EVANS BANCORP INC - Quarter Report: 2009 March (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 March 31, 2009

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

For the transition period from                      to                     

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(716) 926-2000

Not applicable

since last report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 2,785,699 shares as of May 1, 2009

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets — March 31, 2009 and December 31, 2008			1
Unaudited Consolidated Statements of Operations — Three months ended March 31, 2009 and 2008			2
Unaudited Consolidated Statements of Stockholders’ Equity-Three months ended March 31, 2009 and 2008			3
Unaudited Consolidated Statements of Cash Flows—Three months ended March 31, 2009 and 2008			4
Notes to Unaudited Consolidated Financial Statements			6
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
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 6. Exhibits			26
SIGNATURES			27
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2009 AND DECEMBER 31, 2008
(in thousands, except share and per share amounts)

		March 31,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	9,733			$	9,036
Interest-bearing deposits at banks			586				115
Securities:
Available for sale, at fair value			91,293				73,804
Held to maturity, at amortized cost			1,886				1,951
Loans and leases, net of allowance for loan and lease losses of $7,779 in 2009 and $6,087 in 2008			411,021				401,626
Properties and equipment, net			9,676				9,885
Goodwill			8,101				10,046
Intangible assets			2,700				2,900
Bank-owned life insurance			11,564				11,685
Other assets			9,899				7,926
TOTAL ASSETS		$	556,459			$	528,974
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	80,315			$	75,959
NOW			9,471				10,775
Regular savings			183,378				154,283
Muni-vest			45,797				26,477
Time			141,065				136,459
Total deposits			460,026				403,953
Securities sold under agreement to repurchase			5,572				6,307
Other short-term borrowings			4,500				30,695
Other liabilities			13,097				12,590
Junior subordinated debentures			11,330				11,330
Long-term borrowings			18,180				18,180
Total liabilities			512,705				483,055
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS’ EQUITY:
Common stock, $.50 par value; 10,000,000 shares authorized; 2,771,788 and 2,771,788 shares issued, respectively, and 2,769,788 and 2,771,788 shares outstanding, respectively			1,386				1,386
Capital surplus			26,724				26,696
Retained earnings			15,992				18,374
Accumulated other comprehensive loss, net of tax			(321	)			(537	)
Less: Treasury stock, at cost (2,000 and 0 shares, respectively)			(27	)			—
Total stockholders’ equity			43,754				45,919
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	556,459			$	528,974

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(in thousands, except share and per share amounts)

		Three Months Ended
		March 31,
		2009				2008
INTEREST INCOME
Loans and leases		$	6,663			$	6,174
Interest bearing deposits at banks			—				4
Securities:
Taxable			334				320
Non-taxable			429				399
Total interest income			7,426				6,897
INTEREST EXPENSE
Deposits			1,896				1,957
Other borrowings			193				389
Junior subordinated debentures			123				193
Total interest expense			2,212				2,539
NET INTEREST INCOME			5,214				4,358
PROVISION FOR LOAN AND LEASE LOSSES			3,314				557
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			1,900				3,801
NON-INTEREST INCOME:
Bank charges			560				532
Insurance service and fees			2,325				2,134
Premium on loans sold			29				1
Bank-owned life insurance			220				57
Pension curtailment			—				328
Other			760				479
Total non-interest income			3,894				3,531
NON-INTEREST EXPENSE:
Salaries and employee benefits			3,302				2,872
Occupancy			719				626
Supplies			83				67
Repairs and maintenance			191				146
Advertising and public relations			81				108
Professional services			325				267
Technology and communications			174				275
Goodwill impairment			1,984				—
Amortization of intangibles			224				162
Other			599				565
Total non-interest expense			7,682				5,088
(LOSS) INCOME BEFORE INCOME TAXES			(1,888	)			2,244
INCOME TAX (BENEFIT) PROVISION			(641	)			651
NET (LOSS) INCOME			($1,247	)		$	1,593
Net (loss) income per common share-basic			($0.45	)		$	0.58
Net (loss) income per common share-diluted			($0.45	)		$	0.58
Cash dividends per common share		$	0.41			$	0.37
Weighted average number of common shares			2,770,655				2,748,515
Weighted average number of diluted shares			2,770,683				2,748,876

