EVANS BANCORP INC - Annual Report: 2008 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended: December 31, 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 or 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)

Registrant’s telephone number (including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, Par Value $.50 per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Act). Yes o No þ

On June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $39.0 million, based upon the closing sale price of a share of the registrant’s common stock on The NASDAQ Global Market.

As of March 10, 2008, 2,769,715 shares of the registrant’s common stock were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to the registrant’s 2008 Annual Meeting of Shareholders, to be held on April 23, 2009, which will be subsequently filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

TABLE OF CONTENTS

INDEX

				Page
		PART I
Item 1.		BUSINESS			5
Item 1A.		RISK FACTORS			24
Item 1B.		UNRESOLVED STAFF COMMENTS			27
Item 2.		PROPERTIES			27
Item 3.		LEGAL PROCEEDINGS			28
Item 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			28
		PART II
Item 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			28
Item 6.		SELECTED FINANCIAL DATA			31
Item 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31
Item 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			48
Item 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			49
Item 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			87
Item 9A.		CONTROLS AND PROCEDURES			87
Item 9B.		OTHER INFORMATION			87
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

				Page
		PART III
Item 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			88
Item 11.		EXECUTIVE COMPENSATION			88
Item 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			88
Item 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			88
Item 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			88
		PART IV
Item 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			89
		SIGNATURES			91

PART I

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K 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 business plans, prospects, growth and operating strategies of Evans Bancorp, Inc. (the “Company”), 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 (“FASB”) 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 Annual Report on Form 10-K, 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.

Item 1. BUSINESS

EVANS BANCORP, INC.

Evans Bancorp, Inc. (the “Company”) is a New York business corporation which is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The principal offices of the Company are located at 14-16 North Main Street, Angola, New York 14006 and its telephone number is (716) 926-2000. The Company was incorporated on October 28, 1988, but the continuity of its banking business is traced to the organization of the Evans National Bank of Angola on January 20, 1920. 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 Company’s common stock is traded on The NASDAQ Global Market system under the symbol “EVBN.”

At December 31, 2008, the Company had consolidated total assets of $529.0 million, deposits of $404.0 million and stockholders’ equity of $45.9 million.

The Company’s primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities. The Company has two direct wholly-owned subsidiaries: (1) Evans Bank, N.A. (“Evans Bank” or the “Bank”), which provides a full range of banking services to consumer and commercial customers in Western New York; and (2) Evans National Financial Services, Inc. (“ENFS”), which owns 100% of the common stock of The Evans Agency, Inc. (“TEA”), which sells various premium-based insurance policies on a commission basis. At December 31, 2008, the Bank represented 97.6% and ENFS represented 2.4% of the consolidated assets of the Company. Further discussion of our segments is included in Note 17 to the Company’s Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.

Evans Bank

The Bank is a nationally chartered bank that has its headquarters and a full-service banking office at 14 North Main Street, Angola, New York, and a total of twelve full-service banking offices in Erie County and Chautauqua County, New York.

At December 31, 2008, the Bank had total assets of $516.4 million, security investments of $75.8 million, net loans of $401.6 million, deposits of $404.0 million and stockholders’ equity of $40.2 million, compared to total assets of $430.2 million, security investments of $72.4 million, net loans of $319.6 million, deposits of $325.8 million and stockholders’ equity of $35.8 million at December 31, 2007. The Bank’s principal source of funding is deposits, which it reinvests in the community in the form of loans and investments. The Bank offers deposit products, which include checking and NOW accounts, savings accounts, and certificates of deposit. The Bank’s deposits are insured up to the maximum permitted by the Bank Insurance Fund (the “Insurance Fund”) of the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of loan products to its customers, including commercial and consumer loans and leases and commercial and residential mortgage loans.

As is the case with banking institutions generally, the Bank’s operations are significantly influenced by general economic conditions and by related monetary and fiscal policies of banking regulatory agencies, including the Federal Reserve Board (“FRB”) and FDIC. The Bank is also subject to the supervision, regulation and examination of the Office of the Comptroller of the Currency of the United States of America (the “OCC”).

Other Subsidiaries

In addition to the Bank, the Company has the following direct and indirect wholly-owned subsidiaries:

Evans National Leasing, Inc. (“Evans National Leasing” or “ENL”). ENL, a wholly-owned subsidiary of the Bank, provides direct financing leasing of commercial small-ticket general business equipment to companies located throughout the contiguous 48 United States.

Evans National Holding Corp. (“ENHC”). ENHC, a wholly-owned subsidiary of the Bank, operates as a real estate investment trust (“REIT”) that holds commercial real estate loans and residential mortgages, which provides additional flexibility and planning opportunities for the business of the Bank.

Suchak Data Systems (“SDS”). The Company acquired SDS on December 31, 2008. SDS, a wholly-owned subsidiary of the Bank, serves the data processing needs of financial institutions with customized solutions and consultative services. SDS hosts the Bank’s core and primary banking systems along with providing product development and programming services. SDS’s products and services for its other customers include core and online banking systems, check imaging, item processing, and ATM services.

Evans National Financial Services, Inc. (“Evans National Financial Services” or “ENFS”). ENFS is a wholly-owned subsidiary of the Company. ENFS’s primary business is to own the business and assets of the Company’s non-banking financial services segment subsidiaries.

The Evans Agency, Inc. (“The Evans Agency” or “TEA”). TEA, a wholly-owned subsidiary of ENFS, is an insurance agency which sells various premium-based insurance policies on a commission basis, including business and personal insurance, surety bonds, risk management, life, disability and long-term care coverage. TEA has offices located in Erie, Niagara, Chautauqua, and Cattaraugus Counties in New York.

ENB Associates Inc. (“ENB Associates” or “ENBA”). ENBA, a wholly-owned subsidiary of TEA, offers non-deposit investment products, such as annuities and mutual funds.

Frontier Claims Services, Inc. (“FCS”). FCS is a wholly-owned subsidiary of TEA and provides claims adjusting services to various insurance companies.

The Company also has two special purpose entities: Evans Capital Trust I, a statutory trust formed on September 29, 2004 under the Statutory Trust Act, solely for the purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the trust, investing the proceeds thereof in certain debentures of the Company and engaging in those activities necessary, advisable or incidental thereto; and ENB Employers Insurance Trust, a Delaware trust company formed in February 2003 for the sole purpose of holding life insurance policies under the Bank’s bank-owned life insurance program.

The Company operates in two reportable segments — banking activities and insurance agency activities. See Note 17 to the Company’s Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K for more information on the Company’s reportable segments.

MARKET AREA

The Company’s primary market area is Erie County, Niagara County, northern Chautauqua County and northwestern Cattaraugus County, New York. This primary market area is the area where the Bank principally receives deposits and makes loans and TEA sells insurance. Even though ENL conducts business outside of this defined market area, this activity is not deemed to expand the Company’s primary market.

AVERAGE BALANCE SHEET INFORMATION

The table presents the significant categories of the assets and liabilities of the Bank, interest income and interest expense, and the corresponding yields earned and rates paid in 2008, 2007 and 2006. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. Interest income on loans does not include interest on loans for which the Bank has ceased to accrue interest. Securities are stated at fair value. Interest and yield are not presented on a tax-equivalent basis.

