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EVANS BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

e10vq
Table of Contents

 
 
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For quarterly period ended September 30, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-18539
EVANS BANCORP, INC.
(Exact name of registrant as specified in its charter)
     
New York   16-1332767
     
(State of other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
14 -16 North Main Street, Angola, New York   14006
     
(Address of principal executive offices)   (Zip Code)
(716) 926-2000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $.50 par value: 4,073,553 shares as of November 1, 2010
 
 

 


 

INDEX
EVANS BANCORP, INC. AND SUBSIDIARIES
         
    PAGE  
       
 
       
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    7  
 
       
    20  
 
       
    35  
 
       
    36  
 
       
       
 
       
    36  
 
       
    37  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
(in thousands, except share and per share amounts)
                 
    September 30,     December 31,  
    2010     2009  
ASSETS
               
Cash and due from banks
  $ 14,046     $ 12,379  
Interest-bearing deposits at banks
    3,957       604  
Securities:
               
Available for sale, at fair value (cost: $94,028 at September 30, 2010; $74,224 at December 31, 2009)
    97,531       75,854  
Held to maturity, at amortized cost (fair value: $1,738 at September 30, 2010; $3,133 at December 31, 2009)
    1,716       3,164  
 
               
Loans and leases, net of allowance for loan and lease losses of $9,099 in 2010 and $6,971 in 2009
    495,489       482,597  
 
               
Properties and equipment, net
    10,785       9,281  
Goodwill
    8,101       8,101  
Intangible assets
    1,389       2,068  
Bank-owned life insurance
    12,280       11,921  
Other assets
    13,586       13,475  
 
           
 
               
TOTAL ASSETS
  $ 658,880     $ 619,444  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
LIABILITIES
               
Deposits:
               
Demand
  $ 94,809     $ 87,855  
NOW
    30,386       15,619  
Regular savings
    242,897       229,609  
Muni-vest
    22,753       23,418  
Time
    144,441       143,007  
 
           
 
               
Total deposits
    535,286       499,508  
 
               
Securities sold under agreement to repurchase
    9,100       5,546  
Other short-term borrowings
    97       19,090  
Other liabilities
    12,138       10,831  
Junior subordinated debentures
    11,330       11,330  
Long-term borrowings
    27,000       27,180  
 
           
 
               
Total liabilities
    594,951       573,485  
 
           
 
               
CONTINGENT LIABILITIES AND COMMITMENTS
               
 
               
STOCKHOLDERS’ EQUITY:
               
 
               
Common stock, $.50 par value, 10,000,000 shares authorized; 4,067,330 and 2,795,198 shares issued, respectively, and 4,067,044 and 2,771,788 shares outstanding, respectively
    2,034       1,407  
Capital surplus
    40,434       27,279  
Retained earnings
    20,359       17,381  
Accumulated other comprehensive loss, net of tax
    1,102       (108 )
 
           
Total stockholders’ equity
    63,929       45,959  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 658,880     $ 619,444  
 
           
See Notes to Unaudited Consolidated Financial Statements

1


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands, except share and per share amounts)
                 
    Three Months Ended September 30,  
    2010     2009  
INTEREST INCOME
               
 
               
Loans and leases
  $ 7,111     $ 7,046  
Interest bearing deposits at banks
    1        
Securities:
               
Taxable
    496       479  
Non-taxable
    384       399  
 
           
Total interest income
    7,992       7,924  
INTEREST EXPENSE
               
Deposits
    1,444       1,624  
Other borrowings
    229       242  
Junior subordinated debentures
    86       90  
 
           
Total interest expense
    1,759       1,956  
NET INTEREST INCOME
    6,233       5,968  
PROVISION FOR LOAN AND LEASE LOSSES
    1,012       634  
 
           
NET INTEREST INCOME AFTER
               
PROVISION FOR LOAN AND LEASE LOSSES
    5,221       5,334  
NON-INTEREST INCOME
               
Bank charges
    471       562  
Insurance service and fees
    1,775       1,750  
Net gain on sales of securities
          10  
Premium on loans sold
    48       13  
Bank-owned life insurance
    117       111  
Gain on bargain purchase
          671  
Other
    712       712  
 
           
Total non-interest income
    3,123       3,829  
NON-INTEREST EXPENSE
               
Salaries and employee benefits
    3,708       3,216  
Occupancy
    707       687  
Supplies
    67       68  
Repairs and maintenance
    148       153  
Advertising and public relations
    88       133  
Professional services
    355       379  
Technology and communications
    265       173  
Amortization of intangibles
    221       222  
FDIC insurance
    312       167  
Other
    578       598  
 
           
Total non-interest expense
    6,449       5,796  
 
           
INCOME BEFORE INCOME TAXES
    1,895       3,367  
INCOME TAX PROVISION
    617       931  
 
           
NET INCOME
  $ 1,278     $ 2,436  
 
           
 
               
Net income per common share-basic
  $ 0.31     $ 0.87  
 
           
Net income per common share-diluted
  $ 0.31     $ 0.87  
 
           
Cash dividends per common share
  $ 0.20     $ 0.20  
 
           
Weighted average number of common shares outstanding
    4,067,044       2,795,198  
 
           
Weighted average number of diluted shares outstanding
    4,068,301       2,805,493  
 
           
See Notes to Unaudited Consolidated Financial Statements

2


Table of Contents

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

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands, except share and per share amounts)
                 
    Nine Months Ended September 30,  
    2010     2009  
INTEREST INCOME
               
Loans and leases
  $ 21,101     $ 20,340  
Interest bearing deposits at banks
    5       1  
Securities:
               
Taxable
    1,279       1,202  
Non-taxable
    1,189       1,274  
 
           
Total interest income
    23,574       22,817  
INTEREST EXPENSE
               
Deposits
    4,213       5,345  
Other borrowings
    701       630  
Junior subordinated debentures
    250       315  
 
           
Total interest expense
    5,164       6,290  
NET INTEREST INCOME
    18,410       16,527  
PROVISION FOR LOAN AND LEASE LOSSES
    2,535       9,583  
 
           
NET INTEREST INCOME AFTER
               
PROVISION FOR LOAN AND LEASE LOSSES
    15,875       6,944  
NON-INTEREST INCOME
               
Bank charges
    1,462       1,685  
Insurance service and fees
    5,651       5,698  
Net gain on sales of securities
    6       16  
Premium on loans sold
    73       67  
Bank-owned life insurance
    359       466  
Gain on bargain purchase
          671  
Other
    2,253       2,500  
 
           
Total non-interest income
    9,804       11,103  
NON-INTEREST EXPENSE
               
Salaries and employee benefits
    11,042       9,656  
Occupancy
    2,188       2,064  
Supplies
    204       244  
Repairs and maintenance
    509       502  
Advertising and public relations
    447       365  
Professional services
    1,157       1,046  
Technology and communications
    653       572  
Amortization of intangibles
    679       668  
FDIC insurance
    755       550  
Goodwill Impairment
          1,984  
Other
    1,814       1,916  
 
           
Total non-interest expense
    19,448       19,567  
 
           
INCOME (LOSS) BEFORE INCOME TAXES
    6,231       (1,520 )
INCOME TAX PROVISION (BENEFIT)
    1,874       (856 )
 
           
NET INCOME (LOSS)
  $ 4,357       ($664 )
 
           
 
               
Net income (loss) per common share-basic
  $ 1.26       ($0.24 )
 
           
Net income (loss) per common share-diluted
  $ 1.26       ($0.24 )
 
           
Cash dividends per common share
  $ 0.40     $ 0.61  
 
           
Weighted average number of common shares outstanding
    3,451,863       2,783,975  
 
           
Weighted average number of diluted shares outstanding
    3,454,984       2,787,617  
 
           
See Notes to Unaudited Consolidated Financial Statements

3


Table of Contents

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands, except share and per share amounts)
                                                 
                            Accumulated              
                            Other              
    Common     Capital     Retained     Comprehensive     Treasury        
    Stock     Surplus     Earnings     (Loss) Income     Stock     Total  
Balance, January 1, 2009
  $ 1,386     $ 26,696     $ 18,374     $ (537 )   $     $ 45,919  
 
                                               
Comprehensive loss:
                                               
Net Loss
                    (664 )                     (664 )
 
                                               
Unrealized gain on available-for-sale, net of reclassification of gain of $10 (after tax) securities, net of tax effect of ($638)
                            993               993  
 
                                               
Amortization of prior service cost on defined benefit plans and net loss net of tax effect of ($37)
                            57               57  
 
                                             
 
                                               
Total comprehensive loss
                                            386  
 
                                               
Cash dividends ($0.61 per common share)
                    (1,695 )                     (1,695 )
 
                                               
Stock options expense
            100                               100  
 
                                               
Reissued 2,000 shares treasury stock under dividend reinvestment plan
            (4 )                     27       23  
 
                                               
Issued 13,911 shares under dividend reinvestment plan
    7       153                               160  
 
                                               
Issued 9,499 shares under employee stock purchase plan
    5       98                               103  
 
                                               
Purchased 2,000 shares for treasury
                                    (27 )     (27 )
 
                                   
 
                                               
Balance, September 30, 2009
  $ 1,398     $ 27,043     $ 16,015     $ 513     $     $ 44,969  
 
                                   
 
                                               
Balance, January 1, 2010
  $ 1,407     $ 27,279     $ 17,381     $ (108 )   $     $ 45,959  
 
                                               
Comprehensive income:
                                               
