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, 2007

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

For the transition period from                      to                     

Commission file number 0-18539

EVANS BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

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

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

(716) 926-2000 (Registrant’s telephone number, including area code)

Not applicable (Former name, former address and former fiscal year, if changed
since last report)

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

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

Large accelerated filer o                    Accelerated filer o                    Non-accelerated filer þ

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

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

Common Stock, $.50 par value 2,754,450 shares as of November 1, 2007

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets — September 30, 2007 and December 31, 2006			1
Unaudited Consolidated Statements of Income — Three months ended September 30, 2007 and 2006			2
Unaudited Consolidated Statements of Income-Nine months ended September 30, 2007 and 2006			3
Unaudited Consolidated Statements of Stockholders’ Equity-Nine months ended September 30, 2007 and 2006			4
Unaudited Consolidated Statements of Cash Flows—Nine months ended September 30, 2007 and 2006			5
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			25
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
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, 2007 AND DECEMBER 31, 2006

(in thousands, except share and per share amounts)

		September 30,				December 31,
		2007				2006
ASSETS
Cash and due from banks		$	14,213			$	11,710
Interest-bearing deposits at banks			561				882
Securities:
Available for sale, at fair value			93,147				133,519
Held to maturity, at amortized cost			2,350				4,211
Loans and leases, net of allowance for loan and lease losses of $3,841 in 2007 and $3,739 in 2006			303,778				285,367
Properties and equipment, net			8,404				8,743
Goodwill			10,006				10,003
Intangible assets			2,678				2,298
Bank-owned life insurance			10,608				10,140
Other assets			6,415				7,021
TOTAL ASSETS		$	452,160			$	473,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	77,642			$	72,125
NOW			11,670				11,253
Regular savings			90,764				85,084
Muni-vest			25,952				31,240
Time			141,188				156,047
Total deposits			347,216				355,749
Securities sold under agreement to repurchase			6,088				8,954
Other short-term borrowings			12,900				24,753
Other liabilities			9,453				9,089
Junior subordinated debentures			11,330				11,330
Long-term borrowings			22,312				24,476
Dividend payable			1,016				—
Total liabilities			410,315				434,351
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS’ EQUITY:
Common stock, $.50 par value; 10,000,000 shares authorized; 2,753,321 and 2,745,338 shares issued, respectively, and 2,745,575 and 2,733,056 shares outstanding, respectively			1,377				1,373
Capital surplus			26,320				26,160
Retained earnings			14,814				14,196
Accumulated other comprehensive loss, net of tax			(517	)			(1,917	)
Less: Treasury stock, at cost (7,746 and 12,282 shares, respectively)			(149	)			(269	)
Total stockholders’ equity			41,845				39,543
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	452,160			$	473,894

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands, except share and per share amounts)

		Three Months Ended
		September 30,
		2007				2006
INTEREST INCOME
Loans and leases		$	6,036			$	5,323
Interest bearing deposits at banks			156				5
Securities:
Taxable			501				1,030
Non-taxable			401				470
Total interest income			7,094				6,828
INTEREST EXPENSE
Deposits			2,395				2,408
Other borrowings			235				469
Junior subordinated debentures			226				223
Total interest expense			2,856				3,100
NET INTEREST INCOME			4,238				3,728
PROVISION FOR LOAN AND LEASE LOSSES			283				305
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			3,955				3,423
NON-INTEREST INCOME:
Bank charges			596				533
Insurance service and fees			1,683				1,460
Net gain on sales of securities			1				114
Premium on loans sold			2				2
Bank-owned life insurance			151				132
Other			448				405
Total non-interest income			2,881				2,646
NON-INTEREST EXPENSE:
Salaries and employee benefits			2,718				2,403
Occupancy			587				496
Supplies			76				48
Repairs and maintenance			163				140
Advertising and public relations			68				82
Professional services			240				207
Amortization of intangibles			170				141
Other insurance			93				79
Other			747				720
Total non-interest expense			4,862				4,316
INCOME BEFORE INCOME TAXES			1,974				1,753
INCOME TAXES			559				471
NET INCOME		$	1,415			$	1,282
Net income per common share-basic		$	0.52			$	0.47
Net income per common share-diluted		$	0.52			$	0.47
Cash dividends per common share		$	0.37			$	0.34
Weighted average number of common shares			2,746,651				2,724,940
Weighted average number of diluted shares			2,746,956				2,727,307