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(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, 2008		$	1,378			$	26,380			$	15,612			$	16			$	(83	)		$	43,303
Comprehensive income:
Net Income											1,593												1,593
Unrealized gain on available-for-sale securities, net of tax effect of ($190)															298								298
Pension curtailment adjustment net of tax effect of $7															9								9
Total comprehensive income																							1,900
Cash dividends ($0.37 per common share)											(1,017	)											(1,017	)
Stock options expense							37																37
Purchased 13,701 shares for treasury																			(234	)			(234	)
Balance, March 31, 2008		$	1,378			$	26,417			$	16,188			$	323			$	(317	)		$	43,989
Balance, January 1, 2009		$	1,386			$	26,696			$	18,374			$	(537	)		$	—			$	45,919
Comprehensive income:
Net Loss											(1,247	)											(1,247	)
Unrealized gain on available-for-sale securities, net of tax effect of ($125)															197								197
Amortization of prior service cost and net loss net of tax effect of ($12)															19								19
Total comprehensive loss																							(1,031	)
Cash dividends ($0.41 per common share)											(1,135	)											(1,135	)
Stock options expense							28																28
Purchased 2,000 shares for treasury																			(27	)			(27	)
Balance, March 31, 2009		$	1,386			$	26,724			$	15,992			$	(321	)		$	(27	)		$	43,754

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(in thousands)

		Three Months Ended
		March 31,
		2009				2008
OPERATING ACTIVITIES:
Interest received		$	7,142			$	6,837
Fees received			3,647				3,073
Interest paid			(2,422	)			(2,674	)
Cash paid to employees and suppliers			(4,987	)			(4,171	)
Income taxes paid			(75	)			(372	)
Proceeds from sale of loans held for resale			4,138				496
Originations of loans held for resale			(4,066	)			(733	)
Net cash provided by operating activities			3,377				2,456
INVESTING ACTIVITIES:
Available for sales securities:
Purchases			(46,603	)			(27,989	)
Proceeds from maturities			29,489				27,293
Held to maturity securities:
Purchases			—				(15	)
Proceeds from maturities			65				105
Additions to properties and equipment			(87	)			(87	)
Increase in loans, net of repayments			(13,015	)			(15,836	)
Cash paid on earn-out agreements			(40	)			(40	)
Net cash used in investing activities			(30,191	)			(16,569	)
FINANCING ACTIVITIES:
Proceeds from borrowings			—				13,272
Repayments of borrowings			(26,929	)			(14,299	)
Increase in deposits			56,073				17,740
Dividends paid			(1,135	)			(1,017	)
Purchase of treasury stock			(27	)			(234	)
Net cash provided by financing activities			27,982				15,462
Net increase in cash and equivalents			1,168				1,349
CASH AND CASH EQUIVALENTS:
Beginning of period			9,151				12,604
End of period		$	10,319			$	13,953

(continued)

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(in thousands)

		Three Months Ended
		March 31,
		2009				2008
RECONCILIATION OF NET (LOSS) INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income		$	(1,247	)		$	1,593
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization			545				402
Goodwill impairment			1,984				—
Deferred tax benefit			(1,070	)			(4	)
Provision for loan and lease losses			3,314				557
Premium on loans sold			(29	)			(1	)
Stock options expense			28				37
Proceeds from sale of loans held for resale			4,138				496
Originations of loans held for resale			(4,066	)			(733	)
Changes in assets and liabilities affecting cash flow:
Other assets			380				327
Other liabilities			(600	)			(218	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	3,377			$	2,456

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008

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”) , Evans National Holding Corp. (“ENHC”) and Suchak Data Systems, Inc. (“SDS”); and (ii) Evans National Financial Services, Inc. (“ENFS”), and ENFS’s subsidiary The Evans Agency, Inc. (“TEA”) and TEA’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENBA”), 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 month period ended March 31, 2009 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, 2008.
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 $1.5 million and $1.2 million as of March 31, 2009 and December 31, 2008, respectively. As of March 31, 2009, the securities portfolio does not contain any other than temporary declines in fair value.
3.		FAIR VALUE MEASUREMENTS
		Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, defines fair value, provides a framework for determining fair value and requires enhanced disclosure for those assets and liabilities that are carried on the balance sheet at fair value. Effective January 1, 2009, the Company adopted the nonfinancial assets and liabilities provision of SFAS No. 157, which requires measurement at fair value of certain non-financial assets and liabilities which are re-measured at fair value on a nonrecurring basis.
		SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
		Level 1 Inputs — uses unadjusted quoted market prices in active markets for identical assets or liabilities at the measurement date.
		Level 2 Inputs — uses observable market based inputs or unobservable inputs that are corroborated by market data.