Net Income
                    4,357                       4,357  
 
                                               
Unrealized gain on available-for-sale securities, net of reclassification of gain of $4 (after tax), net of tax effect of ($719)
                            1,154               1,154  
 
                                               
Amortization of prior service cost on defined benefit plans and net loss net of tax effect of ($43)
                            56               56  
 
                                             
 
                                               
Total comprehensive income
                                            5,567  
 
                                             
 
                                               
Cash dividends ($0.40 per common share)
                    (1,379 )                     (1,379 )
 
                                               
Stock options expense
            161                               161  
 
                                               
Issued 1,222,000 shares in common stock offering
    611       12,824                               13,435  
 
                                               
Issued 5,996 shares under dividend reinvestment plan
    3       84                               87  
 
                                               
Issued 10,250 shares under employee stock purchase plan
    5       94                               99  
 
                                               
Issued 15,810 restricted shares
    8       (8 )                              
 
                                   
 
                                               
Balance, September 30, 2010
  $ 2,034     $ 40,434     $ 20,359     $ 1,102     $     $ 63,929  
 
                                   
See Notes to Unaudited Consolidated Financial Statements

4


Table of Contents

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands)
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
OPERATING ACTIVITIES:
               
Interest received
  $ 23,425     $ 22,160  
Fees received
    9,621       10,271  
Interest paid
    (5,635 )     (6,687 )
Cash paid to employees and suppliers
    (15,710 )     (15,068 )
Pension plan contributions
    (150 )      
Income taxes paid
    (2,742 )     (831 )
Proceeds from sale of loans held for resale
    7,705       12,691  
Originations of loans held for resale
    (8,043 )     (13,348 )
 
           
 
               
Net cash provided by operating activities
    8,471       9,188  
 
               
INVESTING ACTIVITIES:
               
Available for sales securities:
               
Purchases
    (86,552 )     (64,315 )
Proceeds from maturities and calls
    66,788       59,414  
Held to maturity securities:
               
Purchases
    (130 )     (1,211 )
Proceeds from maturities and calls
    1,461       404  
Life insurance proceeds
          341  
Additions to properties and equipment
    (2,394 )     (451 )
Sale of other real estate
    96        
Increase in loans, net of repayments
    (15,934 )     (41,878 )
Cash received in acquisitions
          8,419  
Cash paid on earn-out agreements
          (40 )
 
           
 
               
Net cash used in investing activities
    (36,665 )     (39,317 )
 
               
FINANCING ACTIVITIES:
               
Proceeds from borrowings
    3,554       9,355  
Repayments of borrowings
    (19,173 )     (21,293 )
Increase in deposits
    35,778       47,605  
Dividends paid
    (566 )     (1,136 )
Purchase of treasury stock
          (27 )
Issuance of common stock
    13,621       263  
Re-issuance of treasury stock
          23  
 
           
 
               
Net cash provided by financing activities
    33,214       34,790  
 
               
Net increase in cash and equivalents
    5,020       4,661  
 
               
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    12,983       9,151  
 
           
 
               
End of period
  $ 18,003     $ 13,812  
 
           
 
               
 
  (continued)  

5


Table of Contents

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands)
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
               
 
               
Net income (loss)
  $ 4,357       ($664 )
 
               
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    1,405       1,289  
Goodwill impairment
          1,984  
Deferred tax benefit
    (665 )     (1,548 )
Provision for loan and lease losses
    2,535       9,583  
Net gain on sales of assets
          (16 )
Premium on loans sold
    (73 )     (67 )
Stock options expense
    161       100  
Proceeds from sale of loans held for resale
    7,705       12,691  
Originations of loans held for resale
    (8,043 )     (13,348 )
Changes in assets and liabilities affecting cash flow:
               
Other assets
    109       (1,146 )
Other liabilities
    980       330  
 
           
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 8,471     $ 9,188  
 
           
 
               
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
               
 
               
Acquisitions:
               
Fair value of
               
Assets acquired (noncash)
  $     $ 43,516  
Liabilities assumed
  $     $ 51,215  
See Notes to Unaudited Consolidated Financial Statements

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PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
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 (“GAAP”) 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. Certain reclassifications have been made to the 2009 unaudited consolidated financial statements to conform to the presentation used in 2010.
The results of operations for the three and nine month periods ended September 30, 2010 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, 2009. The Company has evaluated subsequent events for potential recognition and/or disclosure through the date of filing.
2. SECURITIES
The amortized cost of securities and their approximate fair value at September 30, 2010 and December 31, 2009 were as follows:

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    September 30, 2010  
    (in thousands)  
            Unrealized        
    Amortized                     Fair  
    Cost     Gains     Losses     Value  
Available for Sale:
                               
Debt securities:
                               
U.S. government agencies
  $ 26,178     $ 1,260     $     $ 27,438  
States and political subdivisions
    36,270       1,520             37,790  
 
                       
Total debt securities
  $ 62,448     $ 2,780     $     $ 65,228  
 
                               
Mortgage-backed securities:
                               
FNMA
  $ 10,935     $ 294     $     $ 11,229  
FHLMC
    12,147       303             12,450  
GNMA
    4,879       103             4,982  
CMO’S
    724       23             747  
 
                       
Total mortgage-backed securities
  $ 28,685     $ 723     $     $ 29,408  
 
                               
FRB Stock
    920                   920  
FHLB Stock
    1,975                   1,975  
 
                       
 
                               
Total
  $ 94,028     $ 3,503     $     $ 97,531  
 
                       
 
                               
Held to Maturity:
                               
Debt securities
                               
U.S. government agencies
                       
States and political subdivisions
    1,716       34       (12 )     1,738  
 
                       
 
                               
Total
  $ 1,716     $ 34     $ (12 )   $ 1,738  
 
                       

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    December 31, 2009  
    (in thousands)  
            Unrealized        
    Amortized                     Fair  
    Cost     Gains     Losses     Value  
Available for Sale:
                               
Debt securities:
                               
U.S. government agencies
  $ 19,675     $ 123     $ (86 )   $ 19,712  
States and political subdivisions
    36,503       1,229       (2 )     37,730  
 
                       
Total debt securities
  $ 56,178     $ 1,352     $ (88 )   $ 57,442  
 
                               
Mortgage-backed securities:
                               
FNMA
  $ 9,385     $ 225     $ (2 )   $ 9,608  
FHLMC
    3,723       147             3,870  
GNMA
    362       16             378  
CMO’S
    1,001             (20 )     981  
 
                       
Total mortgage-backed securities
  $ 14,471     $ 388     $ (22 )   $ 14,837  
 
                               
FRB Stock
    912                       912  
FHLB Stock
    2,663                   2,663  
 
                       
 
                               
Total
  $ 74,224     $ 1,740     $ (110 )   $ 75,854  
 
                       
 
                               
Held to Maturity:
                               
Debt securities
                               
U.S. government agencies
    35                   35  
States and political subdivisions
    3,129       19       (50 )     3,098  
 
                       
 
                               
Total
  $ 3,164     $ 19     $ (50 )   $ 3,133  
 
                       
Available for sale securities with a total fair value of $67.9 million and $65.2 million at September 30, 2010 and December 31, 2009, respectively, 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. The Company had a total of $27.0 million and $46.1 million in borrowed funds with FHLBNY at September 30, 2010 and December 31, 2009, respectively. 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 (“FHLB”) System, the Bank is required to hold stock in FHLBNY. The Bank held $2.0 million and $2.7 million in FHLBNY stock as of September 30, 2010 and December 31, 2009, respectively, at fair value.
The scheduled maturities of debt and mortgage-backed securities at September 30, 2010 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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    September 30, 2010  
    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
  $ 2,658     $ 2,701     $ 500     $ 501  
Due after year one through five years
    20,100       20,715       228       234  
Due after five years through ten years
    28,979       30,428       345       362  
Due after ten years
    39,396       40,792       643       641  
 
                       
 
                               
Total
  $ 91,133     $ 94,636     $ 1,716     $ 1,738  
 
                       
Information regarding unrealized losses within the Company’s available for sale securities at September 30, 2010 and December 31, 2009, 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.
                                                 
    September 30, 2010  
    (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
                                       
 
                                   
Total debt securities
  $     $     $     $     $     $  
 
                                               
Mortgage-backed securities:
                                               
FNMA
  $     $     $     $     $     $  
GNMA
                                   
FHLMC
                                       
CMO’S
                                   
 
                                   
Total mortgage-backed securities
  $     $     $     $     $     $  
 
Held to Maturity:
                                               
Debt securities:
                                               
States and political subdivisions
  $ 129     $ (1 )   $ 455     $ (11 )   $ 584     $ (12 )
 
                                   
 
                                               
Total temporarily impaired securities
  $ 129     $ (1 )   $ 455     $ (11 )   $ 584     $ (12 )
 
                                   

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    December 31, 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
  $ 14,589     $ (86 )   $     $     $ 14,589     $ (86 )
States and political subdivisions
    591       (2 )                 591       (2 )
 
                                   
Total debt securities
  $ 15,180     $ (88 )   $     $     $ 15,180     $ (88 )
 
                                               
Mortgage-backed securities:
                                               
FNMA
  $ 3,079     $ (1 )   $ 80     $ (1 )   $ 3,159     $ (2 )
FHLMC
                                   
CMO’S
                981       (20 )     981       (20 )
 
                                   
Total mortgage-backed securities
  $ 3,079     $ (1 )   $ 1,061     $ (21 )   $ 4,140     $ (22 )
 
                                               
Held To Maturity:
                                               
Debt securities:
                                               