		2008												2007												2006
		Average								Yield/				Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
		(dollars in thousands)												(dollars in thousands)												(dollars in thousands)
Assets
Interest-earning assets:
Loans and leases, net		$	357,210			$	26,328				7.37	%		$	297,905			$	23,918				8.03	%		$	268,538			$	20,405				7.60	%
Taxable securities			32,168				1,309				4.07	%			68,453				2,919				4.26	%			104,368				4,209				4.03	%
Tax-exempt securities			34,584				1,490				4.31	%			38,923				1,683				4.32	%			44,044				1,881				4.27	%
Federal funds sold			1,531				24				1.57	%			6,448				317				4.92	%			1,097				49				4.47	%
Total interest-earning assets			425,493				29,151				6.85	%			411,729				28,837				7.00	%			418,047				26,544				6.35	%
Non interest-earning assets:
Cash and due from banks			12,592												11,454												12,066
Premises and equipment, net			8,662												8,568												8,194
Other assets			30,037												29,566												29,022
Total Assets		$	476,784											$	461,317											$	467,329
Liabilities & Stockholders’ Equity
Interest-bearing liabilities:
NOW		$	11,793				80				0.68	%		$	11,014				33				0.30	%		$	11,767				22				0.19	%
Regular savings deposits			113,266				1,801				1.59	%			88,685				1,061				1.20	%			88,522				926				1.05	%
Muni-vest savings			23,459				494				2.11	%			39,840				1,696				4.26	%			36,301				1,550				4.27	%
Time deposits			144,040				5,713				3.97	%			149,578				7,264				4.86	%			151,530				6,481				4.28	%
Other borrowed funds			35,876				1,110				3.09	%			29,655				1,164				3.93	%			46,304				1,800				3.89	%
Junior subordinated debentures			11,330				644				5.68	%			11,330				891				7.86	%			11,330				850				7.50	%
Securities sold under agreement to repurchase			5,151				41				0.80	%			6,694				53				0.79	%			8,493				68				0.80	%
Total interest-bearing liabilities			344,915				9,883				2.87	%			336,796				12,162				3.61	%			354,247				11,697				3.30	%
Non interest-bearing liabilities:
Demand deposits			75,551												73,577												67,046
Other			10,972												9,609												8,153
Total liabilities			431,438												419,982												429,446
Stockholders’ equity			45,346												41,335												37,883
Total Liabilities & Equity		$	476,784											$	461,317											$	467,329
Net interest earnings						$	19,268											$	16,675											$	14,847
Net yield on interest earning assets											4.53	%											4.05	%											3.55	%
Interest rate spread											3.98	%											3.39	%											3.05	%

SECURITIES ACTIVITIES

The primary objective of the Bank’s securities portfolio is to maximize income while preserving safety of principal. Secondary objectives include: providing collateral to secure local municipal deposits, the investment of funds during periods of decreased loan demand, interest rate sensitivity considerations, supporting local communities through the purchase of tax-exempt securities and tax planning considerations. The Bank’s Board of Directors is responsible for establishing overall policy and reviewing performance of the Bank’s investments.

Under the Bank’s policy, acceptable portfolio investments include: United States (“U.S.”) Government obligations, obligations of federal agencies or U.S. Government-sponsored enterprises, mortgage backed securities, municipal obligations (general obligations, revenue obligations, school districts and non-rated issues from the Bank’s general market area), banker’s acceptances, certificates of deposit, Industrial Development Authority Bonds, Public Housing Authority Bonds, corporate bonds (each corporation limited to the Bank’s legal lending limit), collateralized mortgage obligations, Federal Reserve stock and Federal Home Loan Bank stock.

The Bank’s general investment policy is that in-state securities must be rated at least Moody’s Baa (or equivalent) at the time of purchase. Out-of-state issues must be rated at least Moody’s Aa (or equivalent) at the time of purchase. Bonds or securities rated below A are reviewed periodically to ensure their continued credit worthiness. While purchase of non-rated municipal securities is permitted, such purchases are limited to bonds issued by municipalities in the Bank’s general market area which, in the Bank’s judgment, possess no greater credit risk than Baa (or equivalent) bonds. The financial statements of the issuers of non-rated securities are reviewed by the Bank and a credit file of the issuers is kept on each non-rated municipal security with relevant financial information. The securities portfolio of the Bank is priced on a monthly basis.

Pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which establishes accounting treatment for investments in securities, all securities in the Bank’s investment portfolio are either designated as “held to maturity” or “available for sale.”

Income from securities held in the Bank’s investment portfolio represented approximately 9.6% of total interest income of the Company in 2008 as compared to 16.0% in 2007 and 22.9% in 2006. At December 31, 2008, the Bank’s securities portfolio of $75.8 million consisted primarily of state and municipal securities, mortgage-backed securities issued by the Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corp (“FHLMC”), and U.S. and federal agency obligations. The Bank did not hold any FNMA or FHLMC perpetual preferred stock or trust-preferred securities at December 31, 2008. The decrease in the securities portfolio income over the last two years is a result of the Company’s strategy to restructure its balance sheet. The Company sold $45.0 million of available-for-sale securities in June 2007 while allowing other securities to mature. Correspondingly, the Company allowed certain municipal time deposits to roll off and priced down its muni-vest savings account with certain non-core municipal customers which resulted in the loss of those muni-vest accounts. Management has the intent and ability to hold the Company’s investment securities until recovery or maturity.

Available for sale securities with a total fair value of $66.0 million at December 31, 2008 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

The following table summarizes the Bank’s securities with those designated as “available for sale” valued at fair value and securities designated as “held to maturity” valued at amortized cost as of December 31, 2008, 2007 and 2006:

		2008				2007				2006
		(in thousands)
Available for Sale:
Debt securities
U.S. government agencies		$	17,902			$	14,189			$	30,891
States and political subdivisions			35,436				35,658				38,438
Total debt securities		$	53,338			$	49,847			$	69,329
Mortgage-backed securities
FNMA		$	8,165			$	8,135			$	30,168
FHLMC			7,587				7,063				8,448
GNMA			—				—				1,044
CMO’s			1,149				1,587				20,629
Total mortgage-backed securities		$	16,901			$	16,785			$	60,289
FRB and Federal Home Loan Bank Stock			3,565				3,512				3,901
Total securities designated as available for sale		$	73,804			$	70,144			$	133,519
Held to Maturity:
U.S. government agencies		$	35			$	35			$	35
States and political subdivisions			1,916				2,231				4,176
Total securities designated as held to maturity		$	1,951			$	2,266			$	4,211
Total securities		$	75,755			$	72,410			$	137,730

The following table sets forth the contractual maturities and weighted average interest yields of the Bank’s securities portfolio (yields on tax-exempt obligations are not presented on a tax-equivalent basis) as of December 31, 2008:

		Maturing
		Within								After One But								After Five But								After
		One Year								Within Five Years								Within Ten Years								Ten Years
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(dollars in thousands)
Available for Sale:
Debt Securities:
U.S. government agencies		$	16,013				1.48	%		$	1,889				3.75	%		$	—				—			$	—				—
States and political subdivisions			854				4.45	%			19,043				4.45	%			14,246				4.63	%			1,293				4.87	%
Total debt securities		$	16,867				1.63	%		$	20,932				4.38	%		$	14,246				4.63	%		$	1,293				4.87	%
Mortgage-backed Securities:
FNMA		$	209				5.21	%		$	1,013				4.95	%		$	4,599				5.01	%		$	2,345				5.36	%
FHLMC			2,058				3.79	%			579				4.58	%			1,985				5.02	%			2,964				5.43	%
CMO’s			—				—				—				—				125				4.01	%			1,024				4.50	%
Total mortgage-backed securities		$	2,267				3.92	%		$	1,592				4.81	%		$	6,709				5.00	%		$	6,333				5.26	%
Total available for sale		$	19,134				1.90	%		$	22,524				4.41	%		$	20,955				5.01	%		$	7,626				5.19	%
Held to Maturity:
U.S. government agencies		$	—				—			$	—				—			$	35				—			$	—				—
States and political subdivisions		$	198				4.01	%			612				3.79	%			390				4.70	%			716				3.69	%
Total held to maturity		$	198				4.01	%		$	612				3.79	%		$	425				4.31	%		$	716				3.69	%
Total securities		$	19,332				1.92	%		$	23,136				4.40	%		$	21,380				4.86	%		$	8,342				5.06	%

LENDING AND LEASING ACTIVITIES

General. The Bank has a loan and lease policy, which includes a loan and lease loss allowance policy, which is approved by its Board of Directors on an annual basis. The loan and lease policy governs the conditions under which loans and leases may be made, addresses the lending authority of Bank officers, charge off policies and desired portfolio mix.

The Bank offers a variety of loan and lease products to its customers, including residential and commercial real estate mortgage loans, commercial loans, direct financing leases, and installment loans. The Bank primarily extends loans to customers located within the Western New York area, except for direct financing leases, which are originated in all 48 contiguous states. Interest income on loans and leases represented approximately 90.3% of the total interest income of the Company in 2008 and approximately 82.9% and 76.9% of total interest income in 2007 and 2006, respectively. The Bank’s loan and lease portfolio, net of the allowances for loan and lease losses, totaled $401.6 million and $319.6 million at December 31, 2008 and December 31, 2007, respectively. At December 31, 2008, the Bank had a $6.1 million allowance for loan losses which is approximately 1.49% of total loans and leases. This compares with approximately $4.6 million at December 31, 2007 which was approximately 1.41% of total loans and leases. The $1.5 million increase in the allowance for loan and lease losses reflects management’s assessment of the portfolio composition as well as the economy. The United States was in a recession in 2008 and the recession is expected to continue well into 2009. The troubled economy resulted in a significant increase in net charge-offs in the direct financing lease portfolio in 2008. Management expects the leasing portfolio to continue to be sensitive to the economic conditions. While the Company’s remaining commercial and consumer portfolios did not experience charge-offs in 2008, an economic recession puts those portfolios at increased risk as well. Also, a higher allowance is necessary because the loan portfolio was larger at December 31, 2008 than at the previous year-end due to strong growth in 2008, as discussed in more detail below. The net loan portfolio represented approximately 75.9% and 72.2% of the Company’s total assets at December 31, 2008 and December 31, 2007, respectively.

Real Estate Loans. Approximately 72.7% of the Bank’s loan and lease portfolio at December 31, 2008 consisted of real estate loans or loans collateralized by mortgages on real estate, including residential mortgages, commercial mortgages and other types of real estate loans. The Bank’s real estate loan portfolio was $296.2 million at December 31, 2008, compared to $237.5 million at December 31, 2007. The real estate loan portfolio increased by approximately 24.7% in 2008 over 2007 compared to an increase of 8.0% in 2007 over 2006.

The Bank offers fixed rate residential mortgage loans with terms of 10 to 30 years with, typically, up to an 80% loan-to-value ratio. Fixed rate residential mortgage loans outstanding totaled $54.8 million at December 31, 2008, which was approximately 13.4% of total loans and leases outstanding, compared with $56.5 million and 17.4%, respectively, at December 31, 2007. The Bank has a contractual arrangement with FNMA, pursuant to which the Bank sells mortgage loans to FNMA and the Bank retains the servicing rights as to those loans.

In 2008, the Bank sold approximately $3.5 million in mortgages to FNMA under this arrangement, compared with $2.9 million in mortgages sold in 2007. The Bank currently retains the servicing rights on $26.9 million in mortgages sold to FNMA. The Company has recorded a net servicing asset for such loans of approximately $0.1 million and $0.2 million at December 31, 2008 and 2007, respectively. The Bank determines with each origination of residential real estate loans which desired maturities, within the context of overall maturities in the loan portfolio, provide the appropriate mix to optimize the Bank’s ability to absorb the corresponding interest rate risk within the Company’s tolerance ranges.

The Bank offers adjustable rate residential mortgage loans with terms of up to 30 years. Rates on these mortgage loans remain fixed for a predetermined time and are adjusted annually thereafter. At December 31, 2008, the Bank’s outstanding adjustable rate residential mortgage loans were $12.0 million or 2.9% of total loans and leases outstanding as compared with $12.1 million or 3.7% of total loans and leases at December 31, 2007. This balance did not include any construction mortgage loans, which are discussed below.

The Bank also offers commercial mortgage loans with up to an 80% loan-to-value ratio for up to 20 years on a variable and fixed rate basis. Many of these mortgage loans either mature or are subject to a rate call after three to five years. The Bank’s outstanding commercial mortgage loans were $180.4 million at December 31, 2008, which was approximately 44.3% of total loans and leases outstanding, compared with $131.1 million and 40.5%, respectively, at December 31, 2007. This balance included $62.0 million in fixed rate and $118.4 million in variable rate mortgage loans, which include interest rate calls.

The Bank also offers other types of loans collateralized by real estate such as home equity loans. The Bank offers home equity loans at variable and fixed interest rates with terms of up to 15 years and up to an 80% loan-to-value ratio. At December 31, 2008, the real estate loan portfolio included $31.3 million of home equity loans outstanding, which represented approximately 7.7% of total loans and leases outstanding, compared with $26.4 million and 8.1% at December 31, 2007, respectively. This balance included $22.3 million in variable rate loans and $8.9 million in fixed rate loans.

The Bank also offers both residential and commercial real estate construction loans at up to an 80% loan-to-value ratio at fixed interest or adjustable interest rates and multiple maturities. At December 31, 2008, fixed rate real estate construction loans outstanding totaled $4.8 million or 1.2% of total loans and leases outstanding, and adjustable rate construction loans outstanding totaled $13.0 million or 3.2% of total loans and leases outstanding. At December 31, 2007, fixed rate real estate construction loan outstanding totaled $0.6 million, or 0.2% of total loans and leases outstanding, and adjustable rate construction loans outstanding totaled $10.9 million, or 3.3% of total loans and leases outstanding.

As of December 31, 2008, approximately $2.8 million or 0.9% of the Bank’s real estate loans were 30 to 90 days delinquent, and approximately $2.3 million or 0.8% of real estate loans were non-accruing.

Direct Financing Leases. Direct financing leases totaled $58.6 million and $45.1 million at December 31, 2008 and 2007, respectively, representing approximately 14.4% and 13.9% of the Bank’s total loans and leases outstanding at December 31, 2008 and 2007, respectively. As of December 31, 2008, approximately $1.2 million or 2.1% of the Bank’s direct financing leases were 30 to 90 days past due. In addition, $0.8 million, or 1.4%, were non-accruing and $1.9 million, or 3.2%, were restructured in troubled debt restructurings.