		Level 3 Inputs — uses unobservable inputs that are based on the entity’s estimates about the assumptions that market participants would be expected to use and which cannot be corroborated by market data.
		The Company’s available for sale securities portfolio was estimated using Level 2 inputs. When available, unadjusted quoted market prices are used to determine fair value. The Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable.
		Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company evaluates and values impaired loans, at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 2 inputs in the fair value hierarchy. Fair value is estimated based on the value of the collateral securing these loans. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans had a carrying value of $2.6 million, with a valuation allowance of $1.5 million at March 31, 2009, compared to a carrying value of $2.7 million, with a valuation allowance of $0.7 million at December 31, 2008.
		The following table presents the balances of assets and liabilities, measured at fair value, on both a recurring and non-recurring basis by level as of March 31, 2009 and December 31, 2008:

		Fair Value Measurement
						Quoted Prices in
						Active Markets				Significant Other				Significant Other
						for Identical				Observable				Unobservable
		Fair Value				Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)
March 31, 2009
Securities available-for-sale		$	91,293			$	0			$	91,293			$	0
Impaired loans		$	2,550			$	0			$	0			$	2,550
December 31, 2008
Securities available-for-sale		$	73,804			$	0			$	73,804			$	0
Impaired loans		$	2,700			$	0			$	0			$	2,700

The Company measures the fair value of its reporting units annually, as of December 31st, using Level 3 inputs, utilizing the market value and income methods. When using the cash flow models, management considered historical information, the operating budget for 2009, and strategic goals in projecting net income and cash flows for the next five years. As a result of continued credit deterioration in the leasing portfolio and the Company’s strategic decision to exit the national leasing business, a triggering event under SFAS No. 142, Goodwill and Other Intangible Assets, occurred as of March 31, 2009. The Company performed the goodwill analysis of the leasing reporting unit, which indicated the reporting unit was impaired as of March 31, 2009. As a result, the Company recognized an impairment charge of $2.0 million for the three months ended March 31, 2009 related to a write-off of all of the Company’s goodwill allocated to the leasing reporting unit.

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 collectability of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease percentages, input from regulatory agencies, and general economic conditions.
		On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectability 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 three month periods ended March 31, 2009 and 2008.

Allowance for loan and lease losses

		Three months ended March 31,
		2009				2008
		(in thousands)
Beginning balance, January 1		$	6,087			$	4,555
Charge-offs:
Commercial			—				—
Real estate			(16	)			(1	)
Installment loans			(1	)			(1	)
Overdrafts			(11	)			(12	)
Direct financing leases			(1,772	)			(401	)
Total charge-offs			(1,800	)			(415	)
Recoveries:
Commercial			9				9
Real estate			—				—
Installment loans			1				1
Overdrafts			9				5
Direct financing leases			159				40
Total recoveries			178				55
Net charge-offs			(1,622	)			(360	)
Provision for loan and lease losses			3,314				557
Ending balance, March 31		$	7,779			$	4,752
Ratio of net charge-offs to average total loans and leases outstanding (annualized)			1.59	%			0.44	%
Ratio of allowance for loan and lease loss to total loans and leases			1.86	%			1.40	%

5.

PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period. The Company’s potential dilutive securities included 28 and 361 dilutive shares for the three month period ended March 31, 2009 and 2008, respectively. On February 17, 2009, the Company declared a cash dividend of $0.41 per common share.

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. As of March 31, 2009 and 2008, there were approximately 133 and 96 thousand shares, respectively.

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 month period ended March 31, 2009 and 2008.