States and political subdivisions
  $ 695     $ (50 )   $     $     $ 695     $ (50 )
 
                                   
 
                                               
Total temporarily impaired securities
  $ 18,954     $ (139 )   $ 1,061     $ (21 )   $ 20,015     $ (160 )
 
                                   
Management has assessed the securities available for sale in an unrealized loss position at September 30, 2010 and December 31, 2009 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, and the financial condition of the issuer (primarily government or government-sponsored enterprises). In addition, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of 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.
The Company has not recorded any other-than-temporary impairment charges in 2010 or 2009, the gross unrealized losses amounted to less than 0.1% of the total fair value of the securities portfolio at September 30, 2010 and December 31, 2009, and the gross unrealized loss position decreased by $148 thousand from December 31, 2009 to September 30, 2010. Nevertheless, it remains possible that there could be deterioration in the asset quality of 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”), Government National Mortgage Association (“GNMA”), 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
The Company follows the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures.” Those provisions relate to financial assets and liabilities carried at fair value and fair value disclosures related to financial assets and liabilities. ASC Topic 820 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
There are three levels of inputs to fair value measurements:
  Level 1, meaning the use of quoted prices for identical instruments in active markets;

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  Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and
  Level 3, meaning the use of unobservable inputs.
Observable market data should be used when available.
At September 30, 2010 and December 31, 2009, the estimated fair values of the Company’s financial instruments were as follows:
                                 
    September 30, 2010     December 31, 2009  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
    (in thousands)     (in thousands)  
Financial assets:
                               
Cash and cash equivalents
  $ 18,003     $ 18,003     $ 12,983     $ 12,983  
 
                       
Securities
  $ 99,247     $ 99,269     $ 79,018     $ 78,987  
 
                       
Loans and leases, net
  $ 495,489     $ 511,337     $ 482,597     $ 491,590  
 
                       
Financial liabilities:
                               
Deposits
  $ 535,286     $ 536,368     $ 499,508     $ 499,912  
 
                       
Other borrowed funds and securities sold
under agreements to repurchase
  $ 36,197     $ 37,557     $ 51,816     $ 52,362  
 
                       
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 practical 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 available-for-sale 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 ASC 820.
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 of held-to-maturity securities is estimated by discounting the future cash flows using the current rates at which similar agreements would be made with municipalities with similar credit ratings and for the same remaining maturities.
Loans and Leases, net. 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. This fair value calculation is not necessarily indicative of the exit price, as defined in ASC 820.
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.

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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 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 7 — “Contingent Liabilities and Commitments” to these Unaudited Consolidated Financial Statements, the Company was a party to financial instruments with off-balance sheet risk at September 30, 2010 and December 31, 2009. 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 September 30, 2010 and December 31, 2009 approximates the recorded amounts of the related fees, which are not considered material.
The following table presents the fair-value hierarchy levels for those financial instruments disclosed in the previous table which are measured at fair value on both a recurring and non-recurring basis at September 30, 2010 and December 31, 2009:
                                 
    Fair Value Measurement  
    Level 1     Level 2     Level 3     Fair Value  
September 30, 2010
                               
Securities available-for-sale:
                               
U.S. government agencies
  $     $ 27,438     $     $ 27,438  
States and political subdivisions
          37,790             37,790  
Mortgage-backed securities
          29,408             29,408  
FHLB stock
          1,975             1,975  
FRB stock
          920             920  
Net impaired loans
                7,077       7,077  
 
                               
December 31, 2009
                               
Securities available-for-sale:
                               
U.S. government agencies
  $     $ 19,712     $     $ 19,712  
States and political subdivisions
          37,730             37,730  
Mortgage-backed securities
          14,837             14,837  
FHLB stock
          2,663             2,663  
FRB stock
          912             912  
Net impaired loans
                7,611       7,611  
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 gross value of $9.5 million, with a valuation allowance of $2.4 million, at September 30, 2010, compared to a gross value for loans and leases of $8.8 million, with a valuation allowance of

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$1.2 million, at December 31, 2009. The changes in Level 3 assets measured at estimated fair value during the nine months ended September 30, 2010 are as follows:
         
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)        
 
Net impaired loans — December 31, 2009
    7,611  
Included in earnings/change in net assets
    (3,058 )
Sales, settlements, and payments
    (1,796 )
Transfers into Level 3, net
    4,320  
 
     
Net impaired loans — September 30, 2010
    7,077  
 
     
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, and the Company’s strategic goals in projecting net income and cash flows for the next five years. Due to the fact that the Company’s stock price was below the book value per share at September 30, 2010, management performed a goodwill impairment test at September 30, 2010. Management valued TEA, the reporting unit with goodwill, using cash flow modeling techniques. The fair value of TEA substantially exceeded its carrying value in the test. As a test for reasonableness, management also ascribed a value to the total Company by adjusting the market capitalization by accounting for stock market volatility and a control premium. Management did not use other transactions for comparable valuation multiples to earnings for the total Company because there was not a meaningful sample of similar transactions to gain any comfort from using them for valuation purposes. The methodology used in the third quarter 2010 test was identical to those used in the test performed as of December 31, 2009 and described in more detail in the Application of Critical Accounting Estimates section of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K for the year ended December 31, 2009. There were no impairment charges as a result of the tests performed on September 30, 2010 and December 31, 2009.
4. ALLOWANCE FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses represents the amount charged against the Bank’s earnings to maintain an allowance for probable loan and lease losses based on management’s evaluation of the loan and lease portfolio at the balance sheet date. Factors considered by the Bank’s management in establishing the allowance include: the collectability of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease percentages, the fair value of the collateral, input from regulatory agencies, and general economic conditions.
On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectability of the loans and leases in its portfolio by incorporating feedback provided by the Bank’s internal loan and lease staff, an independent internal loan and lease review function and information provided by examinations performed by regulatory agencies.
The analysis of the allowance for loan and lease losses is composed of two components: specific credit allocation and general portfolio allocation. The specific credit allocation includes a detailed review of each impaired loan and allocation is made based on this analysis. Factors may include the appraisal value of the collateral, the age of the appraisal, the type of collateral, the performance of the loan to date, the performance of the borrower’s business based on financial statements, and legal judgments involving the borrower. 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 general portfolio allocation is segmented into pools of loans with similar characteristics. Separate pools of loans include similar types of loans as well as pools that contain loans with similar credit characteristics. These

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credit characteristics include debtor cash flow and payment history. The qualitative factors applied to the general portfolio allocation reflect management’s evaluation of various conditions. The conditions evaluated 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 non-accruing 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 nine month periods ended September 30, 2010 and 2009. It should be noted that on June 30, 2009, the Company placed its direct financing lease portfolio into held-for-sale status, thereby reducing the allowance for lease losses to zero. The market value was determined to be $7.2 million less than the book value. The portfolio was subsequently placed back into held-for-investment as of September 30, 2009 after management determined that a greater value for the portfolio would be realized by keeping it rather than selling it. The portfolio was re-classified as held-for-investment using the same $7.2 million mark. Since that time, leases that are determined to have zero value are applied to the remaining mark, rather than charged off through allowance. As of September 30, 2010, the Company had an allowance for lease losses of $1.1 million and a remaining mark of $2.1 million. Leases written off against the mark were $0.3 million and $2.0 million for the three and nine months ended September 30, 2010, compared with $1.4 million in the three and nine month periods ended September 30, 2009.
Allowance for loan and lease losses
                 
    Nine months ended September 30,  
    2010     2009  
    (in thousands)  
Beginning balance, January 1
  $ 6,971     $ 6,087  
Charge-offs:
               
Real estate
    (154 )     (35 )
Direct financing leases
          (9,483 )
Commercial
    (223 )     (280 )
Consumer loans
    (3 )     (12 )
Other
    (45 )     (35 )
 
           
Total charge-offs
    (425 )     (9,845 )
 
               
Recoveries:
               
Real estate
    1        
Direct financing leases
          212  
Commercial
          9  
Consumer loans
          1  
Other
    17       16  
 
           
Total recoveries
    18       238  
 
           
 
               
Net charge-offs
    (407 )     (9,607 )
 
               
Provision for loan and lease losses
    2,535       9,583  
 
           
 
               
Ending balance, September 30
  $ 9,099     $ 6,063  
 
           
 
               
Ratio of allowance for loan and lease loss to total loans and leases
    1.80 %     1.27 %
 
           

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5. PER SHARE DATA
The common stock per share information is based upon the weighted average number of shares outstanding during each period. The Company had 1,257 and 3,121 dilutive shares for the three and nine month periods ended September 30, 2010. This compares with 10,295 and 3,642 dilutive shares for the three and nine month periods ended September 30, 2009.
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three and nine months periods ended September 30, 2010 there were approximately 269,340 and 172,764 shares, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive. There were 264,989 and 171,578 potentially anti-dilutive shares for the three and nine month periods ended September 30, 2009.
6. SEGMENT INFORMATION
The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and nine month periods ended September 30, 2010 and 2009.
                         
