EVANS BANCORP INC - Quarter Report: 2009 June (Form 10-Q)

FORM 10-Q

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For quarterly period ended June 30, 2009

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 (I.R.S. Employer

incorporation or organization) Identification No.)

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

(Address of principal executive offices) (Zip Code)

(716) 926-2000

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if smaller reporting company) Smaller reporting company 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 2,795,198 shares as of August 1, 2009

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

PAGE

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets — June 30, 2009 and December 31, 2008
1

Unaudited Consolidated Statements of Operations — Three months ended June 30, 2009 and 2008
2

Unaudited Consolidated Statements of Operations-Six months Ended June 30, 2009 and 2008
3

Unaudited Consolidated Statements of Stockholders’ Equity — Six months ended June 30, 2009 and 2008
4

Unaudited Consolidated Statements of Cash Flows — Six months ended June 30, 2009 and 2008
5

Notes to Unaudited Consolidated Condensed Financial Statements
7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
21

Item 3. Quantitative and Qualitative Disclosures About Market Risk
33

Item 4. Controls and Procedures
34

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders
35

Item 6. Exhibits
36

SIGNATURES
37

EX-31.1

EX-31.2

EX-32.1

EX-32.2

Table of Contents

1

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2009 AND DECEMBER 31, 2008
(in thousands, except share and per share amounts)

June 30, December 31,

2009 2008

ASSETS

Cash and due from banks
$ 11,710 $ 9,036

Interest-bearing deposits at banks
695 115

Securities:

Available for sale, at fair value
75,725 71,134

Federal Home Loan Bank stock, at fair value
2,071 2,670

Held to maturity, at amortized cost
2,037 1,951

Loans and leases, net of allowance for loan and lease losses of $5,579 in 2009 and $6,087 in 2008
378,258 401,626

Leases held for sale
40,920 —

Properties and equipment, net
9,469 9,885

Goodwill
8,101 10,046

Intangible assets
2,484 2,900

Bank-owned life insurance
11,698 11,685

Other assets
9,655 7,926

TOTAL ASSETS
$ 552,823 $ 528,974

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES

Deposits:

Demand
$ 87,842 $ 75,959

NOW
11,939 10,775

Regular savings
191,645 154,283

Muni-vest
31,592 26,477

Time
128,235 136,459

Total deposits
451,253 403,953

Securities sold under agreement to repurchase
4,990 6,307

Other short-term borrowings
6,174 30,695

Other liabilities
9,917 12,590

Junior subordinated debentures
11,330 11,330

Long-term borrowings
27,000 18,180

Total liabilities
510,664 483,055

CONTINGENT LIABILITIES AND COMMITMENTS

STOCKHOLDERS’ EQUITY:

Common stock, $.50 par value; 10,000,000 shares authorized; 2,795,198 and 2,771,788 shares issued and outstanding, respectively
1,398 1,386

Capital surplus
27,003 26,696

Retained earnings
14,139 18,374

Accumulated other comprehensive loss, net of tax
(381 ) (537 )

Less: Treasury stock, at cost (0 shares)
— —

Total stockholders’ equity
42,159 45,919

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 552,823 $ 528,974

See Notes to Unaudited Consolidated Financial Statements

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2
PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2009 AND 2008
(in thousands, except share and per share amounts)

Three Months Ended June 30,

2009 2008

Interest Income

Loans and leases
$ 5,147 $ 4,722

Securities:

Taxable
388 323

Non-taxable
447 392

Total interest income
5,982 5,437

Interest Expense

Deposits
1,140 1,151

Other borrowings
297 453

Total interest expense
1,437 1,604

Net Interest Income
4,545 3,833

Provision for Loan and Lease Losses
1,672 231

Net Interest Income After Provision for Loan and Lease Losses
2,873 3,602

Non-Interest Income

Bank charges
563 540

Insurance service and fees
1,623 1,617

Net gain on sales and calls of securities
6 7

Premium on loans sold
25 4

Other
798 488

Total non-interest income
3,015 2,656

Non-Interest Expense

Salaries and employee benefits
2,957 2,698

Occupancy
656 576

Professional services
327 233

Technology and communications
225 288

Amortization of intangibles
223 166

FDIC Insurance
320 30

Other
847 802

Total non-interest expense
5,555 4,793

Income from Continuing Operations Before Income Taxes
333 1,465

Income Taxes
75 360

Income from Continuing Operations
$ 258 $ 1,105

Discontinued Operations:

(Loss) Income from discontinued operations before income taxes
(3,331 ) 460

Income tax (benefit) provision
(1,220 ) 180

(Loss) Income from discontinued operations
(2,111 ) 280

Net (Loss) Income
$ (1,853 ) $ 1,385

Earnings (Loss) per common share:

Basic:

Income from continuing operations
$ 0.09 $ 0.40

(Loss) Income from discontinued operations
$ (0.76 ) $ 0.10

$ (0.67 ) $ 0.50

Diluted:

Income from continuing operations
$ 0.09 $ 0.40

(Loss) Income from discontinued operations
$ (0.76 ) $ 0.10

$ (0.67 ) $ 0.50

Cash dividends per basic common share
$ 0.00 $ 0.00

Weighted average number of basic common shares
2,785,803 2,748,771

Weighted average number of diluted common shares
2,785,803 2,750,563

See Notes to Unaudited Consolidated Financial Statements

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3
PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(in thousands, except share and per share amounts)

Six Months Ended June 30,

2009 2008

Interest Income

Loans and leases
$ 10,128 $ 9,319

Securities:

Taxable
724 648

Non-taxable
875 791

Total interest income
11,727 10,758

Interest Expense

Deposits
2,270 2,360

Other borrowings
613 1,036

Total interest expense
2,883 3,396

Net Interest Income
8,844 7,362

Provision for Loan and Lease Losses
2,127 371

Net Interest Income After Provision for Loan and Lease Losses
6,717 6,991

Non-Interest Income

Bank charges
1,123 1,072

Insurance service and fees
3,948 3,751

Net gain on sales and calls of securities
6 7

Premium on loans sold
54 5

Other
1,640 1,209

Total non-interest income
6,771 6,044

Non-Interest Expense

Salaries and employee benefits
6,115 5,426

Occupancy
1,373 1,200

Professional services
621 482

Technology and communications
397 562

Amortization of intangibles
447 328

FDIC Insurance
383 40

Other
1,601 1,595

Total non-interest expense
10,937 9,633

Income from Continuing Operations Before Income Taxes
2,551 3,402

Income Taxes
595 892

Income from Continuing Operations
$ 1,956 $ 2,510

Discontinued Operations:

(Loss) Income from discontinued operations before income taxes
(7,437 ) 766

Income tax (benefit) provision
(2,381 ) 298

(Loss) Income from discontinued operations
(5,056 ) 468

Net (Loss) Income
$ (3,100 ) $ 2,978

Earnings (Loss) per common share:

Basic:

Income from continuing operations
$ 0.70 $ 0.91

(Loss) Income from discontinued operations
$ (1.82 ) $ 0.17

$ (1.12 ) $ 1.08

Diluted:

Income from continuing operations
$ 0.70 $ 0.91

(Loss) Income from discontinued operations
$ (1.82 ) $ 0.17

$ (1.12 ) $ 1.08

Cash dividends per common share
$ 0.41 $ 0.37

Weighted average number of basic common shares
2,778,271 2,748,643

Weighted average number of diluted common shares
2,778,271 2,749,645

See Notes to Unaudited Consolidated Financial Statements

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4
PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(in thousands, except share and per share amounts)

Accumulated

Other

Common Capital Retained Comprehensive Treasury

Stock Surplus Earnings Income (Loss) Stock Total

Balance, January 1, 2008
$ 1,378 $ 26,380 $ 15,612 $ 16 $ (83 ) $ 43,303

Comprehensive income:

Net Income
2,978 2,978

Unrealized loss on available-for-sale securities, net of tax effect of $65
(101 ) (101 )

Amortization of prior service cost and net loss, net of tax of ($24)
37 37

Pension curtailment adjustment net of tax effect of $7
9 9

Total comprehensive income
2,923

Cash dividends ($0.37 per common share)
(1,017 ) (1,017 )

Stock options expense
74 74

Reissued 7,733 shares treasury stock under dividend reinvestment plan
(12 ) 130 118

Issued 2,969 shares under dividend reinvestment plan
2 44 46

Reissued 6,575 shares treasury stock under employment stock purchase plan
(27 ) 112 85

Purchased 13,701 shares for treasury
(234 ) (234 )

Balance, June 30, 2008
$ 1,380 $ 26,459 $ 17,573 $ (39 ) $ (75 ) $ 45,298

Balance, January 1, 2009
$ 1,386 $ 26,696 $ 18,374 $ (537 ) $ — $ 45,919

Comprehensive loss:

Net Loss
(3,100 ) (3,100 )

Unrealized gain on available-for-sale, net of reclassification of gain of $4 (after tax) securities, net of tax effect of ($76)
118 118

Amortization of prior service cost and net loss net of tax effect of ($25)
38 38

Total comprehensive loss
(2,944 )

Cash dividends ($0.41 per common share)
(1,135 ) (1,135 )

Stock options expense
61 61

Reissued 2,000 shares treasury stock under dividend reinvestment plan
(4 ) 27 23

Issued 13,911 shares under dividend reinvestment plan
7 152 159

Issued 9,499 shares under employee stock purchase plan
5 98 103

Purchased 2,000 shares for treasury
(27 ) (27 )

Balance, June 30, 2009
$ 1,398 $ 27,003 $ 14,139 $ (381 ) $ — $ 42,159

See Notes to Unaudited Consolidated Financial Statements

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5
PART I— FINANCIAL INFORMATION
ITEM I—FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(in thousands)

Six Months Ended
June 30,

2009 2008

OPERATING ACTIVITIES:

Interest received
$ 14,545 $ 14,020

Fees received
6,913 5,677

Interest paid
(4,519 ) (4,963 )

Cash paid to employees and suppliers
(9,931 ) (8,530 )

Income taxes paid
(707 ) (2,344 )

Proceeds from sale of loans held for resale
8,766 1,391

Originations of loans held for resale
(8,669 ) (1,336 )

Net cash provided by operating activities
6,398 3,915

INVESTING ACTIVITIES:

Available for sales securities:

Purchases
(61,338 ) (49,005 )

Proceeds from maturities
57,749 54,149

Held to maturity securities:

Purchases
(233 ) (41 )

Proceeds from maturities
147 229

Life Insurance proceeds
341 —

Additions to properties and equipment
(201 ) (536 )

Increase in loans, net of repayments
(28,976 ) (43,088 )

Cash paid on earn-out agreements
(40 ) (40 )

Net cash used in investing activities
(32,551 ) (38,332 )

FINANCING ACTIVITIES:

Proceeds from borrowings
9,000 12,517

Repayments of borrowings
(26,016 ) (18,649 )

Increase in deposits
47,300 45,631

Dividends paid
(1,135 ) (1,017 )

Purchase of treasury stock
(27 ) (234 )

Issuance of common stock
262 46

Re-issuance of treasury stock
23 203

Net cash provided by financing activities
29,407 38,497

Net increase in cash and equivalents
3,254 4,080

CASH AND CASH EQUIVALENTS:

Beginning of period
9,151 12,604

End of period
$ 12,405 $ 16,684

(continued)

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(in thousands)

Six Months Ended
June 30,

2009 2008

RECONCILIATION OF NET (LOSS) INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Net (loss) income
$ (3,100 ) $ 2,978

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization
929 813

Goodwill impairment
1,984 —

Deferred tax (expense) benefit
(1,070 ) 66

Provision for loan and lease losses
8,949 1,232

Net gain on sales and calls of securities
(6 ) (7 )

Premium on loans sold
(54 ) (5 )

Stock options expense
61 74

Proceeds from sale of loans held for resale
8,766 1,391

Originations of loans held for resale
(8,669 ) (1,336 )

Changes in assets and liabilities affecting cash flow:

Other assets
(2,745 ) (2,514 )

Other liabilities
1,353 1,223

NET CASH PROVIDED BY OPERATING ACTIVITIES
$ 6,398 $ 3,915

See Notes to Unaudited Consolidated Financial Statements

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7
PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”), Evans National Holding Corp. (“ENHC”) and Suchak Data Systems, Inc. (“SDS”); and (ii) Evans National Financial Services, Inc. (“ENFS”), and ENFS’s subsidiary The Evans Agency, Inc. (“TEA”) and TEA’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENBA”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles and with general practice within the industries in which it operates. 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.

