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EVANS BANCORP INC - Quarter Report: 2008 September (Form 10-Q)

Form 10-Q
Table of Contents

 
 
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, 2008
     
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
 
(Registrant’s telephone number, including area code)
Not applicable
 
(Former name, former address and former fiscal year, if changed
since last report)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company 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 2,766,125 shares as of November 1, 2008
 
 

 


 

INDEX
EVANS BANCORP, INC. AND SUBSIDIARIES
                 
    PAGE          
 
               
PART 1. FINANCIAL INFORMATION
 
               
               
 
               
    1          
 
               
    2          
 
               
    3          
 
               
    4          
 
               
    5          
 
               
    7          
 
               
    13          
 
               
    25          
 
               
    26          
 
               
PART II. OTHER INFORMATION
 
               
    27          
 
               
    28          
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

1

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(in thousands, except share and per share amounts)
                 
    September 30,     December 31,  
    2008     2007  
ASSETS
               
Cash and due from banks
  $ 13,847     $ 12,335  
Interest-bearing deposits at banks
    4,585       269  
Securities:
               
Available for sale, at fair value
    62,136       70,144  
Held to maturity, at amortized cost
    2,035       2,266  
Loans and leases, net of allowance for loan and lease losses of $5,091 in 2008 and $4,555 in 2007
    379,427       319,556  
Properties and equipment, net
    9,055       8,366  
Goodwill
    10,046       10,046  
Intangible assets
    2,442       2,507  
Bank-owned life insurance
    10,999       10,760  
Other assets
    8,190       6,480  
 
           
 
               
TOTAL ASSETS
  $ 502,762     $ 442,729  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
LIABILITIES
               
Deposits:
               
Demand
  $ 78,473     $ 69,268  
NOW
    12,635       10,141  
Regular savings
    141,676       92,864  
Muni-vest
    24,198       24,530  
Time
    146,534       129,026  
 
           
Total deposits
    403,516       325,829  
 
               
Securities sold under agreement to repurchase
    3,744       3,825  
Other short-term borrowings
    7,213       33,980  
Other liabilities
    11,966       10,361  
Junior subordinated debentures
    11,330       11,330  
Long-term borrowings
    18,316       14,101  
Dividend payable
    1,130        
 
           
 
               
Total liabilities
    457,215       399,426  
 
           
 
               
CONTINGENT LIABILITIES AND COMMITMENTS
               
 
               
STOCKHOLDERS’ EQUITY:
               
Common stock, $.50 par value; 10,000,000 shares authorized; 2,759,700 and 2,756,731 shares issued, respectively, and 2,755,274 and 2,751,698 shares outstanding, respectively
    1,380       1,378  
Capital surplus
    26,501       26,380  
Retained earnings
    17,868       15,612  
Accumulated other comprehensive (loss) income, net of tax
    (127 )     16  
Less: Treasury stock, at cost (4,426 and 5,033 shares, respectively)
    (75 )     (83 )
 
           
Total stockholders’ equity
    45,547       43,303  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 502,762     $ 442,729  
 
           
See Notes to Unaudited Consolidated Financial Statements


Table of Contents

2

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands, except share and per share amounts)
                 
    Three Months Ended  
    September 30  
    2008     2007  
INTEREST INCOME
               
Loans and leases
  $ 6,908     $ 6,036  
Interest bearing deposits at banks
    13       156  
Securities:
               
Taxable
    360       501  
Non-taxable
    353       401  
 
           
Total interest income
    7,634       7,094  
INTEREST EXPENSE
               
Deposits
    2,115       2,395  
Other borrowings
    234       235  
Junior subordinated debentures
    151       226  
 
           
Total interest expense
    2,500       2,856  
NET INTEREST INCOME
    5,134       4,238  
PROVISION FOR LOAN AND LEASE LOSSES
    582       283  
 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
    4,552       3,955  
NON-INTEREST INCOME:
               
Bank charges
    597       596  
Insurance service and fees
    1,756       1,683  
Net gain on sales of securities
          1  
Premium on loans sold
    2       2  
Bank-owned life insurance
    31       151  
Other
    529       448  
 
           
Total non-interest income
    2,915       2,881  
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
    2,940       2,718  
Occupancy
    631       587  
Supplies
    51       76  
Repairs and maintenance
    162       163  
Advertising and public relations
    125       68  
Professional services
    243       240  
Technology and communications
    305       273  
Amortization of intangibles
    171       170  
Other insurance
    73       93  
Other
    553       474  
 
           
 
               
Total non-interest expense
    5,254       4,862  
 
           
 
               
INCOME BEFORE INCOME TAXES
    2,213       1,974  
INCOME TAX PROVISION
    788       559  
 
           
NET INCOME
  $ 1,425     $ 1,415  
 
           
 
               
Net income per common share-basic
  $ 0.52     $ 0.52  
 
           
Net income per common share-diluted
  $ 0.52     $ 0.52  
 
           
Cash dividends per common share
  $ 0.41     $ 0.37  
 
           
Weighted average number of common shares
    2,755,274       2,746,651  
 
           
Weighted average number of diluted shares
    2,757,972       2,746,956  
 
           
See Notes to Unaudited Consolidated Financial Statements


Table of Contents

3

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands, except share and per share amounts)
                 
    Nine Months Ended  
    September 30,  
    2008     2007  
INTEREST INCOME
               
Loans and leases
  $ 19,515     $ 17,730  
Interest bearing deposits at banks
    20       253  
Securities:
               
Taxable
    1,001       2,374  
Non-taxable
    1,144       1,279  
 
           
Total interest income
    21,680       21,636  
INTEREST EXPENSE
               
Deposits
    5,937       7,768  
Other borrowings
    924       898  
Junior subordinated debentures
    498       667  
 
           
Total interest expense
    7,359       9,333  
NET INTEREST INCOME
    14,321       12,303  
PROVISION FOR LOAN AND LEASE LOSSES
    1,814       943  
 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
    12,507       11,360  
NON-INTEREST INCOME:
               
Bank charges
    1,669       1,615  
Insurance service and fees
    5,506       5,235  
Net gain (loss) on sales of securities
    7       (2,302 )
Premium on loans sold
    7       7  
Bank-owned life insurance
    239       468  
Pension curtailment
    328        
Other
    1,502       1,291  
 
           
Total non-interest income
    9,258       6,314  
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
    8,649       8,007  
Occupancy
    1,835       1,715  
Supplies
    180       227  
Repairs and maintenance
    452       442  
Advertising and public relations
    335       288  
Professional services
    764       765  
Technology and communications
    870       792  
Amortization of intangibles
    499       456  
Other insurance
    238       273  
Other
    1,562       1,541  
 
           
 