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

		Nine Months Ended
		September 30,
		2007				2006
INTEREST INCOME
Loans and leases		$	17,730			$	14,890
Interest bearing deposits at banks			253				35
Securities:
Taxable			2,374				3,209
Non-taxable			1,279				1,427
Total interest income			21,636				19,561
INTEREST EXPENSE
Deposits			7,768				6,429
Other borrowings			898				1,509
Junior subordinated debentures			667				621
Total interest expense			9,333				8,559
NET INTEREST INCOME			12,303				11,002
PROVISION FOR LOAN AND LEASE LOSSES			943				815
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			11,360				10,187
NON-INTEREST INCOME:
Bank charges			1,615				1,508
Insurance service and fees			5,235				5,147
Net (loss) gain on sales of securities			(2,302	)			114
Premium on loans sold			7				6
Bank-owned life insurance			468				365
Other			1,291				1,141
Total non-interest income			6,314				8,281
NON-INTEREST EXPENSE:
Salaries and employee benefits			8,007				7,344
Occupancy			1,715				1,529
Supplies			227				216
Repairs and maintenance			442				411
Advertising and public relations			288				343
Professional services			765				602
Amortization of intangibles			456				406
Other insurance			273				256
Other			2,333				2,179
Total non-interest expense			14,506				13,286
INCOME BEFORE INCOME TAXES			3,168				5,182
INCOME TAXES			605				1,423
NET INCOME		$	2,563			$	3,759
Net income per common share-basic		$	0.94			$	1.38
Net income per common share-diluted		$	0.94			$	1.38
Cash dividends per common share		$	0.71			$	0.68
Weighted average number of common shares			2,740,406				2,724,207
Weighted average number of diluted shares			2,741,111				2,726,486

See Notes to Unaudited Consolidated Financial Statements

 

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive				Treasury
		Stock				Surplus				Earnings				Income (Loss)				Stock				Total
Balance, January 1, 2006		$	1,373			$	26,155			$	11,087			$	(1,387	)		$	(352	)		$	36,876
Impact of adopting SAB 108, net of tax $12											43												43
Comprehensive income:
Net Income											3,759												3,759
Unrealized gain on available for sale securities, net of reclassification of gain of $(114) and tax effect of $(41)															64								64
Total comprehensive income																							3,866
Cash dividends ($0.68 per common share)											(1,855	)											(1,855	)
Stock options expense							86																86
Reissued 9,642 shares treasury stock under dividend reinvestment plan							(33	)											219				186
Reissued 5,773 shares treasury stock under employee stock purchase plan							(29	)											129				100
Purchased 22,750 shares for treasury																			(489	)			(489	)
Balance, September 30, 2006		$	1,373			$	26,179			$	13,034			$	(1,323	)		$	(493	)		$	38,770
Balance, January 1, 2007		$	1,373			$	26,160			$	14,196			$	(1,917	)		$	(269	)		$	39,543
Comprehensive income:
Net Income											2,563												2,563
Unrealized loss 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 of 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 for earn out agreement			4				161																165
Reissued 4,689 shares treasury stock under employment 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