The results of operations for the three and six month periods ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

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2. SECURITIES

The amortized cost of securities and their approximate fair value at June 30, 2009 and December 31, 2008 were as follows:

June 30, 2009

(in thousands)

Amortized Unrealized Fair

Cost Gains Losses Value

Available for Sale:

Debt securities:

U.S. government agencies
$ 20,522 $ 339 $ (87 ) $ 20,774

States and political subdivisions
36,980 1,031 (82 ) 37,929

Total debt securities
$ 57,502 $ 1,370 $ (169 ) $ 58,703

Mortgage-backed securities:

FNMA
$ 10,422 $ 189 $ (41 ) $ 10,570

FHLMC
4,420 130 (1 ) 4,549

CMO’S
1,135 — (136 ) 999

Total mortgage-backed securities
$ 15,977 $ 319 $ (178 ) $ 16,118

FRB Stock
904 904

FHLB Stock
2,071 — — 2,071

Total
$ 76,454 $ 1,689 $ (347 ) $ 77,796

Held to Maturity:

Debt securities

U.S. government agencies
35 — — 35

States and political subdivisions
2,002 — — 2,002

Total
$ 2,037 $ — $ — $ 2,037

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December 31, 2008

(in thousands)

Unrealized

Amortized Fair

Cost Gains Losses Value

Available for Sale:

Debt securities:

U.S. government agencies
$ 17,790 $ 112 $ — $ 17,902

States and political subdivisions
34,490 953 (7 ) 35,436

Total debt securities
$ 52,280 $ 1,065 $ (7 ) $ 53,338

Mortgage-backed securities:

FNMA
$ 8,060 $ 126 $ (21 ) $ 8,165

FHLMC
7,468 130 (11 ) 7,587

CMO’S
1,283 — (134 ) 1,149

Total mortgage-backed securities
$ 16,811 $ 256 $ (166 ) $ 16,901

FRB Stock
895 895

FHLB Stock
2,670 — — 2,670

Total
$ 72,656 $ 1,321 $ (173 ) $ 73,804

Held to Maturity:

Debt securities

U.S. government agencies
35 — — 35

States and political subdivisions
1,916 — — 1,916

Total
$ 1,951 $ — $ — $ 1,951

Available for sale securities with a total fair value of $68.5 million at June 30, 2009 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

The Company uses the Federal Home Loan Bank of New York (“FHLBNY”) as its primary source of overnight funds and also has several long-term advances with FHLBNY. At June 30, 2009, the Company had a total of $32.9 million in borrowed funds with FHLBNY. The Company has placed sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meet FHLB collateral requirements. As a member of the Federal Home Loan Bank System, the Bank is required to hold stock in FHLBNY. The Bank held $2.1 million in FHLBNY stock as of June 30, 2009.

There are 12 branches of the FHLB, including New York. Several members have warned that they have either breached risk-based capital requirements or that they are close to breaching those requirements. To conserve capital, some FHLB branches are suspending dividends, cutting dividend payments, and not buying back excess FHLB stock that members hold. To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment.

Systemic weakness in the FHLB could result in impairment of the Company’s FHLB stock. However, FHLBNY currently meets all of its capital requirements, continues to redeem excess stock for members, and has the expressed ability and intent to continue paying dividends. The most recent dividend was distributed on May 26, 2009 at 5.6% of capital stock. It has maintained a AAA credit rating with a stable outlook. FHLBNY earned $148.1 million in the first quarter, an increase from $100.2 million in the previous year’s first quarter. Due to the relatively strong financial health of FHLBNY, there is no impairment in the Bank’s FHLB stock as of June 30, 2009.

The scheduled maturities of debt and mortgage-backed securities at June 30, 2009 are summarized below. All maturity amounts are contractual maturities. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.

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June 30, 2009

Available for Held to Maturity

Sale Securities Securities

Amortized Fair Amortized Fair

Cost Value Cost Value

(in thousands) (in thousands)

Due in one year or less
$ 4,020 $ 4,114 $ 240 $ 240

Due after year one through five years
20,219 20,788 633 633

Due after fives years through ten years
22,618 23,097 475 475

Due after ten years
26,622 26,822 689 689

Total
$ 73,479 $ 74,821 $ 2,037 $ 2,037

Information regarding unrealized losses within the Company’s available for sale securities at June 30, 2009 and December 31, 2008, is summarized below. The securities are primarily U.S. government-guaranteed agency securities or municipal securities. All unrealized losses are considered temporary and related to market interest rate fluctuations.

June 30, 2009

(in thousands)

Less than 12 months 12 months or longer Total

Fair Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses

Available for Sale:

Debt securities:

U.S. government agencies
$ 10,428 $ (87 ) $ — $ — $ 10,428 $ (87 )

States and political subdivisions
4,865 (82 ) — — 4,865 (82 )

Total debt securities
$ 15,293 $ (169 ) $ — $ — $ 15,293 $ (169 )

Mortgage-backed securities:

FNMA
$ 3,439 $ (40 ) $ 145 $ (1 ) $ 3,584 $ (41 )

FHLMC
— — 124 (1 ) 124 (1 )

CMO’S
— — 999 (136 ) 999 (136 )

Total mortgage-backed securities
$ 3,439 $ (40 ) $ 1,268 $ (138 ) $ 4,707 $ (178 )

Total temporarily impaired securities
$ 18,732 $ (209 ) $ 1,268 $ (138 ) $ 20,000 $ (347 )

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December 31, 2008

(in thousands)

Less than 12 months 12 months or longer Total

Fair Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses

Available for Sale:

Debt securities:

U.S. government agencies
$ — $ — $ — $ — $ — $ —

States and political subdivisions
1,966 (7 ) — — 1,966 (7 )

Total debt securities
$ 1,966 $ (7 ) $ — $ — $ 1,966 $ (7 )

Mortgage-backed securities:

FNMA
$ 638 $ (8 ) $ 1,094 $ (13 ) $ 1,732 $ (21 )

FHLMC
— — 1,209 (11 ) 1,209 (11 )

CMO’S
— — 1,142 (134 ) 1,142 (134 )

Total mortgage-backed securities
$ 638 $ (8 ) $ 3,445 $ (158 ) $ 4,083 $ (166 )

Total temporarily impaired securities
$ 2,604 $ (15 ) $ 3,445 $ (158 ) $ 6,049 $ (173 )

Management has assessed the securities available for sale in an unrealized loss position at June 30, 2009 and December 31, 2008 and determined the decline in fair value below amortized cost to be temporary. In making this determination, management considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer (primarily government or government-sponsored enterprises) and the Company’s ability and intent to hold these securities until their fair value recovers to their amortized cost. Management believes the decline in fair value is primarily related to market interest rate fluctuations and not to the credit deterioration of the individual issuers.

While the Company has not recorded any other-than-temporary impairment charges in 2008 or 2009, gross unrealized losses amount to only 0.4% of the total fair value of the securities portfolio at June 30, 2009, and the gross unrealized position has increased only $174 thousand from December 31, 2008 to June 30, 2009, it remains possible that the poor economy could negatively impact the securities portfolio in the future. The credit worthiness of the Company’s portfolio is largely reliant on the ability of U.S. government sponsored agencies such as FHLB, Federal National Mortgage Association (“FNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations. In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio. The relatively stable past performance is not a guarantee for similar performance of the Company’s securities portfolio going forward.

3. FAIR VALUE MEASUREMENTS

Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, defines fair value, provides a framework for determining fair value and requires enhanced disclosure for those assets and liabilities that are carried on the balance sheet at fair value. Effective January 1, 2009, the Company adopted the non-financial assets and liabilities provision of SFAS No. 157, which requires measurement at fair value of certain non-financial assets and liabilities which are re-measured at fair value on a nonrecurring basis.

There are three levels of determining fair value.

Level 1 Inputs — uses unadjusted quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2 Inputs — uses observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 Inputs — uses unobservable inputs that are based on the entity’s estimates about the assumptions that market participants would be expected to use and which cannot be corroborated by market data.

Observable market data should be used when available.

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At June 30, 2009 and December 31, 2008, the estimated fair values of the Company’s financial instruments were as follows:

June 30, 2009 December 31, 2008

Carrying Fair Carrying Fair

Amount Value Amount Value

(in thousands) (in thousands)

Financial assets:

Cash and cash equivalents
$ 12,405 $ 12,405 $ 9,151 $ 9,151

Securities
$ 79,833 $ 79,833 $ 75,755 $ 75,755

Loans and leases, net
$ 378,258 $ 390,374 $ 401,626 $ 414,381

Leases held for sale
$ 40,920 $ 40,920 $ — $ —

Financial liabilities:

Deposits
$ 451,253 $ 454,179 $ 403,953 $ 406,482

Other borrowed funds and securities sold under agreements to repurchase
$ 38,164 $ 38,294 $ 55,182 $ 55,449

Junior subordinated debentures
$ 11,330 $ 11,330 $ 11,330 $ 11,330

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Cash Equivalents. For these short-term instruments, the carrying amount is a reasonable estimate of fair value. “Cash and Cash Equivalents” includes interest-bearing deposits at other banks.

Securities. Fair values for securities are determined using independent pricing services and market-participating brokers. The pricing service and brokers use a variety of techniques to arrive at fair value including market maker bids, quotes, and pricing models. Inputs to their pricing models include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Management obtains a single market quote or price estimate for each security. These quoted prices reflect current information based on orderly transactions. These are considered Level 2 inputs under SFAS 157.

The Company holds certain municipal bonds as held-to-maturity. These bonds are generally small in dollar amount and are issued only by certain local municipalities within the Company’s market area. The original terms are negotiated directly and on an individual basis. These bonds are not traded on the open market and management intends to hold the bonds to maturity. The fair value is calculated by discounting the cash flows at current interest rates using market observable inputs as no market quotes are available.

Loans Receivable. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, net of the appropriate portion of the allowance for loan losses. For variable rate loans, the carrying amount is a reasonable estimate of fair value.

Leases Held For Sale. The Company is currently initiating a plan to sell its lease portfolio in its entirety. The fair value of leases held for sale is determined by quoted market prices from identified potential buyers and, as such, have been classified as a Level 2 valuation.

Deposits. The fair value of demand deposits, NOW accounts, muni-vest accounts and regular savings accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Other Borrowed Funds and Securities Sold Under Agreement to Repurchase. The fair value of the short-term portion of other borrowed funds approximates its carrying value. The fair value of the long-term portion of other

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borrowed funds is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior Subordinated Debentures. The carrying amount of Junior Subordinated Debentures is a reasonable estimate of fair value due to the fact that they bear a floating interest rate that adjusts on a quarterly basis.