Commercial Loans. The Bank offers commercial loans on a secured and unsecured basis, including lines of credit and term loans at fixed and variable interest rates and multiple maturities. The Bank’s commercial loan portfolio totaled $46.1 million and $34.6 million at December 31, 2008 and 2007, respectively. Commercial loans represented approximately 11.3% and 10.7% of the Bank’s total loans at December 31, 2008 and 2007, respectively.

As of December 31, 2008, approximately $350 thousand or 0.8% of the Bank’s commercial loans were 30 to 90 days past due and $0.3 million or 0.6% of its commercial loans were non-accruing. The Bank also had one commercial loan for $144 thousand or 0.3% of commercial loans that was over 90 days past due and still accruing.

Commercial lending entails significantly more risk than real estate loans. Collateral, where applicable, may consist of inventory, receivables, equipment and other business assets. Approximately 62.6% of the Bank’s commercial loans are at variable rates which are tied to the prime rate.

Consumer Installment Loans. The Bank’s consumer installment loan portfolio totaled $1.8 million and $2.1 million at December 31, 2008 and 2007, respectively, representing approximately 0.5% and 0.6% of the Bank’s total loans and leases outstanding at December 31, 2008 and 2007, respectively. Traditional installment loans are offered at fixed interest rates with various maturities of up to 60 months, on a secured and unsecured basis. As of December 31, 2008, approximately $15 thousand or 0.8% of the Bank’s installment loans were 30 to 90 days past due.

Other Loans. Other loans totaled $4.2 million and $4.0 million at December 31, 2008 and December 31, 2007, respectively. Other loans consisted primarily of loans to municipalities, hospitals, churches and non-profit organizations, at fixed or variable interest rates with multiple maturities. Other loans also includes overdrafts, which totaled $0.4 million at December 31, 2008 and 2007.

The Bank’s lending limit to any one borrower is subject to regulation by the OCC. The Bank continually monitors its loan portfolio to review compliance with new and existing regulations.

The following table summarizes the major classifications of the Bank’s loans and leases (net of deferred origination costs) as of the dates indicated:

		December 31,
		2008				2007				2006				2005				2004
		(in thousands)
Mortgage loans on real estate:
Residential 1-4 family		$	66,750			$	68,553			$	57,702			$	48,580			$	38,491
Commercial and multi-family			180,388				131,146				123,701				123,727				107,392
Construction			17,814				11,446				11,848				9,270				8,188
Second mortgages			8,918				9,452				8,625				6,454				5,716
Home equity lines of credit			22,347				16,926				18,147				21,082				22,108
Total mortgage loans on real estate			296,217				237,523				220,023				209,113				181,895
Direct financing leases			58,639				45,078				31,742				16,945				4,546
Commercial loans			46,077				34,563				29,589				29,920				28,762
Consumer installment loans			1,831				2,083				3,101				2,747				2,832
Other			4,152				3,983				3,997				642				1,973
Net deferred loan and lease origination costs			797				881				654				654				590
Total loans and leases			407,713				324,111				289,106				260,021				220,598
Allowance for loan and lease losses			(6,087	)			(4,555	)			(3,739	)			(3,211	)			(2,999	)
Loans and leases, net		$	401,626			$	319,556			$	285,367			$	256,810			$	217,599

Loan Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table shows the maturities of commercial loans and real estate construction loans outstanding as of December 31, 2008 and the classification of such loans due after one year according to sensitivity to changes in interest rates.

						After One But
		Within				Within Five
		One Year				Years				After Five Years				Total
		(in thousands)
Commercial		$	4,000			$	20,013			$	22,064			$	46,077
Real estate construction			5,968				1,466				10,380				17,814
		$	9,968			$	21,479			$	32,444			$	63,891
Loans maturing after one year with:
Fixed Rates						$	13,743			$	1,833
Variable Rates							7,736				30,611
						$	21,479			$	32,444

Non-accrual, Past Due and Restructured Loans and Leases. The following table summarizes the Bank’s non-accrual and accruing loans and leases 90 days or more past due as of the dates listed below. See Part II, Item 7 of this Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Allowance for Loan and Lease Losses,” and Part II, Item 8 of this Annual Report on Form 10-K “Financial Statements and Supplementary Data — Note 3 of the Notes to Consolidated Financial Statements” for further information about the Company’s non-accrual, past due and restructured loans and leases.

		At December 31,
		2008				2007				2006				2005				2004
		(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate:
Residential 1-4 family		$	50			$	—			$	—			$	—			$	—
Commercial and multi-family			1,787				112				145				600				278
Construction			417				—				—				—				—
Second mortgages			—				—				—				—				—
Home equity lines of credit			—				—				—				—				—
Total mortgage loans on real estate			2,254				112				145				600				278
Direct financing leases			791				215				—				—				2
Commercial loans			263				224				443				1,175				1,375
Consumer installment loans			—				—				—				—				—
Other			123				—				—				—				—
Total non-accruing loans and leases		$	3,431			$	551			$	588			$	1,775			$	1,655
Accruing loans and leases 90+ days past due			148				163				74				95				151
Total non-performing loans and leases		$	3,579			$	714			$	662			$	1,870			$	1,806
Total non-performing loans and leases to total assets			0.68	%			0.16	%			0.15	%			0.41	%			0.42	%
Total non-performing loans and leases to total loans and leases			0.88	%			0.22	%			0.23	%			0.72	%			0.82	%

The Bank had $1.9 million in leases that were restructured in a troubled debt restructuring at December 31, 2008, in addition to the non-accruing leases in the table above. These restructurings were allowed in an effort to maximize the Bank’s ability to collect on leases where borrowers were experiencing financial issues. The general practice of the Bank is to work with borrowers so that they are able to pay back their loan or lease in full. If a borrower continues to be delinquent after a troubled debt restructuring, the loan or lease will be placed in nonaccrual or charged off. There were no other troubled debt restructurings at December 31, 2008.

Non-performing loans and leases increased from $0.7 million at December 31, 2007 to $3.6 million at December 31, 2008. Most of the increase came in real estate loans. The increase in non-performing real estate loans was due to three sizable commercial relationships. As commercial relationships tend to involve high-dollar balances, the non-performance of only a small number of relationships can result in a large increase in the non-performing loan and lease balance. The placement of these relationships in non-accruing loans and leases took place in the fourth quarter of 2008. Previously, management had categorized these loans as criticized in its internal rating system. Criticized loans tend to carry larger specific reserves for potential losses than the rest of the general loan portfolio. There was also an increase in non-performing direct financing leases as the depressed economy negatively impacted the performance of the overall leasing portfolio.