               
Total non-interest expense
    15,384       14,506  
 
           
 
               
INCOME BEFORE INCOME TAXES
    6,381       3,168  
INCOME TAX PROVISION
    1,978       605  
 
           
NET INCOME
  $ 4,403     $ 2,563  
 
           
 
               
Net income per common share-basic
  $ 1.60     $ 0.94  
 
           
Net income per common share-diluted
  $ 1.60     $ 0.94  
 
           
Cash dividends per common share
  $ 0.78     $ 0.71  
 
           
Weighted average number of common shares
    2,750,870       2,740,406  
 
           
Weighted average number of diluted shares
    2,753,534       2,741,111  
 
           
See Notes to Unaudited Consolidated Financial Statements


Table of Contents

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, 2008 AND 2007
(in thousands, except share and per share amounts)
                                                 
                            Accumulated              
                            Other              
    Common     Capital     Retained     Comprehensive     Treasury        
    Stock     Surplus     Earnings     (Loss) Income     Stock     Total  
 
                                               
Balance, January 1, 2007
  $ 1,373     $ 26,160     $ 14,196     $ (1,917 )   $ (269 )   $ 39,543  
 
                                               
Comprehensive income:
                                               
Net Income
                    2,563                       2,563  
 
                                               
Unrealized gain on available-for-sale securities, net of reclassification of loss of $1,413 (after tax) and tax effect of ($868)
                            1,361               1,361  
Amortization of prior service cost and net loss, net tax effect ($26)
                            39               39  
 
                                               
Total comprehensive income
                                            3,963  
 
                                               
Cash dividends ($0.71 per common share)
                    (1,945 )                     (1,945 )
Stock options expense
            93                               93  
 
                                               
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 employee stock purchase plan
            (20 )                     101       81  
 
                                               
Purchased 11,400 shares for treasury
                                    (229 )     (229 )
 
                                   
 
                                               
Balance, September 30, 2007
  $ 1,377     $ 26,320     $ 14,814     $ (517 )   $ (149 )   $ 41,845  
 
                                   
 
                                               
Balance, January 1, 2008
  $ 1,378     $ 26,380     $ 15,612     $ 16     $ (83 )   $ 43,303  
 
                                               
Comprehensive income:
                                               
Net Income
                    4,403                       4,403  
 
                                               
Unrealized loss on available-for-sale securities, net of tax effect of $119
                            (186 )             (186 )
 
                                               
Amortization of prior service cost and net loss net of tax effect of ($22)
                            34               34  
Pension curtailment net of taxes $7
                            9               9  
 
                                             
 
                                               
Total comprehensive income
                                            4,260  
 
                                             
 
                                               
Cash dividends ($0.78 per common share)
                    (2,147 )                     (2,147 )
 
                                               
Stock options expense
            116                               116  
 
                                               
Reissued 7,733 shares treasury stock under dividend reinvestment plan
            (12 )                     130       118  
 
                                               
Issued 2,969 shares under dividend reinvestment plan
    2       44                               46  
 
                                               
Reissued 6,575 shares treasury stock under employment stock purchase plan
            (27 )                     112       85  
 
                                               
Purchased 13,701 shares for treasury
                                    (234 )     (234 )
 
                                               
 
                                   
Balance, September 30, 2008
  $ 1,380     $ 26,501     $ 17,868     $ (127 )   $ (75 )   $ 45,547  
 
                                   
See Notes to Unaudited Consolidated Financial Statements


Table of Contents

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, 2008 AND 2007
(in thousands)
                 
    Nine Months Ended  
    September 30,  
    2008     2007  
 
               
OPERATING ACTIVITIES:
               
Interest received
  $ 21,421     $ 20,721  
Fees received
    8,574       7,799  
Interest paid
    (7,701 )     (9,419 )
Cash paid to employees and suppliers
    (12,006 )     (12,522 )
Income taxes paid
    (2,345 )     (964 )
Proceeds from sale of loans held for resale
    1,815       1,460  
Originations of loans held for resale
    (1,758 )     (1,812 )
 
           
 
               
Net cash provided by operating activities
    8,000       5,263  
 
               
INVESTING ACTIVITIES:
               
Available for sales securities:
               
Purchases
    (64,028 )     (170,341 )
Proceeds from sales
          45,655  
Proceeds from maturities
    71,907       165,975  
Held to maturity securities:
               
Purchases
    (165 )     (255 )
Proceeds from maturities
    396       2,116  
Additions to properties and equipment
    (1,397 )     (283 )
Increase in loans, net of repayments
    (62,398 )     (19,414 )
Acquisitions
    (453 )     (425 )
Cash paid on earn-out agreements
    (40 )     (202 )
 
           
 
               
Net cash (used in) provided by investing activities
    (56,178 )     22,826  
 
               
FINANCING ACTIVITIES:
               
Proceeds from short-term borrowings
    6,919        
Proceeds from long-term borrowings
    5,000       412  
Repayments of short-term borrowings
    (34,455 )     (14,719 )
Repayments of long-term borrowings
    (97 )     (2,165 )
Increase (decrease) in deposits
    77,687       (8,533 )
Dividends paid
    (1,017 )     (928 )
Purchase of treasury stock
    (234 )     (229 )
Re-issuance of treasury stock
    203       255  
 
           
 
               
Net cash provided by (used in) financing activities
    54,006       (25,907 )
 
               
Net increase in cash and equivalents
    5,828       2,182  
 
               
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    12,604       12,592  
 
           
 
               
End of period
  $ 18,432     $ 14,774  
 
           

 


Table of Contents

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, 2008 AND 2007
(in thousands)
                 
    Nine Months Ended  
    September 30,  
    2008     2007  
 
               
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
               
 
               
Net income
  $ 4,403     $ 2,563  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,238       1,280  
Deferred tax (benefit) expense
    (60 )     42  
Provision for loan and lease losses
    1,814       943  
Net (gain) loss on sales of assets
    (7 )     2,308  
Premiums on loans sold
    (7 )     (7 )
Stock options expense
    116       93  
Proceeds from sale of loans held for resale
    1,815       1,460  
Originations of loans held for resale
    (1,758 )     (1,812 )
Changes in assets and liabilities affecting cash flow:
               
Other assets
    (1,349 )     (2,112 )
Other liabilities
    1,795       505  
 
           
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 8,000     $ 5,263  
 
           
 
               
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
               
 
               
Issuance of shares for earn out agreement
  $     $ 165  
Note payable on acquisition
  $     $ 425  
See Notes to Unaudited Consolidated Financial Statements

 


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PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
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 Bank, National Association (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 nine month period ended September 30, 2008 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, 2007.
 