Commitments to extend credit and standby letters of credit. As described in Note 8 “Contingent Liabilities and Commitments” to these Unaudited Consolidated Financial Statements, the Company was a party to financial instruments with off-balance sheet risk at June 30, 2009 and December 31, 2008. Such financial instruments consist of commitments to extend permanent financing and letters of credit. If the options are exercised by the prospective borrowers, these financial instruments will become interest-earning assets of the Company. If the options expire, the Company retains any fees paid by the counterparty in order to obtain the commitment or guarantee. The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The fair value of these off-balance sheet items at June 30, 2009 and December 31, 2008 approximates the recorded amounts of the related fees, which are not considered material.

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

The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments disclosed in the previous table which are measured at fair value on both a recurring and non-recurring basis at June 30, 2009 and December 31, 2008:

Fair Value Measurement

Quoted Prices in

Active Markets Significant Other Significant Other

for Identical Observable Unobservable

Fair Value Assets (Level 1) Inputs (Level 2) Inputs (Level 3)

June 30, 2009

Securities available-for-sale
$ 75,725 $ 0 $ 75,725 $ 0

FHLB stock
$ 2,071 $ 0 $ 2,071

Leases held for sale
$ 40,920 $ 0 $ 40,920 $ 0

Impaired loans
$ 2,204 $ 0 $ 0 $ 2,204

December 31, 2008

Securities available-for-sale
$ 71,134 $ 0 $ 71,134 $ 0

FHLB stock
$ 2,670 $ 2,670

Impaired loans
$ 2,700 $ 0 $ 0 $ 2,700

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). For the Company, these include impaired loans and goodwill and intangible assets. The Company evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Fair value is estimated based on the value of the collateral securing these loans. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans had a carrying value of $2.2 million, with a valuation allowance of $0.5 million, at June 30, 2009, compared to a carrying value for loans and leases of $2.7 million, with a valuation allowance of $0.7 million, at December 31, 2008.

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The Company measures the fair value of its reporting units annually, as of December 31st, using Level 3 inputs, utilizing the market value and income methods to determine if its goodwill and intangible assets are impaired. When using the cash flow models, management considers historical information, the Company’s operating budget for 2009, and the Company’s strategic goals in projecting net income and cash flows for the next five years. However, impairment analysis of the leasing reporting unit was performed at the end of the first quarter of fiscal 2009 due to a material change in circumstances and the decision to exit the national direct financing leasing business. FAS Statement No. 142 requires interim impairment testing when there is a material change in circumstances. The analysis resulted in a $2.0 million goodwill impairment charge pertaining to the leasing reporting unit. After experiencing a net loss in the second quarter of 2009 and in view of the fact that the market price for a share of the Company’s common stock was still below book value per share, management performed another impairment test for the entire Company at June 30, 2009. There were no impairment charges as a result of the test.

4. DISCONTINUED OPERATIONS

The Company elected to exit its national leasing operations in the first quarter of 2009. During the second quarter of 2009, the Company developed a plan of sale for the lease portfolio, which included an active strategy to identify potential buyers. There are no other assets or liabilities held for sale related to the leasing reporting unit. Based on competitive bids the leases were marked to market to $40.9 million and classified as held for sale at June 30, 2009. In accordance with FAS No. 144 “Accounting for the Impairment and Disposal of Long-Lived Assets,” the operations of the leasing reporting unit have been reported as discontinued operations in the accompanying statements of operations for the three and six month periods ended June 30, 2009 and for all prior year periods presented. For the second quarter of 2009, the Company recognized an after-tax loss of $2.1 million from discontinued operations, primarily related to the mark to market adjustment of $6.9 million of leases, of which $3.8 million was previously reserved for in the allowance for loan and lease losses.

The leasing business was formerly included in the Banking segment. The income statements for all periods have been reclassified. The reclassification resulted in a reduction to previously reported levels of Interest Income, Interest Expense on Deposits and Net Interest Income; a reduction in Provision for Loan and Lease Losses; a reduction in Other non-interest income; and a reduction in Non-Interest Expense. The reduction in those line items is equal to the amount attributable to the discontinued operations and is netted together in the “(Loss) Income from discontinued operations” line in the Company’s unaudited consolidated statements of operations.

Interest income attributable to the leasing reporting unit amounted to approximately $1.5 for the second quarter of 2009 compared with $1.7 million in the second quarter of 2008. Additionally, the year to date leasing interest income was $3.2 million and $3.3 million for the six months ended June 30, 2009 and 2008, respectively. The Company allocates interest expense to the leasing reporting unit for the cost to fund the lease portfolio. The interest expense allocated is based on an internally designated rate for the average outstanding lease balance that is required to be funded in any one reporting period. Due to the allocation of interest expense to the discontinued leasing operations, interest expense on deposits was reduced $0.7 million for the three month periods ended June 30, 2009 and 2008 and $1.5 million for the six month periods ended June 30, 2009 and 2008.

5. ALLOWANCE FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses represents the amount charged against the Bank’s earnings to maintain an allowance for probable loan and lease losses based on management’s evaluation of the loan and lease portfolio at the balance sheet date. Factors considered by the Bank’s management in establishing the allowance include: the collectability of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease percentages, input from regulatory agencies, and general economic conditions.

On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectability of the loans and leases in its portfolio by incorporating feedback provided by the Bank’s internal loan and lease staff, an independent internal loan and lease review function and information provided by examinations performed by regulatory agencies.

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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 SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures,” and allocation is made based on this analysis. The general portfolio allocation consists of an assigned reserve percentage based on the historical loss experience and other qualitative factors of the loan or lease category.

The subjective portion of the allowance reflects management’s evaluation of various conditions, and involves a higher degree of uncertainty because this component of the allowance is not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with this component include the following: industry and regional conditions; seasoning of the loan and lease portfolio and changes in the composition of and growth in the loan and lease portfolio; the strength and duration of the business cycle; existing general economic and business conditions in the lending areas; credit quality trends in nonaccruing loans and leases; timing of the identification of downgrades; 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 six month periods ended June 30, 2009 and 2008.

Allowance for loan and lease losses

Six months ended June 30,

2009 2008

(in thousands)

Beginning balance, January 1
$ 6,087 $ 4,555

Charge-offs:

Commercial
(164 ) —

Real estate
(16 ) (1 )

Installment loans
(6 ) (3 )

Overdrafts
(21 ) (26 )

Direct financing leases
(2,597 ) (838 )

Leases held for sale
(6,886 ) —

Total charge-offs
(9,690 ) (868 )

Recoveries:

Commercial
9 18

Real estate
— —

Installment loans
1 2

Overdrafts
12 13

Direct financing leases
211 107

Total recoveries
233 140

Net charge-offs
(9,457 ) (728 )

Provision for loan and lease losses
8,949 1,232

Ending balance, June 30
$ 5,579 $ 5,059

Ratio of net charge-offs to average total loans and leases outstanding (annualized)
4.58 % 0.43 %

Ratio of allowance for loan and lease loss to total loans and leases
1.31 % 1.38 %

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6. PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period. The Company had no potential dilutive securities for the three and six month periods ended June 30, 2009. This compares with 1,792 and 1,002 for the three and six month periods ended June 30, 2008, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three and six months periods ended June 30, 2009, there were approximately 168 thousand and 174 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive. For the three and six months periods ended June 30, 2008, there were approximately 106 thousand and 100 thousand shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.

7. SEGMENT INFORMATION

The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and six month periods ended June 30, 2009 and 2008.

Three Months Ended June 30, 2009

(in thousands)

Insurance Agency

Banking Activities Activities Total

Net interest income (expense)
$ 4,581 $ (36 ) $ 4,545

Provision for loan and lease losses
1,672 — 1,672

Net interest income (expense) after provision for loan and lease losses
2,909 (36 ) 2,873

Non-interest income
1,392 — 1,392

Insurance service and fees
— 1,623 1,623

Non-interest expense
4,223 1,332 5,555

Income from continuing operations before income taxes
78 255 333

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Six Months Ended June 30, 2009

(in thousands)

Insurance Agency

Banking Activities Activities Total

Net interest income (expense)
$ 8,929 $ (85 ) $ 8,844

Provision for loan and lease losses
2,127 — 2,127

Net interest income (expense) after provision for loan and lease losses
6,802 (85 ) 6,717

Non-interest income
2,823 — 2,823

Insurance service and fees
— 3,948 3,948

Non-interest expense
8,248 2,689 10,937

Income from continuing operations before income taxes
1,377 1,174 2,551

Three Months Ended June 30, 2008

(in thousands)

Insurance Agency

Banking Activities Activities Total

Net interest income (expense)
$ 3,901 $ (68 ) $ 3,833

Provision for loan and lease losses
231 — 231

Net interest income (expense) after provision for loan and lease losses
3,670 (68 ) 3,602

Non-interest income
1,039 — 1,039

Insurance service and fees
— 1,617 1,617

Non-interest expense
3,512 1,281 4,793

Income from continuing operations before income taxes
1,197 268 1,465

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Six Months Ended June 30, 2008

(in thousands)

Insurance Agency

Banking Activities Activities Total

Net interest income (expense)
$ 7,521 $ (159 ) $ 7,362

Provision for loan and lease losses
371 — 371

Net interest income (expense) after provision for loan and lease losses
7,150 (159 ) 6,991

Non-interest income
2,293 — 2,293

Insurance service and fees
— 3,751 3,751

Non-interest expense
7,059 2,574 9,633

Income from continuing operations before income taxes
2,384 1,018 3,402

8. CONTINGENT LIABILITIES AND COMMITMENTS

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

June 30, December 31,

2009 2008

(in thousands)

Commitments to extend credit
$ 89,140 $ 87,320

Standby letters of credit
4,062 2,807

Total
$ 93,202 $ 90,127

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

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

The Company is subject to possible litigation proceedings in the normal course of business. As of June 30, 2009, there were no claims pending against the Company that management considered to be material.

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9. NET PERIODIC BENEFIT COSTS

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

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

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

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the six month periods ended June 30, 2009 and 2008.

Six months ended June 30,

(in thousands)

Supplemental Executive

Pension Benefits Retirement Plan

2009 2008 2009 2008

Service cost
$ — $ — $ 30 $ 30

Interest cost
108 118 90 87

Expected return on plan assets
(85 ) (146 ) — —

Amortization of prior service cost
— — 28 28

Amortization of the net loss
28 — 7 9

Net periodic cost (benefit)
$ 51 $ (28 ) $ 155 $ 154

The minimum required contribution for the defined benefit pension plan for 2009 is $0. However, the Bank expects to make a contribution of approximately $140,000 to alleviate the reduction in plan assets over the past year due to the volatile equities market.

10. RECENT ACCOUNTING PRONOUNCEMENTS

In April of 2009, the FASB issued Staff Position No. FAS 107-1, “Interim Disclosures About Fair Value of Financial Instruments.” This position extends the disclosure requirements of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” to interim financial statements of publicly traded companies. Staff Position No. FAS 107-1 is effective for interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company has adopted the standard in the current reporting period and has provided the enhanced disclosure requirements around fair value of financial instruments in Note 3 to these Unaudited Consolidated Financial Statements.

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In April of 2009, the FASB issued Staff Position No. FAS 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This position revised the guidance for determining whether an impairment is other than temporary for debt securities, requires bifurcation of any other than temporary impairment between the amount representing credit loss and the amount related to all other factors and requires additional disclosures on other than temporary impairment of debt and equity securities. Staff Position No. FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company adopted Staff Position No. FAS 115-2 in the current reporting period, but because it has had no previous other-than-temporary impairment charges, there was no impact on the Company’s financial statements.