Three Months Ended
March 31, 2009
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	5,263			$	(49	)		$	5,214
Provision for loan and lease losses			3,314				—				3,314
Net interest income (expense) after provision for loan and lease losses			1,949				(49	)			1,900
Non-interest income			1,569				—				1,569
Insurance service and fees			—				2,325				2,325
Non-interest expense			6,325				1,357				7,682
(Loss) Income before income taxes			(2,807	)			919				(1,888	)
Income tax (benefit) provision			(996	)			355				(641	)
Net (loss) income		$	(1,811	)		$	564			$	(1,247	)

Three Months Ended
March 31, 2008
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	4,449			$	(91	)		$	4,358
Provision for loan and lease losses			557				—				557
Net interest income (expense) after provision for loan and lease losses			3,892				(91	)			3,801
Non-interest income			1,397				—				1,397
Insurance service and fees			—				2,134				2,134
Non-interest expense			3,795				1,293				5,088
Income before income taxes			1,494				750				2,244
Income tax provision			360				291				651
Net income		$	1,134			$	459			$	1,593

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 is as follows:

		March 31,				December 31,
		2009				2008
		(in thousands)
Commitments to extend credit		$	100,845			$	87,320
Standby letters of credit			4,149				2,807
Total		$	104,994			$	90,127

		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 is not recorded on the consolidated balance sheets as the fair value of these derivatives is not considered material.
		The Company is subject to possible litigation proceedings in the normal course of business. As of March 31, 2009, there were no claims pending against the Company that management considered to be material.
8.		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.
		The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three month periods ended March 31, 2009 and 2008.

		Three months ended March 31,
		(in thousands)
										Supplemental Executive
		Pension Benefits								Retirement Plan
		2009				2008				2009				2008
Service cost		$	—			$	—			$	15			$	15
Interest cost			54				59				45				44
Expected return on plan assets			(42	)			(73	)			—				—
Amortization of prior service cost			—				—				14				14
Amortization of the net loss			14				—				3				4
Net periodic (benefit) cost		$	26			$	(14	)		$	77			$	77

9.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2009, the Company adopted SFAS No. 141(R), “Business Combinations.” This statement significantly changes how business acquisitions are accounted for, continuing the transition to fair value measurement, and will impact financial statements both on the acquisition date and in subsequent periods. This statement requires the acquirer to recognize assets acquired, liabilities assumed, and any noncontrolling interest in the acquire at their respective fair values as of the acquisition date. SFAS No. 141(R) changes the treatment of acquisition-related costs, restructuring costs related to an acquisition that the acquirer expects but is not obligated to incur, contingent consideration associated with the purchase price. In addition, SFAS No. 141(R) requires enhanced disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of SFAS No. 141(R) did not have an impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted SFAS No. 160, “Non-controlling Interests in Financial Statements.” This statement changes the accounting and reporting for minority interests, which are recharacterized as non-controlling interests and classified as a component of shareholders’ equity. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing consolidated minority interests. All other requirements of SFAS No. 160 are required to be applied prospectively. The Company has no existing consolidated minority interests; therefore, the adoption of SFAS No. 160 did not have an impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This position applies to a repurchase financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties that is entered into contemporaneously with the initial transfer. This position presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement, known as a linked transaction. However, if certain criteria are met, the initial transfer and repurchase financing may not be evaluated as a linked transaction and must be evaluated separately under FASB Statement No. 140. The adoption of Staff Position No. FAS 140-3 did not have an impact on the Company’s Consolidated Financial Statements.

In April of 2009, the FASB issued Staff Position No. FAS 107-1, “Interim Disclosures About Fair Value of Financial Instruments.” This position extends the disclosure requirements of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” to interim financial statements of publicly traded companies. Staff Position No. FAS 107-1 is effective for interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is evaluating the enhanced disclosure requirements around fair value of financial instruments and does not anticipate that the adoption of Staff Position No. FAS 107-1 will have a material

impact on the Company’s Consolidated Financial Statements. The Company will adopt Staff Position No. FAS 107-1 for the period ending June 30, 2009.

In April of 2009, the FASB issued Staff Position No. FAS 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This position revised the guidance for determining whether an impairment is other than temporary for debt securities, requires bifurcation of any other than temporary impairment between the amount representing credit loss and the amount related to all other factors and requires additional disclosures on other than temporary impairment of debt and equity securities. Staff Position No. FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is evaluating the revised guidance and enhanced disclosure requirements around other than temporary impairment and does not anticipate that adoption of Staff Position No. FAS 115-2 will have a material impact on the Company’s Consolidated Financial Statements. The Company will adopt Staff Position No. FAS 115-2 for the period ending June 30, 2009.