See Notes to Unaudited Consolidated Financial Statements

PART I-FINANCIAL INFORMATION

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

		Nine Months Ended
		September 30,
		2007				2006
OPERATING ACTIVITIES:
Interest received		$	20,721			$	19,721
Fees received			7,799				8,054
Interest paid			(9,419	)			(8,363	)
Cash paid to employees and suppliers			(12,522	)			(12,073	)
Income taxes paid			(964	)			(1,650	)
Proceeds from sale of loans held for resale			1,460				1,599
Originations of loans held for resale			(1,812	)			(1,593	)
Net cash provided by operating activities			5,263				5,695
INVESTING ACTIVITIES:
Available for sales securities:
Purchases			(170,341	)			(331	)
Proceeds from sales			45,655				2,086
Proceeds from maturities			165,975				17,312
Held to maturity securities:
Purchases			(255	)			(2,104	)
Proceeds from maturities			2,116				2,048
Additions to properties and equipment			(283	)			(588	)
Increase in loans, net of repayments			(19,414	)			(19,400	)
Acquisitions			(425	)			(187	)
Cash paid on earn-out agreements			(202	)			(57	)
Net cash provided by (used in) investing activities			22,826				(1,221	)
FINANCING ACTIVITIES:
Proceeds from borrowings			412				2,917
Repayments of short-term borrowings			(14,719	)			(28,928	)
Repayments of long-term borrowings			(2,165	)			(2,659	)
Increase in deposits			(8,533	)			22,359
Dividends paid			(928	)			(1,855	)
Purchase of treasury stock			(229	)			(489	)
Re-issuance of treasury stock			255				286
Net cash used in financing activities			(25,907	)			(8,369	)
Net increase (decrease) in cash and equivalents			2,182				(3,895	)
CASH AND CASH EQUIVALENTS:
Beginning of period			12,592				15,635
End of period		$	14,774			$	11,740

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

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

		Nine Months Ended
		September 30,
		2007				2006
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income		$	2,563			$	3,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,280				1,359
Deferred tax expense(benefit)			42				(102	)
Provision for loan and lease losses			943				815
Net loss (gain) on sales of assets			2,308				(114	)
Premiums on loans sold			(7	)			(6	)
Stock options expense			93				86
Proceeds from sale of loans held for resale			1,460				1,599
Originations of loans held for resale			(1,812	)			(1,593	)
Changes in assets and liabilities affecting cash flow:
Other assets			(2,112	)			(1,292	)
Other liabilities			505				1,184
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	5,263			$	5,695
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of shares for earn out agreement		$	165			$	0
Note payable on acquisition		$	425			$	0

See Notes to Unaudited Consolidated Financial Statements

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

1.		ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans National Bank (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”) and Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, Inc. (“ENFS”), and ENFS’s subsidiary ENB Insurance Agency, Inc. (“ENBI”) and ENBI’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENB”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles and with general practice within the banking industry. Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”
		The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature.
		The results of operations for the three and nine month period ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.
2.		SECURITIES
		Securities which the Company has the positive ability and intent to hold to maturity are stated at amortized cost. Securities which the Company has identified as available-for-sale are stated at fair value with unrealized gains and losses excluded from earnings and reported net of deferred income taxes, in accumulated other comprehensive loss, a component of stockholders’ equity. Available-for-sale securities are net of unrealized gain of $0.3 million as of September 30, 2007, and a loss of $1.9 million as of December 31, 2006, respectively. As of September 30, 2007 the securities portfolio did not contain any other than temporary declines in fair value.
3.		ALLOWANCE FOR LOAN AND LEASE LOSSES
		The allowance for loan and lease losses represents the amount charged against the Bank’s earnings to establish an allowance for probable loan and lease losses based on the management of the Bank’s evaluation of the loan and lease portfolio. Factors considered by the Bank’s management in establishing the allowance include: the collectibility of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease percentages, input from regulatory agencies and general economic conditions.
		On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectibility of the loans and leases in its portfolio by incorporating feedback provided by the Bank’s internal loan staff, an independent internal loan review function and information provided by examinations performed by regulatory agencies.
		The analysis of the allowance for loan and lease losses is composed of three components: specific credit allocation, general portfolio allocation and a subjective allocation. The specific credit allocation includes a

		detailed review of the credit in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures,” and allocation is made based on this analysis. The general portfolio allocation consists of an assigned reserve percentage based on the historical loss experience of the loan or lease category.
		The subjective portion of the allowance reflects management’s evaluation of various conditions, and involves a higher degree of uncertainty because this component of the allowance is not identified with specific problem credits of portfolio segments. The conditions evaluated in connection with this component include the following: industry and regional conditions; seasoning of the loan and lease portfolio and changes in the composition of and growth in the loan and lease portfolio; the strength and duration of the business cycle; existing general economic and business conditions in the lending areas; credit quality trends in nonaccruing loans and leases; historical loan and lease charge-off experience; and the results of bank regulatory examinations.
		The following table sets forth information regarding the allowance for loan and lease losses for the nine month periods ended September 30, 2007 and 2006.