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 income, a component of stockholders’ equity. Available-for-sale securities are shown at fair value which includes an unrealized gain of $0.4 million, $0.6 million and $0.7 million as of September 30, 2008, June 30, 2008, and December 31, 2007, respectively. As of September 30, 2008 the securities portfolio does not contain any other than temporary declines in fair value.
 
3.   FAIR VALUE MEASUREMENTS
 
    As of January 1, 2008, the Company adopted on a prospective basis certain required provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157. In October 2008, the FASB issued FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. See Note 10 for discussion on FAS No. 157-3. Those provisions relate to financial assets and liabilities carried at fair value and fair value disclosures related to financial assets and liabilities. SFAS 157 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs to fair value measurements- Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted

 


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    prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when available.
 
    Investments that are classified as available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in Other Comprehensive Income. The fair value measurement of these instruments is measured using quoted prices for similar instruments in active markets, which is defined as Level 2 inputs. All other financial assets and liabilities, including held to maturity securities, loans and leases, deposits, securities sold under agreement to repurchase, other short-term borrowings, junior subordinated debentures, and long-term borrowings are carried at either amortized cost or historical proceeds. The adoption of SFAS 157 did not have significant impact on our consolidated financial statements. The Company delayed the application of SFAS No. 157 for acquired non-financial assets and assumed non-financial liabilities until January 1, 2009.
 
4.   ALLOWANCE FOR LOAN AND LEASE LOSSES
 
    The provision for loan and lease losses represents the amount charged against the Bank’s earnings to maintain an allowance for probable loan and lease losses based on management’s evaluation of the loan and lease portfolio at the balance sheet date. 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 meet 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 and lease staff, an independent internal loan and lease 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 SFAS 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 and other qualitative factors 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 or 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 nine month periods ended September 30, 2008 and 2007.

 


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Allowance for loan and lease losses
                 
    Nine months ended September 30,  
    2008     2007  
    (in thousands)  
 
               
Beginning balance, January 1
  $ 4,555     $ 3,739  
Charge-offs:
               
Commercial
          (153 )
Real estate
    (1 )     (5 )
Installment loans
    (4 )     (6 )
Overdrafts
    (41 )     (40 )
Direct financing leases
    (1,412 )     (739 )
 
           
Total charge-offs
    (1,458 )     (943 )
 
               
Recoveries:
               
Commercial
    27       15  
Real estate
           
Installment loans
    2       16  
Overdrafts
    18       15  
Direct financing leases
    133       56  
 
           
Total recoveries
    180       102  
 
           
 
               
Net charge-offs
    (1,278 )     (841 )
 
               
Provision for loan and lease losses
    1,814       943  
 
           
 
               
Ending balance, September 30
  $ 5,091     $ 3,841  
 
           
 
               
Ratio of net charge-offs to average total loans and leases outstanding (annualized)
    0.49 %     0.38 %
 
           
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 2,698 and 2,664 dilutive shares for the three and nine month periods ended September 30, 2008, respectively. This compares with 305 and 705 for the three and nine month periods ended September 30, 2007, respectively.
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three and nine months periods ended September 30, 2008, there were approximately 109 thousand and 106 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive. For the three and nine months periods ended September 30, 2007, there were approximately 92 thousand and 74 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.
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 nine month periods ended September 30, 2008 and 2007.

 


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Three Months Ended
September 30, 2008
(in thousands)
                         
            Insurance        
    Banking     Agency        
    Activities     Activities     Total  
Net interest income (expense)
  $ 5,200       ($66 )   $ 5,134  
Provision for loan and lease losses
    582             582  
 
                 
Net interest income (expense) after provision for loan and lease losses
    4,618       (66 )     4,552  
Non-interest income
    1,159             1,159  
Insurance service and fees
          1,756       1,756  
Non-interest expense
    3,979       1,275       5,254  
 
                 
Income before income taxes
    1,798       415       2,213  
Income tax provision
    628       160       788  
 
                 
Net income
  $ 1,170     $ 255     $ 1,425  
 
                 
Nine Months Ended
September 30, 2008
(in thousands)
                         
            Insurance        
    Banking     Agency        
    Activities     Activities     Total  
Net interest income (expense)
  $ 14,546       ($225 )   $ 14,321  
Provision for loan and lease losses
    1,814             1,814  
 
                 
Net interest income (expense) after provision for loan and lease losses
    12,732       (225 )     12,507  
Non-interest income
    3,752             3,752  
Insurance service and fees
          5,506       5,506  
Non-interest expense
    11,535       3,849       15,384  
 
                 
Income before income taxes
    4,949       1,432       6,381  
Income tax provision
    1,424       554       1,978  
 
                 
Net income
  $ 3,525     $ 878     $ 4,403  
 
                 


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Three Months Ended
September 30, 2007
(in thousands)
                         
            Insurance        
    Banking     Agency        
    Activities     Activities     Total  
Net interest income (expense)
  $ 4,353       ($115 )   $ 4,238  
Provision for loan and lease losses
    283             283  
 
                 
Net interest income (expense) after provision for loan and lease losses
    4,070       (115 )     3,955  
Non-interest income
    1,198             1,198  
Insurance service and fees
          1,683       1,683  
Non-interest expense
    3,665       1,197       4,862  
 
                 
Income before income taxes
    1,603       371       1,974  
Income tax provision
    411       148       559  
 
                 
Net income
  $ 1,192     $ 223     $ 1,415  
 
                 
Nine Months Ended
September 30, 2007
(in thousands)
                         
            Insurance        
    Banking     Agency        
    Activities     Activities     Total  
Net interest income (expense)
  $ 12,641       ($338 )   $ 12,303  
Provision for loan and lease losses
    943             943  
 
                 
Net interest income (expense) after provision for loan and lease losses
    11,698       (338 )     11,360  
Non-interest income
    1,079             1,079  
Insurance service and fees
          5,235       5,235  
Non-interest expense
    11,025       3,481       14,506  
 
                 
Income before income taxes
    1,752       1,416       3,168  
Income tax provision
    39       566       605  
 
                 
Net income
  $ 1,713     $ 850     $ 2,563  
 
                 
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


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credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:
                 
    September 30,     December 31,  
    2008     2007  
    (in thousands)  
 
               
Commitments to extend credit
  $ 63,403     $ 63,319  
 
               
Standby letters of credit
    2,683       2,623  
 
           
 
               
Total
  $ 66,086     $ 65,942  
 
           
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 September 30, 2008, there were no claims pending against the Company that management considered to be material.
8. RECLASSIFICATIONS
Certain reclassifications have been made to the 2007 unaudited consolidated financial statements to conform with the presentation used in 2008.
9. NET PERIODIC BENEFIT COSTS
On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered substantially all Company employees. The plan provides benefits that are based on the employees’ compensation and years of service. Under the freeze, eligible employees will receive the benefits already earned through January 31, 2008 at retirement, but will not be able to accrue any additional benefits. As a result, service cost will no longer be incurred.
The Bank used 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 amortization method the Bank used recognized the prior service cost and net gains or losses over the average remaining service period of active employees. The freezing of the defined benefit pension plan was considered a curtailment. This resulted in the elimination of the unrecognized prior service cost and the unrecognized net loss. The elimination of those two components resulted in a $328 thousand gain in the first quarter of 2008.
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.