In April of 2009, the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This position provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, provides guidance on circumstances that may indicate that a transaction is not orderly and requires additional disclosures about fair value measurements in annual and interim reporting periods. Staff Position No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is evaluating the revised guidance and enhanced disclosure requirements around fair value of financial instruments and does not anticipate that adoption of Staff Position No. FAS 157-4 will have a material impact on the Company’s Consolidated Financial Statements. The Company will adopt Staff Position No. FAS 157-4 for the period ending June 30, 2009.

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 Quarterly 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 months and many lenders and financial institutions have reduced or ceased to provide funding to borrowers, including other lending institutions. The availability of credit, confidence in the entire financial sector, and stability in financial markets has been adversely affected. These disruptions are likely to have some impact on all institutions in the U.S. banking and financial industries.

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 to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q 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 for the fiscal year ended December 31, 2008. 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 Company’s Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company’s Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.

Goodwill and Intangible Assets

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. An impairment analysis of the leasing reporting unit was performed at the end of the first quarter of fiscal 2009. Refer to Note 3 to Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further details on the Company’s goodwill analysis.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

Total loans and leases grew to $418.8 at March 31, 2009, reflecting an $11.1 million or 2.7% increase from December 31, 2008. Gross loans and leases are net of $10.0 million and $11.1 million of unearned income on direct financing leases as of March 31, 2009 and December 31, 2008, respectively. Commercial loans and leases totaled $320.4 million at March 31, 2009, reflecting an $11.6 million or 3.7% increase from December 31, 2008. Growth in commercial real estate loans of $11.6 million for the first fiscal quarter was largely responsible for the increase in commercial loans and leases from December 31, 2008.

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. 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 caused some of those competitors to curtail their lending activities somewhat and consequently have 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 lease balances decreased $3.2 million or 5.5% from December 31, 2008. Starting in the third quarter of 2008, the leasing portfolio’s asset quality began to deteriorate. This deterioration accelerated in the first quarter of 2009. Non-performing leases increased to $1.6 million at March 31, 2009, from $0.8 million at December 31, 2008 and $0.1 million at March 31, 2008. Net leasing charge-offs in the first quarter of 2009 were $1.6 million, compared with $0.7 million in the fourth quarter of 2008 and $0.4 million in the first quarter of 2008. This rapid deterioration in the portfolio prompted management to take preventive measures such as credit tightening for new applicants and consolidation of ENL’s broker network during the fourth quarter of 2008. However, in the first quarter of 2009 management decided that these measures were not enough and materially slowed new originations. Given the high risk of the portfolio in the current economic recession, in April 2009 management decided that the business model of ENL was no longer a good strategic fit, and decided to exit the national leasing business. As a result, management expects to service the existing leasing portfolio as it rolls off in the next 24-48 months, but discontinue any new originations outside the Company’s local footprint.

Consumer loans totaled $97.5 million at March 31, 2009, reflecting a $0.5 million or 0.5% decrease from December 31, 2008. Consumer real estate loans decreased $1.5 million or 2.6% from December 31, 2008. Recent efforts by the federal government to stimulate housing demand in the face of the economic recession have lowered residential home mortgage rates and resulted in significantly increasing consumer real estate demand. However, given the low fixed rates and long terms of the loans being originated, the Company has sold most of its originated residential mortgage loans. This, along with accelerated prepayments from existing customers re-financing their homes, has resulted in decreased consumer real estate balances at March 31, 2009.

The Bank sells these fixed rate residential mortgages to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended March 31, 2009, the Bank sold mortgages to FNMA totaling $4.1 million, as compared with $0.5 million during the three month period ended March 31, 2008. At March 31, 2009, the Bank had a loan servicing portfolio principal balance of $31.0 million upon which it earns servicing fees, as compared with $26.9 million at December 31, 2008.

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.

		March 31, 2009				Percentage				December 31, 2008				Percentage
		(in thousands)								(in thousands)
Commercial Loans and Leases
Real Estate		$	214,661				51.3	%		$	203,449				49.9	%
Installment			26,760				6.4	%			24,770				6.1	%
Direct Financing Leases			55,434				13.2	%			58,639				14.4	%
Lines of Credit			23,525				5.6	%			21,953				5.4	%
Cash Reserve			57				0.0	%			52				0.0	%
Total Commercial Loans and Leases			320,437				76.5	%			308,863				75.8	%
Consumer Loans
Real Estate			55,228				13.2	%			56,730				13.9	%
Home Equity			40,346				9.6	%			39,348				9.6	%
Installment			1,592				0.4	%			1,609				0.4	%
Overdrafts			108				0.0	%			360				0.1	%
Other			259				0.1	%			5				0.0	%
Total Consumer Loans			97,533				23.3	%			98,052				24.0	%
Net Deferred Costs & Unearned Discounts			830				0.2	%			798				0.2	%
Total Loans and Leases			418,800				100.0	%			407,713				100.0	%
Allowance for Loan and Lease Losses			(7,779	)							(6,087	)
Loans and Leases, net		$	411,021							$	401,626