Allowance for loan and lease losses

		Nine months ended				September 30,
		2007				2006
		(in thousands)
Beginning balance, January 1		$	3,739			$	3,211
Charge-offs:
Commercial			(153	)			(205	)
Real estate			(5	)			—
Installment loans			(6	)			(42	)
Overdrafts			(40	)			(28	)
Direct financing leases			(739	)			(250	)
Total charge-offs			(943	)			(525	)
Recoveries:
Commercial			15				48
Real estate			—				—
Installment loans			16				61
Overdrafts			15				15
Direct financing leases			56				55
Total recoveries			102				179
Net charge-offs			(841	)			(346	)
Provision for loan and lease losses			943				815
Ending balance, September 30		$	3,841			$	3,680
Ratio of net charge-offs to average total loans and leases outstanding (annualized)			0.38	%			0.17	%

4.		PER SHARE DATA
		The common stock per share information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. The Company’s potential dilutive securities included 305 and 705 dilutive shares for the three and nine month periods ended September 30, 2007. There were 2,367 and 2,279 dilutive shares for the three and nine month periods ended September 30, 2006. On August 21, 2007, the Company declared a cash dividend of $0.37 per share payable on October 2, 2007 to shareholders of record as of September 11, 2007.
		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 the three and nine month periods ended September 30, 2007, there were approximately 92 thousand and 74 thousand shares, respectively, that are not included in calculating diluted earnings per share because their effect was anti-dilutive. As of the three and nine month periods ended September 30, 2006, there were approximately 55 thousand shares that are not included in calculating diluted earnings per share because their effect was anti-dilutive.
5.		TREASURY STOCK
		During the quarter ended September 30, 2007 the Company repurchased 2,100 shares of common stock at an average cost of $19.12 per share, pursuant to the Company’s publicly announced common stock repurchase program.
6.		SEGMENT INFORMATION
		The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and nine month periods ended September 30, 2007 and 2006.

Three Months Ended
September 30, 2007
(in thousands)

						Insurance Agency
		Banking 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 Agency
		Banking 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

Three Months Ended
September 30, 2006
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	3,846				($118	)		$	3,728
Provision for loan and lease losses			305				—				305
Net interest income (expense) after provision for loan and lease losses			3,541				(118	)			3,423
Non-interest income			1,186				—				1,186
Insurance service and fees			—				1,460				1,460
Non-interest expense			3,242				1,074				4,316
Income before income taxes			1,485				268				1,753
Income tax provision			363				108				471
Net income		$	1,122			$	160			$	1,282

Nine Months Ended
September 30, 2006
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	11,352				($350	)		$	11,002
Provision for loan and lease losses			815				—				815
Net interest income (expense) after provision for loan and lease losses			10,537				(350	)			10,187
Non-interest income			3,134				—				3,134
Insurance service and fees			—				5,147				5,147
Non-interest expense			9,893				3,393				13,286
Income before income taxes			3,778				1,404				5,182
Income tax provision			861				562				1,423
Net income		$	2,917			$	842			$	3,759

7.

CONTINGENT LIABILITIES AND COMMITMENTS

The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at September 30, 2007 and 2006 is as follows:

		2007				2006
		(in thousands)
Commitments to extend credit		$	65,503			$	60,343
Standby letters of credit			2,027				2,134
Total		$	67,530			$	62,477

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, 2007, there were no claims pending against the Company that management considered to be material.

8.

RECLASSIFICATIONS

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

9.

NET PERIODIC BENEFIT COSTS

The Bank has a defined benefit pension plan covering substantially all Company employees. The plan provides benefits that are based on the employees’ compensation and years of service. The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortized method the Bank is using recognizes the prior service cost and net gains or losses over the average remaining service period of active employees.

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

The following table represents net periodic benefit costs recognized:

		Three months ended September 30,
		(in thousands)
										Supplemental Executive
		Pension Benefits								Retirement Plan
		2007				2006				2007				2006
Service cost		$	91			$	79			$	15			$	29
Interest cost			61				49				40				38
Expected return on plan assets			(62	)			(58	)			—				—
Amortization of prior service cost			(4	)			(4	)			14				14
Amortization of the net loss			7				6				4				4
Net periodic benefit cost		$	93			$	72			$	73			$	85

		Nine months ended September 30,
		(in thousands)
										Supplemental Executive
		Pension Benefits								Retirement Plan
		2007				2006				2007				2006
Service cost		$	274			$	237			$	44			$	87
Interest cost			181				147				120				114
Expected return on plan assets			(185	)			(174	)			—				—
Amortization of prior service cost			(12	)			(12	)			42				42
Amortization of the net loss			22				18				13				12
Net periodic benefit cost		$	280			$	216			$	219			$	255

10.