The following table summarizes the Bank’s allowance for loan and lease losses and changes in the allowance for loan and lease losses by categories:

ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES

		2008				2007				2006				2005				2004
		(in thousands)
BALANCE AT THE BEGINNING OF THE YEAR		$	4,555			$	3,739			$	3,211			$	2,999			$	2,539
CHARGE-OFFS:
Commercial			—				(153	)			(212	)			(417	)			(200	)
Real estate mortgages			(1	)			(5	)			—				(25	)			(6	)
Direct financing leases			(2,149	)			(1,048	)			(500	)			(108	)			—
Consumer installment loans			(4	)			(7	)			(44	)			(86	)			(9	)
Overdrafted deposit accounts			(51	)			(58	)			(42	)			(39	)			—
TOTAL CHARGE-OFFS			(2,205	)			(1,271	)			(798	)			(675	)			(215	)
RECOVERIES:
Commercial			36				26				53				—				48
Real estate mortgages			—				—				—				40				8
Direct financing leases			170				105				62				56				—
Installment loans			2				18				63				11				4
Overdrafted deposit accounts			21				21				20				11				—
TOTAL RECOVERIES			229				170				198				118				60
NET CHARGE-OFFS			(1,976	)			(1,101	)			(600	)			(557	)			(155	)
PROVISION FOR LOAN AND LEASE LOSSES			3,508				1,917				1,128				769				485
ADDITION OF ALLOWANCE FROM ACQUISITION			—				—				—				—				130
BALANCE AT END OF YEAR		$	6,087			$	4,555			$	3,739			$	3,211			$	2,999
RATIO OF NET CHARGE-OFFS TO AVERAGE NET LOANS AND LEASES OUTSTANDING			0.55	%			0.37	%			0.22	%			0.23	%			0.08	%
RATIO OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO TOTAL LOANS AND LEASES			1.49	%			1.41	%			1.29	%			1.23	%			1.36	%

Much of the economic turmoil in the national economy is due to the sub-prime mortgage credit crisis. As the Company does not engage in sub-prime lending, the faltering sub-prime credit market has not directly affected the Company’s loan and lease portfolio. Also, local real estate values have remained steady to slightly higher. However, management is closely monitoring the Company’s loan and lease portfolio for potential losses and heightened risk factors related to our customers. The increase in the allowance for loan and lease losses in 2008 reflects management’s assessment of the portfolio composition as well as the economy. The United States has been in recession since December 2007 and the recession is expected to continue well into 2009, if not for the entire year. The troubled economy resulted in a significant increase in net charge-offs in the direct financing lease portfolio in 2008. ENL does business with customers all over the United States, including states that previously had fast-growing economies such as California, Florida, and Texas. ENL’s highest volume state remains the Company’s home state of New York (17.9% of balances at December 31, 2008), but ENL has significant exposure to economic difficulties in other parts of the country. As of December 31, 2008, the principal balance of leases in the aforementioned states of California, Florida, and Texas are 11.9%, 8.3%, and 6.3% of the total portfolio, respectively. No other state has more than 3.9% of the portfolio’s balances at December 31, 2008. While ENL does not lend to sub-prime borrowers, small-ticket commercial leasing is a relatively riskier type of lending than traditional commercial and consumer real estate lending. Management expects the leasing portfolio to continue to be sensitive to the economic conditions. While the Company’s remaining commercial and consumer portfolios did not experience increased charge-offs in 2008, an economic recession puts those portfolios at increased risk as well. While charge-offs in those portfolios remained low, non-performing loans and leases increased substantially year-over-year.

The Company maintains a robust loan review process to ensure that specific credits are appropriately reserved. In particular, management is monitoring the leasing portfolio for signs of weakness in a more challenging economic environment. Also, management is cognizant that commercial real estate values may be susceptible to decline in an adverse economy. Management believes that the provision for loan and lease losses is reflective of its assessment of the environment, as well as the continued trend in commercial loan activity and balances outstanding.

SOURCES OF FUNDS — DEPOSITS

General. Customer deposits represent the primary source of the Bank’s funds for lending and other investment purposes. In addition to deposits, other sources of funds include loan and lease repayments, loan sales on the secondary market, interest and dividend income from investments, matured investments, and borrowings from the Federal Home Loan Bank (“FHLB”) and from correspondent banks First Tennessee Bank and M&T Bank.

Deposits. The Bank offers a variety of deposit products, including checking, passbook, statement savings, NOW accounts, certificates of deposit and jumbo certificates of deposit. Bank deposits are insured up to the limits provided by the FDIC. At December 31, 2008, the Bank’s deposits totaled $404.0 million consisting of the following:

		(In thousands)
Demand deposits		$	75,959
NOW accounts			10,775
Regular savings			154,283
Muni-vest savings			26,477
Time deposits, $100,000 and over			56,672
Other time deposits			79,787
Total		$	403,953

The following table shows daily average deposits and average rates paid on significant deposit categories by the Bank (dollars in thousands):

		2008								2007								2006
						Weighted								Weighted								Weighted
		Average				Average				Average				Average				Average				Average
		Balance				Rate				Balance				Rate				Balance				Rate
Demand deposits		$	75,551				0.00	%		$	73,577				0.00	%		$	67,046				0.00	%
NOW accounts			11,793				0.68	%			11,014				0.30	%			11,767				0.19	%
Regular Savings			113,266				1.59	%			88,685				1.20	%			88,522				1.05	%
Muni-vest savings			23,459				2.11	%			39,840				4.26	%			36,301				4.27	%
Time deposits			144,040				3.97	%			149,578				4.86	%			151,530				4.28	%
Total		$	368,109				2.20	%		$	362,694				2.77	%		$	355,166				2.53	%

The following schedule sets forth the maturities of the Bank’s time deposits as of December 31, 2008:

		Time Deposit Maturity Schedule
		(in thousands)
		0-3				3-6				6-12				Over 12
		Mos.				Mos.				Mos.				Mos.				Total
Time deposits — $100,000 and over		$	7,979			$	10,036			$	9,606			$	29,051			$	56,672
Other time deposits			14,418				7,586				27,657				30,126				79,787
Total time deposits		$	22,397			$	17,622			$	37,263			$	59,177			$	136,459

Federal Funds Purchased and Other Borrowed Funds. Another source of the Bank’s funds for lending and investing activities at December 31, 2008 consisted of short and long term borrowings from the Federal Home Loan Bank.

Other borrowed funds consisted primarily of various advances from the FHLB with both fixed and variable interest rate terms ranging from 0.44% to 3.55%. The maturities and weighted average rates of other borrowed funds at December 31, 2008 are as follows (dollars in thousands):

						Weighted
						Average
		Maturities				Rate
2009		$	30,695				0.96	%
2010			112				6.00	%
2011			5,068				3.12	%
2012			—				—	%
2013			7,000				3.39	%
Thereafter			6,000				3.55	%
Total		$	48,875				1.86	%

Securities Sold Under Agreements to Repurchase. The Bank enters into agreements with depositors to sell to the depositors securities owned by the Bank and repurchase the identical security, generally within one day. No physical movement of the securities is involved. The depositor is informed that the securities are held in safekeeping by the Bank on behalf of the depositor. Securities sold under agreements to repurchase totaled $6.3 million at December 31, 2008 compared to $3.8 million at December 31, 2007. Balances can vary day to day based on customer needs.

MARKET RISK

For information about, and a discussion of, the Company’s “Market Risk,” see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” of this Annual Report on Form 10-K.

ENVIRONMENTAL MATTERS

In the course of its business, the Bank has acquired and may acquire in the future, property securing loans that are in default. There is a risk that the Bank could be required to investigate and clean-up hazardous or toxic substances or chemical releases at such properties after acquisition by the Bank in a foreclosure action, and that the Bank may be held liable to a governmental entity or third parties for property damage, personal injury and investigation and clean-up costs incurred by such parties in connection with such contamination. In addition, the owner or former owners of contaminated sites may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from such property.

To date, the Bank has not been required to perform any investigation or clean-up activities, nor has it been subject to any environmental claims. There can be no assurance, however, that this will remain the case in the future.