Net loan and lease charge-offs were $1.6 million in the three month period ended March 31, 2009 as compared with $698 thousand in the fourth quarter of 2008 and $360 thousand in the three month period ended March 31, 2008. Nearly all of the net charge-offs for all periods were in the Company’s leasing portfolio. The rapid deterioration of the portfolio and the sensitivity of direct financing leases to the economic environment led management to make the strategic decision in April 2009 to discontinue the origination of new leases outside the Company’s local footprint.

Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.98% of total loans and leases outstanding at March 31, 2009 as compared with 0.88% at December 31, 2008. The allowance for loan and lease losses totaled $7.8 million or 1.86% of total loans and leases outstanding at March 31, 2009 as compared with $6.1 million or 1.49% of total loans and leases outstanding as of December 31, 2008. Given the accelerated charge-offs in the leasing portfolio and the continued troubles in the economy, management increased the allowance for loan and lease losses through the provision for loan and lease losses to cover the increased level of expected future losses inherent in the portfolio at March 31, 2009.

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, regulatory considerations, 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.

		March 31, 2009				December 31, 2008
		(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate
Residential 1-4 family		$	—			$	50
Commercial and multi-family			1,279				1,787
Construction			417				417
Second mortgages			—				—
Home equity lines of credit			34				—
Total mortgage loans on real estate			1,730				2,254
Direct financing leases			1,592				791
Commercial loans			723				263
Consumer installment loans			—				—
Other			—				123
Total non-accruing loans and leases		$	4,045			$	3,431
Accruing loans and leases 90+ days past due			48				148
Total non-performing loans and leases			4,093				3,579
Total non-performing loans and leases as a percentage of total assets			0.74	%			0.68	%
Total non-performing loans and leases as a percentage of total loans and leases			0.98	%			0.88	%

For the three month period ended March 31, 2009 gross interest income that would have been reported on non-accruing loans and leases had they been current was $101 thousand, as compared to $10 thousand for the same period in 2008. There was $24 thousand and $10 thousand of interest income from non-accruing loans and leases included in net income for the three month periods ended March 31, 2009 and 2008.

Investing Activities

Total securities increased to $93.2 million at March 31, 2009, reflecting a $17.4 million, or 23.0%, increase from $75.8 million at December 31, 2008. Securities and interest-bearing deposits at banks made up 15.8% of the Bank’s total average interest earning assets in the first quarter of 2009 compared with 14.7% in the trailing fourth quarter of 2008 and 18.0% in the first quarter of 2008.

The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 47.1% of the portfolio at March 31, 2009 compared with 49.3% at December 31, 2008; and U.S. government-sponsored agency bonds of various types, which comprise 34.2% of the portfolio at March 31, 2009 versus 23.7% at December 31, 2008. Agency mortgage-backed securities comprise 16.1% at March 31, 2009 compared with 20.9% at December 31, 2008. 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 2.6% of the portfolio at March 31, 2009 versus 4.7% at December 31, 2008. 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 unrealized loss position.

18

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 3.0 years as of March 31, 2009 compared with 2.1 years as of December 31, 2008. Available-for-sale securities with a total fair value of $88.0 million at March 31, 2009 were pledged as collateral to secure public deposits and for other purposes required or permitted by law. The Company has no direct exposure to subprime mortgages, nor does the Company hold 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 March 31, 2009 were $460.0 million, reflecting a $56.1 million or 13.9% increase from December 31, 2008. Demand deposits at March 31, 2009 were $80.3 million, reflecting a $4.4 million or 5.7% increase from December 31, 2008. 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 March 31, 2009 were 1.1% lower than the fourth quarter of 2008, but 13.2% higher than the prior year’s first quarter. Much of the overall deposit growth in the quarter ended March 31, 2009 when compared with the prior year period is attributable to an increase in regular savings deposits of $29.1 million, or 18.9%, to $183.4 million. The Company introduced a new money market savings product in 2008 and much of the continued growth in regular savings is due to this product. NOW deposits decreased in the quarter ended March 31, 2009 by $1.3 million, or 12.1%, while muni-vest balances increased in the same quarter by $19.3 million, or 73.0%. The growth in muni-vest is due mainly to temporary seasonal municipal deposits. Time deposits were $141.1 million at March 31, 2009, reflecting a $4.6 million or 3.4% increase from December 31, 2008.

Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York decreased from $30.7 million at December 31, 2008 to $4.5 million at March 31, 2009. Long-term borrowings remained at $18.2 million at March 31, 2009, unchanged from the balance at December 31, 2008. The Company’s strong savings deposit growth has resulted in a decrease in its need for wholesale 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
		March 31, 2009												March 31, 2008
		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		$	406,945			$	6,663				6.55	%		$	322,168			$	6,174				7.67	%
Taxable securities			36,111				334				3.70	%			32,944				320				3.89	%
Tax-exempt securities			39,900				429				4.30	%			36,848				399				4.33	%
Interest bearing deposits at banks			602				—				0.00	%			703				4				2.28	%
Total interest-earning assets			483,558				7,426				6.14	%			392,663				6,897				7.03	%
Non interest-earning assets:
Cash and due from banks			11,501												12,029
Premises and equipment, net			9,804												8,322
Other assets			32,797												29,628
Total Assets			537,660											$	442,642
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW		$	12,249			$	11				0.36	%		$	10,401			$	15				0.58	%
Regular savings			167,769				641				1.53	%			86,758				256				1.18	%
Muni-Vest savings			30,113				67				0.89	%			24,433				177				2.90	%
Time deposits			136,954				1,177				3.44	%			136,084				1,509				4.44	%
Other borrowed funds			35,734				186				2.08	%			43,246				378				3.50	%
Junior subordinated debentures			11,330				123				4.34	%			11,330				193				6.81	%
Securities sold U/A to repurchase			5,442				7				0.51	%			5,513				11				0.80	%
Total interest-bearing liabilities			399,591			$	2,212				2.21	%			317,765			$	2,539				3.20	%
Noninterest-bearing liabilities:
Demand deposits			79,220												69,996
Other			12,693												10,792
Total liabilities			491,504											$	398,553
Stockholders’ equity			46,156												44,089
Total Liabilities and Equity			537,660											$	442,642
Net interest earnings						$	5,214											$	4,358
Net interest margin											4.31	%											4.44	%
Interest rate spread											3.93	%											3.83	%

Net Income

The Company recorded a net loss for the first quarter of 2009 of $1.2 million, or $0.45 per diluted share, compared with net income of $1.6 million, or $0.58 per diluted share, in the first quarter of 2008. The net loss was primarily due to a $1.2 million after-tax and non-cash charge for impairment of the entire $2.0 million of goodwill associated with the Company’s leasing business. First quarter results were additionally impacted by the recording of a $3.3 million provision for loan and lease losses, an increase of $2.8 million over the first quarter of 2008, of which $2.5 million was the result of credit deterioration in the leasing portfolio. Return on average equity was (10.81%) for the first quarter of 2009, compared with 14.45% in last year’s first quarter.

“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 first quarter of 2009 was $0.10 million, or $0.04 per diluted share, a decrease of $1.6 million, or 93.9%, from net operating income of $1.7 million, or $0.62 per diluted share, in the first quarter of 2008.

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 the non-cash impairment and amortization of acquisition-related goodwill and 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 GAAP net income and GAAP diluted earnings per share in the following table:

Reconciliation of GAAP Net (Loss) Income to Net Operating Income

		Three months ended March 31
(in thousands, except per share)		2009				2008				Change
GAAP Net (loss) income		$	(1,247	)		$	1,593				(178.3	)%
Goodwill impairment charge*			1,214				—
Amortization of intangibles*			137				99
Net operating income		$	104			$	1,692				(93.9	)%
GAAP diluted (loss) earnings per share		$	(0.45	)		$	0.58				(177.6	)%
Goodwill impairment charge*			0.44				—
Amortization of intangibles*			0.05				0.04
Diluted net operating earnings per share		$	0.04			$	0.62				(93.5	)%