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

 

 

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended June 30, 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

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		Smaller reporting company þ
				(Do not check if a smaller reporting company)

     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 2,755,274 shares as of August 1, 2008

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART 1. FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Unaudited Consolidated Balance Sheets — June 30, 2008 and December 31, 2007			1
Unaudited Consolidated Statements of Operations — Three months ended June 30, 2008 and 2007			2
Unaudited Consolidated Statements of Income — Six months ended June 30, 2008 and 2007			3
Unaudited Consolidated Statements of Stockholders’ Equity-Six months ended June 30, 2008 and 2007			4
Unaudited Consolidated Statements of Cash Flows-Six months ended June 30, 2008 and 2007			5
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Item 6. Exhibits			26
SIGNATURES			27
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

1

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND DECEMBER 31, 2007
(in thousands, except share and per share amounts)

		June 30,				December 31,
		2008				2007
ASSETS
Cash and due from banks		$	16,031			$	12,335
Interest-bearing deposits at banks			653				269
Securities:
Available for sale, at fair value			64,978				70,144
Held to maturity, at amortized cost			2,079				2,266
Loans and leases, net of allowance for loan and lease losses of $5,059 in 2008 and $4,555 in 2007			360,961				319,556
Properties and equipment, net			8,512				8,366
Goodwill			10,046				10,046
Intangible assets			2,180				2,507
Bank-owned life insurance			10,968				10,760
Other assets			8,331				6,480
TOTAL ASSETS		$	484,739			$	442,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	76,947			$	69,268
NOW			16,691				10,141
Regular savings			107,845				92,864
Muni-vest			17,952				24,530
Time			152,025				129,026
Total deposits			371,460				325,829
Securities sold under agreement to repurchase			4,342				3,825
Other short-term borrowings			23,083				33,980
Other liabilities			10,877				10,361
Junior subordinated debentures			11,330				11,330
Long-term borrowings			18,349				14,101
Total liabilities			439,441				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			26,459				26,380
Retained earnings			17,573				15,612
Accumulated other comprehensive (loss) income, net of tax			(39	)			16
Less: Treasury stock, at cost (4,426 and 5,033 shares, respectively)			(75	)			(83	)
Total stockholders’ equity			45,298				43,303
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	484,739			$	442,729

See Notes to Unaudited Consolidated Financial Statements

2

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2008 AND 2007
in thousands, except share and per share amounts)

		Three Months Ended
		June 30
		2008				2007
INTEREST INCOME
Loans and leases		$	6,434			$	6,094
Interest bearing deposits at banks			3				10
Securities:
Taxable			320				861
Non-taxable			392				435
Total interest income			7,149				7,400
INTEREST EXPENSE
Deposits			1,866				2,670
Other borrowings			299				313
Junior subordinated debentures			154				223
Total interest expense			2,319				3,206
NET INTEREST INCOME			4,830				4,194
PROVISION FOR LOAN AND LEASE LOSSES			675				345
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			4,155				3,849
NON-INTEREST INCOME:
Bank charges			540				548
Insurance service and fees			1,617				1,423
Net gain (loss) on sales of securities			7				(2,302	)
Premium on loans sold			4				4
Bank-owned life insurance			151				177
Other			493				439
Total non-interest income			2,812				289
NON-INTEREST EXPENSE:
Salaries and employee benefits			2,837				2,621
Occupancy			578				525
Supplies			62				73
Repairs and maintenance			143				140
Advertising and public relations			102				133
Professional services			254				273
Technology and communications			290				255
Amortization of intangibles			166				142
Other insurance			84				90
Other			526				460
Total non-interest expense			5,042				4,712
INCOME (LOSS) BEFORE INCOME TAXES			1,925				(574	)
INCOME TAX PROVISION (BENEFIT)			540				(435	)
NET INCOME (LOSS)		$	1,385				($139	)
Net income (loss) per common share-basic		$	0.50			$	(0.05	)
Net income (loss) per common share-diluted		$	0.50			$	(0.05	)
Cash dividends per common share		$	0.00			$	0.00
Weighted average number of common shares			2,748,771				2,743,819
Weighted average number of diluted shares			2,750,563				2,743,819

