United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended September 30, 2008

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

For the transition period from                      to                     

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

14 -16 North Main Street, Angola, New York 14006

(Address of principal executive offices)
(Zip Code)

(716) 926-2000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed
since last report)

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $.50 par value 2,766,125 shares as of November 1, 2008

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets — September 30, 2008 and December 31, 2007			1
Unaudited Consolidated Statements of Income — Three months ended September 30, 2008 and 2007			2
Unaudited Consolidated Statements of Income — Nine months ended September 30, 2008 and 2007			3
Unaudited Consolidated Statements of Stockholders’ Equity-Nine months ended September 30, 2008 and 2007			4
Unaudited Consolidated Statements of Cash Flows—Nine months ended September 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			25
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 6. Exhibits			27
SIGNATURES			28
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(in thousands, except share and per share amounts)

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

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands, except share and per share amounts)

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

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands, except share and per share amounts)

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

See Notes to Unaudited Consolidated Financial Statements

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands, except share and per share amounts)

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive				Treasury
		Stock				Surplus				Earnings				(Loss) Income				Stock				Total
Balance, January 1, 2007		$	1,373			$	26,160			$	14,196			$	(1,917	)		$	(269	)		$	39,543
Comprehensive income:
Net Income											2,563												2,563
Unrealized gain on available-for-sale securities, net of reclassification of loss of $1,413 (after tax) and tax effect of ($868)															1,361								1,361
Amortization of prior service cost and net loss, net tax effect ($26)															39								39
Total comprehensive income																							3,963
Cash dividends ($0.71 per common share)											(1,945	)											(1,945	)
Stock options expense							93																93
Reissued 8,747 shares treasury stock under dividend reinvestment plan							(21	)											195				174
Reissued 2,500 shares of restricted stock							(53	)											53				—
Issued 7,983 shares treasury stock			4				161																165
Reissued 4,689 shares treasury stock under employee stock purchase plan							(20	)											101				81
Purchased 11,400 shares for treasury																			(229	)			(229	)
Balance, September 30, 2007		$	1,377			$	26,320			$	14,814			$	(517	)		$	(149	)		$	41,845
Balance, January 1, 2008		$	1,378			$	26,380			$	15,612			$	16			$	(83	)		$	43,303
Comprehensive income:
Net Income											4,403												4,403
Unrealized loss on available-for-sale securities, net of tax effect of $119															(186	)							(186	)
Amortization of prior service cost and net loss net of tax effect of ($22)															34								34
Pension curtailment net of taxes $7															9								9
Total comprehensive income																							4,260
Cash dividends ($0.78 per common share)											(2,147	)											(2,147	)
Stock options expense							116																116
Reissued 7,733 shares treasury stock under dividend reinvestment plan							(12	)											130				118
Issued 2,969 shares under dividend reinvestment plan			2				44																46
Reissued 6,575 shares treasury stock under employment stock purchase plan							(27	)											112				85
Purchased 13,701 shares for treasury																			(234	)			(234	)
Balance, September 30, 2008		$	1,380			$	26,501			$	17,868			$	(127	)		$	(75	)		$	45,547

See Notes to Unaudited Consolidated Financial Statements

5

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands)

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

6

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in thousands)

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

See Notes to Unaudited Consolidated Financial Statements

7

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

1.		ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”) and Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, Inc. (“ENFS”), and ENFS’s subsidiary ENB Insurance Agency, Inc. (“ENBI”) and ENBI’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENB”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles and with general practice within the banking industry. Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”
		The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature.
		The results of operations for the three and nine month period ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.
2.		SECURITIES
		Securities which the Company has the positive ability and intent to hold to maturity are stated at amortized cost. Securities which the Company has identified as available-for-sale are stated at fair value with unrealized gains and losses excluded from earnings and reported net of deferred income taxes, in accumulated other comprehensive income, a component of stockholders’ equity. Available-for-sale securities are shown at fair value which includes an unrealized gain of $0.4 million, $0.6 million and $0.7 million as of September 30, 2008, June 30, 2008, and December 31, 2007, respectively. As of September 30, 2008 the securities portfolio does not contain any other than temporary declines in fair value.
3.		FAIR VALUE MEASUREMENTS
		As of January 1, 2008, the Company adopted on a prospective basis certain required provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157. In October 2008, the FASB issued FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. See Note 10 for discussion on FAS No. 157-3. Those provisions relate to financial assets and liabilities carried at fair value and fair value disclosures related to financial assets and liabilities. SFAS 157 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs to fair value measurements- Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted