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Nine months ended
September 30, (in thousands)
                                 
                    Supplemental Executive  
    Pension Benefits     Retirement Plan  
    2008     2007     2008     2007  
         
Service cost
  $     $ 274     $ 44     $ 44  
Interest cost
    177       181       131       120  
Expected return on plan assets
    (219 )     (185 )            
Amortization of prior service cost
          (12 )     42       42  
Amortization of the net loss
          22       14       13  
 
                       
Net periodic (benefit) cost
    ($42 )   $ 280     $ 231     $ 219  
 
                       
10. RECENT ACCOUNTING PRONOUNCEMENTS
FASB Staff Position No.157-3: Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. On October 10, 2008, FASB issued FSP No. 157-3 with the objective of clarifying the application of FASB Statement No. 157: Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Effective immediately for the Company’s interim financial statements as of September 30, 2008, the implementation of FSP No. 157-3 did not have a material impact on our consolidated financial statements.
FASB Staff Position No. 133-1 and FIN 45-4: Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45. On September 12, 2008, FASB issued FAS 133-1 and FIN 45-4 with the objective of improving disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the staff position that amends FAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. The Company does not expect the staff position to have a material impact on its consolidated financial statements.
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


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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.
There have been historical disruptions in the financial system in recent weeks and many lenders and financial institutions have reduced or ceased to provided funding to borrowers, including other lending institutions. The availability of credit, confidence in the entire financial sector, and stability in financial markets have been adversely affected. Although the Company has not to date experienced any adverse effects, these disruptions are likely to have some impact on all institutions in the U.S. banking and financial industries.
In response to the financial crises affecting the overall banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. Under that act, the U.S. Treasury will have authority, among other things, to purchase up to $700 billion of mortgages, mortgage backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. As part of that program, the Department of the Treasury will purchase equity interests in a wide variety of eligible banks, thrifts and bank holding companies. Under this program, called the Troubled Asset Relief Program Capital Purchase Program (“TARP”), $250 billion of capital will be made available to U.S. financial institutions through the sale of preferred stock. The preferred stock would pay a 5% dividend for five years, which will increase to 9% after five years. In conjunction with its purchase of preferred stock, the Treasury will also receive warrants to purchase common stock with an aggregate market price equal to 15% of the amount invested in preferred stock. Participating institutions will be required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury continues to hold the institution’s equity under TARP.
Although both the Company and its subsidiary bank meet all applicable regulatory capital requirements and remain well capitalized, the Company will nonetheless evaluate the program to determine if participation would be advantageous for the Company and its common shareholders.
The actions described above, together with additional actions announced by the Treasury and other regulatory agencies continue to develop. It is not clear at this time what long term impact, EESA, TARP, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The Company’s Unaudited Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles 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


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Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. Refer to Note 3 in Item 1 of this report for further detail on fair value measurement.
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 Company’s loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.
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 loans and leases grew to $384.5 at September 30, 2008, reflecting a $18.5 million or 5.1% increase from June 30, 2008 and a $60.4 million or 18.6% increase from December 31, 2007. Gross loans and leases are net of $10.9 million, $10.1 million and $9.7 million of unearned income on direct financing leases as of September 30, 2008, June 30, 2008 and December 31, 2007, respectively. Commercial loans and leases totaled $284.7 million at September 30, 2008, reflecting a $17.5 million or 6.6% increase from June 30, 2008 and a $56.3 million or 24.7% increase from December 31, 2007. Growth in commercial real estate loans of $9.3 million for the third fiscal quarter and $37.5 million for the year to date was largely responsible for the increase in commercial loans and leases from June 30, 2008 and December 31, 2007, respectively.


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The Company has no direct exposure to sub-prime lending, and as a result, the faltering sub-prime credit market has not affected the Company’s loan portfolio. Further, the local real estate market to date has not had the significant deterioration in values seen in high-growth parts of the United States as local real estate values have remained steady to slightly up. In contrast, some of the Bank’s larger competitors and the conduit markets are having capital adequacy and liquidity problems due to their exposure to sub-prime loans in their investment portfolio or lending activities in other parts of the United States. These problems have curtailed their lending activities somewhat and consequently created opportunities in the local commercial real estate market for smaller banks not experiencing the same issues such as the Bank. The increased opportunities have resulted in the Bank’s strong loan growth rates.
Direct finance leases increased $4.7 million or 9.2% from June 30, 2008 and $10.5 million or 23.3% from December 31, 2007. Direct finance leases are sold through a national channel of brokers with whom the Company has had long standing relationships and finance small commercial equipment. Direct leases carry a higher risk than the rest of the loan portfolio, but also provide a higher return. Management employs strict underwriting standards in selecting credits for this portion of the portfolio and has taken steps in an attempt to mitigate the leasing portfolio’s risk exposure in a potential economic recession. Actions taken to this effect include tightening credit standards, consolidating the broker network, and purchasing credit protection on certain leases late last year. The loan composition strategy is to maintain the direct lease portfolio at an optimum percentage of the loan portfolio that weights the risk involved in this type of credit.
Consumer loans totaled $98.9 million at September 30, 2008, reflecting a $1.0 million or 1.0% increase from June 30, 2008 and a $4.0 million or 4.2% increase from December 31, 2007. Real estate loans increased $0.3 million or 0.5% from June 30, 2008 and $1.6 million or 2.8% from December 31, 2007. While short-term interest rates have sharply decreased in 2008, long-term fixed rates have actually been gradually increasing. This, combined with the recent difficult and tumultuous economic environment, has put some downward pressure on the demand for consumer loans, resulting in lower growth rates in consumer loan balances.
The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest rate level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended September 30, 2008, the Bank sold mortgages to FNMA totaling $0.4 million, as compared with $0.3 million during the three month period ended September 30, 2007. During the nine month period ended September 30, 2008, the Bank sold mortgages to FNMA totaling $1.8 million, as compared with $1.5 million during the nine month period ended September 30, 2007. At September 30, 2008, the Bank had a loan servicing portfolio principal balance of $27.7 million upon which it earns servicing fees, as compared with $28.1 million at June 30, 2008 and $28.4 million at December 31, 2007.
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.