In April of 2009, the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This position provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, provides guidance on circumstances that may indicate that a transaction is not orderly and requires additional disclosures about fair value measurements in annual and interim reporting periods. As the Company does not have any assets or liabilities that have experienced a significant decrease in activity in relation to normal market activity, Staff Position No. FAS 157-4 did not have an impact on the Company’s financial statements.

In June of 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” The FASB’s Accounting Standards Codification was released on July 1, 2009. The Codification will become the exclusive authoritative reference for nongovernmental U.S. generally accepted accounting principles (“GAAP”) for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The contents of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth in Statement No. 162. The Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The Company will adopt the standard for the interim period ended September 30, 2009. There will be no impact on the Company’s financial statements, but disclosure references will adhere to the Codification.

In June of 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R).” Statement No. 167 amends the guidance in FASB Interpretation 46(R) related to the consolidation of variable interest entities (“VIEs”). It changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. This Statement requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The Statement is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009, and for subsequent interim and annual reporting periods. The Company will adopt the standard on January 1, 2010. As the Company does not have any VIE’s, the adoption of this standard will not have any impact on the Company’s financial statements.

11. SUBSEQUENT EVENTS

Subsequent events per SFAS No. 165, Subsequent Events, represent events or transactions occurring after the balance sheet date but before the financial statements are issued or are available to be issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Financial statements are considered “available to be issued” when they are complete in form and format that complies with GAAP and all approvals necessary for their issuance have been obtained.

Specifically, there are two types of subsequent events:

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• Those comprising events or transactions providing additional evidence about conditions that existed at the balance sheet date, including estimates inherent in the financial statement preparation process (referred to as recognized subsequent events).

• Those comprising events that provide evidence about conditions not existing at the balance sheet date but, rather, that arose after such date (referred to as non-recognized subsequent events).

Subsequent events have been evaluated through August 14, 2009, the date the June 30, 2009 financial statements were available to be issued.

On July 24, 2009, the Bank entered into a definitive purchase and assumption agreement (the “Agreement”) with the Federal Deposit Insurance Corporation (“FDIC”) under which the Bank assumed approximately $51 million in liabilities, consisting almost entirely of deposits, and certain other liabilities, consisting primarily of accrued interest, and purchased substantially all of the assets, of Waterford Village Bank, a community bank located in Williamsville, New York. Total assets purchased (as calculated post-closing) amounted to approximately $47 million, including a loan portfolio of approximately $43 million. Under the terms of the Agreement, the FDIC made an initial payment of $4.6 million to Evans Bank, which includes the bid price of a $0.8 million discount and approximately $3.8 million for the capital shortfall at the initial closing. The final settlement will be determined 180 days after the purchase date of July 24, 2009. All of the purchased loans and foreclosed real estate that are being purchased by the Bank under the Agreement are covered by a loss sharing agreement between the FDIC and the Bank which is included in the Agreement. Under this loss sharing agreement, the FDIC has agreed to bear 80% of loan and foreclosed real estate losses up to $5.6 million and 95% of losses that exceed $5.6 million. Reimbursable losses are based on the book value of the relevant loans and foreclosed assets as determined by the FDIC as of the date of the acquisition.

Management is still evaluating the estimated fair values of the assets acquired and the liabilities assumed, as is required under the acquisition method of accounting. Accordingly, the amount of any goodwill or bargain purchase gain is also yet to be determined.

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

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

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

There have been historical disruptions in the financial system in recent months and many lenders and financial

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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.

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 included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. Refer to Note 3 to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.

Significant accounting policies followed by the Company are presented in Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the fiscal year ended December 31, 2008. These policies, along with the disclosures presented in the other Notes to the Company’s Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are valued in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

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

Allowance for Loan and Lease Losses

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

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Goodwill and Intangible Assets

The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is typically performed annually on December 31^st. However, an impairment analysis of the leasing reporting unit was performed at the end of the first quarter of fiscal 2009 due to a material change in circumstances, the Company’s decision to exit the national direct financing leasing business. SFAS Statement No. 142 requires interim impairment testing when there is a material change in circumstances. The analysis resulted in a $2.0 million goodwill impairment charge. After experiencing a net loss in the second quarter of 2009 and in view of the fact that the market price for a share of the Company’s common stock was still below book value per share, management performed another impairment test at June 30, 2009 for the remainder of the business. There were no impairment charges as a result of the test.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

Total loans and leases grew to $424.8 at June 30, 2009, reflecting a $6.0 million or 1.4% increase from March 31, 2009 and a $17.0 million or 4.2% increase from December 31, 2008. Gross loans and leases are net of $0, $10.0 million, and $11.1 million of unearned income on direct financing leases as of June 30, 2009, March 31, 2009 and December 31, 2008, respectively. Commercial loans and leases totaled $324.1 million at June 30, 2009, reflecting a $3.7 million or 1.2% increase from March 31, 2009 and a $15.3 million or 4.9% increase from December 31, 2008. Growth in commercial real estate loans of $18.6 million for the second fiscal quarter and $29.8 million for the year to date was largely responsible for the increase in commercial loans and leases from March 31, 2009 and December 31, 2008, respectively, to June 30, 2009.

The Company has no direct exposure to sub-prime lending, and as a result, the faltering sub-prime credit market has not affected the Company’s loan portfolio beyond the recessionary consequences suffered by the economy as a whole. In contrast, some of the Bank’s larger competitors and the conduit markets are having capital adequacy and liquidity problems due to their exposure to sub-prime loans in their investment portfolio or lending activities in other parts of the United States. These problems have caused some of those competitors to curtail their lending activities somewhat and consequently have created opportunities in the local commercial real estate market for smaller banks not experiencing the same issues, such as the Bank. The increased opportunities have resulted in the Bank’s strong loan growth rates.

Direct finance lease balances decreased $14.5 million or 26.2% from March 31, 2009 and $17.7 million or 30.2% from December 31, 2008. Starting in the third quarter of 2008, the leasing portfolio’s asset quality began to deteriorate. This deterioration accelerated in the first quarter of 2009. Non-performing leases increased to $2.1 million at June 30, 2009, from $0.8 million at December 31, 2008 and $1.6 million at March 31, 2009. Net leasing charge-offs in the second quarter of 2009 were $7.7 million (including $6.9 million for the mark-to-market adjustment), compared with $1.6 million in the first quarter of 2009 and $0.4 million in the second quarter of 2008. This rapid deterioration in the portfolio prompted management to take preventive measures such as credit tightening for new applicants and consolidation of ENL’s broker network during the fourth quarter of 2008. However, in the first quarter of 2009 management decided that these measures were not enough and materially slowed new originations. Given the high risk of the portfolio in the current economic recession, in April 2009 management decided that the business model of ENL was no longer a good strategic fit, and decided to exit the national leasing business. As it was the Company’s intent to sell the leasing portfolio as of June 30, 2009, the portfolio was marked to its market value and classified as held for sale on the Company’s balance sheet.

Consumer loans totaled $100.1 million at June 30, 2009, reflecting a $2.5 million or 2.6% increase from March 31, 2009 and a 2.0% increase from December 31, 2008. Consumer real estate loans increased $1.0 million or 1.8% from March 31, 2009 and decreased $0.5 million or 0.9% from December 31, 2008. Recent efforts by the federal government to stimulate housing demand in the face of the economic recession have lowered residential home mortgage rates and resulted in significantly increased consumer real estate demand. However, given the low fixed

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rates and long terms of the loans being originated, the Company has sold most of its originated residential mortgage loans. This, along with accelerated prepayments from existing customers re-financing their homes, has resulted in decreased consumer real estate balances at June 30, 2009 compared to December 31, 2008.

The Bank sells these fixed rate residential mortgages to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended June 30, 2009, the Bank sold mortgages to FNMA totaling $4.6 million, as compared with $0.9 million sold during the three month period ended June 30, 2008. During the six month period ended June 30, 2009, the Bank sold mortgages to FNMA totaling $8.8 million, as compared to $1.4 million sold during the six month period ended June 30, 2008. At June 30, 2009, the Bank had a loan servicing portfolio principal balance of $33.2 million upon which it earns servicing fees, as compared with $31.0 million at March 31, 2009 and $26.9 million at December 31, 2008.

Loan and Lease Portfolio Composition

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

(in thousands) June 30, 2009 Percentage December 31, 2008 Percentage

Commercial Loans and Leases

Real Estate
$ 233,245 54.9 % $ 203,449 49.9 %

Installment
25,219 6.0 % 24,770 6.1 %

Direct Financing Leases
— — 58,639 14.4 %

Leases Held for Sale
40,920 9.6 % — —

Lines of Credit
24,680 5.8 % 21,953 5.4 %

Cash Reserve
66 0.0 % 52 0.0 %

Total Commercial Loans and Leases
324,130 76.3 % 308,863 75.8 %

Consumer Loans

Real Estate
56,245 13.2 % 56,730 13.9 %

Home Equity
41,785 9.8 % 39,348 9.6 %

Installment
1,510 0.4 % 1,609 0.4 %

Overdrafts
192 0.1 % 360 0.1 %

Other
320 0.1 % 5 0.0 %

Total Consumer Loans
100,052 23.6 % 98,052 24.0 %

Net Deferred Costs & Unearned Discounts
575 0.1 % 798 0.2 %

Total Loans and Leases
424,757 100.0 % 407,713 100.0 %

Allowance for Loan and Lease Losses
(5,579 ) (6,087 )

Loans and Leases, net
$ 419,178 $ 401,626

Net loan and lease charge-offs were $7.8 million in the three month period ended June 30, 2009 as compared with $1.6 million in the first quarter of 2009 and $0.4 million in the three month period ended June 30, 2008. Nearly all

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of the net charge-offs for all periods were in the Company’s leasing portfolio, including the mark to market value of $6.9 million when the portfolio became classified as held-for-sale. The rapid deterioration of the portfolio and the sensitivity of direct financing leases to the economic environment led management to make the strategic decision in April 2009 to exit the national direct financing leasing business. As it was the Company’s intent to sell the leasing portfolio as of June 30, 2009, the portfolio was marked to its market value and classified as held for sale on the balance sheet.

Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 1.14% of total loans and leases outstanding at June 30, 2009 as compared with 0.98% at March 31, 2009 and 0.88% at December 31, 2008. The allowance for loan and lease losses totaled $5.6 million or 1.31% of total loans and leases outstanding at June 30, 2009 as compared with $7.8 million or 1.86% of total loans and leases outstanding as of March 31, 2009 and $6.1 million or 1.49% of total loans and leases outstanding as of December 31, 2008. Given the accelerated charge-offs in the leasing portfolio and the continued troubles in the economy, management increased the allowance for loan and lease losses through the provision for loan and lease losses to cover the increased level of expected future losses inherent in the portfolio at March 31, 2009. However, when the direct financing leases were classified as held for sale at June 30, 2009 and marked to their market value, the markdown was recorded as a charge-off that reduced the reserve for leases to zero. This resulted in a lower allowance for loan and lease losses at June 30, 2009.

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

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

June 30, 2009 December 31, 2008

(in thousands)

Non-accruing loans and leases:

Mortgage loans on real estate

Residential 1-4 family
$ 70 $ 50

Commercial and multi-family
1,521 1,787

Construction
417 417

Second mortgages
— —

Home equity lines of credit
— —

Total mortgage loans on real estate
2,008 2,254

Direct financing leases
2,090 791

Commercial loans
651 263

Consumer installment loans
— —

Other
— 123

Total non-accruing loans and leases
$ 4,749 $ 3,431

Accruing loans and leases 90+ days past due
104 148

Total non-performing loans and leases
4,853 3,579

Total non-performing loans and leases as a percentage of total assets
0.88 % 0.68 %

Total non-performing loans and leases as a percentage of total loans and leases
1.14 % 0.88 %

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For the three and six month period ended June 30, 2009, gross interest income that would have been reported on non-accruing loans and leases had they been current was $127 thousand and $217 thousand. For the three and six month periods ended June 30, 2008, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $14 thousand and $30 thousand, respectively. There was $6 thousand and $61 thousand of interest income on non-accruing loans and leases included in net income for the three and six month periods ended June 30, 2009. There was $12 thousand and $22 thousand of interest income on non-accruing loans and leases included in net income for the three and six month periods ended June 30, 2008.