See Notes to Unaudited Consolidated Financial Statements

3

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(in thousands, except share and per share amounts)

		Six Months Ended
		June 30,
		2008				2007
INTEREST INCOME
Loans and leases		$	12,608			$	11,694
Interest bearing deposits at banks			7				97
Securities:
Taxable			641				1,873
Non-taxable			791				878
Total interest income			14,047				14,542
INTEREST EXPENSE
Deposits			3,823				5,373
Other borrowings			689				663
Junior subordinated debentures			347				441
Total interest expense			4,859				6,477
NET INTEREST INCOME			9,188				8,065
PROVISION FOR LOAN AND LEASE LOSSES			1,232				660
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			7,956				7,405
NON-INTEREST INCOME:
Bank charges			1,072				1,019
Insurance service and fees			3,751				3,552
Net gain (loss) on sales of securities			7				(2,303	)
Premium on loans sold			5				5
Bank-owned life insurance			208				317
Pension curtailment			328				—
Other			972				843
Total non-interest income			6,343				3,433
NON-INTEREST EXPENSE:
Salaries and employee benefits			5,709				5,289
Occupancy			1,204				1,128
Supplies			129				151
Repairs and maintenance			290				279
Advertising and public relations			210				220
Professional services			522				525
Technology and communications			565				519
Amortization of intangibles			328				286
Other insurance			165				180
Other			1,009				1,067
Total non-interest expense			10,131				9,644
INCOME BEFORE INCOME TAXES			4,168				1,194
INCOME TAX PROVISION			1,190				46
NET INCOME		$	2,978			$	1,148
Net income per common share-basic		$	1.08			$	0.42
Net income per common share-diluted		$	1.08			$	0.42
Cash dividends per common share		$	0.37			$	0.34
Weighted average number of common shares			2,748,643				2,737,232
Weighted average number of diluted shares			2,749,645				2,737,914

See Notes to Unaudited Consolidated Financial Statements

4

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(in thousands, except share and per share amounts)

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive				Treasury
		Stock				Surplus				Earnings				Income (Loss)				Stock				Total
Balance, January 1, 2007		$	1,373			$	26,160			$	14,196			$	(1,917	)		$	(269	)		$	39,543
Comprehensive income:
Net Income											1,148												1,148
Unrealized gain on available-for-sale securities, net of reclassification of loss of $1,413 (after tax) and tax effect of ($629)															985								985
Amortization of prior service cost and net loss, net tax effect ($17)															26								26
Total comprehensive income																							2,159
Cash dividends ($0.34 per common share)											(928	)											(928	)
Stock options expense							56																56
Reissued 8,747 shares treasury stock under dividend reinvestment plan							(21	)											195				174
Reissued 2,500 shares of restricted stock							(53	)											53				—
Issued 7,983 shares treasury stock			4				161																165
Reissued 4,689 shares treasury stock under employee stock purchase plan							(20	)											101				81
Purchased 9,300 shares for treasury																			(189	)			(189	)
Balance, June 30, 2007		$	1,377			$	26,283			$	14,416			$	(906	)		$	(109	)		$	41,061
Balance, January 1, 2008		$	1,378			$	26,380			$	15,612			$	16			$	(83	)		$	43,303
Comprehensive income:
Net Income											2,978												2,978
Unrealized loss on available-for-sale securities, net of tax effect of $65															(101	)							(101	)
Amortization of prior service cost and net loss															37								37
Pension curtailment adjustment net of taxes $7															9								9
Total comprehensive income																							2,923
Cash dividends ($0.37 per common share)											(1,017	)											(1,017	)
Stock options expense							74																74
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, June 30, 2008		$	1,380			$	26,459			$	17,573			$	(39	)		$	(75	)		$	45,298

See Notes to Unaudited Consolidated Financial Statements

5

PART I—FINANCIAL INFORMATION
ITEM I—FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(in thousands)