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    September 30, 2008     Percentage     December 31, 2007     Percentage  
    (in thousands)             (in thousands)          
Commercial Loans and Leases
                               
Real Estate
  $ 185,799       48.3 %   $ 148,257       45.7 %
Installment
    20,225       5.3 %     18,502       5.7 %
Direct Financing Leases
    55,629       14.5 %     45,078       13.9 %
Lines of Credit
    23,023       6.0 %     16,446       5.1 %
Cash Reserve
    58       0.0 %     71       0.0 %
 
                       
 
                               
Total Commercial Loans and Leases
    284,734       74.1 %     228,354       70.4 %
 
                               
Consumer Loans
                               
Real Estate
    58,063       15.1 %     56,529       17.5 %
Home Equity
    38,264       9.9 %     36,035       11.1 %
Installment
    2,003       0.5 %     1,858       0.6 %
Overdrafts
    252       0.1 %     379       0.1 %
Other
    271       0.1 %     75       0.0 %
 
                       
 
                               
Total Consumer Loans
    98,853       25.7 %     94,876       29.3 %
 
Net Deferred Costs & Unearned Discounts
    931       0.2 %     881       0.3 %
 
                       
 
                               
Total Loans and Leases
    384,518       100.0 %     324,111       100.0 %
 
                               
Allowance for Loan and Lease Losses
    (5,091 )             (4,555 )        
 
                           
Loans and Leases, net
  $ 379,427             $ 319,556          
 
                           
Net loan and lease charge-offs were $550 thousand in the three month period ended September 30, 2008 as compared with $368 thousand in the second quarter of 2008 and $308 thousand in the three month period ended September 30, 2007. Net charge-offs were $1.3 million for the nine month period ended September 30, 2008, as compared with $841 thousand for the same period of 2007. The continued seasoning of the lease portfolio is responsible for the increase in net charge-offs. As has been the experience since the Company began originating small-ticket leases, the majority of charge-offs in the loan and lease portfolio have been leases. This is consistent with the risk/return nature of these credits in which the Company requires a higher rate of return. Management employs strict underwriting standards in selecting credits for this portion of the portfolio and has taken steps in an attempt to mitigate the leasing portfolio’s risk exposure in a potential economic recession. Actions taken to this effect include tightening credit standards and consolidation of the broker network.
Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.20% of total loans and leases outstanding at September 30, 2008 as compared with 0.12% at June 30, 2008 and 0.22% at December 31, 2007. The allowance for loan and lease losses totaled $5.1 million or 1.32% of total loans and leases outstanding at September 30, 2008 as compared with $5.1 million or 1.38% of total loans and leases outstanding as of June 30, 2008 and $4.6 million or 1.41% of total loans and leases at December 31, 2007.
The adequacy of the Company’s allowance for loan and lease losses is reviewed quarterly by the Company’s management with consideration given to loan and lease concentrations, charge-off history, delinquent loan and lease


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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.
                 
    September 30, 2008     December 31, 2007  
    (in thousands)  
Non-accruing loans and leases:
               
Mortgage loans on real estate
               
Residential 1-4 family
  $ 34     $  
Commercial and multi-family
    93       112  
Construction
           
Second mortgages
           
Home equity lines of credit
    50        
 
           
Total mortgage loans on real estate
    177       112  
 
               
Direct financing leases
    439       215  
 
               
Commercial loans
    125       224  
 
               
Consumer installment loans
               
Personal
           
Credit cards
           
Other
           
 
           
Total consumer installment loans
           
 
               
Total non-accruing loans and leases
  $ 741     $ 551  
 
           
 
               
Accruing loans and leases 90+ days past due
    41       163  
 
           
Total non-performing loans and leases
    782       714  
 
           
Total non-performing loans and leases as a percentage of total assets
    0.16 %     0.16 %
Total non-performing loans and leases as a percentage of total loans and leases
    0.20 %     0.22 %
For the three and nine month period ended September 30, 2008, gross interest income that would have been reported on non-accruing loans and leases had they been current was $8 thousand and $25 thousand. For the three and nine month periods ended September 30, 2007, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $39 thousand and $85 thousand, respectively. There was $3 thousand and $25 thousand of interest income included in net income for the three and nine month periods ended September 30, 2008 on non-accruing loans and leases, before those loans were classified as non-accrual. There was $5 thousand and $23 thousand of interest income included in net income for the three and nine month periods ended September 30, 2007 on non-accruing loans and leases.
Investing Activities
Total securities decreased to $64.2 million at September 30, 2008, reflecting a $2.9 million, or 4.3% decrease from $67.1 million at June 30, 2008, and an $8.2 million, or 11.3% decrease from $72.4 million at December 31, 2007. Securities and interest-bearing deposits at banks made up 15.7% of the Bank’s total average interest earning assets in the third quarter of 2008 compared with 16.0% in the trailing second quarter of 2008 and 24.0% in the third quarter of 2007. The large decline in the securities portfolio compared with the third quarter of 2007 is a result of the Company’s strategy to de-leverage a portion of its balance sheet.