8

		prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when available.
		Investments that are classified as available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in Other Comprehensive Income. The fair value measurement of these instruments is measured using quoted prices for similar instruments in active markets, which is defined as Level 2 inputs. All other financial assets and liabilities, including held to maturity securities, loans and leases, deposits, securities sold under agreement to repurchase, other short-term borrowings, junior subordinated debentures, and long-term borrowings are carried at either amortized cost or historical proceeds. The adoption of SFAS 157 did not have significant impact on our consolidated financial statements. The Company delayed the application of SFAS No. 157 for acquired non-financial assets and assumed non-financial liabilities until January 1, 2009.
4.		ALLOWANCE FOR LOAN AND LEASE LOSSES
		The provision for loan and lease losses represents the amount charged against the Bank’s earnings to maintain an allowance for probable loan and lease losses based on management’s evaluation of the loan and lease portfolio at the balance sheet date. Factors considered by the Bank’s management in establishing the allowance include: the collectibility of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease percentages, input from regulatory agencies and general economic conditions.
		On a quarterly basis, management of the Bank meet to review and determine the adequacy of the allowance for loan and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectibility of the loans and leases in its portfolio by incorporating feedback provided by the Bank’s internal loan and lease staff, an independent internal loan and lease review function and information provided by examinations performed by regulatory agencies.
		The analysis of the allowance for loan and lease losses is composed of three components: specific credit allocation, general portfolio allocation and a subjective allocation. The specific credit allocation includes a detailed review of the credit in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures,” and allocation is made based on this analysis. The general portfolio allocation consists of an assigned reserve percentage based on the historical loss experience and other qualitative factors of the loan or lease category.
		The subjective portion of the allowance reflects management’s evaluation of various conditions, and involves a higher degree of uncertainty because this component of the allowance is not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with this component include the following: industry and regional conditions; seasoning of the loan and lease portfolio and changes in the composition of and growth in the loan and lease portfolio; the strength and duration of the business cycle; existing general economic and business conditions in the lending areas; credit quality trends in nonaccruing loans and leases; historical loan and lease charge-off experience; and the results of bank regulatory examinations.
		The following table sets forth information regarding the allowance for loan and lease losses for the nine month periods ended September 30, 2008 and 2007.

9

Allowance for loan and lease losses

		Nine months ended September 30,
		2008				2007
		(in thousands)
Beginning balance, January 1		$	4,555			$	3,739
Charge-offs:
Commercial			—				(153	)
Real estate			(1	)			(5	)
Installment loans			(4	)			(6	)
Overdrafts			(41	)			(40	)
Direct financing leases			(1,412	)			(739	)
Total charge-offs			(1,458	)			(943	)
Recoveries:
Commercial			27				15
Real estate			—				—
Installment loans			2				16
Overdrafts			18				15
Direct financing leases			133				56
Total recoveries			180				102
Net charge-offs			(1,278	)			(841	)
Provision for loan and lease losses			1,814				943
Ending balance, September 30		$	5,091			$	3,841
Ratio of net charge-offs to average total loans and leases outstanding (annualized)			0.49	%			0.38	%

5.

PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. The Company’s potential dilutive securities included 2,698 and 2,664 dilutive shares for the three and nine month periods ended September 30, 2008, respectively. This compares with 305 and 705 for the three and nine month periods ended September 30, 2007, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three and nine months periods ended September 30, 2008, there were approximately 109 thousand and 106 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive. For the three and nine months periods ended September 30, 2007, there were approximately 92 thousand and 74 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.

6.

SEGMENT INFORMATION

The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and nine month periods ended September 30, 2008 and 2007.

Three Months Ended
September 30, 2008
(in thousands)

						Insurance
		Banking				Agency
		Activities				Activities				Total
Net interest income (expense)		$	5,200				($66	)		$	5,134
Provision for loan and lease losses			582				—				582
Net interest income (expense) after provision for loan and lease losses			4,618				(66	)			4,552
Non-interest income			1,159				—				1,159
Insurance service and fees			—				1,756				1,756
Non-interest expense			3,979				1,275				5,254
Income before income taxes			1,798				415				2,213
Income tax provision			628				160				788
Net income		$	1,170			$	255			$	1,425

Nine Months Ended
September 30, 2008
(in thousands)