INCOME TAXES

Income tax expense totaled $559 thousand and $605 thousand for the three and nine month periods ended September 30, 2007, respectively. The effective tax rate for the respective periods were 28.3% and 19.1%. The low effective tax rate for the year-to-date is due to the loss on sale of securities of $2.3 million incurred in the second quarter. Excluding the loss on sale of securities, the effective tax rate on all other income for the nine month period ended September 30, 2007 was 27.4%, compared to 27.5% in the prior year. Excluding the loss on sale of securities, the Company records an effective tax rate for the period that will be reflective of the projected annual tax rate based on expected supportable tax positions.

11.

ACQUISITIONS

On July 25, 2007, ENBI completed its acquisition of substantially all of the business, assets, and property of L.R. Frank & Associates (“L.R. Frank”), an insurance agency located in Williamsville, NY, subject to certain of its liabilities. The purchase price of $850,000 included $425,000 in cash and $425,000 of notes payable. The assets acquired included certain fixed assets and intangible assets.

12.

RECENT ACCOUNTING PRONOUNCEMENTS

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

The Internal Revenue Service (IRS) commenced examinations of the Company’s U.S. Federal income tax returns for 2003, 2004, and 2005 in the first quarter of 2007. The examination related to these returns was completed during the third quarter. There were no proposed adjustments that had a material impact on the Company’s financial position or results of operations. All interest on adjustments has been expensed as income tax expense.

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

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

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Report on Form 10-Q, as well as in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are beyond the Company’s control and are difficult to predict.

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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

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

values are determined.

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

Allowance for Loan and Lease Losses

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

Goodwill

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

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

          Total gross loans and leases grew to $307.6 million at September 30, 2007, reflecting a $5.3 million or 1.8% increase from June 30, 2007 and an $18.5 million or 6.4% increase from December 31, 2006. Gross loans and leases are net of $9.2 million, $8.5 million and $7.8 million unearned income on direct financing leases as of September 30, 2007, June 30, 2007 and December 31, 2006, respectively. Commercial loans and leases totaled $215.3 million at September 30, 2007, reflecting a $1.8 million or 0.8% increase from June 30, 2007, and a $13.6 million or 6.8% increase from December 31, 2006. Growth in direct financing leases of $4.5 million or 12.0% was largely responsible for the increase from June 30, 2007 to September 30, 2007. Direct finance leases are sold through a national channel of brokers with whom the Company has had long standing relations and finance small commercial equipment. Direct leases carry a higher risk than the rest of the loan portfolio, but also provide a higher return. We employ strict underwriting standards in selecting credits for this portion of the portfolio. Our 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. The growth in leases was somewhat offset by the decreases in commercial installment loans of $2.9 million or 14.4 %, and commercial lines of credit of $0.8 million or 5.9%, from June 30, 2007 to September 30, 2007. Growth in direct financing leases of $9.9 million, or 31.1%, commercial mortgages of $2.3 million, or 1.7%, and commercial lines of credit of $1.2 million, or 9.9%, were responsible for the increase from December 31, 2006 to September 30, 2007.

          Consumer loans totaled $91.5 million at September 30, 2007, reflecting a $3.5 million, or 4.0%, increase from June 30, 2007, and a $4.7 million, or 5.4%, increase from December 31, 2006. Real estate loans accounted for most of the increase as those loans increased $4.4 million, or 8.7%, from June 30, 2007 to September 30, 2007 and $5.9 million, or 12.0%, from December 31, 2006 to September 30, 2007. The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended September 30, 2007, the Bank sold mortgages to FNMA totaling $0.3 million, as compared to $0.9 million during the three month period ended September 30, 2006. During the nine month period ended September 30, 2007, the

Bank sold mortgages to FNMA totaling $1.5 million, as compared to $1.6 million during the nine month period ended September 30, 2006. At September 30, 2007, the Bank had a loan servicing portfolio principal balance of $28.0 million upon which it earns servicing fees, as compared to $28.4 million at June 30, 2007, and $28.7 million at December 31, 2006.