COMPETITION

All phases of the Company’s business are highly competitive. The Company competes actively with local, regional and national financial institutions, as well as with bank branches and insurance agency offices in the Company’s primary market area of Erie County, Niagara County, northern Chautauqua County, and northwestern Cattaraugus County, New York. These Western New York counties have a high density of financial institutions, many of which are significantly larger and have greater financial resources than the Company. The Company faces competition for loans, direct financing leases and deposits from other commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies and other financial services companies. The Company faces additional competition for deposits and insurance business from non-depository competitors such as the mutual fund industry, securities and brokerage firms, and insurance companies and brokerages. The Company attempts to be generally competitive with all financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts, and interest rates charged on loans and leases.

SUPERVISION AND REGULATION

Bank holding companies and banks are extensively regulated under both federal and state laws and regulations that are intended to protect depositors and investors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any

change in the applicable law or regulation, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material adverse effect on the Company’s business, financial condition and results of operations.

Bank Holding Company Regulation (BHCA)

As a financial holding company registered under the BHCA, the Company and its non-banking subsidiaries are subject to regulation and supervision under the BHCA by the FRB. The FRB requires periodic reports from the Company, and is authorized by the BHCA to make regular examinations of the Company and its subsidiaries. Under Regulation Y, a bank holding company must serve as a source of financial and managerial strength for its subsidiary banks and must not conduct its operations in an unsafe and unsound manner.

The Company is required to obtain the prior approval of the FRB before acquiring all or substantially all of the assets of, or direct or indirect ownership or control of more than 5% of the voting shares of, a bank or bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public.

The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. A bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in any non-banking activity, unless such activity has been determined by the FRB to be closely related to banking or managing banks. The FRB has identified by regulation various non-banking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB.

The FRB has enforcement powers over financial holding companies and their subsidiaries, among other things, to interdict activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative orders, or written agreements with a federal bank regulator. These powers may be exercised through the issuance of cease and desist orders, civil monetary penalties or other actions.

Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the FRB (or other appropriate bank regulatory agency, in the case of the Bank, the OCC) is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the communities served by that bank, including low- and moderate-income neighborhoods. Furthermore, such assessment is taken into account in evaluating any application made by a bank holding company or a bank for, among other things, approval of a branch or other deposit facility, an office relocation, a merger or an acquisition of bank shares.

Supervision and Regulation of Bank Subsidiaries

The Bank is a nationally chartered banking corporation subject to supervision, examination and regulation by the FRB, the FDIC and the OCC. These regulators have the power to enjoin “unsafe or unsound practices,” require affirmative action to correct any conditions resulting from any violation or practice, issue an administrative order that can be judicially enforced, direct an increase in capital, restrict the growth of a bank, assess civil monetary penalties, and remove a bank’s officers and directors.

The operations of the Bank are subject to numerous statutes and regulations. Such statutes and regulations relate to required reserves against deposits, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, establishment of branches, and other aspects of the Bank’s operations. Various consumer laws and regulations also affect the operations of the Bank, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting, and privacy of non-public financial information.

The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder, which govern certain transactions, such as loans, extensions of credit, investments and purchases of assets between member banks and their affiliates, including their parent holding companies. These restrictions limit the transfer from its subsidiaries, including the Bank, of funds to the Company in the form of loans, extensions of credit, investments or purchases of assets (collectively, “Transfers”), and they require that the Bank’s transactions with the Company be on terms no less favorable to the Bank than comparable transactions between the Bank and unrelated third parties. Transfers by the Bank to any affiliate (including the Company) are limited in amount to 10% of the Bank’s capital and surplus, and transfers to all affiliates are limited in the aggregate to 20% of the Bank’s capital and surplus. Furthermore, such loans and extensions of credit are also subject to various collateral requirements. These regulations and restrictions may limit the

Company’s ability to obtain funds from the Bank for its cash needs, including funds for acquisitions, and the payment of dividends, interest and operating expenses.

The Bank is prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, the Bank may not generally require a customer to obtain other services from the Bank or the Company, and may not require the customer to promise not to obtain other services from a competitor as a condition to an extension of credit. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal stockholders or any related interest of such persons. Extensions of credit: (i) must be made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for, and following credit underwriting procedures that are not less stringent than those applicable to, comparable transactions with persons not covered above and who are not employees, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the Bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of the Bank or the imposition of a cease and desist order.

The deposits of the Bank are insured by the FDIC through the Insurance Fund to the extent provided by law. Under the FDIC’s risk-based insurance system, institutions insured through the Insurance Fund are currently assessed premiums based on eligible deposits and the institutions’ capital position and other supervisory factors. In addition to any Insurance Fund assessments, banks insured through the Insurance Fund are subject to FDIC assessments to pay certain financing corporation (“FICO”) obligations. The assessment is based on eligible deposits and is determined quarterly.

The Federal Deposit Insurance Reform Act of 2005 and regulations thereunder gave the FDIC increased flexibility in assessing premiums on banks and savings associations, including the Bank, to pay for deposit insurance and in managing its deposit insurance reserves. Under these regulations, all insured depository institutions are placed into one of four risk categories. The Bank is in Risk Category I, the most favorable category. As of January 1, 2009, all insured institutions within this category will pay a base rate assessment of $0.12 to $0.50 per $100 of deposits for the first quarter of 2009 of assessable deposits based on the risk of loss to the Insurance Fund posed by the particular institution. Institutions, such as the Bank, in risk Category I will be assessed within a range of $0.12 to $0.14 per $100 of deposits for the first quarter of 2009. This is a substantial increase from the base rate assessment of $0.02 to $0.04 per $100 of assessable deposits that was in effect during 2008. The increase in the base rate assessment from 2008 to 2009 is due to the financial crises affecting the banking system and financial markets. For institutions such as the Bank, which do not have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and certain financial ratios and other measurements of its financial condition. For institutions that have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and its debt rating. On February 27, 2009, the FDIC issued new rules to take effect April 1, 2009 to change the way the FDIC differentiates risk and appropriate assessment rates. Base assessment rates set to take effect on April 1, 2009 will range from 12 to 45 basis points, but giving effect to certain risk adjustments in the rule issued by the FDIC on February 27, 2009, assessments may range from 7 to 77.5 basis points. For institutions such as the Bank, in Risk Category I, risk-adjusted assessments will range from 7 to 24 basis points. In addition, the FDIC also issued an interim rule on February 27, 2009 that will impose an emergency special assessment of 20 basis points in addition to its risk-based assessment. This assessment will be imposed on June 30, 2009 and collected on September 30, 2009. The reform legislation also provided a credit to all insured depository institutions, based on the amount of their insured deposits at year-end 1996, that may be used as an offset to the premiums that are assessed. The Bank’s credit was fully utilized in 2008 to offset its 2008 deposit insurance assessment. Due to the full utilization of the Bank’s credit, the systemic increase in deposit insurance assessments and the emergency special assessment, the Bank will be subject to increased deposit premium expenses in future periods.

In 2008, the Bank announced that it was electing to participate in the FDIC’s Transaction Account Guarantee Program. Under this program, all non-interest bearing transaction accounts and certain low-interest NOW checking accounts are fully guaranteed by the FDIC for the entire amount on deposit. This coverage is in addition to, and separate from, the coverage provided under the FDIC’s general deposit insurance rules. The program will remain in effect until December 31, 2009. Interest-bearing savings accounts and certificates of deposit are not covered accounts under the program, but are insured up to $250,000 through December 31, 2009. At the expiration of these programs, it is expected that the FDIC insurance limits will return to $100,000 on all deposits at eligible institutions.