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The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 51.9% of the portfolio at September 30, 2008 compared with 50.1% at June 30, 2008 and 52.3% at December 31, 2007; and U.S. government-sponsored agency bonds of various types, which comprise 18.7% of the portfolio at September 30, 2008 versus 19.5% at June 30, 2008 and 19.6% at December 31, 2007. Agency mortgage-backed securities comprise 25.5% at September 30, 2008 compared with 25.6% at June 30, 2008 and 23.2% as of December 31, 2007. As a member of both the Federal Reserve System and the Federal Home Loan Bank of New York, the Bank is required to hold stock in those entities. These investments made up 3.9% of the portfolio at September 30, 2008 versus 4.8% at June 30, 2008 and 4.9% of the portfolio at December 31, 2007. The credit quality of the securities portfolio is believed to be strong as the portfolio is in an overall unrealized net gain position, with no individual securities in a significant net loss position.
The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 2.6 years as of September 30, 2008 compared with 2.9 years as of June 30, 2008 and 2.4 years as of December 31, 2007. Available-for-sale securities with a total fair value of $58.3 million at September 30, 2008 were pledged as collateral to secure public deposits and for other purposes required or permitted by law. The Company has no exposure to subprime mortgages, private mortgage-backed securities, credit default swaps, or Fannie Mae or Freddie Mac preferred stock investments in its investment portfolio.
Funding Activities
Total deposits at September 30, 2008 were $403.5 million, reflecting a $32.0 million or 8.6% increase from June 30, 2008 and a $77.7 million or 23.9% increase from December 31, 2007. Demand deposits at September 30, 2008 were $78.5 million, reflecting a $1.6 million or 2.1% increase from June 30, 2008 and a $9.2 million or 13.3% increase from December 31, 2007. Demand deposit balances fluctuate day-to-day based on the high volume of transactions normally associated with the demand product. Average demand deposit growth is a better measure of sustained growth. Average demand deposits in the three month period ended September 30, 2008 were 8.5% higher than the second quarter of 2008 and 5.5% higher than the prior year’s third quarter. Much of the overall deposit growth in the third quarter ended September 30, 2008 is attributable to an increase in regular savings deposits of $33.9 million, or 31.5%, to $141.7 million. After a period of flat growth to declining balances, the Company introduced a new money market savings product in an effort to attract savings deposits. Compared with December 31, 2007, savings deposits have increased $48.8 million, or 52.5%. Time deposits were $146.5 million at September 30, 2008, reflecting a $5.5 million or 3.6% decrease from June 30, 2008, and a $17.5 million or 13.6% increase from December 31, 2007. Due to the significant growth in the Company’s loan and lease portfolio, the Company had been aggressive in attracting time deposits, particularly those with longer-term maturities, through the first two quarters of 2008. However, the combination of unfavorable pricing conditions in the market as well as the funding provided by the inflow of savings deposits resulted in the Company pulling back somewhat on its pursuit of time deposits in the third quarter of 2008. NOW deposits decreased in the third quarter ended September 30, 2008 by $4.1 million, or 24.6%, while muni-vest balances increased in the same quarter by $6.2 million, or 34.4%. These fluctuations were largely a result of a single large municipal customer moving money between accounts.
Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York decreased from $34.0 million at December 31, 2007 and $23.1 million at June 30, 2008 to $7.2 million at September 30, 2008. In contrast, long-term borrowings remained at $18.3 million at September 30, 2008, virtually flat to the balance at June 30, 2008, and higher than the December 31, 2007 balance of $14.1 million. The Federal Reserve continued to cut its target rate for federal funds in the first half of 2008 in light of a sluggish economy. By the end of the 2008 third quarter, the target rate stood at 2.00%. Compared to historical norms, interest rates were at a lower than usual level in the second and third quarter of 2008, prompting the Company to lock in relatively low rates for a longer period of time, resulting in the increase in long-term borrowings from December 31, 2007. The Company’s strong savings deposit growth has resulted in a decrease in its reliance on wholesale short-term borrowings.


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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  
    September 30, 2008     September 30, 2007  
    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
  $ 370,349     $ 6,908       7.46 %   $ 299,932     $ 6,036       8.05 %
Taxable securities
    33,140       360       4.35 %     45,402       501       4.41 %
Tax-exempt securities
    32,877       353       4.29 %     37,801       401       4.24 %
Interest bearing deposits at banks
    3,086       13       1.69 %     11,302       156       5.52 %
 
                                   
Total interest-earning assets
    439,452       7,634       6.95 %     394,437       7,094       7.19 %
 
                                       
 
                                               
Non interest-earning assets:
                                               
 
                                               
Cash and due from banks
    13,650                       11,893                  
Premises and equipment, net
    8,793                       8,551                  
Other assets
    30,926                       29,639                  
 
                                           
 
                                               
Total Assets
    492,821                     $ 444,520                  
 
                                           
 
                                               
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
NOW
  $ 13,669     $ 28       0.82 %   $ 10,377     $ 7       0.27 %
Regular savings
    126,324       551       1.74 %     88,701       277       1.25 %
Muni-Vest savings
    20,742       96       1.85 %     28,059       291       4.15 %
Time deposits
    150,496       1,440       3.83 %     148,808       1,820       4.89 %
Other borrowed funds
    29,106       225       3.09 %     24,835       223       3.59 %
Junior subordinated debentures
    11,330       151       5.33 %     11,330       226       7.98 %
Securities sold U/A to repurchase
    4,710       9       0.76 %     6,193       12       0.78 %
 
                                   
 
                                               
Total interest-bearing liabilities
    356,377     $ 2,500       2.81 %     318,303     $ 2,856       3.59 %
 
                                       
 
                                               
Noninterest-bearing liabilities:
                                               
Demand deposits
    79,107                       74,973                  
Other
    11,075                       9,169                  
 
                                           
Total liabilities
    446,559                     $ 402,445                  
Stockholders’ equity
    46,262                       42,075                  
 
                                           
 
                                               
Total Liabilities and Equity
    492,821                     $ 444,520                  
 
                                           
Net interest earnings
          $ 5,134                     $ 4,238          
 
                                           
Net interest margin
                    4.67 %                     4.30 %
 
                                           
Interest rate spread
                    4.14 %                     3.60 %
 
                                           


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21

                                                 
    Nine Months Ended     Nine Months Ended  
    September 30, 2008     September 30, 2007  
    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
  $ 345,971     $ 19,515       7.52 %   $ 293,804     $ 17,730       8.05 %
Taxable securities
    31,817       1,001       4.19 %     75,073       2,374       4.22 %
Tax-exempt securities
    35,217       1,144       4.33 %     39,476       1,279       4.32 %
Interest bearing deposits at banks
    1,475       20       1.81 %     6,939       253       4.86 %
 
                                   
 
                                               
Total interest-earning assets
    414,480       21,680       6.97 %     415,292       21,636       6.95 %
 
                                       
 
                                               
Non interest-earning assets:
                                               
 
                                               
Cash and due from banks
    12,611                       11,225                  
Premises and equipment, net
    8,486                       8,637                  
Other assets
    30,016                       29,625                  
 
                                           
 
                                               
Total Assets
    465,593                     $ 464,779                  
 
                                           
 
                                               
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
NOW
  $ 12,264     $ 66       0.72 %   $ 11,141     $ 19       0.23 %
Regular savings
    102,211       1,092       1.42 %     87,526       784       1.19 %
Muni-Vest savings
    23,202       391       2.25 %     40,940       1,323       4.31 %
Time deposits
    144,128       4,388       4.06 %     154,248       5,642       4.88 %
Other borrowed funds
    37,399       892       3.18 %     29,745       856       3.84 %
Junior subordinated debentures
    11,330       498       5.86 %     11,330       667       7.85 %
Securities sold U/A to repurchase
    5,195       32       0.82 %     7,026       42       0.80 %
 
                                   
 
                                               
Total interest-bearing liabilities
    335,729     $ 7,359       2.92 %     341,956     $ 9,333       3.64 %
 
                                       
 
                                               
Noninterest-bearing liabilities:
                                               
Demand deposits
    74,028                       72,424                  
Other
    10,787                       9,507                  
 
                                           
Total liabilities
    420,544                     $ 423,887                  
 
                                               
Stockholders’ equity
    45,049                       40,892                  
 
                                           
 