Investing Activities

Total securities decreased to $79.8 million at June 30, 2009, reflecting a $13.3 million, or 14.3%, decrease from $93.2 million at March 31, 2009 and a 5.4% increase from $75.8 million at December 31, 2008. Securities and interest-bearing deposits at banks made up 16.8% of the Bank’s total average interest earning assets in the second quarter of 2009 compared with 15.8% in the first quarter of 2009 and 16.0% in the second quarter of 2008.

The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 50.0% of the portfolio at June 30, 2009 compared with 47.1% at March 31, 2009 and 49.3% at December 31, 2008; and U.S. government-sponsored agency bonds of various types, which comprise 26.1% of the portfolio at June 30, 2009 versus 34.2% at March 31, 2009 and 23.7% at December 31, 2008. Agency mortgage-backed securities comprise 20.2% at June 30, 2009 compared with 16.1% at March 31, 2009 and 20.9% at December 31, 2008. As a member of both the Federal Reserve System and the Federal Home Loan Bank of New York (“FHLBNY”), the Bank is required to hold stock in those entities. These investments made up 3.7% of the portfolio at June 30, 2009 versus 2.6% at March 31, 2009 and 4.7% at December 31, 2008. The credit quality of the securities portfolio as a whole is believed to be strong as the portfolio is in an overall unrealized net gain position, with no individual securities in a significant unrealized loss position.

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 3.7 years as of June 30, 2009 compared with 3.0 years as of March 31, 2009 and 2.1 years as of December 31, 2008. The longer average life is because the Company does not have any short-term discount notes as of June 30, 2009 as it did on March 31, 2009 and December 31, 2008, and also due to the Company’s purchase of municipal bonds to replace securities rolling off. Discount notes are bonds which typically have maturities of under one month and are used to collateralize short-term, seasonal municipal deposits. Late in 2008 and early in 2009, municipal bonds were selling at a spread to U.S. Treasury bonds much wider than the historical norms due to market concerns over municipal bond insurers during the economic crisis. Management took advantage of these wide spreads and purchased municipal bonds at favorable yields. Spreads have now returned to much closer to historical norms. Available-for-sale securities with a total fair value of $68.5 million at June 30, 2009 were pledged as collateral to secure public deposits and for other purposes required or permitted by law. The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or Fannie Mae or Freddie Mac preferred stock investments in its investment portfolio.

Funding Activities

Total deposits at June 30, 2009 were $451.3 million, reflecting an $8.8 million or 1.9% decrease from March 31, 2009 and a $47.3 million or 11.7% increase from December 31, 2008. Demand deposits at June 30, 2009 were $87.8 million, reflecting a $7.5 million or 9.4% increase from March 31, 2009 and an $11.9 million or 15.6% increase from December 31, 2008. Demand deposit balances fluctuate day-to-day based on the high volume of transactions normally associated with the demand product, and therefore average demand deposit growth is a better measure of sustained growth. Average demand deposits in the three month period ended June 30, 2009 were 7.7% higher than the first quarter of 2009, and 17.0% higher than the prior year’s second quarter. Much of the overall deposit growth in the quarter ended June 30, 2009 when compared with the prior year-end is attributable to an increase in regular savings deposits of $37.4 million, or 24.2%, to $191.6 million. The Company introduced a new money market savings product in 2008 and much of the continued growth in regular savings is due to this product. NOW deposits increased during the quarter ended June 30, 2009 by $2.5 million, or 26.1%, while muni-vest balances decreased during the same quarter by $14.2 million, or 31.0%. The decrease in muni-vest balances reflects the seasonal nature of municipal deposit balances. Municipal deposits trend higher in the first quarter when municipalities collect taxes. These deposits tend to diminish throughout the fiscal year as municipalities use the

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funds for operations. Time deposits were $128.2 million at June 30, 2009, reflecting a $12.8 million or 9.1% decrease from March 31, 2009 and an $8.2 million or 6.0% decrease from December 31, 2008. The decrease in time deposits is primarily due to the fact that management chose not to chase high-rate short-term competitive time deposit rates at a time when wholesale rates remained at historical lows. The Company’s customer acquisition strategy has focused on attracting customers to its money market savings product, rather than time deposits.

Short-term borrowings from other correspondent banks and the FHLBNY was $6.2 million at June 30, 2009, a slight increase from $4.5 million at March 31, 2009, but a significant decrease from $30.7 million at December 31, 2008. Long-term borrowings were $27.0 million at June 30, 2009, reflecting an $8.8 million increase from March 31, 2009 and December 31, 2008. The Company’s strong savings deposit growth has resulted in a decrease in its need for wholesale short-term borrowings. However, in an effort to mitigate interest rate risk with the growing variable rate savings balances and declining fixed rate time deposits, the Company increased its long-term fixed rate borrowings.

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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. The tables are inclusive of the associated interest income and expense of the leasing reporting unit, which are presented as part of discontinued operations in the Statement of Operations Income Statement in the Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Three Months Ended Three Months Ended

June 30, 2009 June 30, 2008

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Balance Paid Rate Balance Paid Rate

(dollars in thousands) (dollars in thousands)

ASSETS

Interest-earning assets:

Loans and leases, net
$ 418,952 $ 6,632 6.33 % $ 345,200 $ 6,434 7.46 %

Taxable securities
40,767 388 3.81 % 29,130 320 4.39 %

Tax-exempt securities
42,713 447 4.19 % 35,947 392 4.36 %

Interest bearing deposits at banks
1,104 — 0.06 % 651 3 1.84 %

Total interest-earning assets
503,536 7,467 5.93 % 410,928 7,149 6.96 %

Non interest-earning assets:

Cash and due from banks
11,904 12,143

Premises and equipment, net
9,606 8,343

Other assets
32,040 29,734

Total Assets
557,086 461,148

LIABILITIES & STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

NOW
$ 10,940 $ 8 0.29 % $ 12,722 $ 24 0.75 %

Regular savings
186,467 606 1.30 % 93,448 285 1.22 %

Muni-Vest savings
38,976 66 0.68 % 24,457 118 1.93 %

Time deposits
136,110 1,144 3.36 % 145,705 1,439 3.95 %

Other borrowed funds
26,397 191 2.89 % 39,901 288 2.89 %

Junior subordinated debentures
11,330 102 3.60 % 11,330 154 5.44 %

Securities sold U/A to repurchase
4,350 4 0.37 % 5,363 11 0.82 %

Total interest-bearing liabilities
414,570 $ 2,121 2.05 % 332,926 $ 2,319 2.79 %

Noninterest-bearing liabilities:

Demand deposits
85,334 72,940

Other
12,527 10,493

Total liabilities
$ 512,431 $ 416,359

Stockholders’ equity
44,655 44,789

Total Liabilities and Equity
$ 557,086 461,148

Net interest earnings
$ 5,346 $ 4,830

Net yield on interest earning assets
4.25 % 4.70 %

Interest rate spread
3.88 % 4.17 %

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Six Months Ended Six Months Ended

June 30, 2009 June 30, 2008

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Balance Paid Rate Balance Paid Rate

(dollars in thousands) (dollars in thousands)

ASSETS

Interest-earning assets:

Loans and leases, net
$ 412,997 $ 13,295 6.44 % $ 333,680 $ 12,608 7.56 %

Taxable securities
38,443 724 3.77 % 31,023 641 4.13 %

Tax-exempt securities
41,319 875 4.24 % 36,400 791 4.35 %

Interest bearing deposits at banks
856 — 0.06 % 676 7 2.07 %

Total interest-earning assets
493,615 14,894 6.03 % 401,779 14,047 6.99 %

Non interest-earning assets:

Cash and due from banks
11,701 12,086

Premises and equipment, net
9,704 8,332

Other assets
32,417 29,684

Total Assets
547,437 451,881

LIABILITIES & STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

NOW
$ 11,605 $ 19 0.33 % $ 11,549 $ 39 0.68 %

Regular savings
177,172 1,247 1.41 % 90,089 541 1.20 %

Muni-Vest savings
34,559 133 0.77 % 24,458 295 2.41 %

Time deposits
136,535 2,322 3.40 % 140,896 2,948 4.18 %

Other borrowed funds
31,037 377 2.43 % 41,566 667 3.21 %

Junior subordinated debentures
11,330 225 3.97 % 11,330 347 6.13 %

Securities sold U/A to repurchase
4,893 11 0.45 % 5,439 22 0.81 %

Total interest-bearing liabilities
407,131 $ 4,334 2.13 % 325,327 $ 4,859 2.99 %

Noninterest-bearing liabilities:

Demand deposits
82,294 71,464

Other
12,609 10,651

Total liabilities
$ 502,034 407,442

Stockholders’ equity
45,403 44,439

Total Liabilities and Equity
$ 547,437 451,881

Net interest earnings
$ 10,560 $ 9,188

Net yield on interest earning assets
4.28 % 4.57 %

Interest rate spread
3.90 % 4.00 %

Net Income

The Company had income from continuing operations of $0.3 million in the second quarter of 2009, a decrease of $0.8 million, or 76.7%, from income from continuing operations of $1.1 million in the prior year’s second quarter. The Company’s strong growth in net interest income of $0.7 million was more than offset by a $1.4 million increase in provision for loan losses. The allowance for loan losses was increased as the troubled economy continues to increase the risk of future loan losses. For the year-to-date, the Company had income from continuing operations of $2.0 million, a decrease of $0.5 million, or 22.1%, from continuing operations of $2.5 million in the prior year. The same factors that caused the quarterly decrease were also the primary factors in the year-to-date decrease.

The Company also incurred a loss from discontinued operations of $2.1 million in the second quarter of 2009, compared with income from discontinued operations of $0.3 million in the second quarter of 2008. The Company’s

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lease portfolio was classified as held-for-sale at June 30, 2009, resulting in the leasing portfolio being marked to its market value as determined by competitive bids received from potential buyers. This mark of $6.9 million and net charge-offs of $0.8 million previous to the portfolio’s classification as held-for-sale were the primary factors that caused the loss in discontinued operations. Given the reserve for leases of $3.8 million at March 31, 2009, the impact to income from discontinued operations before taxes was $3.9 million. For the year-to-date, the loss from discontinued operations was $5.1 million, compared with income from discontinued operations of $0.5 million in the prior year. The provision for leasing credit losses in the first quarter was $2.9 million. Therefore, the year-to-date provision for leasing credit losses is $6.8 million. This provision was the primary cause of the year-to-date loss from discontinued operations.

The Company has included several line items related to discontinued operations in its unaudited consolidated statements of operations because the lease portfolio was classified as held-for-sale at June 30, 2009. See Note 4, Discontinued Operations, to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of the reclassification.

In total, the Company recorded a net loss for the second quarter of 2009 of $1.9 million, or ($0.67) per diluted share, compared with net income of $1.4 million, or $0.50 per diluted share, in the second quarter of 2008. For the year to date, the net loss was ($3.1) million, or ($1.12) per share, compared with $3.0 million in net income, or $1.08 per share, in the prior year period. Return on average equity was (16.60%) for the quarter and (13.66%) for the year to date, compared with 12.37% and 13.41% in last year’s respective periods.