						Insurance
		Banking				Agency
		Activities				Activities				Total
Net interest income (expense)		$	14,546				($225	)		$	14,321
Provision for loan and lease losses			1,814				—				1,814
Net interest income (expense) after provision for loan and lease losses			12,732				(225	)			12,507
Non-interest income			3,752				—				3,752
Insurance service and fees			—				5,506				5,506
Non-interest expense			11,535				3,849				15,384
Income before income taxes			4,949				1,432				6,381
Income tax provision			1,424				554				1,978
Net income		$	3,525			$	878			$	4,403

Three Months Ended
September 30, 2007
(in thousands)

						Insurance
		Banking				Agency
		Activities				Activities				Total
Net interest income (expense)		$	4,353				($115	)		$	4,238
Provision for loan and lease losses			283				—				283
Net interest income (expense) after provision for loan and lease losses			4,070				(115	)			3,955
Non-interest income			1,198				—				1,198
Insurance service and fees			—				1,683				1,683
Non-interest expense			3,665				1,197				4,862
Income before income taxes			1,603				371				1,974
Income tax provision			411				148				559
Net income		$	1,192			$	223			$	1,415

Nine Months Ended
September 30, 2007
(in thousands)

						Insurance
		Banking				Agency
		Activities				Activities				Total
Net interest income (expense)		$	12,641				($338	)		$	12,303
Provision for loan and lease losses			943				—				943
Net interest income (expense) after provision for loan and lease losses			11,698				(338	)			11,360
Non-interest income			1,079				—				1,079
Insurance service and fees			—				5,235				5,235
Non-interest expense			11,025				3,481				14,506
Income before income taxes			1,752				1,416				3,168
Income tax provision			39				566				605
Net income		$	1,713			$	850			$	2,563

7. CONTINGENT LIABILITIES AND COMMITMENTS

The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend

credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:

		September 30,				December 31,
		2008				2007
		(in thousands)
Commitments to extend credit		$	63,403			$	63,319
Standby letters of credit			2,683				2,623
Total		$	66,086			$	65,942

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

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

The Company is subject to possible litigation proceedings in the normal course of business. As of September 30, 2008, there were no claims pending against the Company that management considered to be material.

8. RECLASSIFICATIONS

Certain reclassifications have been made to the 2007 unaudited consolidated financial statements to conform with the presentation used in 2008.

9. NET PERIODIC BENEFIT COSTS

On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered substantially all Company employees. The plan provides benefits that are based on the employees’ compensation and years of service. Under the freeze, eligible employees will receive the benefits already earned through January 31, 2008 at retirement, but will not be able to accrue any additional benefits. As a result, service cost will no longer be incurred.

The Bank used an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortization method the Bank used recognized the prior service cost and net gains or losses over the average remaining service period of active employees. The freezing of the defined benefit pension plan was considered a curtailment. This resulted in the elimination of the unrecognized prior service cost and the unrecognized net loss. The elimination of those two components resulted in a $328 thousand gain in the first quarter of 2008.

The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.

Nine months ended
September 30, (in thousands)

										Supplemental Executive
		Pension Benefits								Retirement Plan
		2008				2007				2008				2007
Service cost		$	—			$	274			$	44			$	44
Interest cost			177				181				131				120
Expected return on plan assets			(219	)			(185	)			—				—
Amortization of prior service cost			—				(12	)			42				42
Amortization of the net loss			—				22				14				13
Net periodic (benefit) cost			($42	)		$	280			$	231			$	219

10. RECENT ACCOUNTING PRONOUNCEMENTS

FASB Staff Position No.157-3: Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. On October 10, 2008, FASB issued FSP No. 157-3 with the objective of clarifying the application of FASB Statement No. 157: Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Effective immediately for the Company’s interim financial statements as of September 30, 2008, the implementation of FSP No. 157-3 did not have a material impact on our consolidated financial statements.

FASB Staff Position No. 133-1 and FIN 45-4: Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45. On September 12, 2008, FASB issued FAS 133-1 and FIN 45-4 with the objective of improving disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the staff position that amends FAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. The Company does not expect the staff position to have a material impact on its consolidated financial statements.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either

nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Report on Form 10-Q, as well as in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are beyond the Company’s control and are difficult to predict.

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation, to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.

There have been historical disruptions in the financial system in recent weeks and many lenders and financial institutions have reduced or ceased to provided funding to borrowers, including other lending institutions. The availability of credit, confidence in the entire financial sector, and stability in financial markets have been adversely affected. Although the Company has not to date experienced any adverse effects, these disruptions are likely to have some impact on all institutions in the U.S. banking and financial industries.