    Three Months Ended September 30, 2010  
            (in thousands)        
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 6,286       ($53 )   $ 6,233  
 
                       
Provision for loan and lease losses
    1,012             1,012  
 
                 
 
                       
Net interest income (expense) after provision for loan and lease losses
    5,274       (53 )     5,221  
 
                       
Non-interest income
    1,348             1,348  
 
                       
Insurance service and fees
          1,775       1,775  
 
                       
Non-interest expense
    5,095       1,354       6,449  
 
                 
 
                       
Income before income taxes
    1,527       368       1,895  
 
                       
Income tax provision
    474       143       617  
 
                 
 
                       
Net income
  $ 1,053     $ 225     $ 1,278  
 
                 

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    Three Months Ended September 30, 2009  
            (in thousands)        
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 5,996       ($28 )   $ 5,968  
 
                       
Provision for loan and lease losses
    634             634  
 
                 
 
                       
Net interest income (expense) after provision for loan and lease losses
    5,362       (28 )     5,334  
 
                       
Non-interest income
    2,079             2,079  
 
                       
Insurance service and fees
          1,750       1,750  
 
                       
Non-interest expense
    4,423       1,373       5,796  
 
                 
 
                       
Income before income taxes
    3,018       349       3,367  
 
                       
Income tax provision
    796       135       931  
 
                 
 
                       
Net income
  $ 2,222     $ 214     $ 2,436  
 
                 
                         
    Nine Months Ended September 30, 2010  
            (in thousands)        
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 18,562       ($152 )   $ 18,410  
 
                       
Provision for loan and lease losses
    2,535             2,535  
 
                 
 
                       
Net interest income (expense) after provision for loan and lease losses
    16,027       (152 )     15,875  
 
                       
Non-interest income
    4,153             4,153  
 
                       
Insurance service and fees
          5,651       5,651  
 
                       
Non-interest expense
    15,257       4,191       19,448  
 
                 
 
                       
Income before income taxes
    4,923       1,308       6,231  
 
                       
Income tax provision
    1,369       505       1,874  
 
                 
 
                       
Net income
  $ 3,554     $ 803     $ 4,357  
 
                 

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    Nine Months Ended September 30, 2009  
            (in thousands)        
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 16,640       ($113 )   $ 16,527  
 
                       
Provision for loan and lease losses
    9,583             9,583  
 
                 
 
                       
Net interest income (expense) after provision for loan and lease losses
    7,057       (113 )     6,944  
 
                       
Non-interest income
    5,405             5,405  
 
                       
Insurance service and fees
          5,698       5,698  
 
                       
Non-interest expense
    15,505       4,062       19,567  
 
                 
 
                       
(Loss) Income before income taxes
    (3,043 )     1,523       (1,520 )
 
                       
Income tax (benefit) provision
    (1,444 )     588       (856 )
 
                 
 
                       
Net (loss) income
    ($1,599 )   $ 935       ($664 )
 
                 
7. CONTINGENT LIABILITIES AND COMMITMENTS
The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:
                 
    September 30, 2010     December 31, 2009  
    (in thousands)  
Commitments to extend credit
  $ 105,544     $ 90,994  
 
               
Standby letters of credit
    3,750       3,316  
 
           
 
               
Total
  $ 109,294     $ 94,310  
 
           
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 GAAP. The changes in the fair value of these commitments, due to interest rate risk, are not recorded on the consolidated balance sheets as the fair value of these derivatives is not considered material.
The Company is subject to possible litigation proceedings in the normal course of business. As of September 30, 2010 and December 31, 2009, there were no claims pending against the Company that management considered material.

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8. NET PERIODIC BENEFIT COSTS
On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered substantially all Company employees. The plan provides benefits that are based on the employees’ compensation and years of service. Under the freeze, eligible employees will receive at retirement the benefits already earned through January 31, 2008, but do not accrue any additional benefits. As a result, service cost is no longer incurred.
The Bank used an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual expense 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 Bank contributed $150,000 to its defined benefit pension plan in July 2010.
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 nine month periods ended September 30, 2010 and 2009:
                                 
    Nine months ended September 30,  
    (in thousands)  
                    Supplemental Executive  
    Pension Benefits     Retirement Plan  
    2010     2009     2010     2009  
Service cost
  $     $     $ 123     $ 45  
 
                               
Interest cost
    161       161       141       135  
 
                               
Expected return on plan assets
    (146 )     (127 )            
 
                               
Amortization of prior service cost
                65       42  
 
                               
Amortization of the net loss
    26       42       8       10  
 
                       
 
                               
Net periodic cost
  $ 41     $ 76     $ 337     $ 232  
 
                       
9. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update (“ASU”) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of the ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The ASU is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. To achieve that objective, an entity should provide disclosures on a disaggregated basis, including portfolio segment and class of financing receivable. The ASU lists a number of additional disclosures that will be required to be provided by entities once the ASU is adopted. The new guidance is effective for interim periods ending after December 15, 2010. The Company will adopt ASU 2010-20 for the year ended December 31, 2010. The ASU will have a significant impact on the amount of information disclosed by the Company about the credit quality of its loans and leases and the allowance for loan and lease losses.

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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 (such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, discussed in greater detail below), 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 SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Many of these factors are beyond the Company’s control and are difficult to predict.
Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP 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 — “Fair Value Measurements” 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 — “Organization and Summary of

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Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2009. 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 presented 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 for the year ended December 31, 2009, describes the methodology used to determine the allowance for loan and lease losses.
Goodwill
The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is typically performed annually on December 31st. Since the stock price of the Company was below the book value per share at September 30, 2010, another goodwill impairment test was performed. No impairment charges were incurred as a result of the test and the fair value of the tested reporting unit substantially exceeded its fair value.
RECENT LEGISLATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into law on July 21, 2010. The Act contains numerous and wide-ranging reforms to the structure and operation of the U.S. financial system. Among the Act’s significant regulatory changes are (i) the imposition of more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios and prohibiting new trust preferred issuances from counting as Tier 1 capital; (ii) making permanent the temporary increase in FDIC deposit insurance coverage from $100,000 to $250,000 and providing for unlimited deposit insurance on noninterest-bearing transaction accounts, together with an increase in the minimum Deposit Insurance Fund reserve requirement and a change in the assessment base from deposits to net assets; (iii) the creation of the Bureau of Consumer Financial Protection, a new financial consumer protection agency, which is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer compliance; (iv) provisions permitting states to adopt stricter consumer protection laws and permitting state attorneys general to enforce rules issued by the Bureau of Consumer Financial Protection; (v) increased regulation of derivatives and hedging transactions and restrictions on the Company’s ability to engage in certain proprietary trading and investing activities; (vi) limitations on debit card interchange fees; (vii) the imposition of new disclosure and other requirements related to corporate governance and executive compensation; and (viii) the creation of the Financial Stability Oversight Council, with responsibility for identifying and monitoring systemic risks posed by financial firms, activities and practices.
The Company is currently evaluating the potential impact of the Act on its business, financial condition and results of operations. Management expects that some provisions of the Act may have adverse effects on the Company, such

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as the cost of complying with the numerous new regulations and disclosure and reporting requirements mandated by the Act. Portions of the Act become effective at different times, and many of the Act’s provisions consist of general statements directing various regulators to issue more detailed rules. Consequently, the full scope of the Act’s impact on the financial system in general and the Company in particular cannot be predicted at this time.
ANALYSIS OF FINANCIAL CONDITION
Loan and Lease Activity
Total loans and leases grew to $504.6 million at September 30, 2010, reflecting a $1.6 million or 0.3% increase from June 30, 2010 and a 3.1% increase from December 31, 2009. Loans secured by real estate were $410.6 million at September 30, 2010, an increase of $0.5 million or 0.1% from June 30, 2010 and a $21.1 million or 5.4% increase from December 31, 2009. The two portfolios that grew the most in the second quarter were construction loans and commercial and industrial (C&I) loans.
In 2008 and 2009, some of the Bank’s larger banking competitors and the conduit markets curtailed their lending activities somewhat and consequently created opportunities in the local commercial real estate market for smaller banks, such as the Bank. The increased opportunities resulted in the Bank’s strong commercial real estate growth rates. Given the Bank’s experienced and local lending team, its history of low commercial real estate losses, and knowledge of its customers, management feels comfortable that its growth in commercial real estate over the past couple years has put quality assets on the balance sheet. However, the Company’s strategy has shifted to a more diverse loan portfolio not as heavily reliant on commercial real estate for growth. This is evidenced in the lack of growth in commercial and multi-family real estate loans in the third quarter while C&I loans increased $4.4 million, or 7.1% from June 30, 2010. C&I loans traditionally provide banks with a better opportunity to gain new commercial deposits and establish deeper relationships.
The national direct financing lease portfolio declined $3.9 million during the third quarter and has declined $12.7 million year-to-date to $18.7 million at September 30, 2010 as the Company ceased lease originations in the second quarter of 2009 and is winding down the portfolio and exiting this business line. In the third quarter of 2009, the Company announced that it had ceased its marketing efforts to sell the portfolio and intends to service the portfolio until maturity. The national direct financing lease portfolio currently comprises 3.7% of the Company’s total loan and lease portfolio, down from 4.5% at June 30, 2010 and 6.4% at December 31, 2009.
Residential 1-4 family real estate loans decreased $1.3 million from June 30, 2010 and $2.2 million from December 31, 2009. 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 stronger consumer real estate demand. 2009 was the high point of the Bank’s residential mortgage demand, with demand slowing somewhat in 2010 as the low rate environment has been in place for so long that many of the consumers who would be candidates to re-finance have already done so. Although demand has abated in 2010 somewhat, it is still higher than the typical volume previously experienced in the Company’s history. Given the low fixed rates and long terms of the loans being originated, the Company has sold many of its originated residential mortgage loans. This, along with prepayments from existing customers re-financing their homes, has resulted in decreased consumer real estate balances at September 30, 2010 when compared with June 30, 2010 and December 31, 2009.
The Bank sells these fixed rate residential mortgages to FNMA, while maintaining the servicing rights for those mortgages. During the three month period ended September 30, 2010, the Bank sold mortgages to FNMA totaling $2.8 million, as compared with $4.0 million sold during the three month period ended September 30, 2009. During the nine month period ended September 30, 2010, the Bank sold mortgages to FNMA totaling $7.6 million, as compared with $12.6 million during the nine month period ended September 30, 2009. Sales to FNMA decreased due to a decline in originations. At September 30, 2010, the Bank had a loan servicing portfolio principal balance of $41.3 million upon which it earns servicing fees, as compared with $40.3 million at June 30, 2010 and $37.4 million at December 31, 2009. The value of the mortgage servicing rights for that portfolio was $0.3 million at September 30, 2010, compared with $0.4 million at June 30, 2010 and $0.3 million at December 31, 2009. The value of the mortgage servicing rights has not increased in perfect correlation to the increase in the size of the servicing portfolio because the historic low interest rate environment portends more prepayments and refinancing of loans in the servicing portfolio with higher coupon rates, reducing the amount of time the Company has to earn servicing fees from FNMA. Residential mortgage loans held-for-sale were $0.7 million at September 30, 2010, compared with

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$0.3 million at June 30, 2010 and $0.3 million at December 31, 2009. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.
Loan and Lease Portfolio Composition
The following table presents selected information on the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated.
                 