Other Results of Operations

Net interest income increased to $5.3 million during the second quarter of 2009, an increase of 10.7% from $4.8 million in the second quarter of 2008. Net interest income for the six month period ended June 30, 2009 was $10.6 million, an increase of 14.9% from $9.2 million in the prior year. (The net interest income analysis includes the impact of the leasing portfolio. The average balance sheet schedules on the previous two pages should be used in conjunction with this analysis). Growth of the core loan portfolio and the reduced cost of interest-bearing liabilities continue to be the main factors driving this increase. The core loan portfolio is defined as total loans and leases less direct financing leases. Core loans were $383.8 million at June 30, 2009, an increase of 5.6% from $363.4 million at March 31, 2009, and 10.0% from $349.1 million at December 31, 2008. The Company continued to experience strong growth in commercial real estate. Origination of residential mortgages was also very strong in the second quarter of 2009 with $9.2 million in originations, compared with $4.5 million in last year’s second quarter. Residential mortgage balances are flat, however, as the Company does not hold 30-year loans and has sold most of the mortgages to FNMA in an effort to mitigate the interest rate risk of keeping 30-year fixed rate loans, resulting in a gain on sale of $25 thousand, compared with a gain of $4 thousand in the previous year’s second quarter. The Company continues to service all mortgage loans it originates. The direct financing lease portfolio declined $14.5 million from March 31, 2009 to $40.9 million at the end of the 2009 second quarter as the Company ceased lease originations in the second quarter of 2009 and also marketed the portfolio for sale. As it was the Company’s intent to sell the portfolio at June 30, 2009, the lease portfolio was classified as held-for-sale and marked to its market value of $40.9 million. The market value is based on quoted market prices from identified potential buyers from the Company’s marketing efforts related to the leasing portfolio.

The Company’s net interest margin was 4.25% and 4.28% for the three and six month periods ended June 30, 2009, respectively, down from 4.70% and 4.57% in the prior year’s respective periods. (The net interest margin analysis includes the impact of the leasing portfolio. The average balance sheet schedules on the previous two pages should be used in conjunction with this analysis). The decreased margin was partly due to a higher concentration of investments in 2009, which typically have lower yields than loans, and run-off in the leasing portfolio. Net loans and leases earned a yield of 6.33% and 6.44% in the three and six month periods ended June 30, 2009, respectively, compared with 7.46% and 7.56%, respectively. Some of the decrease in yield is due to variable rate loans re-pricing at lower rates and new fixed-rate loans replacing older loans that had higher interest rates. However, much of this negative impact to net interest income and net interest margin is offset by the beneficial re-pricing in interest-bearing liabilities. The incremental impact is attributable to the run-off of the leasing portfolio. The Company’s leases typically earned an interest yield of approximately 14%, much higher than the Company’s core loan portfolio yields noted above. After the leasing portfolio is sold or as it runs off, it is expected that the net interest margin will decline. Limiting the effect of these factors was the strong non-interest-bearing demand deposit growth discussed

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above under “Analysis of Financial Condition – Funding Activities.”

Net charge-offs to average total loans and leases increased to 7.48% compared with 1.59% in the first quarter of 2009 and 0.42% for the 2008 second quarter. The net charge off ratio for the first six months of 2009 was 4.58%, compared with 0.43% for the same period in 2008. This increase in net charge-offs was primarily related to the direct finance national lease portfolio. As noted earlier, the leasing portfolio was classified as held-for-sale on the balance sheet as of June 30, 2009, and as such was marked down to its market value. This mark to market adjustment and actual charge-offs amounted to $7.7 million in the second quarter. $3.8 million had previously been reserved for, resulting in the $3.9 million provision in the second quarter related to leasing. Excluding the lease portfolio, there were $176 thousand in net charge-offs in the core loan portfolio.

Non-interest income increased 13.5%, or $0.4 million, from last year’s second quarter to $3.0 million in the second quarter of 2009. For the six month period ended June 30, 2009, non-interest income increased 12.0%, or $0.7 million, to $6.8 million. Non-interest income represented 39.9% and 43.4% of total revenue in the three and six month periods ended June 30, 2009, compared with 40.9% and 45.1% in the same respective periods in 2008.

Insurance service and fee income, the largest component of non-interest income, was flat in the second quarter of 2009 to last year’s second quarter at $1.6 million as the soft insurance market continued. For the year-to-date, insurance services and fee income increased $0.2 million, or 5.3%, over the prior year period to $3.9 million. Other income increased $0.3 million from the second quarter of 2008 to the second quarter of 2009 due to revenue generated by Suchak Data Systems, Inc. (“SDS”), a data processing company acquired by the Company in December 2008. Other income for the first six months increased $0.4 million over the same prior year period for the same factors causing the quarterly increase.

Total non-interest expenses were $5.6 million and $10.9 million for the three and six month periods ended June 30, 2009, respectively, compared with $4.8 million and $9.6 million for the same periods in 2008. The largest component of the increase in total non-interest expenses from last year’s second quarter was salaries and employee benefits expense of $3.0 million, which increased $0.3 million or 9.6% over the second quarter of 2008. Salaries and benefits were higher because of the addition of 18 new employees including those working in the Company’s new branch office in the Elmwood Village in Buffalo, and from the acquisitions of SDS and the Fitzgerald Agency. Another significant factor in the increase in non-interest expenses were higher FDIC insurance premiums. FDIC insurance expense was $320 thousand for the three month period ended June 30, 2009 compared with $30 thousand in the same period in the prior year. In addition to increased premiums, a $250 thousand special FDIC assessment to be paid in September 2009 was accrued for in June 2009.

For the year-to-date period, salaries and benefits expenses increased $0.7 million, or 12.7%, to $6.1 million. FDIC insurance expense increased from $40 thousand to $383 thousand. The increases were primarily attributed to the same factors cited above with respect to the quarterly increase.

The efficiency ratio for the three and six month periods ended June 30, 2009, was 70.59% and 70.07%, compared with 71.38% and 71.89% in last year’s comparable periods. Amortization is excluded from the efficiency ratio calculation. The efficiency ratio has been relatively stable as the increased salaries and benefits expenses and FDIC insurance expenses have been offset by the increase in net interest income and non-interest income

Income tax benefit totaled ($1.1) million and ($1.8) million for the three and six month periods ended June 30, 2009, respectively, reflecting an effective tax rate of (38.2%) and (36.6%). The effective tax rate for the three and six month periods ended June 30, 2008 was 28.1% and 28.5%, respectively. Excluding the tax benefit from discrete items such as the impairment charge and the mark to market leasing adjustment, the Company records an effective tax rate based on the expected rate for the entire year.

CAPITAL

The Company consistently maintains regulatory capital ratios measurably above the federal “well capitalized” standard of 5.00% with a Tier 1 leverage ratio of 7.89%. Average equity as a percentage of average assets was 8.02% in the three months ended June 30, 2009, compared with 8.58% in the three months ended March 31, 2009, and 9.71% in the three months ended June 30, 2008. The decrease was a result of the strong growth in core earning assets over the last year as well as the net loss incurred in the first six months of 2009. The net loss in the second quarter of 2009 resulted in a lower book value per share of $15.08 at June 30, 2009, compared with $15.80 at March 31, 2009, and $16.57 at December 31, 2008.

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32
LIQUIDITY

The Company utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. As a member of the FHLB the Bank is able to borrow funds at competitive rates. Advances of up to $60.0 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. The Bank recently was approved for additional credit at FHLB after placing additional commercial real estate loans as collateral at FHLB. An amount equal to 25% of the Bank’s total assets could be borrowed through the advance programs under certain qualifying circumstances. The Bank also has the ability to purchase up to $14.0 million in federal funds from its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Company’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network, of which the Bank became a member in 2009. Additionally, the Company has access to capital markets as a funding source.

Cash flows from the Company’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At June 30, 2009, approximately 5.7% of the Bank’s securities had contractual maturity dates of one year or less and approximately 33.5% had maturity dates of five years or less.

Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies, and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are liquid assets and potential liabilities. Management stresses the potential liabilities calculation to ensure a strong liquidity position. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closing and investment purchases. At June 30, 2009, in the Company’s internal stress test, the Company had net short-term liquidity of $29.0 million as compared with $19.7 million at March 31, 2009 and $22.4 million at December 31, 2008. Available assets of $84.3 million, divided by public and purchased funds of $132.0 million, resulted in a long-term liquidity ratio of 64% at June 30, 2009, compared with 65% at March 31, 2009 and 51% at December 31, 2008.

Management does not anticipate engaging in any activities, either currently or the long term, for which adequate funding would not be available and which would therefore result in significant pressure on liquidity. However, continued economic recession could negatively impact the Company’s liquidity. The Bank relies heavily on FHLBNY as a source of funds, particularly with its overnight line of credit. Several members of FHLB have warned that they have either breached risk-based capital requirements or that they are close to breaching those requirements. To conserve capital, some FHLB branches are suspending dividends, cutting dividend payments, and not buying back excess FHLB stock that members hold. FHLBNY has stated that they expect to be able to continue to pay dividends, redeem excess capital stock, and provide competitively priced advances in the future. The most severe problems in FHLB have been at some of the other FHLB branches. Nonetheless, the 12 FHLB branches are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment.

Systemic weakness in the FHLB could result in higher costs of FHLB borrowings and increased demand for alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent banks First Tennessee and M&T Bank.

The Company believes that the Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for municipal deposits.

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33

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.

Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.

The Bank’s Asset-Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a computer model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and other financial instruments used for interest rate risk management purposes.

The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12-month period of time:

SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST
RATES

Calculated (decrease) increase

in projected annual net interest income

(in thousands)

June 30, 2009 December 31, 2008

Changes in interest rates

+200 basis points
675 (293 )

+100 basis points
339 (140 )

-100 basis points
(90 ) (33 )

-200 basis points
N/A 20

Many assumptions were utilized by management to calculate the impact that changes in the interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the event that the 200 basis point rate changes cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may

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34
take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.

ITEM 4 - CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of June 30, 2009 (the end of the period covered by this Report) have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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35

PART II — OTHER INFORMATION

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2009 annual shareholders meeting of the registrant was held on April 23, 2009. At the meeting Robert G. Miller, Jr., John R. O’Brien, and James Tilley were re-elected as directors for a term of three years. The following table reflects the tabulation of votes with respect to each director who was elected at the 2009 annual meeting.

Number of Votes

Director Nominees:

For: Withheld:

Robert G. Miller, Jr
1,793,458 59,436

John R. O’Brien
1,787,773 65,120

James Tilley
1,783,439 69,455

The following directors also continued their terms as directors of the Company following the 2009 annual shareholders meeting:

Phillip Brothman
James E. Biddle, Jr
Kenneth C. Kirst
Mary Catherine Militello
David J. Nasca
David M. Taylor
Nancy W. Ware
Thomas H. Waring, Jr.

The 2009 Long-Term Equity Incentive Plan was also approved at the 2009 annual meeting. The following table reflects the tabulation of votes:

For: Against: Withheld:

2009 Long-Term Equity Incentive Plan
872,134 102,869 327,224

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36

ITEM 6 – EXHIBITS

Exhibit No. Name Page No.

31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
39

31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
40

32.1
Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
41

32.2
Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
42

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37

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Evans Bancorp, Inc.

DATE

August 14, 2009
/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

August 14, 2009
/s/ Gary A. Kajtoch

Gary A. Kajtoch

Treasurer

(Principal Financial Officer)

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38

Exhibit Index

Exhibit No. Name Page No.