In response to the financial crises affecting the overall banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. Under that act, the U.S. Treasury will have authority, among other things, to purchase up to $700 billion of mortgages, mortgage backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. As part of that program, the Department of the Treasury will purchase equity interests in a wide variety of eligible banks, thrifts and bank holding companies. Under this program, called the Troubled Asset Relief Program Capital Purchase Program (“TARP”), $250 billion of capital will be made available to U.S. financial institutions through the sale of preferred stock. The preferred stock would pay a 5% dividend for five years, which will increase to 9% after five years. In conjunction with its purchase of preferred stock, the Treasury will also receive warrants to purchase common stock with an aggregate market price equal to 15% of the amount invested in preferred stock. Participating institutions will be required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury continues to hold the institution’s equity under TARP.

Although both the Company and its subsidiary bank meet all applicable regulatory capital requirements and remain well capitalized, the Company will nonetheless evaluate the program to determine if participation would be advantageous for the Company and its common shareholders.

The actions described above, together with additional actions announced by the Treasury and other regulatory agencies continue to develop. It is not clear at this time what long term impact, EESA, TARP, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The Company’s Unaudited Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial

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

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

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

Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents management’s estimate of probable losses in the Company’s loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.

Goodwill

The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

Total loans and leases grew to $384.5 at September 30, 2008, reflecting a $18.5 million or 5.1% increase from June 30, 2008 and a $60.4 million or 18.6% increase from December 31, 2007. Gross loans and leases are net of $10.9 million, $10.1 million and $9.7 million of unearned income on direct financing leases as of September 30, 2008, June 30, 2008 and December 31, 2007, respectively. Commercial loans and leases totaled $284.7 million at September 30, 2008, reflecting a $17.5 million or 6.6% increase from June 30, 2008 and a $56.3 million or 24.7% increase from December 31, 2007. Growth in commercial real estate loans of $9.3 million for the third fiscal quarter and $37.5 million for the year to date was largely responsible for the increase in commercial loans and leases from June 30, 2008 and December 31, 2007, respectively.

16

The Company has no direct exposure to sub-prime lending, and as a result, the faltering sub-prime credit market has not affected the Company’s loan portfolio. Further, the local real estate market to date has not had the significant deterioration in values seen in high-growth parts of the United States as local real estate values have remained steady to slightly up. In contrast, some of the Bank’s larger competitors and the conduit markets are having capital adequacy and liquidity problems due to their exposure to sub-prime loans in their investment portfolio or lending activities in other parts of the United States. These problems have curtailed their lending activities somewhat and consequently created opportunities in the local commercial real estate market for smaller banks not experiencing the same issues such as the Bank. The increased opportunities have resulted in the Bank’s strong loan growth rates.

Direct finance leases increased $4.7 million or 9.2% from June 30, 2008 and $10.5 million or 23.3% from December 31, 2007. Direct finance leases are sold through a national channel of brokers with whom the Company has had long standing relationships and finance small commercial equipment. Direct leases carry a higher risk than the rest of the loan portfolio, but also provide a higher return. Management employs strict underwriting standards in selecting credits for this portion of the portfolio and has taken steps in an attempt to mitigate the leasing portfolio’s risk exposure in a potential economic recession. Actions taken to this effect include tightening credit standards, consolidating the broker network, and purchasing credit protection on certain leases late last year. The loan composition strategy is to maintain the direct lease portfolio at an optimum percentage of the loan portfolio that weights the risk involved in this type of credit.

Consumer loans totaled $98.9 million at September 30, 2008, reflecting a $1.0 million or 1.0% increase from June 30, 2008 and a $4.0 million or 4.2% increase from December 31, 2007. Real estate loans increased $0.3 million or 0.5% from June 30, 2008 and $1.6 million or 2.8% from December 31, 2007. While short-term interest rates have sharply decreased in 2008, long-term fixed rates have actually been gradually increasing. This, combined with the recent difficult and tumultuous economic environment, has put some downward pressure on the demand for consumer loans, resulting in lower growth rates in consumer loan balances.

The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest rate level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended September 30, 2008, the Bank sold mortgages to FNMA totaling $0.4 million, as compared with $0.3 million during the three month period ended September 30, 2007. During the nine month period ended September 30, 2008, the Bank sold mortgages to FNMA totaling $1.8 million, as compared with $1.5 million during the nine month period ended September 30, 2007. At September 30, 2008, the Bank had a loan servicing portfolio principal balance of $27.7 million upon which it earns servicing fees, as compared with $28.1 million at June 30, 2008 and $28.4 million at December 31, 2007.

