolio to limit potential exposures. Management believes the average expected life of the portfolio is 2.4 years as of June 30, 2007, as compared to 2.7 years as of March 31, 2007. Available-for-sale securities with a total fair value of $112.2 million at June 30, 2007 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

Funding Activities

     Total deposits at June 30, 2007 were $373.1 million, reflecting a $6.8 million or 1.8% decrease from March 31, 2007. Time deposits $100,000 and over decreased $12.0 million, or 14.3%, to $72.0 million mainly due to municipal deposits and run off of time deposits accumulated in promotions in prior periods. Additionally, muni-vest balances decreased $1.6 million or 3.4% from March 31, 2007. The Company has allowed these sources of funds to roll off as part of its de-leverage strategy. As the investment securities balance has declined, these funds were no longer needed. These decreases were partially offset by an increase of $3.6 million, or 5.1%, in demand deposits. Core deposits (all deposits excluding time deposits greater than $100,000) increased $5.2 million, or 1.8%, to $301.2 million from March 31, 2007.

     Total deposits increased $17.4 million or 4.9% increase from December 31, 2006. The increase in deposits from December 31, 2006 was primarily attributable to an increase in muni-vest deposits of $13.9 million or 44.6%, which was the mainly due to a large deposit made by a single municipal customer in the first quarter. Additionally, demand deposits increased $2.3 million or 3.2% from December 31, 2006, while NOW accounts decreased $1.1 million or 9.6% from December 31, 2006.

     As the securities portfolio has declined, the Company has had less need to rely on wholesale sources of funds. Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York was $5.8 million at June 30, 2007 as compared to $26.4 million at March 31, 2007 and $24.8 million at December 31, 2006.

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

     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.

		Three Months Ended												Three Months Ended
		June 30, 2007												June 30, 2006
		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 and leases, net		$	294,365			$	6,094				8.28	%		$	264,064			$	4,942				7.49	%
Taxable securities			85,975				861				4.01	%			106,830				1,075				4.03	%
Tax-exempt securities			39,425				435				4.41	%			45,151				483				4.28	%
Interest bearing deposits at banks			2,333				10				1.71	%			1,458				19				5.21	%
Total interest-earning assets			422,098				7,400				7.01	%			417,503				6,519				6.25	%
Non interest-earning assets:
Cash and due from banks			10,789												12,507
Premises and equipment, net			8,653												8,194
Other assets			29,681												28,865
Total Assets		$	471,221											$	467,069
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW		$	11,015			$	6				0.22	%		$	11,659			$	6				0.21	%
Regular savings			85,638				256				1.20	%			87,352				220				1.01	%
Muni-Vest savings			46,989				514				4.38	%			43,123				458				4.25	%
Time deposits			156,521				1,894				4.84	%			142,847				1,442				4.04	%
Other borrowed funds			30,495				298				3.91	%			53,715				546				4.07	%
Junior subordinated debentures			11,330				223				7.87	%			11,330				206				7.27	%
Securities sold U/A to repurchase			7,453				15				0.81	%			6,373				11				0.69	%
Total interest-bearing liabilities			349,441			$	3,206				3.67	%			356,399			$	2,889				3.24	%
Noninterest-bearing liabilities:
Demand deposits			71,340												66,149
Other			9,913												7,598
Total liabilities		$	430,694											$	430,146
Stockholders’ equity			40,527												36,923
Total Liabilities and Equity		$	471,221											$	467,069
Net interest earnings						$	4,194											$	3,630
Net yield on interest earning assets											3.97	%											3.48	%
Interest rate spread											3.34	%											3.01	%