Regulations promulgated by the FDIC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 place limitations on the ability of certain insured depository institutions to accept, renew or rollover deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other depository institutions having the same type of charter in such depository institutions’ normal market area. Under these regulations, well-capitalized institutions may accept, renew or rollover such deposits without restriction, while adequately capitalized

institutions may accept, renew or rollover such deposits with a waiver from the FDIC (subject to certain restrictions on payment of rates). Undercapitalized institutions may not accept, renew or rollover such deposits.

Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with: (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured institution in danger of default. “Default” is defined generally as the appointment of a conservator or receiver, and “in danger of Default” is defined generally as the existence of certain conditions indicating that, in the opinion of the appropriate banking agency, a “default” is likely to occur in the absence of regulatory assistance.

In addition to the forgoing, federal regulators have adopted regulations and examination procedures promoting the safety and soundness of individual institutions by specifically addressing, among other things: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets to capital; (vii) minimum earnings; and (viii) compensation and benefits standards for management officials. Federal Reserve Board’s regulations, for example, generally require a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution.

Dividends paid by the Bank have been the Company’s primary source of operating funds and are expected to be for the foreseeable future. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under OCC regulations, the Bank may not pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceed the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. As of December 31, 2008, approximately $7.2 million was available for the payment of dividends without prior OCC approval. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. As indicated below, the Bank is currently in compliance with these requirements.

Because the Company is a legal entity separate and distinct from the Bank, the Company’s right to participate in the distribution of assets of the Bank in the event of the Bank’s liquidation or reorganization would be subject to the prior claims of the Bank’s creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of unsecured, non-deposit creditors, including a parent bank holding company (such as the Company) or any shareholder or creditor thereof.

The FRB, the OCC and other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, to impose substantial fines and other civil and criminal penalties, and to appoint a conservator or receiver for the assets of a regulated entity. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or its subsidiaries, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potential civil monetary penalties.

Capital Adequacy

The FRB, the FDIC and the OCC have adopted risk-based capital adequacy guidelines for bank holding companies and banks under their supervision. Under these guidelines, the so-called “Tier 1 capital” and “Total capital” as a percentage of risk-weighted assets and certain off-balance sheet instruments must be at least 4% and 8%, respectively.

The FRB, the FDIC and the OCC have also imposed a leverage standard to supplement their risk-based ratios. This leverage standard focuses on a banking institution’s ratio of Tier 1 capital to average total assets, adjusted for goodwill and certain other items. Under these guidelines, banking institutions that meet certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that have received the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average assets of at least 3%.

Institutions not meeting these criteria, as well as institutions with supervisory, financial or operational weaknesses, along with those experiencing or anticipating significant growth, are expected to maintain a Tier 1 capital to total adjusted average assets ratio equal to at least 4%. As reflected in the following table, the risk-based capital ratios and leverage

ratios of the Company and the Bank as of December 31, 2008 and 2007 exceeded the required capital ratios for classification as “well capitalized,” the highest classification under the regulatory capital guidelines.

Capital Components and Ratios at December 31,
(dollars in thousands)

		2008								2007
		Company				Bank				Company				Bank
Capital components
Tier 1 capital		$	44,829			$	43,436			$	44,224			$	39,103
Total risk-based capital			50,139				48,726				48,453				43,289
Risk-weighted assets and off-balance sheet instruments			424,014				422,425				338,016				334,494
Risk-based capital ratio
Tier 1 capital			10.6	%			10.3	%			13.1	%			11.7	%
Total risk-based capital			11.8	%			11.5	%			14.3	%			12.9	%
Leverage ratio			9.0	%			8.8	%			10.0	%			9.0	%

The federal banking agencies, including the FRB and the OCC, maintain risk-based capital standards in order to ensure that those standards take adequate account of interest rate risk, concentration of credit risk, the risk of non-traditional activities and equity investments in non-financial companies, as well as reflect the actual performance and expected risk of loss on certain multifamily housing loans. Bank regulators periodically propose amendments to the risk-based capital guidelines and related regulatory framework, and consider changes to the risk-based capital standards that could significantly increase the amount of capital needed to meet the requirements for the capital tiers described below. While the Company’s management studies such proposals, the timing of adoption, ultimate form and effect of any such proposed amendments on the Company’s capital requirements and operations cannot be predicted.

The federal banking agencies are required to take “prompt corrective action” in respect of depository institutions and their bank holding companies that do not meet minimum capital requirements. The Federal Deposit Insurance Act established five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier, or that of its bank holding company, depends upon where its capital levels are in relation to various relevant capital measures, including a risk-based capital measure and a leverage ratio capital measure, and certain other factors.

Under the implementing regulations adopted by the federal banking agencies, a bank holding company or bank is considered “well capitalized” if it has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6% or greater; and (iii) a leverage ratio of 5% or greater; and is not subject to any order or written directive to meet and maintain a specific capital level for a capital measure. An “adequately capitalized” bank holding company or bank is defined as one that has: (i) a total risk-based capital ratio of 8% or greater; (ii) a Tier 1 risk-based capital ratio of 4% or greater; and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of (1)). A bank holding company or bank is considered (A) “undercapitalized” if it has: (i) a total risk-based capital ratio of less than 8%; (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of (1)); (B) “significantly undercapitalized” if it has: (i) a total risk-based capital ratio of less than 6%; or (ii) a Tier 1 risk-based capital ratio of less than 3%; or (iii) a leverage ratio of less than 3%; and (C) “critically undercapitalized” if it has a ratio of tangible equity to total assets equal to or less than 2%. The FRB may reclassify a “well capitalized” bank holding company or bank as “adequately capitalized” or subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower capital category if it determines that the bank holding company or bank is in an unsafe or unsound condition or deems the bank holding company or bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency. As of December 31, 2008, the Company and the Bank met the definition of “well capitalized” institutions.

“Undercapitalized” depository institutions, among other things, are subject to growth limitations; are prohibited, with certain exceptions, from making capital distributions; are limited in their ability to obtain funding from a Federal Reserve Bank; and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan and provide appropriate assurances of performance. If a depository institution fails to submit an acceptable plan, including if the holding company refuses or is unable to make the guarantee described in the previous sentence, it is treated as if it is “significantly undercapitalized.” Failure to submit or implement an acceptable capital plan also is

grounds for the appointment of a conservator or a receiver. “Significantly undercapitalized” depository institutions may be subject to a number of additional requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Moreover, the parent holding company of a “significantly undercapitalized” depository institution may be ordered to divest itself of the institution or of non-bank subsidiaries of the holding company. “Critically undercapitalized” institutions, among other things, are prohibited from making any payments of principal and interest on subordinated debt, and are subject to the appointment of a receiver or conservator.

Each federal banking agency prescribes standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares and other standards as they deem appropriate. The FRB and the OCC have adopted such standards.

Financial Services Modernization and Other Recent Legislation

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) facilitates the interstate expansion and consolidation of banking organizations by permitting bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home states, regardless of whether such acquisitions are authorized under the law of the host state. The Riegle-Neal Act also permits interstate mergers of banks, with some limitations, and the establishment of new branches on an interstate basis, provided that such actions are authorized by the law of the host state.