		Six Months Ended
		June 30,
		2008				2007
OPERATING ACTIVITIES:
Interest received		$	14,020			$	13,748
Fees received			5,677				5,367
Interest paid			(4,963	)			(6,416	)
Cash paid to employees and suppliers			(8,484	)			(8,525	)
Income taxes paid			(2,344	)			(1,069	)
Proceeds from sale of loans held for resale			1,391				1,117
Originations of loans held for resale			(1,336	)			(1,385	)
Net cash provided by operating activities			3,961				2,837
INVESTING ACTIVITIES:
Available for sales securities:
Purchases			(49,005	)			(66,937	)
Proceeds from sales			—				45,653
Proceeds from maturities			54,149				39,733
Held to maturity securities:
Purchases			(41	)			(93	)
Proceeds from maturities			229				1,917
Additions to properties and equipment			(536	)			(193	)
Increase in loans, net of repayments			(43,088	)			(13,676	)
Sale of other real estate			—				(6	)
Cash paid on earn-out agreements			(40	)			(202	)
Net cash (used in) provided by investing activities			(38,332	)			6,196
FINANCING ACTIVITIES:
Proceeds from short-term borrowings			7,517				—
Proceeds from long-term borrowings			5,000				—
Repayments of short-term borrowings			(18,585	)			(21,285	)
Repayments of long-term borrowings			(64	)			(2,381	)
Increase in deposits			45,631				17,378
Dividends paid			(1,017	)			(928	)
Purchase of treasury stock			(234	)			(189	)
Re-issuance of treasury stock			203				255
Net cash provided by (used in) financing activities			38,451				(7,150	)
Net increase in cash and equivalents			4,080				1,883
CASH AND CASH EQUIVALENTS:
Beginning of period			12,604				12,592
End of period		$	16,684			$	14,475

6

PART I—FINANCIAL INFORMATION
ITEM I—FINANCIAL STATEMENTS

7

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 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 National Bank, effective August 1, 2008 its name was changed to 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 six month period ended June 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 $0.6 million, $1.2 million and $0.7 million as of June 30, 2008, March 31, 2008, and December 31, 2007, respectively. As of June 30, 2008 the securities portfolio should 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. 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 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.

8

		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 are 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 did not elect to adopt SFAS 157 for acquired non-financial assets and assumed non-financial liabilities.
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 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.

9

The following table sets forth information regarding the allowance for loan and lease losses for the six month periods ended June 30, 2008 and 2007.

Allowance for loan and lease losses

		Six months ended June 30,
		2008				2007
		(in thousands)
Beginning balance, January 1		$	4,555			$	3,739
Charge-offs:
Commercial			—				(153	)
Real estate			(1	)			(5	)
Installment loans			(3	)			(4	)
Overdrafts			(26	)			(16	)
Direct financing leases			(838	)			(400	)
Total charge-offs			(868	)			(578	)
Recoveries:
Commercial			18				9
Real estate			—				—
Installment loans			2				1
Overdrafts			13				8
Direct financing leases			107				27
Total recoveries			140				45
Net charge-offs			(728	)			(533	)
Provision for loan and lease losses			1,232				660
Ending balance, June 30		$	5,059			$	3,866
Ratio of net charge-offs to average total loans and leases outstanding (annualized)			0.43	%			0.37	%

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 1,792 and 1,002 dilutive shares for the three and six month periods ended June 30, 2008, respectively. This compares with 0 and 682 for the three and six month periods ended June 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 six months periods ended June 30, 2008, there were approximately 106 thousand and 100 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive. For the three and six months periods ended June 30, 2007, there were approximately 74 thousand and 61 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 six month periods ended June 30, 2008 and 2007.

10

Three Months Ended
June 30, 2008
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	4,898			$	(68	)		$	4,830
Provision for loan and lease losses			675				—				675
Net interest income (expense) after provision for loan and lease losses			4,223				(68	)			4,155
Non-interest income			1,195				—				1,195
Insurance service and fees			—				1,617				1,617
Non-interest expense			3,761				1,281				5,042
Income before income taxes			1,657				268				1,925
Income tax provision			437				103				540
Net income		$	1,220			$	165			$	1,385