Loan and Lease Portfolio Composition

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

		September 30, 2007				Percentage				December 31, 2006				Percentage
		(in thousands)								(in thousands)
Commercial Loans and Leases
Real Estate		$	142,695				46.4	%		$	140,376				48.6	%
Installment			17,473				5.7	%			17,263				6.0	%
Direct Financing Leases			41,619				13.5	%			31,742				11.0	%
Lines of Credit			13,490				4.4	%			12,279				4.2	%
Cash Reserve			52				0.0	%			39				0.0	%
Total Commercial Loans and Leases			215,329				70.0	%			201,699				69.8	%
Consumer Loans
Real Estate			54,743				17.8	%			48,877				16.9	%
Home Equity			34,380				11.2	%			34,453				11.9	%
Installment			1,950				0.6	%			2,621				0.9	%
Overdrafts			245				0.1	%			163				0.1	%
Credit Card			—				0.0	%			298				0.1	%
Other			133				0.0	%			341				0.1	%
Total Consumer Loans			91,451				29.7	%			86,753				30.0	%
Net Deferred Costs & Unearned Discounts			839				0.3	%			654				0.2	%
Total Loans and Leases			307,619				100.0	%			289,106				100.0	%
Allowance for Loan and Lease Losses			(3,841	)							(3,739	)
Loans and Leases, net		$	303,778							$	285,367

          Net loan and lease charge-offs were $308 thousand in the three month period ended September 30, 2007 as compared to $229 thousand in the same period of 2006. Net charge-offs were $841 thousand for the nine month period ended September 30, 2007 as compared to $346 thousand in the same period of 2006. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.23% of total loans and leases outstanding at September 30, 2007 as compared to 0.26% at June 30, 2007 and 0.23% at December 31, 2006. The allowance for loan and lease losses totaled $3.8 million or 1.25% of total loans and leases outstanding at September 30, 2007 as compared to $3.9 million or 1.28% of total loans and leases at June 30, 2007 and $3.7 million or 1.29% of total loans and leases outstanding at December 31, 2006.

     The adequacy of the Company’s allowance for loan and lease losses is reviewed quarterly by the Company’s management with consideration given to loan and lease concentrations, charge-off history, delinquent loan and lease percentages, and general economic conditions. Management believes the allowance for loan and lease losses is adequate for losses from existing loans and leases.

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

		September 30, 2007				December 31, 2006
		(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate
Residential 1-4 family		$	—			$	—
Commercial and multi-family			121				145
Construction			—				—
Second mortgages			—				—
Home equity lines of credit			—				—
Total mortgage loans on real estate			121				145
Direct financing leases			324				—
Commercial loans			256				443
Consumer installment loans
Personal			—				—
Credit cards			—				—
Other			—				—
Total consumer installment loans			580				443
Total non-accruing loans and leases		$	701			$	588
Accruing loans and leases 90+ days past due			3				74
Total non-performing loans and leases			704				662
Total non-performing loans and leases as a percentage of total assets			0.16	%			0.15	%
Total non-performing loans and leases as a percentage of total loans and leases			0.23	%			0.23	%

          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. For the three and nine month periods ended September 30, 2006, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $15 thousand and $69 thousand, respectively. 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, and no interest income for the same periods in 2006 on non-accruing loans and leases.

Investing Activities

          Total securities declined to $95.5 million at September 30, 2007, reflecting a $22.3 million or 18.9% decrease from June 30, 2007, and a $42.2 million or 30.7% decrease from December 31, 2006. Securities and interest-bearing deposits at banks made up 24.0% of the Bank’s total average interest earning assets in the third quarter of 2007 compared to 34.7% in the third quarter of 2006. The decline in the securities portfolio is a result of the Company’s strategy to de-lever a portion of its balance sheet. The Company sold $45 million in securities in June 2007 to initiate the strategy. During the third quarter, the Company reduced funding levels by pricing down

certain municipal accounts and allowing municipal time deposits to roll off. At the conclusion of the third quarter, nearly all of the targeted funding roll-off had been achieved.