    September 30, 2010     December 31, 2009  
    (in thousands)  
Mortgage loans on real estate:
               
Residential 1-4 family
  $ 78,591     $ 80,775  
Commercial and multi-family
    255,621       244,242  
Construction
    30,764       21,010  
Second mortgages
    6,439       7,813  
Home equity lines of credit
    39,179       35,633  
 
           
Total real estate loans
    410,594       389,473  
 
               
Direct financing leases
    18,745       31,486  
Commercial and industrial loans
    66,576       60,345  
Consumer loans
    2,905       2,957  
Other
    5,453       4,782  
Net deferred loan origination costs
    315       525  
 
           
 
    504,588       489,568  
Allowance for loan losses
    (9,099 )     (6,971 )
 
           
 
               
Loans, net
  $ 495,489     $ 482,597  
 
           
Other loans include $0.9 million and $0.2 million at September 30, 2010 and December 31, 2009, respectively, of overdrawn deposit accounts classified as loans.
Leasing Portfolio
Net loan and lease charge-offs were $0.2 million and $0.4 million for the three and nine month periods ended September 30, 2010 as compared with $0.1 million and $9.6 million in the three and nine month periods ended September 30, 2009. Nearly all of the net charge-offs for 2009 was in the Company’s leasing portfolio. What follows is an explanation of the sequence of events for ENL over the past 18 months, followed by a table illustrating the history of the leasing portfolio’s accounting over the past 15 months.
The rapid deterioration of the portfolio, the lack of strategic fit in the Company’s community banking business model, 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 lease business and market the portfolio for sale. This decision resulted in the classification of the leasing portfolio as held-for-sale and the portfolio being marked to its market value at June 30, 2009. The mark-to-market adjustment was $7.2 million. At September 30, 2009, management determined to keep the lease portfolio, terminated its plans to actively market the portfolio for sale, and the portfolio was placed back into held-for-investment at the revised carrying amount as of June 30, 2009. The difference between the principal value and the carrying value, initially created by the mark-to-market adjustment at June 30, 2009, reduces over time as individual leases deteriorate, become uncollectible, and are written off. The allowance for lease losses was zero at June 30, 2009 when the portfolio was classified as held-for-sale and reported at its fair market value. With the portfolio classified as held-for-investment at September 30, 2010, the portfolio has been evaluated in accordance with the Company’s normal credit review policies in determining the appropriate allowance for lease losses. During the third quarter of 2010, $0.3 million in leases were deemed uncollectible and the difference between the principal value and carrying value of the leases declined from $2.4 million to $2.1 million. This is a decline in the quarterly write-offs from $0.6 million in the second quarter of 2010 and $1.1 million in the first quarter of 2010. Non-performing leases of $2.4 million at September 30, 2010 have declined from $2.9 million at December 31, 2009, but remained flat compared with $2.4 million at June 30, 2010. Leases still accruing but delinquent 31 days or more were $0.4 million at September 30, 2010, an increase from $0.2 million at June 30, 2010 and $0.3 million at December 31, 2009. With charge-offs continuing to reduce the remaining mark

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on the leasing portfolio and non-accruing and delinquent leases not correspondingly declining, management determined that an additional $0.3 million in reserve for lease losses was appropriate at September 30, 2010.
                                         
    ($ in thousands)  
    2010     2009  
    September 30,     June 30,     March 31,     December 31,     September 30,  
         
Leasing Principal Balance
  $ 20,869     $ 25,142     $ 29,788     $ 35,645     $ 41,950  
Mark
    (2,124 )     (2,469 )     (3,084 )     (4,159 )     (5,732 )
         
Leasing Carrying Value
  $ 18,745     $ 22,673     $ 26,704     $ 31,486     $ 36,218  
         
 
                                       
Mark-to-Market Adjustment
  $ 2,469     $ 3,084     $ 4,159     $ 5,732     $ 7,164  
Net Write-Offs
    (345 )     (615 )     (1,075 )     (1,573 )     (1,432 )
         
Remaining Mark
  $ 2,124     $ 2,469     $ 3,084     $ 4,159     $ 5,732  
         
 
                                       
                                         
    For the three months ended     For the three months ended  
    2010     2009  
    September 30,     June 30,     March 31,     December 31,     September 30,  
         
Allowance for lease losses
  $ 772     $ 772     $ 0     $ 0     $ 0  
Provision for leases
    305             772              
Leasing net charge-offs
                             
         
Allowance for lease losses
  $ 1,077     $ 772     $ 772     $ 0     $ 0  
         
 
                                       
Total mark plus allowance
  $ 3,201     $ 3,241     $ 3,856     $ 4,159     $ 5,732  
Mark + allowance/leasing
                                       
principal balance
    15.34 %     12.89 %     12.94 %     11.67 %     13.66 %
Non-Performing Loans and Leases
Total non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled $9.9 million, or 1.96% of total loans and leases outstanding, at September 30, 2010, compared with $11.1 million, or 2.20% of total loans and leases outstanding at June 30, 2010 and $12.9 million, or 2.64% at December 31, 2009. In the third quarter, two loans totaling $1.4 million were removed from the 90 days past due and still accruing category. One of the loans, for $0.8 million, was extended under normal terms after administrative delays caused the loan to go past its original maturity date, and is no longer categorized as a non-performing loan. The other loan, for $0.6 million, was a construction loan and was put on nonaccrual status and is still considered a non-performing loan. Most of the rest of the decline in nonperforming loans in the quarter ($0.2 million) is attributable to charge-offs of previously non-performing loans.
Non-accruing mortgage loans on real estate were $5.1 million as of September 30, 2010, up from $4.5 million at June 30, 2010 and $4.3 million at December 31, 2009. The increase is primarily attributable to the aforementioned downgrade of a $0.6 million construction loan from the former Waterford portfolio.
Non-accruing direct financing leases were $2.4 million at September 30, 2010, flat compared with the $2.4 million balance at June 30, 2010, but lower than the $2.9 million balance at December 31, 2009. Most of the Company’s direct financing lease write-offs are coming from those in non-accruing status. Thus far in 2010, leasing write-offs have outpaced the rate of formerly performing leases being placed into non-accrual status, resulting in the decrease in non-accruing leases.
Non-accruing commercial and industrial loans were $1.7 million at September 30, 2010, compared with $1.9 million at June 30, 2010 and $1.4 million at December 31, 2009. The decrease in the quarter was related to the charge-off of a commercial and industrial loan for $0.2 million. The increase since December was primarily caused by the downgrading of two commercial loan relationships in the second quarter.

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Loans 90 days past due and still accruing were $0.5 million at September 30, 2010, a decrease from $2.0 million at June 30, 2010 and $4.1 million at December 31, 2009. The two loans remaining in this category are more than 90 days past the initial maturity. The Bank intends to either extend the loans under normal underwriting criteria and market terms or receive payment in full. The delay in refinancing or repayment is generally due to administrative, legal, or other processing matters, and not due to the ability to pay or creditworthiness of the borrower. Of the matured loans that made up this balance at December 31, 2009, March 31, 2010, and June 30, 2010, all except the construction loan for $0.6 million at June 30, 2010 that went into nonaccrual were renewed under normal underwriting criteria and market terms or paid in full.
The following table sets forth information regarding non-performing loans and leases as of the dates specified.
                 