31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
39

31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
40

32.1
Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
41

32.2
Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
42


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


New York		16-1332767

(State of other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

(Address of principal executive offices)		(Zip Code)


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if smaller reporting company)		Smaller reporting company þ


	PAGE
PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets — June 30, 2009 and December 31, 2008		1

Unaudited Consolidated Statements of Operations — Three months ended June 30, 2009 and 2008		2

Unaudited Consolidated Statements of Operations-Six months Ended June 30, 2009 and 2008		3

Unaudited Consolidated Statements of Stockholders’ Equity — Six months ended June 30, 2009 and 2008		4

Unaudited Consolidated Statements of Cash Flows — Six months ended June 30, 2009 and 2008		5

Notes to Unaudited Consolidated Condensed Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3. Quantitative and Qualitative Disclosures About Market Risk		33

Item 4. Controls and Procedures		34

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders		35

Item 6. Exhibits		36

SIGNATURES		37
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	June 30,			December 31,
	2009			2008
ASSETS
Cash and due from banks	$	11,710		$	9,036
Interest-bearing deposits at banks		695			115
Securities:
Available for sale, at fair value		75,725			71,134
Federal Home Loan Bank stock, at fair value		2,071			2,670
Held to maturity, at amortized cost		2,037			1,951
Loans and leases, net of allowance for loan and lease losses of $5,579 in 2009 and $6,087 in 2008		378,258			401,626
Leases held for sale		40,920			—
Properties and equipment, net		9,469			9,885
Goodwill		8,101			10,046
Intangible assets		2,484			2,900
Bank-owned life insurance		11,698			11,685
Other assets		9,655			7,926


TOTAL ASSETS	$	552,823		$	528,974


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Demand	$	87,842		$	75,959
NOW		11,939			10,775
Regular savings		191,645			154,283
Muni-vest		31,592			26,477
Time		128,235			136,459

Total deposits		451,253			403,953

Securities sold under agreement to repurchase		4,990			6,307
Other short-term borrowings		6,174			30,695
Other liabilities		9,917			12,590
Junior subordinated debentures		11,330			11,330
Long-term borrowings		27,000			18,180


Total liabilities		510,664			483,055


CONTINGENT LIABILITIES AND COMMITMENTS

STOCKHOLDERS’ EQUITY:

Common stock, $.50 par value; 10,000,000 shares authorized; 2,795,198 and 2,771,788 shares issued and outstanding, respectively		1,398			1,386
Capital surplus		27,003			26,696
Retained earnings		14,139			18,374
Accumulated other comprehensive loss, net of tax		(381	)		(537	)
Less: Treasury stock, at cost (0 shares)		—			—

Total stockholders’ equity		42,159			45,919


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	552,823		$	528,974


	Three Months Ended June 30,
	2009			2008
Interest Income
Loans and leases	$	5,147		$	4,722
Securities:
Taxable		388			323
Non-taxable		447			392

Total interest income		5,982			5,437
Interest Expense
Deposits		1,140			1,151
Other borrowings		297			453

Total interest expense		1,437			1,604
Net Interest Income		4,545			3,833
Provision for Loan and Lease Losses		1,672			231

Net Interest Income After Provision for Loan and Lease Losses		2,873			3,602
Non-Interest Income
Bank charges		563			540
Insurance service and fees		1,623			1,617
Net gain on sales and calls of securities		6			7
Premium on loans sold		25			4
Other		798			488

Total non-interest income		3,015			2,656
Non-Interest Expense
Salaries and employee benefits		2,957			2,698
Occupancy		656			576
Professional services		327			233
Technology and communications		225			288
Amortization of intangibles		223			166
FDIC Insurance		320			30
Other		847			802

Total non-interest expense		5,555			4,793

Income from Continuing Operations Before Income Taxes		333			1,465
Income Taxes		75			360

Income from Continuing Operations	$	258		$	1,105
Discontinued Operations:
(Loss) Income from discontinued operations before income taxes		(3,331	)		460
Income tax (benefit) provision		(1,220	)		180

(Loss) Income from discontinued operations		(2,111	)		280

Net (Loss) Income	$	(1,853	)	$	1,385

Earnings (Loss) per common share:
Basic:
Income from continuing operations	$	0.09		$	0.40
(Loss) Income from discontinued operations	$	(0.76	)	$	0.10

	$	(0.67	)	$	0.50


Diluted:
Income from continuing operations	$	0.09		$	0.40
(Loss) Income from discontinued operations	$	(0.76	)	$	0.10

	$	(0.67	)	$	0.50

Cash dividends per basic common share	$	0.00		$	0.00

Weighted average number of basic common shares		2,785,803			2,748,771

Weighted average number of diluted common shares		2,785,803			2,750,563


	Six Months Ended June 30,
	2009			2008
Interest Income
Loans and leases	$	10,128		$	9,319
Securities:
Taxable		724			648
Non-taxable		875			791

Total interest income		11,727			10,758
Interest Expense
Deposits		2,270			2,360
Other borrowings		613			1,036

Total interest expense		2,883			3,396
Net Interest Income		8,844			7,362
Provision for Loan and Lease Losses		2,127			371

Net Interest Income After Provision for Loan and Lease Losses		6,717			6,991
Non-Interest Income
Bank charges		1,123			1,072
Insurance service and fees		3,948			3,751
Net gain on sales and calls of securities		6			7
Premium on loans sold		54			5
Other		1,640			1,209

Total non-interest income		6,771			6,044
Non-Interest Expense
Salaries and employee benefits		6,115			5,426
Occupancy		1,373			1,200
Professional services		621			482
Technology and communications		397			562
Amortization of intangibles		447			328
FDIC Insurance		383			40
Other		1,601			1,595

Total non-interest expense		10,937			9,633

Income from Continuing Operations Before Income Taxes		2,551			3,402
Income Taxes		595			892

Income from Continuing Operations	$	1,956		$	2,510
Discontinued Operations:
(Loss) Income from discontinued operations before income taxes		(7,437	)		766
Income tax (benefit) provision		(2,381	)		298

(Loss) Income from discontinued operations		(5,056	)		468

Net (Loss) Income	$	(3,100	)	$	2,978

Earnings (Loss) per common share:
Basic:
Income from continuing operations	$	0.70		$	0.91
(Loss) Income from discontinued operations	$	(1.82	)	$	0.17

	$	(1.12	)	$	1.08


Diluted:
Income from continuing operations	$	0.70		$	0.91
(Loss) Income from discontinued operations	$	(1.82	)	$	0.17

	$	(1.12	)	$	1.08

Cash dividends per common share	$	0.41		$	0.37

Weighted average number of basic common shares		2,778,271			2,748,643

Weighted average number of diluted common shares		2,778,271			2,749,645


									Accumulated
									Other
	Common		Capital			Retained			Comprehensive			Treasury
	Stock		Surplus			Earnings			Income (Loss)			Stock			Total
Balance, January 1, 2008	$	1,378	$	26,380		$	15,612		$	16		$	(83	)	$	43,303

Comprehensive income:
Net Income							2,978									2,978

Unrealized loss on available-for-sale securities, net of tax effect of $65										(101	)					(101	)

Amortization of prior service cost and net loss, net of tax of ($24)										37						37

Pension curtailment adjustment net of tax effect of $7										9						9


Total comprehensive income																2,923


Cash dividends ($0.37 per common share)							(1,017	)								(1,017	)
Stock options expense				74												74

Reissued 7,733 shares treasury stock under dividend reinvestment plan				(12	)								130			118

Issued 2,969 shares under dividend reinvestment plan		2		44												46

Reissued 6,575 shares treasury stock under employment stock purchase plan				(27	)								112			85

Purchased 13,701 shares for treasury													(234	)		(234	)


Balance, June 30, 2008	$	1,380	$	26,459		$	17,573		$	(39	)	$	(75	)	$	45,298


Balance, January 1, 2009	$	1,386	$	26,696		$	18,374		$	(537	)	$	—		$	45,919

Comprehensive loss:
Net Loss							(3,100	)								(3,100	)

Unrealized gain on available-for-sale, net of reclassification of gain of $4 (after tax) securities, net of tax effect of ($76)										118						118

Amortization of prior service cost and net loss net of tax effect of ($25)										38						38


Total comprehensive loss																(2,944	)


Cash dividends ($0.41 per common share)							(1,135	)								(1,135	)

Stock options expense				61												61

Reissued 2,000 shares treasury stock under dividend reinvestment plan				(4	)								27			23

Issued 13,911 shares under dividend reinvestment plan		7		152												159

Issued 9,499 shares under employee stock purchase plan		5		98												103

Purchased 2,000 shares for treasury													(27	)		(27	)


Balance, June 30, 2009	$	1,398	$	27,003		$	14,139		$	(381	)	$	—		$	42,159


	Six Months Ended June 30,
	2009			2008
OPERATING ACTIVITIES:
Interest received	$	14,545		$	14,020
Fees received		6,913			5,677
Interest paid		(4,519	)		(4,963	)
Cash paid to employees and suppliers		(9,931	)		(8,530	)
Income taxes paid		(707	)		(2,344	)
Proceeds from sale of loans held for resale		8,766			1,391
Originations of loans held for resale		(8,669	)		(1,336	)


Net cash provided by operating activities		6,398			3,915

INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(61,338	)		(49,005	)
Proceeds from maturities		57,749			54,149
Held to maturity securities:
Purchases		(233	)		(41	)
Proceeds from maturities		147			229
Life Insurance proceeds		341			—
Additions to properties and equipment		(201	)		(536	)
Increase in loans, net of repayments		(28,976	)		(43,088	)
Cash paid on earn-out agreements		(40	)		(40	)


Net cash used in investing activities		(32,551	)		(38,332	)

FINANCING ACTIVITIES:
Proceeds from borrowings		9,000			12,517
Repayments of borrowings		(26,016	)		(18,649	)
Increase in deposits		47,300			45,631
Dividends paid		(1,135	)		(1,017	)
Purchase of treasury stock		(27	)		(234	)
Issuance of common stock		262			46
Re-issuance of treasury stock		23			203


Net cash provided by financing activities		29,407			38,497

Net increase in cash and equivalents		3,254			4,080

CASH AND CASH EQUIVALENTS:
Beginning of period		9,151			12,604


End of period	$	12,405		$	16,684


	June 30, 2009
	(in thousands)
	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
Available for Sale:
Debt securities:
U.S. government agencies	$	20,522	$	339	$	(87	)	$	20,774
States and political subdivisions		36,980		1,031		(82	)		37,929

Total debt securities	$	57,502	$	1,370	$	(169	)	$	58,703

Mortgage-backed securities:
FNMA	$	10,422	$	189	$	(41	)	$	10,570
FHLMC		4,420		130		(1	)		4,549
CMO’S		1,135		—		(136	)		999

Total mortgage-backed securities	$	15,977	$	319	$	(178	)	$	16,118

FRB Stock		904							904
FHLB Stock		2,071		—		—			2,071


Total	$	76,454	$	1,689	$	(347	)	$	77,796


Held to Maturity:
Debt securities
U.S. government agencies		35		—		—			35
States and political subdivisions		2,002		—		—			2,002


Total	$	2,037	$	—	$	—		$	2,037


	December 31, 2008
	(in thousands)
			Unrealized
	Amortized							Fair
	Cost		Gains		Losses			Value
Available for Sale:
Debt securities:
U.S. government agencies	$	17,790	$	112	$	—		$	17,902
States and political subdivisions		34,490		953		(7	)		35,436