          The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 40.1% of the portfolio at September 30, 2007 compared with 30.9% at December 31, 2006; and U.S. government-sponsored agency bonds of various types, which comprise 43.2% of the portfolio at September 30, 2007 versus 22.5% at December 31, 2006. After the sale of securities in June 2007, mortgage-backed securities have declined as a percentage of the portfolio from 43.8% to 13.3%. As a member if both the Federal Reserve System and the Federal Home Loan Bank, the Bank is required to hold stock in those entities. These investments made up 3.4% of the portfolio at September 30, 2007 versus 2.8% of the portfolio at December 31, 2006. The credit quality of the securities portfolio is believed to be strong, with 97.5% of the securities portfolio carrying the equivalent of a Moody’s rating of AAA.

          The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 2.4 years as of September 30, 2007 which is consistent with expected life of the portfolio as of June 30, 2007. Available-for-sale securities with a total fair value of $88.5 million at September 30, 2007 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

Funding Activities

          Total deposits at September 30, 2007 were $347.2 million, reflecting a $25.9 million or 6.9% decrease from June 30, 2007. Time deposits $100,000 and over decreased $11.4 million, or 15.8%, to $60.6 million mainly due to municipal deposits and run off of time deposits accumulated in promotions in prior periods. Additionally, muni-vest balances decreased $19.2 million or 42.5% from June 30, 2007. The Company has priced down certain muni-vest accounts and allowed certain municipal jumbo time deposits to roll off as part of its de-leverage strategy. Among core deposits, demand deposits increased $3.2 million, or 4.3%, from June 30, 2007. Regular savings also increased $3.0 million, or 3.4%, during the quarter.

          Total deposits decreased $8.5 million, or 2.4%, from December 31, 2006. The decrease in deposits from December 31, 2006 was primarily attributable to the de-leverage strategy. The strategy has resulted in a decrease in time deposits $100,000 and over of $19.6 million, or 24.4%, and in muni-vest deposits of $5.3 million, or 16.9%. Among core deposits, demand deposits increased $5.5 million, or 7.6%, and regular savings accounts increased $5.7 million, or 6.7%, from December 31, 2006.

          Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York was $12.9 million at September 30, 2007, as compared to $5.8 million at June 30, 2007 and $24.8 million at December 31, 2006.

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

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

		Three Months Ended												Three Months Ended
		September 30, 2007												September 30, 2006
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
		(dollars in thousands)												(dollars in thousands)
ASSETS
Interest-earning assets:
Loans and leases, net		$	299,932			$	6,036				8.05	%		$	272,492			$	5,323				7.81	%
Taxable securities			45,402				501				4.41	%			100,440				1,030				4.10	%
Tax-exempt securities			37,801				401				4.24	%			43,570				470				4.31	%
Interest bearing deposits at banks			11,302				156				5.52	%			514				5				3.89	%
Total interest-earning assets			394,437				7,094				7.19	%			417,016				6,828				6.55	%
Non interest-earning assets:
Cash and due from banks			11,893												12,584
Premises and equipment, net			8,551												8,172
Other assets			29,639												29,645
Total Assets			444,520											$	467,417
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW		$	10,377			$	7				0.27	%		$	11,952			$	6				0.20	%
Regular savings			88,701				277				1.25	%			89,868				272				1.21	%
Muni-Vest savings			28,059				291				4.15	%			34,293				385				4.49	%
Time deposits			148,808				1,821				4.89	%			152,207				1,745				4.59	%
Other borrowed funds			24,835				222				3.58	%			45,680				452				3.96	%
Junior subordinated debentures			11,330				226				7.98	%			11,330				223				7.87	%
Securities sold U/A to repurchase			6,193				12				0.78	%			8,564				17				0.79	%
Total interest-bearing liabilities			318,303			$	2,856				3.59	%			353,894			$	3,100				3.50	%
Noninterest-bearing liabilities:
Demand deposits			74,973												66,430
Other			9,169												9,255
Total liabilities			402,445											$	429,579
Stockholders’ equity			42,075												37,838
Total Liabilities and Equity			444,520											$	467,417
Net interest earnings						$	4,238											$	3,728
Net yield on interest earning assets											4.30	%											3.58	%
Interest rate spread											3.60	%											3.05	%