    September 30, 2010     December 31, 2009  
    (in thousands)  
Non-accruing loans and leases:
               
Mortgage loans on real estate
               
Residential 1-4 family
  $ 816     $ 1,076  
Commercial and multi-family
    2,102       2,713  
Construction
    1,966       417  
Second mortgages
    74        
Home equity lines of credit
    189       128  
 
           
Total mortgage loans on real estate
    5,147       4,334  
 
               
Direct financing leases
    2,372       2,905  
 
               
Commercial and industrial loans
    1,661       1,400  
 
               
Consumer loans
    200       197  
 
           
 
               
Total non-accruing loans and leases
  $ 9,380     $ 8,836  
 
           
 
               
Accruing loans and leases 90+ days past due
    523       4,112  
 
           
Total non-performing loans and leases
  $ 9,903     $ 12,948  
 
           
Total non-performing loans and leases as a percentage of total assets
    1.50 %     2.09 %
Total non-performing loans and leases as a percentage of total loans and leases
    1.96 %     2.64 %
For the three and nine month periods ended September 30, 2010, gross interest income that would have been reported on non-accruing loans and leases had they been current was $186 thousand and $506 thousand, respectively. For the three and nine month periods ended September 30, 2009, gross interest income that would have been reported on non-accruing loans and leases had they been current was $70 thousand and $287 thousand, respectively. The amount has increased year-over-year to the higher level of non-accruing loans and leases. There was $13 thousand and $53 thousand of interest income on non-accruing loans and leases included in net income for the three and nine month periods ended September 30, 2010. There was $71 thousand and $200 thousand of interest income on non-accruing loans and leases included in net income for the three and nine month periods ended September 30, 2009. This amount has decreased as more loans and leases were added to non-accruing status in the prior year than in the current year, resulting in more loans and leases in 2009 that earned income prior to be putting in non-accruing status
The Company had $1.6 million in loans and leases that were restructured in a troubled debt restructuring at September 30, 2010, compared with $1.9 million at June 30, 2010 and $2.2 million at December 31, 2009. $0.5 million, $0.6 million, and $0.9 million of the troubled debt restructurings at September 30, 2010, June 30, 2010, and December 31, 2009, respectively, were in non-accrual. All of the restructurings were undertaken in an effort to

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maximize the Company’s ability to collect on loans and leases where borrowers were experiencing financial issues. The general practice of the Company is to work with borrowers so that they are able to pay back their loan or lease in full. If a borrower continues to be delinquent or cannot meet the terms of a troubled debt restructuring, the loan or lease will be placed in nonaccrual or charged off.
The allowance for loan and lease losses totaled $9.1 million or 1.80% of total loans and leases outstanding at September 30, 2010, as compared with $8.3 million or 1.65% of total loans and leases outstanding at June 30, 2010, and $7.0 million or 1.42% of total loans and leases outstanding as of December 31, 2009. The allowance increase this year has resulted from a $2.5 million provision for loan and lease losses while maintaining fairly low charge-off levels at 0.11% of average loans and leases, or $0.4 million. The provision has resulted from an upward trend in loans categorized as special mention or substandard in the Company’s internal credit ratings, loan growth, and additional reserve needed for the leasing portfolio as non-performing leases have not declined in tandem with the roll-off of the portfolio. However, despite the relatively high level of provision for loan and lease losses, the Company’s charge-off level had remained better than industry averages at $0.4 million, or 0.11% of average loans and leases for the year to date.
At September 30, 2010, the Company had $35.1 million in loans remaining from its FDIC-assisted acquisition of Waterford Village Bank (“Waterford”) in July 2009. $2.2 million, or 6.4%, of the loans in the former Waterford portfolio are non-accruing and considered non-performing. The indemnification asset, which represents the expected proceeds from FDIC loss share claims related to former Waterford loans which are charged off, was $0.9 million at September 30, 2010, compared with $1.0 million at June 30, 2010 and $1.4 million at December 31, 2009. The asset declines as losses are reimbursed by the FDIC or losses are not incurred as initially recorded.
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.
Investing Activities
Total securities were $99.3 million at September 30, 2010, reflecting a $2.1 million, or 2.16%, increase from $97.2 million at June 30, 2010 and a $20.3 million, or 25.7%, increase from $79.0 million at December 31, 2009. In the second quarter of 2010, the Company raised net proceeds of $13.4 million through a registered offering of shares of its common stock and experienced deposit growth that outpaced loan growth. With cash and interest-bearing deposits at correspondent banks paying close to zero in this historically low interest rate environment, management purchased investment securities of various types and maturities to better utilize the excess capital. Compared with December 31, 2009, as of September 30, 2010, the Company added $7.7 million in U.S. government-sponsored agency bonds, $0.1 million in tax-advantaged municipal bonds, and $14.6 million in U.S. government-sponsored mortgage-backed securities. Securities and interest-bearing deposits at correspondent banks made up 16.9% of the Bank’s total average interest earning assets in the third quarter of 2010, compared with 15.1% in the second quarter of 2010 and 15.6% in the third quarter of 2009.
Due to the mix of the investment security purchases made in 2010, the Company’s concentration in tax-advantaged municipal bonds decreased from 51.7% at December 31, 2009 to 39.8% at September 30, 2010 and the concentration in government-sponsored mortgage-backed securities increased from 18.8% at December 31, 2009 to 29.6% at September 30, 2010. U.S. government-sponsored agency bonds of various types comprised 27.6% of the portfolio at September 30, 2010 versus 25.0% at December 31, 2009. As a member of both the Federal Reserve System and FHLBNY, the Bank is required to hold stock in those entities. These investments made up 2.9% of the portfolio at September 30, 2010 versus 4.5% at December 31, 2009. 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. With interest rates at historical lows, the unrealized gain position of the investment portfolio increased from $1.6 million and $2.7 million at December 31, 2009 and June 30, 2010, respectively, to $3.5 million at September 30, 2010.
The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. The average expected life of the securities portfolio was 3.4 years as of September 30, 2010 compared with 3.6 years at June 30, 2010 and 3.2 years as of December 31, 2009. Available-for-sale securities with a total fair value of $67.9

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million, $69.9 million, and $65.2 million at September 30, 2010, June 30, 2010 and December 31, 2009, respectively, 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 FNMA or FHLMC preferred stock investments in its investment portfolio.
Funding Activities
Total deposits at September 30, 2010 were $535.3 million, reflecting a $0.3 million, or 0.1%, decrease from June 30, 2010, but a $35.8 million, or 7.2%, increase from December 31, 2009. Demand deposits at September 30, 2010 were $94.8 million, reflecting a $1.1 million or 1.1% decrease from June 30, 2010, but a $7.0 million or 7.9% increase from December 31, 2009. 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 during the three month period ended September 30, 2010 were 7.9% higher than the second quarter of 2010 and 10.8% higher than the prior year’s third quarter. Most of the Company’s growth in demand deposits has come from commercial customers.
In 2010, the Company’s deposit growth vehicle has shifted from the premium money market savings product to its complementary Better Checking and Better Savings products, which are included in the NOW and regular savings deposit categories on the financial statements, respectively. The Better Checking product, introduced in the fourth quarter of 2009, is unique in the Bank’s Western New York footprint as it pays a premium interest rate as a reward to customers who demonstrate a deep relationship with the Company as evidenced by regular use of their debit card, use of direct deposit, and electronic statements. Overall, NOW deposits increased $4.7 million, or 18.4%, in the third quarter, and $14.8 million, or 94.6% for the first nine months of the year. Regular savings deposits increased $3.6 million, or 1.5%, in the third quarter of 2010 after the Better Savings product was introduced during the second quarter. Regular savings deposits of $242.9 million at September 30, 2010 are up $13.3 million from the end of last year.
The Company experienced a decline in its muni-vest savings product in the third quarter. The Company’s muni-vest savings portfolio includes a small number of municipal customers. The balance of the portfolio can experience a large amount of volatility based on property tax inflow seasonality and the specific circumstances of a small number of rate-sensitive municipal customers. Muni-vest deposits were $22.8 million at September 30, 2010, $27.7 million at June 30, 2010, and $23.4 million at December 31, 2009. Time deposits were $144.4 million at September 30, 2010, compared with $147.0 million at June 30, 2010 and $143.0 million at December 31, 2009. After a successful promotion of 5 year certificates of deposit in the second quarter, market interest rates fell further in the third quarter. The lower rates on the long end of the yield curve have once again reduced the consumer demand for longer-term deposits.
Short-term borrowings, which typically include the Bank’s overnight line of credit and other advances with the FHLBNY and other short-term notes, remained at $0.1 million at September 30, 2010, unchanged from $0.1 million at June 30, 2010. However, this does represent a significant decrease from $19.1 million at December 31, 2009. Because the Company’s deposit growth has outpaced its loan growth this year and with the injection of cash from the common stock offering in the second quarter of 2010, the Bank’s outstanding overnight line of credit with FHLBNY, which was $19.1 million at December 31, 2009, was reduced to zero at June 30, 2010 and September 30, 2010. Long-term borrowings at September 30, 2010 remained unchanged from the June 30, 2010 balance of $27.0 million, and down slightly from $27.2 million at December 31, 2009.