Six Months Ended
June 30, 2008
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	9,347			$	(159	)		$	9,188
Provision for loan and lease losses			1,232				—				1,232
Net interest income (expense) after provision for loan and lease losses			8,115				(159	)			7,956
Non-interest income			2,592				—				2,592
Insurance service and fees			—				3,751				3,751
Non-interest expense			7,557				2,574				10,131
Income before income taxes			3,150				1,018				4,168
Income tax provision			796				394				1,190
Net income		$	2,354			$	624			$	2,978

11

Three Months Ended
June 30, 2007
(in thousands)

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

Six Months Ended
June 30, 2007
(in thousands)

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

7.		CONTINGENT LIABILITIES AND COMMITMENTS
		The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at June 30, 2008 and 2007 is as follows:

		2008				2007
		(in thousands)
Commitments to extend credit		$	71,213			$	57,662
Standby letters of credit			2,787				2,089
Total		$	74,000			$	59,751

Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance of the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank has not incurred any losses on its commitments during the past two years.

Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The changes in the fair value of these commitments due to interest rate risk are not recorded on the consolidated balance sheets as the fair value of these derivatives are not considered material.

The Company is subject to possible litigation proceedings in the normal course of business. As of June 30, 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 amortized 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.

		Six months ended June 30,
		(in thousands)
										Supplemental Executive
		Pension Benefits								Retirement Plan
		2008				2007				2008				2007
Service cost		$	—			$	91			$	30			$	15
Interest cost			118				61				87				40
Expected return on plan assets			(146	)			(62	)			—				—
Amortization of prior service cost			—				(4	)			28				14
Amortization of the net loss			—				7				9				4
Net periodic (benefit) cost		$	(28	)		$	93			$	154			$	73

10. RECENT ACCOUNTING PRONOUNCEMENTS

FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). We expect the hierarchical guidance provided by SFAS 162 will not have a significant impact on the Company’s 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 nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Report on Form 10-Q, as well as in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are beyond the Company’s control and are difficult to predict.

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation, to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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

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

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

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 $366.0 at June 30, 2008, reflecting a $26.3 million or 7.7% increase from March 31, 2008 and a $41.9 million or 12.9% increase from December 31, 2007. Gross loans and leases are net of $10.1 million, $9.8 million and $9.7 million of unearned income on direct financing leases as of June 30, 2008, March 31, 2008 and December 31, 2007, respectively. Commercial loans and leases totaled $267.2 million at June 30, 2008, reflecting a $24.4 million or 10.1% increase from March 31, 2008 and a $38.8 million or 17.0% increase from December 31, 2007. Growth in commercial real estate loans of $16.8 million for the second fiscal quarter and $28.2 million for the year to date was largely responsible for the increase in commercial loans and leases from March 31, 2008 and December 31, 2007, respectively, to June 30, 2008.

     The Company has no 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 experienced 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 $3.5 million or 7.4% from March 31, 2008 and $5.8 million or 12.9% 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. 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 $97.9 million at June 30, 2008, reflecting a $2.0 million or 2.1% increase from March 31, 2008 and a $3.0 million or 3.2% increase from December 31, 2007. Real estate loans increased $0.7 million or 1.2% from March 31, 2008 and $1.3 million or 2.3% from December 31, 2007. While short-term interest rates have sharply decreased in 2008, long-term fixed rates have actually been gradually increasing. This 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 level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended June 30, 2008, the Bank sold mortgages to FNMA totaling $0.9 million, as compared with $0.8 million during the three month period ended June 30, 2007. During the six month period ended June 30, 2008, the Bank sold mortgages to FNMA totaling $1.4 million, as compared to $1.1 million during the six month period ended June 30, 2007. At June 30, 2008, the Bank had a loan servicing portfolio principal balance of $28.1 million upon which it earns servicing fees, as compared with $28.2 million at March 31, 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.