Loan and Lease Portfolio Composition

The following table presents selected information on the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated.

		September 30, 2008				Percentage				December 31, 2007				Percentage
		(in thousands)								(in thousands)
Commercial Loans and Leases
Real Estate		$	185,799				48.3	%		$	148,257				45.7	%
Installment			20,225				5.3	%			18,502				5.7	%
Direct Financing Leases			55,629				14.5	%			45,078				13.9	%
Lines of Credit			23,023				6.0	%			16,446				5.1	%
Cash Reserve			58				0.0	%			71				0.0	%
Total Commercial Loans and Leases			284,734				74.1	%			228,354				70.4	%
Consumer Loans
Real Estate			58,063				15.1	%			56,529				17.5	%
Home Equity			38,264				9.9	%			36,035				11.1	%
Installment			2,003				0.5	%			1,858				0.6	%
Overdrafts			252				0.1	%			379				0.1	%
Other			271				0.1	%			75				0.0	%
Total Consumer Loans			98,853				25.7	%			94,876				29.3	%
Net Deferred Costs & Unearned Discounts			931				0.2	%			881				0.3	%
Total Loans and Leases			384,518				100.0	%			324,111				100.0	%
Allowance for Loan and Lease Losses			(5,091	)							(4,555	)
Loans and Leases, net		$	379,427							$	319,556

Net loan and lease charge-offs were $550 thousand in the three month period ended September 30, 2008 as compared with $368 thousand in the second quarter of 2008 and $308 thousand in the three month period ended September 30, 2007. Net charge-offs were $1.3 million for the nine month period ended September 30, 2008, as compared with $841 thousand for the same period of 2007. The continued seasoning of the lease portfolio is responsible for the increase in net charge-offs. As has been the experience since the Company began originating small-ticket leases, the majority of charge-offs in the loan and lease portfolio have been leases. This is consistent with the risk/return nature of these credits in which the Company requires a higher rate of return. Management employs strict underwriting standards in selecting credits for this portion of the portfolio and has taken steps in an attempt to mitigate the leasing portfolio’s risk exposure in a potential economic recession. Actions taken to this effect include tightening credit standards and consolidation of the broker network.

Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.20% of total loans and leases outstanding at September 30, 2008 as compared with 0.12% at June 30, 2008 and 0.22% at December 31, 2007. The allowance for loan and lease losses totaled $5.1 million or 1.32% of total loans and leases outstanding at September 30, 2008 as compared with $5.1 million or 1.38% of total loans and leases outstanding as of June 30, 2008 and $4.6 million or 1.41% of total loans and leases at December 31, 2007.

The adequacy of the Company’s allowance for loan and lease losses is reviewed quarterly by the Company’s management with consideration given to loan and lease concentrations, charge-off history, delinquent loan and lease

percentages, and general economic conditions. Management believes the allowance for loan and lease losses is adequate for losses from existing loans and leases.

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

		September 30, 2008				December 31, 2007
		(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate
Residential 1-4 family		$	34			$	—
Commercial and multi-family			93				112
Construction			—				—
Second mortgages			—				—
Home equity lines of credit			50				—
Total mortgage loans on real estate			177				112
Direct financing leases			439				215
Commercial loans			125				224
Consumer installment loans
Personal			—				—
Credit cards			—				—
Other			—				—
Total consumer installment loans			—				—
Total non-accruing loans and leases		$	741			$	551
Accruing loans and leases 90+ days past due			41				163
Total non-performing loans and leases			782				714
Total non-performing loans and leases as a percentage of total assets			0.16	%			0.16	%
Total non-performing loans and leases as a percentage of total loans and leases			0.20	%			0.22	%

For the three and nine month period ended September 30, 2008, gross interest income that would have been reported on non-accruing loans and leases had they been current was $8 thousand and $25 thousand. For the three and nine month periods ended September 30, 2007, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $39 thousand and $85 thousand, respectively. There was $3 thousand and $25 thousand of interest income included in net income for the three and nine month periods ended September 30, 2008 on non-accruing loans and leases, before those loans were classified as non-accrual. There was $5 thousand and $23 thousand of interest income included in net income for the three and nine month periods ended September 30, 2007 on non-accruing loans and leases.