                                               
Total Liabilities and Equity
    465,593                     $ 464,779                  
 
                                           
Net interest earnings
          $ 14,321                     $ 12,303          
 
                                           
Net interest margin
                    4.61 %                     3.95 %
 
                                           
Interest rate spread
                    4.05 %                     3.31 %
 
                                           
Net Income
Net income for the third quarter of 2008 was $1.43 million, or $0.52 per diluted share, an increase of $0.01 million, or 0.7%, from net income of $1.42 million, or $0.52 per diluted share, in the third quarter of 2007. Return on average equity was 12.32% for the quarter, compared with 13.45% in last year’s third quarter. For the nine-month period ended September 30, 2008, net income was $4.40 million, or $1.60 per diluted share, an increase of $1.84 million, or 71.8%, from $2.56 million, or $0.94 per diluted share, in the same period in 2007. In last year’s second quarter, the Company restructured its balance sheet by selling $45 million of securities at an after-tax loss of $1.41 million, or $0.51 per diluted share. The return on average equity was 13.03% and 8.36% for the nine-month periods ended September 30, 2008 and 2007, respectively.


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“Net operating” income (as defined in the following Supplemental Non-GAAP Disclosure) is net income adjusted for what management considers to be “non-operating” items. Net operating income for the third quarter of 2008 was $1.53 million, or $0.55 per diluted share, an increase of $0.01 million, or 0.7%, from net operating income of $1.52 million, or $0.55 per diluted share, in the third quarter of 2007. For the nine-month period ended September 30, 2008, net operating income of $4.71 million, or $1.71 per diluted share, was 10.6% higher than net operating income of $4.26 million, or $1.55 per diluted share, in the same period in 2007.
Supplemental Reporting of Non-GAAP Results of Operations
To provide investors with greater visibility of the Company’s operating results, in addition to the results measured in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company provides supplemental reporting on “net operating income”, which excludes items that management believes to be non-operating in nature. Specifically, “net operating income” excludes gains and losses on the sale of securities and the amortization of acquisition-related intangible assets. This non-GAAP information is being disclosed because management believes that providing these non-GAAP financial measures provides investors with information useful in understanding the Company’s financial performance, its performance trends, and financial position. While the Company’s management uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it necessarily comparable with non-GAAP measures which may be presented by other companies.
See the reconciliation of net operating income and diluted net operating earnings per share to net income and diluted earnings per share in the following table:
Reconciliation of GAAP Net Income to Net Operating Income
                                                 
    Three months ended             Nine months ended        
    September 30     Inc     September 30     Inc  
(in thousands, except per share)   2008     2007     (dec)     2008     2007     (dec)  
 
                                               
GAAP Net Income
  $ 1,425     $ 1,415       0.7 %   $ 4,403     $ 2,563       71.8 %
 
                                               
(Gain) loss on sale of securities*
          (1 )             (4 )     1,413          
Amortization of intangibles*
    104       104               306       280          
 
                                       
 
                                               
Net operating income
  $ 1,529     $ 1,518       0.7 %   $ 4,705     $ 4,256       10.6 %
 
                                       
 
                                               
GAAP diluted earnings per share
  $ 0.52     $ 0.52           $ 1.60     $ 0.94       70.2 %
 
                                               
(Gain) loss on sale of securities*
                              0.52          
Amortization of intangibles*
    0.03       0.03               0.11       0.09          
 
                                       
 
                                               
Diluted net operating earnings per share
  $ 0.55     $ 0.55           $ 1.71     $ 1.55       10.3 %
 
                                       
 
*   After any tax-related effect


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Other Operating Results
Net interest income for the three and nine month periods ended September 30, 2008 was $5.1 million and $14.3 million, respectively, an increase of $0.9 million and $2.0 million over the same periods in 2007. There are several factors driving the increase. First, there has been strong growth in the Company’s commercial loan portfolio, particularly its commercial real estate portfolio. Second, there has been a benefit to net interest income from the de-leverage of the balance sheet in June 2007 through the sale of low-earning investment securities and disposition of high-cost municipal time deposits. Third, the Company has benefited from a decline in market interest rates as the Federal Reserve has cut its target federal funds rate by 300 basis points since September 2007 to 2.00% at the end of September 2008.
The net interest margin for the three month period ended September 30, 2008 was 4.67%, as compared with 4.70% in the second quarter of 2008 and 4.30% for the three months ended September 30, 2007. The return on interest earning assets in the three month period ended September 30, 2008 decreased 24 basis points from the prior year third quarter. The decrease from prior year is due to the decreased yield earned on loans. The cost of interest-bearing liabilities was 2.81% in the third quarter of 2008, compared with 3.59% in the third quarter of 2007. The drop in market interest rates resulted in lower rates paid on most funding sources, particularly muni-vest savings, time deposits, and short-term borrowings. The margin benefits from the declining market interest rates have leveled off, however, as asset yields decreased 1 basis point and the cost of interest-bearing liabilities increased 2 basis points from the second quarter to the third quarter of 2008. Interest free funds contributed 53 basis points to the net interest margin in the three month period ended September 30, 2008, the same as in the second quarter of 2008, but lower than the 70 basis points in the third quarter of 2007.
The net interest margin for the nine month period ended September 30, 2008 was 4.61%, as compared with 3.95% in the same period in 2007.
The provision for loan and lease losses for the three month period ended September 30, 2008 decreased to $582 thousand from $675 thousand in the linked quarter but increased from $283 thousand in the same three month period in 2007. Increased charge-offs, the continued loan growth, and additional reserves needed for the continued seasoning of the leasing portfolio resulted in the year-over-year increase in the provision for loan and lease losses. While loan growth remained strong in the third quarter of 2008, it was off the second quarter’s even stronger pace, resulting in the decrease in the provision for loan and lease losses when comparing the third quarter of 2008 to the second quarter of 2008. The ratio of net charge-offs to average loans and leases increased from 0.41% in the third quarter of 2007 and 0.42% in the second quarter of 2008, to 0.59% in the third quarter of 2008. The continued seasoning of the lease portfolio is responsible for the increase in net charge-offs. As has been the experience since the Company began originating small-ticket leases, the majority of write-offs have been in leases. This is consistent with the risk/return nature of these credits in which the Company requires a higher rate of return. Management employs strict underwriting standards in selecting credits for this portion of the portfolio and has taken steps in an attempt to mitigate the leasing portfolio’s risk exposure in a potential economic recession. Actions taken to this effect include tightening credit standards and consolidation of the broker network.
Non-interest income was $2.9 million and $9.3 million for the three and nine month periods ended September 30, 2008, respectively. This is flat to the third quarter of 2007 and an increase of $3.0 million over the same nine month period of 2007. Most of the increase over the nine month period ($2.3 million) is attributable to the loss on the sale of $45 million in securities in the second quarter of 2007 when the Company restructured its balance sheet. Excluding securities gains and losses, all other non-interest income rose 7.5% for the nine month period ended September 30, 2008, when compared with the same period of 2007. The largest component of non-interest income, insurance revenue, improved 4.3% to $1.8 million in the three month period ended September 30, 2008 compared to the same period of the prior year. For the nine month period ended September 30, 2008, it increased 5.2%, or $0.3 million, to $5.5 million when compared with the nine month period in the prior year. The increase in insurance revenue is due in large part to the purchase of an insurance agency in July 2007. The Evans Insurance Agency made another acquisition in the third quarter of 2008 with the purchase of the Fitzgerald Agency in Amherst, NY. Organic growth continues to be sluggish in a soft insurance market with intense competition.
The increase in the value of the Company’s bank-owned life insurance policies (“BOLI”) was $31 thousand and $239 thousand for the three and nine-month periods ended September 30, 2008 compared with $151 thousand and