		June 30, 2008				Percentage				December 31, 2007				Percentage
		(in thousands)								(in thousands)
Commercial Loans and Leases
Real Estate		$	176,498				48.2	%		$	148,257				45.7	%
Installment			20,647				5.6	%			18,502				5.7	%
Direct Financing Leases			50,875				13.9	%			45,078				13.9	%
Lines of Credit			19,148				5.2	%			16,446				5.1	%
Cash Reserve			79				0.0	%			71				0.0	%
Total Commercial Loans and Leases			267,247				72.9	%			228,354				70.4	%
Consumer Loans
Real Estate			57,828				15.8	%			56,529				17.5	%
Home Equity			37,449				10.3	%			36,035				11.1	%
Installment			2,199				0.6	%			1,858				0.6	%
Overdrafts			275				0.1	%			379				0.1	%
Other			147				0.1	%			75				0.0	%
Total Consumer Loans			97,898				26.9	%			94,876				29.3	%
Net Deferred Costs & Unearned Discounts			875				0.2	%			881				0.3	%
Total Loans and Leases			366,020				100.0	%			324,111				100.0	%
Allowance for Loan and Lease Losses			(5,059	)							(4,555	)
Loans and Leases, net		$	360,961							$	319,556

     Net loan and lease charge-offs were $368 thousand in the three month period ended June 30, 2008 as compared with $360 thousand in the first quarter of 2008 and $365 thousand in the three month period ended June 30, 2007. Net charge-offs were $728 thousand for the six month period ended June 30, 2008, as compared with $533 thousand for the same period of 2007. Despite the turbulent economic environment, the Bank has experienced a relatively stable charge-off level year-to-date through June 30, 2008. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.12% of total loans and leases outstanding at June 30, 2008 as compared with 0.13% at March 31, 2008 and 0.22% at December 31, 2007. The allowance for loan and lease losses totaled $5.1 million or 1.38% of total loans and leases outstanding at June 30, 2008 as compared with $4.8 million or 1.40% of total loans and leases outstanding as of March 31, 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 percentages, and general economic conditions. Management believes the allowance for loan and lease losses is adequate for losses from existing loans and leases.

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

		June 30, 2008				December 31, 2007
		(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate
Residential 1-4 family		$	—			$	—
Commercial and multi-family			97				112
Construction			—				—
Second mortgages			—				—
Home equity lines of credit			50				—
Total mortgage loans on real estate			147				112
Direct financing leases			136				215
Commercial loans			125				224
Consumer installment loans
Personal			—				—
Credit cards			—				—
Other			—				—
Total consumer installment loans			—				—
Total non-accruing loans and leases		$	408			$	551
Accruing loans and leases 90+ days past due			22				163
Total non-performing loans and leases			430				714
Total non-performing loans and leases as a percentage of total assets			0.09	%			0.16	%
Total non-performing loans and leases as a percentage of total loans and leases			0.12	%			0.22	%

     For the three and six month period ended June 30, 2008, gross interest income that would have been reported on non-accruing loans and leases had they been current was $14 thousand and $30 thousand. For the three and six month periods ended June 30, 2007, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $28 thousand and $46 thousand, respectively. There was $12 thousand and $22 thousand of interest income included in net income for the three and six month periods ended June 30, 2008 on non-accruing loans and leases. There was $12 thousand and $18 thousand of interest income included in net income for the three and six month periods ended June 30, 2007 on non-accruing loans and leases.

Investing Activities

     Total securities decreased to $67.1 million at June 30, 2008, reflecting a $6.5 million, or 8.8% decrease from $73.6 million at March 31, 2008, and a $5.3 million, or 7.3% decrease from $72.4 million at December 31, 2007. Securities and interest-bearing deposits at banks made up 16.0% of the Bank’s total average interest earning assets in the second quarter of 2008 compared with 18.0% in the trailing first quarter of 2008 and 30.3% in the second quarter of 2007. The large decline in the securities portfolio compared with the second quarter of 2007 is a result of the Company’s strategy to de-leverage a portion of its balance sheet. The Company sold $45 million in securities in June 2007.

     The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 50.1% of the portfolio at June 30, 2008 compared with 51.5% at March 31, 2008 and 52.3% at December 31, 2007; and U.S. government-sponsored agency bonds of various types, which comprise 19.5% of the portfolio at June 30, 2008 versus 27.3% at March 31, 2008 and 19.6% at December 31, 2007. Agency mortgage-backed securities comprise 25.6% at June 30, 2008 compared with 16.5% at March 31, 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 4.8% of the portfolio at June 30, 2008 versus 4.7% at March 31, 2008 and 4.9% of the portfolio at December 31, 2007. The credit quality of the securities portfolio is believed to be strong, with 96.9% of the securities portfolio carrying the equivalent of a Moody’s rating of Aaa.