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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.
                                                 
    Three Months Ended     Three Months Ended  
    September 30, 2010     September 30, 2009  
    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
  $ 496,037     $ 7,111       5.73 %   $ 455,509     $ 7,046       6.19 %
Taxable securities
    59,091       496       3.36 %     43,471       479       4.41 %
Tax-exempt securities
    39,515       384       3.89 %     38,842       399       4.11 %
Interest bearing deposits at banks
    2,189       1       0.18 %     1,623             0.05 %
 
                                   
 
                                               
Total interest-earning assets
    596,832     $ 7,992       5.36 %     539,445     $ 7,924       5.88 %
 
                                       
 
                                               
Non interest-earning assets:
                                               
 
                                               
Cash and due from banks
    13,818                       13,125                  
Premises and equipment, net
    10,772                       9,456                  
Other assets
    34,813                       32,756                  
 
                                           
 
                                               
Total Assets
  $ 656,235                     $ 594,782                  
 
                                           
 
                                               
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
NOW
  $ 26,684     $ 70       1.05 %   $ 9,588     $ 5       0.21 %
Regular savings
    240,424       421       0.70 %     209,406       520       0.99 %
Muni-Vest savings
    25,162       29       0.46 %     31,908       35       0.44 %
Time deposits
    145,202       924       2.55 %     149,354       1,064       2.85 %
Other borrowed funds
    27,490       224       3.26 %     36,004       236       2.62 %
Junior subordinated debentures
    11,330       86       3.04 %     11,330       90       3.18 %
Securities sold U/A to repurchase
    7,748       5       0.26 %     5,201       5       0.38 %
 
                                   
 
                                               
Total interest-bearing liabilities
    484,040     $ 1,759       1.45 %     452,791     $ 1,955       1.73 %
 
                                       
 
                                               
Noninterest-bearing liabilities:
                                               
Demand deposits
    96,669                       87,275                  
Other
    11,099                       11,318                  
 
                                           
Total liabilities
  $ 591,808                     $ 551,384                  
 
                                               
Stockholders’ equity
    64,427                       43,398                  
 
                                           
 
                                               
Total Liabilities and Equity
  $ 656,235                     $ 594,782                  
 
                                           
 
                                               
Net interest earnings
          $ 6,233                     $ 5,969          
 
                                           
 
                                               
Net interest margin
                    4.18 %                     4.43 %
 
                                           
 
                                               
Interest rate spread
                    3.91 %                     4.15 %
 
                                           

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    Nine Months Ended     Nine Months Ended  
    September 30, 2010     September 30, 2009  
    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
  $ 490,881     $ 21,101       5.73 %   $ 427,263     $ 20,340       6.35 %
Taxable securities
    47,498       1,279       3.59 %     40,135       1,202       3.99 %
Tax-exempt securities
    39,586       1,189       4.00 %     40,484       1,274       4.20 %
Interest bearing deposits at banks
    3,744       5       0.18 %     1,118       1       0.12 %
 
                                   
 
                                               
Total interest-earning assets
    581,709     $ 23,574       5.40 %     509,000     $ 22,817       5.98 %
 
                                       
 
                                               
Non interest-earning assets:
                                               
 
                                               
Cash and due from banks
    12,714                       12,182                  
Premises and equipment, net
    9,824                       9,621                  
Other assets
    35,042                       32,532                  
 
                                           
 
                                               
Total Assets
  $ 639,289                     $ 563,335                  
 
                                           
 
                                               
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
NOW
  $ 22,922     $ 163       0.95 %   $ 10,923     $ 24       0.29 %
Regular savings
    235,393       1,227       0.70 %     188,004       1,767       1.25 %
Muni-Vest savings
    30,381       110       0.48 %     33,671       169       0.67 %
Time deposits
    142,213       2,713       2.54 %     140,831       3,385       3.20 %
Other borrowed funds
    33,164       685       2.75 %     32,707       614       2.50 %
Junior subordinated debentures
    11,330       250       2.94 %     11,330       316       3.72 %
Securities sold U/A to repurchase
    7,277       16       0.29 %     4,997       15       0.40 %
 
                                   
 
                                               
Total interest-bearing liabilities
    482,680     $ 5,164       1.43 %     422,463     $ 6,290       1.99 %
 
                                       
 
                                               
Noninterest-bearing liabilities:
                                               
Demand deposits
    90,112                       83,975                  
Other
    10,813                       12,173                  
 
                                           
Total liabilities
  $ 583,605                     $ 518,611                  
 
                                               
Stockholders’ equity
    55,684                       44,724                  
 
                                           
 
                                               
Total Liabilities and Equity
  $ 639,289                     $ 563,335                  
 
                                           
 
                                               
Net interest earnings
          $ 18,410                     $ 16,527          
 
                                           
 
                                               
Net interest margin
                    4.22 %                     4.33 %
 
                                           
 
                                               
Interest rate spread
                    3.97 %                     3.99 %
 
                                           
Net Income
Net income for the third quarter of 2010 was $1.3 million, or $0.31 per diluted share, compared with a net income of $2.4 million, or $0.87 per diluted share, in the third quarter of 2009. The decrease in net income was largely due to a higher provision for loan and lease losses, the gain on bargain purchase related to the Waterford acquisition recognized in last year’s third quarter, and higher non-interest expenses. The provision for loan and lease losses increased from $0.6 million to $1.0 million year-over-year. Included in the 2010 third quarter was a $0.3 million provision for the Company’s discontinued leasing portfolio. There was no provision for leasing in last year’s third quarter. The reasons for the increased provision are discussed above under “Analysis of Financial Condition — Leasing Portfolio.” For the year-to-date period, net income in 2010 was $4.4 million, or $1.26 per diluted share, compared with a net loss of ($0.7) million, or ($0.24) per diluted share in 2009. The significant increase in net income was largely due to a lower provision for loan and lease losses in the first nine months of 2010. For the nine

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month period ended September 30, 2009 and September 30, 2010, the provision for loan and lease loss decreased from $9.6 million to $2.5 million, respectively. The Company incurred significantly higher provision for lease losses in the first two quarters of 2009 when compared with the first two quarters of 2010, which more than offset the increased provision in the third quarter of 2010. Also, for the year-to-date comparative, there was a $2.0 million goodwill impairment charge related to the Company’s leasing reporting unit in the first quarter of 2009. The return on average equity was 7.93% and 10.43% for the three and nine month periods ended September 30, 2010, compared with 22.45% and (1.98%) in the same periods in 2009. Return on average equity decreased for the three month comparison due to lower net income in the 2010 third quarter and higher average equity for the 2010 third quarter from the secondary common stock offering in May 2010. The increase in return on average equity for the nine month period is due to higher net income in 2010.
“Net operating income” (as defined in the following Supplemental Non-GAAP Disclosure) is net income adjusted for what management considers “non-operating” items. Net operating income for the three and nine month periods ended September 30, 2010 was $1.4 million, or $0.34 per diluted share, and $4.8 million, or $1.38 per diluted share, respectively, compared with a net operating income of $2.2 million, or $0.77 per diluted share, and $0.5 million, or $0.19 per diluted share in the same periods for 2009. The decrease in the three month comparison is due to the increase in leasing provision and non-interest expenses related to investments in people and infrastructure. The increase in the nine month comparison is due to the decrease in the provision for loan and lease losses as well as the increase in net interest income.
Supplemental Reporting of Non-GAAP Results of Operations
To provide investors with greater understanding of the Company’s operating results, in addition to the results measured in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company provides supplemental reporting on “net operating income” and “diluted net operating earnings per share” which excludes items that management believes to be non-operating in nature. Specifically, net operating income and diluted net operating earnings per share exclude gains and losses on the sale and call of securities and the non-cash impairment and amortization of acquisition-related goodwill and intangible assets. This non-GAAP information is being disclosed because management believes that providing these non-GAAP financial measures provides investors with information useful in understanding the Company’s financial performance, its performance trends, and financial position. While the Company’s management uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it necessarily comparable with non-GAAP measures which may be presented by other companies. The reconciliation of net operating income and diluted net operating earnings per share to GAAP net income (loss) and GAAP diluted earnings (loss) per share is presented in the following table.

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Reconciliation of GAAP Net Income (Loss) to Net Operating Income (non-GAAP)
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
(in thousands, except per share)   2010     2009     2010     2009  
GAAP Net Income (Loss)
  $ 1,278     $ 2,436     $ 4,357       ($664 )
Gain on sale and call of securities 1
          (6 )     (4 )     (10 )
Goodwill impairment charge 1
                      1,210  
Amortization of intangibles 1
    135       135       414       408  
Gain on bargain purchase 1
          (409 )           (409 )
 
                       
Net operating income 2
  $ 1,413     $ 2,156     $ 4,767     $ 535  
 
                       
 
                               
GAAP diluted earnings (loss) per share
  $ 0.31     $ 0.87     $ 1.26       ($0.24 )
Gain on sale and call of securities 1
                       
Goodwill impairment charge 1
                      0.43  
Amortization of intangibles 1
    0.03       0.05       0.12       0.15  
Gain on bargain purchase 1
          (0.15 )           (0.15 )
 
                       
Diluted net operating earnings per share 2
  $ 0.34     $ 0.77     $ 1.38     $ 0.19  
 
                       
 
1   After any tax-related effect
 
2   Non-GAAP measure
Other Results of Operations
Net interest income was $6.2 million during the third quarter of 2010, up $0.1 million, or 2.2% from the trailing second quarter of 2010, and $0.2 million, or 4.4%, higher than $6.0 million in the third quarter of 2009. For the year-to-date, net interest income of $18.4 million in 2010 was 11.4% higher than the $16.5 million in net interest income earned in the same period in 2009. While the net interest margin continues to contract, interest-earning asset growth has allowed the Company to sustain its net interest income growth. Core loans, which are defined as total loans and leases less direct financing leases, were $485.8 million at September 30, 2010, an increase of 1.2% (4.8% annualized) from $480.3 million at June 30, 2010 and 6.1% from $458.1 million at December 31, 2009. The Company experienced growth in its commercial and industrial portfolio, offset by a decrease in its residential mortgage balances due to refinancing activity and the sale of most originations to FNMA. Investment securities were $99.2 million at September 30, 2010, up 2.1% from $97.2 million at the end of the second quarter of 2010 and 25.6% from $79.0 million at the end of 2009. The Company raised $13.4 million in capital in May 2010 which it intends to use to support future loan growth. In the interim, the Company has used the capital to purchase investment securities. Partially offsetting the increase in core loans and investment securities was the continuing decline in direct financing lease balances after the Company discontinued this business line in the second quarter of 2009. Direct financing leases were $18.7 million at September 30, 2010, compared with $22.7 million at June 30, 2010 and $31.5 million at December 31, 2009.
The Company’s net interest margin was 4.18% in the third quarter of 2010, but the margin continues to contract, as it was 4.21% in the 2010 second quarter and 4.43% in the 2009 third quarter. The Company’s net interest margin for the third quarter of 2010 was impacted by two former Waterford loans that were impaired at the time of acquisition that paid off in full in the quarter. The recovery of those loans was recognized into interest income, boosting net interest margin by 5 basis points. Adjusting for those two Waterford loans, net interest margin for the quarter would have been 4.13%, continuing a trend of net interest margin compression of 6-9 basis points per quarter. For the year-to-date period, net interest margin decreased from 4.33% in 2009 to 4.22% in 2010. While loan rates remain stable, investment security yields continue to decline as the yield curve flattens among long-term low inflation rate expectations in the marketplace. Investment securities also make up a larger portion of the Company’s interest earning assets during the third quarter of 2010 than in past quarters as a result of the Company’s