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$468 thousand in the same periods in 2007. Other income increased $81 thousand, or 18.1%, to $529 thousand in the third quarter of 2008 compared to the third quarter of 2007. Most of the increase is attributable to appreciation in the value of the Company’s mortgage servicing rights. For the nine-month period ended September 30, 2008, other income was $1.4 million, a $0.1 million, or 11.5%, increase from $1.3 million in the comparable period in 2007.
Total non-interest expenses were $5.3 million and $15.4 million for the three and nine month periods ended September 30, 2008, respectively. This is an increase of $0.4 million, or 8.1%, and $0.9 million, or 6.1%, respectively, from the same periods in 2007. Salary and employee benefit expense for the three month period ended September 30, 2008 increased $0.2 million, or 8.2%, to $2.9 million for the quarter due to merit increases, the addition of new employees, including those working the Company’s new branch office in Buffalo, an enhanced incentive compensation system, and increased contributions to the 401(k) savings plan, which were somewhat offset by savings related to the freezing of the defined benefit pension plan. Those same factors contributed to the increase in salary and employee benefit expense for the nine month period ended September 30, 2008 of $0.6 million, or 8.0%, to $8.6 million. The new branch office also drove the increase in occupancy expenses of 7.5% from the third quarter of 2007 to $0.6 million in the third quarter of 2008. Advertising and public relations expenses increased $57 thousand in the third quarter of 2008 compared with the prior year as a result of the Company’s branding campaign which resulted in the name change of several of the Company’s subsidiaries, a new logo, and a new tagline. The increase in advertising and public relations expenses in the nine-month period ended September 30, 2008 compared to the prior year is $47 thousand.
Income tax expense totaled $0.8 million and $2.0 million for the three and nine month periods ended September 30, 2008, respectively. The effective tax rates for the periods were 35.6% and 31.0%, respectively. The effective tax rates for the comparable periods in 2007 were impacted by the aforementioned loss on the sale of securities. Excluding the loss on sale of securities, the effective tax rate on all other income for the three-month and nine-month periods ended September 30, 2007 was 28.3% and 27.4%, respectively. The increase in the effective rate is a result of tax-exempt income such as interest earned on municipal bonds and the increase in value of bank-owned life insurance being a smaller portion of total income. The Company records an effective tax rate for the period that will be reflective of the projected annual tax rate based on expected supportable tax positions.
CAPITAL
The Company has consistently maintained regulatory capital ratios at, or above, federal “well capitalized” standards. Equity as a percentage of assets was 9.1% at September 30, 2008, down from 9.3% at June 30, 2008 and 9.8% at December 31, 2007. The ratio has declined because assets grew faster than equity. Book value per outstanding common share was $16.53 at September 30, 2008, compared with $16.44 at June 30, 2008 and $15.74 at December 31, 2007. Total stockholders’ equity was $45.5 million at September 30, 2008, compared with $45.3 million at June 30, 2008 and $43.3 million at December 31, 2007. The increase is primarily attributable to total comprehensive income of $4.3 million in the first nine months of 2008, offset by $2.1 million in dividends.
LIQUIDITY
The Company utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. As a member of the Federal Home Loan Bank (“FHLB”) the Bank is able to borrow funds at competitive rates. Advances of up to $35.0 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. An amount equal to 25% of the Bank’s total assets could be borrowed through the advance programs under certain qualifying circumstances. The Bank also has the ability to purchase up to $14.0 million in federal funds from its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Company’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market.
Additionally, the Company has access to capital markets as a funding source, including the new TARP program, which was discussed at length at the beginning of Item 2 of this document.


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The cash flows from the investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At September 30, 2008, approximately 19.3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 53.0% had maturity dates of five years or less. At September 30, 2008, the Company had net short-term liquidity of $25.0 million as compared with $23.4 million at June 30, 2008 and $28.2 million at December 31, 2007. Available assets of $72.4 million, divided by public and purchased funds of $134.7 million, resulted in a long-term liquidity ratio of 54% at September 30, 2008, compared with 46% at June 30, 2008 and 51% at December 31, 2007.
The Company believes that the Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for municipal deposits.
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in the future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.
The Bank’s Asset Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a computer model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and other financial instruments used for interest rate risk management purposes.


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The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12 month period of time:
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
                 
    Calculated (decrease) increase
    in projected annual net interest income
    (in thousands)
    September 30, 2008   December 31, 2007
Changes in interest rates
               
 
               
+200 basis points
    (54 )     (676 )
+100 basis points
    (24 )     (333 )
 
               
-100 basis points
    (42 )     394  
-200 basis points
    (216 )     629  
Many assumptions were utilized by management to calculate the impact that changes in the interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the event that the 200 basis point rate changes cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.
ITEM 4 — CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of September 30, 2008 (the end of the period covered by this Report) have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company’s internal control over financial reporting were identified in the fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II — OTHER INFORMATION
ITEM 6 — EXHIBITS
             
Exhibit No.   Name   Page No.
 
           
31.1
  Certification of Principal Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     29
 
           
31.2
  Certification of the Principal Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     30
 
           
32.1
  Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     31
 
           
32.2
  Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     32


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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Evans Bancorp, Inc.
 
 
DATE
November 04, 2008 
/s/ David J. Nasca    
  David J. Nasca   
  President and CEO
(Principal Executive Officer) 
 
 
     
DATE
November 04, 2008 
/s/ Gary A. Kajtoch    
  Gary A. Kajtoch   
  Treasurer
(Principal Financial Officer) 
 


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Exhibit Index
             
Exhibit No.   Name   Page No.
 
           
31.1
  Certification of Principal Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     29
 
           
31.2
  Certification of the Principal Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     30
 
           
32.1
  Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     31
 
           
32.2
  Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     32