     The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 2.9 years as of June 30, 2008 compared with 2.4 years as of March 31, 2008 and December 31, 2007. Available-for-sale securities with a total fair value of $58.5 million at June 30, 2008 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

Funding Activities

     Total deposits at June 30, 2008 were $371.5 million, reflecting a $27.9 million or 8.1% increase from March 31, 2008 and a $45.7 million or 14.0% increase from December 31, 2007. Demand deposits at June 30, 2008 were $76.9 million, reflecting a $3.6 million or 4.9% increase from March 31, 2008 and a $7.6 million or 11.1% 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 June 30, 2008 were 4.2% higher than the first quarter of 2008 and 2.2% higher than the prior year’s second quarter. Much of the overall deposit growth in the second quarter ended June 30, 2008 is attributable to an increase in regular savings deposits of $21.7 million, or 25.2%, to $107.8 million. After a period of flat growth to declining balances, the Company introduced a new money market product in an effort to attract savings deposits. The effort resulted in the increase in savings deposits in the second quarter ended June 30, 2008. Compared with December 31, 2007, savings deposits have increased $14.9 million, or 16.1%. Time deposits were $152.0 million at June 30, 2008, reflecting a $5.0 million or 3.4% increase from March 31, 2008, and a $23.0 million or 17.8% increase from December 31, 2007. Due to the significant growth in the Company’s loan and lease portfolio, the Company has been aggressive in attracting time deposits, particularly those with longer-term maturities. NOW deposits increased in the second quarter ended June 30, 2008 while muni-vest balances decreased in the same quarter as a result of one large municipal customer moving money between two products with similar rates.

     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 $27.4 million at March 31, 2008 to $23.1 million at June 30, 2008. In contrast, long-term borrowings remained at $18.3 million at June 30, 2008, virtually flat to the balance at March 31, 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 second quarter, the target rate stood at 2.00%. Compared to historical norms, interest rates were at a lower than usual level in the first and second 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 and the decrease in short-term borrowings.

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

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

						Three Months Ended												Three Months Ended
						June 30, 2008												June 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		$	345,200			$	6,434				7.46	%		$	294,365			$	6,094				8.28	%
Taxable securities			29,130				320				4.39	%			85,975				861				4.01	%
Tax-exempt securities			35,947				392				4.36	%			39,425				435				4.41	%
Interest bearing deposits at banks			651				3				1.84	%			2,333				10				1.71	%
Total interest-earning assets			410,928				7,149				6.96	%			422,098				7,400				7.01	%
Non interest-earning assets:
Cash and due from banks			12,143												10,789
Premises and equipment, net			8,343												8,653
Other assets			29,734												29,681
Total Assets			461,148											$	471,221
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW		$	12,722			$	24				0.75	%		$	11,015			$	6				0.22	%
Regular savings			93,448				285				1.22	%			85,638				256				1.20	%
Muni-Vest savings			24,457				118				1.93	%			46,989				514				4.38	%
Time deposits			145,705				1,439				3.95	%			156,521				1,894				4.84	%
Other borrowed funds			39,901				288				2.89	%			30,495				298				3.91	%
Junior subordinated debentures			11,330				154				5.44	%			11,330				223				7.87	%
Securities sold U/A to repurchase			5,363				11				0.82	%			7,453				15				0.81	%
Total interest-bearing liabilities			332,926			$	2,319				2.79	%			349,441			$	3,206				3.67	%
Noninterest-bearing liabilities:
Demand deposits			72,940												71,340
Other			10,493												9,913
Total liabilities			416,359											$	430,694
Stockholders’ equity			44,789												40,527
Total Liabilities and Equity			461,148											$	471,221
Net interest earnings						$	4,830											$	4,194
Net yield on interest earning assets											4.70	%											3.97	%
Interest rate spread											4.17	%											3.34	%