Total debt securities	$	52,280	$	1,065	$	(7	)	$	53,338

Mortgage-backed securities:
FNMA	$	8,060	$	126	$	(21	)	$	8,165
FHLMC		7,468		130		(11	)		7,587
CMO’S		1,283		—		(134	)		1,149

Total mortgage-backed securities	$	16,811	$	256	$	(166	)	$	16,901

FRB Stock		895							895
FHLB Stock		2,670		—		—			2,670


Total	$	72,656	$	1,321	$	(173	)	$	73,804


Held to Maturity:
Debt securities
U.S. government agencies		35		—		—			35
States and political subdivisions		1,916		—		—			1,916


Total	$	1,951	$	—	$	—		$	1,951


	June 30, 2009
	Available for				Held to Maturity
	Sale Securities				Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(in thousands)				(in thousands)
Due in one year or less	$	4,020	$	4,114	$	240	$	240
Due after year one through five years		20,219		20,788		633		633
Due after fives years through ten years		22,618		23,097		475		475
Due after ten years		26,622		26,822		689		689


Total	$	73,479	$	74,821	$	2,037	$	2,037


	June 30, 2009
	(in thousands)
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale:
Debt securities:
U.S. government agencies	$	10,428	$	(87	)	$	—	$	—		$	10,428	$	(87	)
States and political subdivisions		4,865		(82	)		—		—			4,865		(82	)

Total debt securities	$	15,293	$	(169	)	$	—	$	—		$	15,293	$	(169	)

Mortgage-backed securities:
FNMA	$	3,439	$	(40	)	$	145	$	(1	)	$	3,584	$	(41	)
FHLMC		—		—			124		(1	)		124		(1	)
CMO’S		—		—			999		(136	)		999		(136	)

Total mortgage-backed securities	$	3,439	$	(40	)	$	1,268	$	(138	)	$	4,707	$	(178	)

Total temporarily impaired securities	$	18,732	$	(209	)	$	1,268	$	(138	)	$	20,000	$	(347	)


	June 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)				(in thousands)
Financial assets:
Cash and cash equivalents	$	12,405	$	12,405	$	9,151	$	9,151

Securities	$	79,833	$	79,833	$	75,755	$	75,755

Loans and leases, net	$	378,258	$	390,374	$	401,626	$	414,381

Leases held for sale	$	40,920	$	40,920	$	—	$	—

Financial liabilities:
Deposits	$	451,253	$	454,179	$	403,953	$	406,482

Other borrowed funds and securities sold under agreements to repurchase	$	38,164	$	38,294	$	55,182	$	55,449

Junior subordinated debentures	$	11,330	$	11,330	$	11,330	$	11,330


	Fair Value Measurement
			Quoted Prices in
			Active Markets		Significant Other		Significant Other
			for Identical		Observable		Unobservable
	Fair Value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
June 30, 2009
Securities available-for-sale	$	75,725	$	0	$	75,725	$	0
FHLB stock	$	2,071	$	0	$	2,071
Leases held for sale	$	40,920	$	0	$	40,920	$	0
Impaired loans	$	2,204	$	0	$	0	$	2,204

December 31, 2008
Securities available-for-sale	$	71,134	$	0	$	71,134	$	0
FHLB stock	$	2,670			$	2,670
Impaired loans	$	2,700	$	0	$	0	$	2,700


	Three Months Ended June 30, 2009
	(in thousands)
			Insurance Agency
	Banking Activities		Activities			Total
Net interest income (expense)	$	4,581	$	(36	)	$	4,545
Provision for loan and lease losses		1,672		—			1,672

Net interest income (expense) after provision for loan and lease losses		2,909		(36	)		2,873
Non-interest income		1,392		—			1,392
Insurance service and fees		—		1,623			1,623
Non-interest expense		4,223		1,332			5,555

Income from continuing operations before income taxes		78		255			333


	Six Months Ended June 30, 2009
	(in thousands)
			Insurance Agency
	Banking Activities		Activities			Total
Net interest income (expense)	$	8,929	$	(85	)	$	8,844
Provision for loan and lease losses		2,127		—			2,127

Net interest income (expense) after provision for loan and lease losses		6,802		(85	)		6,717
Non-interest income		2,823		—			2,823
Insurance service and fees		—		3,948			3,948
Non-interest expense		8,248		2,689			10,937

Income from continuing operations before income taxes		1,377		1,174			2,551


	Three Months Ended June 30, 2008
	(in thousands)
			Insurance Agency
	Banking Activities		Activities			Total
Net interest income (expense)	$	3,901	$	(68	)	$	3,833
Provision for loan and lease losses		231		—			231

Net interest income (expense) after provision for loan and lease losses		3,670		(68	)		3,602
Non-interest income		1,039		—			1,039
Insurance service and fees		—		1,617			1,617
Non-interest expense		3,512		1,281			4,793

Income from continuing operations before income taxes		1,197		268			1,465


	Six Months Ended June 30, 2008
	(in thousands)
			Insurance Agency
	Banking Activities		Activities			Total
Net interest income (expense)	$	7,521	$	(159	)	$	7,362
Provision for loan and lease losses		371		—			371

Net interest income (expense) after provision for loan and lease losses		7,150		(159	)		6,991
Non-interest income		2,293		—			2,293
Insurance service and fees		—		3,751			3,751
Non-interest expense		7,059		2,574			9,633

Income from continuing operations before income taxes		2,384		1,018			3,402


	June 30,		December 31,
	2009		2008
	(in thousands)
Commitments to extend credit	$	89,140	$	87,320
Standby letters of credit		4,062		2,807

Total	$	93,202	$	90,127


	Six months ended June 30,
	(in thousands)
							Supplemental Executive
	Pension Benefits						Retirement Plan
	2009			2008			2009		2008
Service cost	$	—		$	—		$	30	$	30
Interest cost		108			118			90		87
Expected return on plan assets		(85	)		(146	)		—		—
Amortization of prior service cost		—			—			28		28
Amortization of the net loss		28			—			7		9

Net periodic cost (benefit)	$	51		$	(28	)	$	155	$	154


(in thousands)	June 30, 2009			Percentage			December 31, 2008			Percentage
Commercial Loans and Leases
Real Estate	$	233,245			54.9	%	$	203,449			49.9	%
Installment		25,219			6.0	%		24,770			6.1	%
Direct Financing Leases		—			—			58,639			14.4	%
Leases Held for Sale		40,920			9.6	%		—			—
Lines of Credit		24,680			5.8	%		21,953			5.4	%
Cash Reserve		66			0.0	%		52			0.0	%

Total Commercial Loans and Leases		324,130			76.3	%		308,863			75.8	%
Consumer Loans
Real Estate		56,245			13.2	%		56,730			13.9	%
Home Equity		41,785			9.8	%		39,348			9.6	%
Installment		1,510			0.4	%		1,609			0.4	%
Overdrafts		192			0.1	%		360			0.1	%
Other		320			0.1	%		5			0.0	%

Total Consumer Loans		100,052			23.6	%		98,052			24.0	%
Net Deferred Costs & Unearned Discounts		575			0.1	%		798			0.2	%

Total Loans and Leases		424,757			100.0	%		407,713			100.0	%
Allowance for Loan and Lease Losses		(5,579	)					(6,087	)

Loans and Leases, net	$	419,178					$	401,626


	Three Months Ended							Three Months Ended
	June 30, 2009							June 30, 2008
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)							(dollars in thousands)
ASSETS
Interest-earning assets:
Loans and leases, net	$	418,952	$	6,632		6.33	%	$	345,200	$	6,434		7.46	%
Taxable securities		40,767		388		3.81	%		29,130		320		4.39	%
Tax-exempt securities		42,713		447		4.19	%		35,947		392		4.36	%
Interest bearing deposits at banks		1,104		—		0.06	%		651		3		1.84	%


Total interest-earning assets		503,536		7,467		5.93	%		410,928		7,149		6.96	%


Non interest-earning assets:

Cash and due from banks		11,904							12,143
Premises and equipment, net		9,606							8,343
Other assets		32,040							29,734


Total Assets		557,086							461,148


LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW	$	10,940	$	8		0.29	%	$	12,722	$	24		0.75	%
Regular savings		186,467		606		1.30	%		93,448		285		1.22	%
Muni-Vest savings		38,976		66		0.68	%		24,457		118		1.93	%
Time deposits		136,110		1,144		3.36	%		145,705		1,439		3.95	%
Other borrowed funds		26,397		191		2.89	%		39,901		288		2.89	%
Junior subordinated debentures		11,330		102		3.60	%		11,330		154		5.44	%
Securities sold U/A to repurchase		4,350		4		0.37	%		5,363		11		0.82	%


Total interest-bearing liabilities		414,570	$	2,121		2.05	%		332,926	$	2,319		2.79	%


Noninterest-bearing liabilities:
Demand deposits		85,334							72,940
Other		12,527							10,493

Total liabilities	$	512,431						$	416,359

Stockholders’ equity		44,655							44,789


Total Liabilities and Equity	$	557,086							461,148


Net interest earnings			$	5,346						$	4,830


Net yield on interest earning assets						4.25	%						4.70	%


Interest rate spread						3.88	%						4.17	%


	Six Months Ended							Six Months Ended
	June 30, 2009							June 30, 2008
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)							(dollars in thousands)
ASSETS
Interest-earning assets:
Loans and leases, net	$	412,997	$	13,295		6.44	%	$	333,680	$	12,608		7.56	%
Taxable securities		38,443		724		3.77	%		31,023		641		4.13	%
Tax-exempt securities		41,319		875		4.24	%		36,400		791		4.35	%
Interest bearing deposits at banks		856		—		0.06	%		676		7		2.07	%


Total interest-earning assets		493,615		14,894		6.03	%		401,779		14,047		6.99	%


Non interest-earning assets:

Cash and due from banks		11,701							12,086
Premises and equipment, net		9,704							8,332
Other assets		32,417							29,684


Total Assets		547,437							451,881


LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW	$	11,605	$	19		0.33	%	$	11,549	$	39		0.68	%
Regular savings		177,172		1,247		1.41	%		90,089		541		1.20	%
Muni-Vest savings		34,559		133		0.77	%		24,458		295		2.41	%
Time deposits		136,535		2,322		3.40	%		140,896		2,948		4.18	%
Other borrowed funds		31,037		377		2.43	%		41,566		667		3.21	%
Junior subordinated debentures		11,330		225		3.97	%		11,330		347		6.13	%
Securities sold U/A to repurchase		4,893		11		0.45	%		5,439		22		0.81	%


Total interest-bearing liabilities		407,131	$	4,334		2.13	%		325,327	$	4,859		2.99	%


Noninterest-bearing liabilities:
Demand deposits		82,294							71,464
Other		12,609							10,651

Total liabilities	$	502,034							407,442

Stockholders’ equity		45,403							44,439


Total Liabilities and Equity	$	547,437							451,881


Net interest earnings			$	10,560						$	9,188


Net yield on interest earning assets						4.28	%						4.57	%


Interest rate spread						3.90	%						4.00	%


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


	Calculated (decrease) increase
	in projected annual net interest income
	(in thousands)
	June 30, 2009			December 31, 2008
Changes in interest rates

+200 basis points		675			(293	)
+100 basis points		339			(140	)

-100 basis points		(90	)		(33	)
-200 basis points		N/A			20


ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


Director Nominees:	For:	Withheld:
Robert G. Miller, Jr	1,793,458	59,436
John R. O’Brien	1,787,773	65,120
James Tilley	1,783,439	69,455


	For:	Against:	Withheld:
2009 Long-Term Equity Incentive Plan	872,134	102,869	327,224


Exhibit No.		Name	Page No.

	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		39

	31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		40

	32.1	Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		41

	32.2	Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		42