The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) permits banks, securities firms and insurance companies to affiliate under a common holding company structure. In addition to allowing new forms of financial services combinations, the GLB Act clarifies how financial services conglomerates will be regulated by the different federal and state regulators. The GLB Act amended the BHCA and expanded the permissible activities of certain qualifying bank holding companies, known as financial holding companies. In addition to engaging in banking and activities closely related to banking, as determined by the FRB by regulation or order, financial holding companies may engage in activities that are financial in nature or incidental to financial activities that are complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Under the GLB Act, all financial institutions, including the Company and the Bank, are required to develop privacy policies, restrict the sharing of non-public customer data with non-affiliated parties at the customer’s request, and establish procedures and practices to protect customer data from unauthorized access.

USA Patriot Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) imposes additional obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to prevent, detect and report instances of money laundering and the financing of terrorism. In addition, provisions of the Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions. The Company and its impacted subsidiaries have approved and are implementing policies and procedures that the Company believes are compliant with the Patriot Act.

Sarbanes-Oxley Act of 2002

Since the enactment of the Sarbanes-Oxley Act of 2002 and the SEC’s implementing regulations of the same (collectively, the “Sarbanes-Oxley Act”), companies that have securities registered under the Exchange Act, including the Company, are subject to enhanced and more transparent corporate governance standards, disclosure requirements and accounting and financial reporting requirements. The Sarbanes-Oxley Act, among other things, (i) requires: the principal executive and principal financial officers of a public company to establish and maintain disclosure controls and procedures and internal control over financial reporting for the company, and to evaluate the effectiveness of these controls and procedures and certify and report on their findings in the company’s periodic reports; a public company to establish and maintain audit committees, comprised solely of independent directors, which committee must be empowered to, among other things, engage, supervise and discharge the company’s auditors; that a public company’s financial statements be certified by the principal executive and principal financial officers of such company; increased and quicker public disclosure — real time — of obligations of the company and its directors and officers, including disclosures of off-balance sheet transactions and accelerated reporting of transactions in company stock; (ii) prohibits personal loans to company directors and officers, except certain loans made by insured financial institutions on non-

preferential terms and in compliance with other bank regulatory requirements; and (iii) creates or provides for various increased civil and criminal penalties for violations of the securities laws.

Monetary Policy and Economic Control

The commercial banking business is affected not only by general economic conditions, but also by the monetary policies of the FRB. Changes in the discount rate on member bank borrowing, availability of borrowing at the “discount window,” open market operations, the imposition of changes in reserve requirements against member banks’ deposits and assets of foreign branches and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the FRB. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The monetary policies of these agencies are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the United States Government. Future monetary policies and the effect of such policies on the future business and earnings of the Company cannot be predicted.

Emergency Economic Stabilization Act of 2008

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

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 EESA, the U.S. Treasury has 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 U.S. Treasury has purchased 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 has been made available to U.S. financial institutions through the purchase 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 also receives warrants to purchase common stock with an aggregate market price equal to 15% of the amount invested in preferred stock. Participating institutions are 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.

Management evaluated the program to determine whether participation would be advantageous for the Company and its common shareholders. Although both the Company and the Bank meet all applicable regulatory capital requirements and remain well capitalized, on December 17, 2008, the Company announced that the Company had elected not to participate in the program by a unanimous vote of the Board of Directors. Factors driving this decision included the lack of exposure to the troubled assets for which the program was originally designed, including subprime mortgages and mortgage-backed securities tied to subprime mortgages, dividend restrictions, uncertainty around the management and changing parameters of TARP, and the difficulty in providing adequate return to shareholders with the new capital as the Bank was already experiencing high levels of lending activity without the capital from TARP.

The actions described above, together with additional actions announced by the U.S. 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 U.S. 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 affect the U.S. banking industry for the foreseeable future.

Consumer Laws and Regulations

In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include, but are not limited to, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, Federal Financial Privacy Laws, Interagency Guidelines Establishing

Information Security Standards, the Right to Financial Privacy Act, and the Fair and Accurate Credit Transactions Reporting Act. These laws and regulations regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.

SUBSIDIARIES OF THE COMPANY

Evans National Financial Services, Inc. ENFS, a wholly-owned subsidiary of the Company, is a holding company for the financial services business of the Company, including TEA.

The Evans Agency, Inc. TEA, a retail property and casualty insurance agency, is a wholly-owned subsidiary of ENFS. TEA is headquartered in Angola, New York, with offices located throughout Western New York. TEA is a full-service insurance agency offering personal, commercial and financial services products. It also has a small consulting department. For the year ended December 31, 2008, TEA had a premium volume of approximately $43.5 million and commission revenue of $6.9 million.

TEA’s primary market area is Erie, Chautauqua, Cattaraugus and Niagara counties. All lines of personal insurance are provided, including automobile, homeowner’s, boat, recreational vehicle, landlord and umbrella coverages. Commercial insurance products are also provided, consisting of property, liability, automobile, inland marine, workers compensation, bonds, crop and umbrella insurance. TEA also provides the following financial services products: life and disability insurance, Medicare supplements, long term care, annuities, mutual funds, retirement programs and New York State Disability.

TEA has a small consulting division which works almost exclusively with school districts. The majority of the work is done in preparing specifications for bidding and reviewing existing insurance programs. The majority of the consulting accounts are located in central and eastern New York.

In the personal insurance area, the majority of TEA’s competition comes from direct writers, as well as some small local agencies located in the same towns and villages in which TEA has offices. In the commercial business segment, the majority of the competition comes from larger agencies located in and around Buffalo, New York. By offering the large number of carriers which it has available to its customers, TEA has attempted to remain competitive in all aspects of its business.

TEA is regulated by the New York State Insurance Department. It meets and maintains all licensing and continuing education requirements required by the State of New York.

Frontier Claims Services, Inc. FCS, a wholly-owned subsidiary of TEA, provides insurance adjusting services for insurance companies. FCS is located in Angola, New York.

ENB Associates Inc. ENBA, a wholly-owned subsidiary of the Bank, provides non-deposit investment products, such as mutual funds and annuities, to Bank customers at Bank branch locations.

Evans Bank, N.A. The Bank is a wholly-owned subsidiary of the Company. The Bank’s business is described above.

Evans National Leasing, Inc. ENL, a wholly-owned subsidiary of the Bank, provides direct financing leasing of commercial small-ticket general business equipment to companies located throughout the contiguous 48 United States.

Evans National Holding Corp. ENHC, a wholly-owned subsidiary of the Bank, holds certain real estate loans and provides management services. ENHC is operated as a Real Estate Investment Trust (“REIT”), which provides additional flexibility and planning opportunities for the business of the Bank.

Suchak Data Systems. SDS serves the data processing needs of financial institutions with customized solutions and consultative services. SDS hosts the Bank’s core and primary banking systems along with providing product development and programming services. SDS’s products and services for its other customers include core and online banking systems, check imaging, item processing, and ATM services.

ENB Employers Insurance Trust. ENB Employers Insurance Trust is a Delaware trust company formed for the sole purpose of holding life insurance policies under the Bank’s bank-owned life insurance program.

Evans Capital Trust I. Evans Capital Trust I, a wholly-owned subsidiary of the Company, was organized solely to issue and sell certain securities representing undivided beneficial interests of the Trust and investing the proceeds thereof in certain debentures of the Company.

EMPLOYEES

As of December 31, 2008, the Company had no direct employees. As of December 31, 2008, the following table summarizes the employment rosters of the Company’s subsidiaries:

		Full Time				Part Time
Bank			132				11
ENL			12				—
SDS			9				1
TEA			55				5
FCS			4				—
			212				17