Investing Activities

Total securities decreased to $64.2 million at September 30, 2008, reflecting a $2.9 million, or 4.3% decrease from $67.1 million at June 30, 2008, and an $8.2 million, or 11.3% decrease from $72.4 million at December 31, 2007. Securities and interest-bearing deposits at banks made up 15.7% of the Bank’s total average interest earning assets in the third quarter of 2008 compared with 16.0% in the trailing second quarter of 2008 and 24.0% in the third quarter of 2007. The large decline in the securities portfolio compared with the third quarter of 2007 is a result of the Company’s strategy to de-leverage a portion of its balance sheet.

The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 51.9% of the portfolio at September 30, 2008 compared with 50.1% at June 30, 2008 and 52.3% at December 31, 2007; and U.S. government-sponsored agency bonds of various types, which comprise 18.7% of the portfolio at September 30, 2008 versus 19.5% at June 30, 2008 and 19.6% at December 31, 2007. Agency mortgage-backed securities comprise 25.5% at September 30, 2008 compared with 25.6% at June 30, 2008 and 23.2% as of December 31, 2007. As a member of both the Federal Reserve System and the Federal Home Loan Bank of New York, the Bank is required to hold stock in those entities. These investments made up 3.9% of the portfolio at September 30, 2008 versus 4.8% at June 30, 2008 and 4.9% of the portfolio at December 31, 2007. The credit quality of the securities portfolio is believed to be strong as the portfolio is in an overall unrealized net gain position, with no individual securities in a significant net loss position.

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 2.6 years as of September 30, 2008 compared with 2.9 years as of June 30, 2008 and 2.4 years as of December 31, 2007. Available-for-sale securities with a total fair value of $58.3 million at September 30, 2008 were pledged as collateral to secure public deposits and for other purposes required or permitted by law. The Company has no exposure to subprime mortgages, private mortgage-backed securities, credit default swaps, or Fannie Mae or Freddie Mac preferred stock investments in its investment portfolio.

Funding Activities

Total deposits at September 30, 2008 were $403.5 million, reflecting a $32.0 million or 8.6% increase from June 30, 2008 and a $77.7 million or 23.9% increase from December 31, 2007. Demand deposits at September 30, 2008 were $78.5 million, reflecting a $1.6 million or 2.1% increase from June 30, 2008 and a $9.2 million or 13.3% increase from December 31, 2007. Demand deposit balances fluctuate day-to-day based on the high volume of transactions normally associated with the demand product. Average demand deposit growth is a better measure of sustained growth. Average demand deposits in the three month period ended September 30, 2008 were 8.5% higher than the second quarter of 2008 and 5.5% higher than the prior year’s third quarter. Much of the overall deposit growth in the third quarter ended September 30, 2008 is attributable to an increase in regular savings deposits of $33.9 million, or 31.5%, to $141.7 million. After a period of flat growth to declining balances, the Company introduced a new money market savings product in an effort to attract savings deposits. Compared with December 31, 2007, savings deposits have increased $48.8 million, or 52.5%. Time deposits were $146.5 million at September 30, 2008, reflecting a $5.5 million or 3.6% decrease from June 30, 2008, and a $17.5 million or 13.6% increase from December 31, 2007. Due to the significant growth in the Company’s loan and lease portfolio, the Company had been aggressive in attracting time deposits, particularly those with longer-term maturities, through the first two quarters of 2008. However, the combination of unfavorable pricing conditions in the market as well as the funding provided by the inflow of savings deposits resulted in the Company pulling back somewhat on its pursuit of time deposits in the third quarter of 2008. NOW deposits decreased in the third quarter ended September 30, 2008 by $4.1 million, or 24.6%, while muni-vest balances increased in the same quarter by $6.2 million, or 34.4%. These fluctuations were largely a result of a single large municipal customer moving money between accounts.

Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York decreased from $34.0 million at December 31, 2007 and $23.1 million at June 30, 2008 to $7.2 million at September 30, 2008. In contrast, long-term borrowings remained at $18.3 million at September 30, 2008, virtually flat to the balance at June 30, 2008, and higher than the December 31, 2007 balance of $14.1 million. The Federal Reserve continued to cut its target rate for federal funds in the first half of 2008 in light of a sluggish economy. By the end of the 2008 third quarter, the target rate stood at 2.00%. Compared to historical norms, interest rates were at a lower than usual level in the second and third quarter of 2008, prompting the Company to lock in relatively low rates for a longer period of time, resulting in the increase in long-term borrowings from December 31, 2007. The Company’s strong savings deposit growth has resulted in a decrease in its reliance on wholesale short-term borrowings.

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

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

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