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May 2010 capital raise. On the funding side, while the Company has been successful in attracting new customers, most of that success has come in the premium rate Better Checking, Better Savings, and business money market accounts. While these products have put some pressure on the net interest margin, the Company expects to benefit in the longer term from the deep customer relationships that these products provide. With rates at a low level for such an extended period, there is limited benefit available going forward in more beneficial deposit pricing while asset yields continue to decline.
The provision for loan and lease losses increased from $0.6 million in the third quarter of 2009 and $0.3 million in the second quarter of 2010 to $1.0 million in the third quarter of 2010, primarily due to the $0.3 million provision for leases. The provision for the Company’s core loan portfolio was $0.7 million in the third quarter of 2010, compared with $0.3 million in the second quarter of 2010 and $0.6 million in the third quarter of 2009. The increase in the provision for loan losses in the third quarter of 2010 versus the second quarter of 2010 was due to an increased amount of loan downgrades in the Company’s internal credit risk ratings during the quarter. The provision for the Company’s leasing portfolio was $0.3 million in the third quarter 2010, compared with $0 in the second quarter of 2010 and the third quarter of 2009. Despite not originating any new leases since the second quarter of 2009 and another $0.3 million in net write-offs in the third quarter of 2010, leasing nonaccruals were flat at September 30, 2010 compared with June 30, 2010 and 31 or more days delinquent leases increased from $0.2 million to $0.4 million. With charge-offs continuing to reduce the remaining mark on the leasing portfolio and non-accruing and delinquent leases not correspondingly declining, management determined that an additional $0.3 million in reserve for lease losses was appropriate at September 30, 2010.
For the nine-month period ended September 30, 2010, the provision for loan and lease losses was $2.5 million, compared with $9.6 million for the same period in 2009. The decline is largely due to the leasing portfolio, which was impaired with a mark-to-market adjustment in the second quarter of 2009 when the Company announced its intention to market the portfolio for sale. Management has since decided to hold the portfolio through maturity. The provision for lease losses was $1.1 million for the nine month period ended September 30, 2010, compared with $6.8 million in the prior year period. The provision for the core loan portfolio has also declined in 2010. The provision for loan losses was $1.4 million for the nine month period ended September 30, 2010, compared with $2.8 million in the prior year period. The provision was higher in 2009 because of higher loan growth, a larger increase in criticized loans according to the Company’s internal credit ratings, and a larger increase in qualitative loss factors due to the economic recession.
Non-interest income, which represented 33.4% of total revenue, compared with 39.1% in the prior year third quarter, declined 18.4%, or $0.7 million to $3.1 million when compared with the third quarter of 2009. The decrease is primarily attributable to a gain on bargain purchase of $0.7 million recognized in the third quarter of 2009 related to the Waterford acquisition in an FDIC-assisted transaction in July 2009.
The largest portion of the Company’s non-interest income is insurance service and fee revenue from The Evans Agency (“TEA”). Insurance agency revenue of $1.8 million was flat for this year’s third quarter when compared with the 2009 third quarter. The revenue is higher than the $1.6 million in the second quarter of 2010 due to the seasonality of the revenue. The soft insurance market and macro-economic conditions continue to put downward pressure on TEA’s revenue in personal and commercial property and casualty insurance commissions.
For the nine-month period ended September 30, 2010, non-interest income declined to $9.8 million, from $11.1 million in 2009. $0.7 million of the year-over-year decline is attributable to the bargain purchase gain related to the Waterford acquisition in July 2009. Deposit service charges declined $0.2 million from $1.7 million to $1.5 million, reflecting an industry-wide trend related to consumer behavior and new regulation. Other income declined from $2.5 million in the first nine months of 2009 to $2.3 million in 2010. This decline is a result of reduced non-compliance and late fees charged to ENL customers as the portfolio rolls off. TEA revenue remained flat for the nine month period ended September 30, 2010 when compared to the prior year period at $5.7 million.
Total non-interest expenses were $6.4 million for the third quarter of 2010, an increase of $0.7 million, or 11.3%, from $5.8 million in the third quarter of 2009. The increase is primarily due to higher salary and employee benefits. The largest component of the increase was in salaries and employee benefits, which increased 15.3%, or $0.5 million, to $3.7 million for the third quarter of 2010 compared with the prior year third quarter. Salaries and benefits were higher because of annual merit raises and the addition of new employees including commercial loan officers and branch employees retained in the acquisition of Waterford. Another portion of the increase is a result of annual

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bonus accruals in the third quarter of 2010. After the losses recorded in the first two quarters of 2009, the Company determined that it would not pay out bonuses to any employees for 2009 and thus suspended its normal bonus accrual for the remainder of 2009.
For the year-to-date period, non-interest expenses decreased $0.2 million to $19.4 million in 2010 due primarily to the goodwill impairment charge related to the Company’s leasing reporting unit in the first quarter of 2009. Excluding the $2.0 million goodwill impairment charge, non-interest expenses increased $1.9 million, or 10.6%, from 2009 to 2010, primarily due to the reasons discussed in the quarterly comparison above.
As a result of the increase in non-interest expenses and the decrease in non-interest income, the efficiency ratio, excluding goodwill impairment and intangible amortization, increased to 66.57% for the third quarter of 2010, from 56.95% in the third quarter of 2009. The Company’s efficiency ratio for the second quarter of 2010 was 69.72%. For the year-to-date, the efficiency ratio was 66.54% in 2010, compared with 61.26% in 2009.
Income tax expense was $0.6 million and $1.9 million for the three and nine month periods ended September 30, 2010, respectively. These figures represent an effective tax rate of 32.6% and 30.1% for the three and nine month periods ended September 30, 2010, respectively, compared with 27.7% and 56.3% in the three and nine month periods ended September 30, 2009. The Company’s effective tax rate is higher in the third quarter of 2010 compared with an effective tax rate of 26.6% in the second quarter of 2010. The Company typically files its tax returns in the third quarter, resulting in the effective tax rate varying based on how the tax return differs from the previously estimated tax provision. The Company also recorded adjustments related to the completion of its normal IRS and New York State tax audits. The effective tax rates in 2009 were significantly impacted by the losses incurred in the Company’s leasing reporting unit.
CAPITAL
The Company consistently maintains regulatory capital ratios measurably above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 9.99% at September 30, 2010. This is a significant increase from the 7.80% at December 31, 2009 due to the Company’s successful registered common stock offering in May 2010 generating net proceeds to the Company of $13.4 million. Book value per share of the Company’s common stock was $15.72 at September 30, 2010, compared with $15.44 at June 30, 2010, and $16.34 at December 31, 2009. While earnings increased the book value of the Company, the 1.2 million additional shares issued in the May 2010 common stock offering at $12.00 per share diluted the book value per share. Tangible book value per share at September 30, 2010 was $13.39, compared with $13.05 at June 30, 2010 and $12.72 at December 31, 2009 as earnings growth offset the stock offering’s dilution.
On August 17, 2010, the Board of Directors of the Company declared a semi-annual cash dividend of $0.20 per share on the Company’s outstanding common stock. The dividend was paid on October 6, 2010 to shareholders of record as of September 13, 2010. The $0.20 dividend was equal to the previous dividend paid on April 27, 2010.
LIQUIDITY
The Bank 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 $84.5 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the 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 Bank’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. The Company’s primary source of liquidity is dividends from the Bank. Additionally, the Company has access to capital markets as a funding source, as evidenced by its recent registered public offering of common stock, described above under “Capital.”
Cash flows from the Bank’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 September 30, 2010,

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approximately 3.3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 21.7% 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 September 30, 2010, in the Company’s internal stress test, the Company had net short-term liquidity of $60.6 million as compared with $43.2 million at December 31, 2009.
Management does not anticipate engaging in any activities, either currently or in 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 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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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 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)
                 
    September 30, 2010     December 31, 2009  
Changes in interest rates
               
 
               
+200 basis points
  $ 29       ($807 )
+100 basis points
    825       92  
 
               
-100 basis points
    470       577  
-200 basis points
    N/A       N/A  
Many assumptions were utilized by management to calculate the impact that changes in 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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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) as of September 30, 2010 (the end of the period covered by this Report). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of September 30, 2010 the Company’s disclosure controls and procedures were effective.
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 September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 6 — EXHIBITS
The information called for by this item is incorporated herein by reference to the Exhibit Index included immediately following the signature page to this Quarterly Report on Form 10-Q.

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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      
November 3, 2010  /s/ David J. Nasca    
  David J. Nasca   
  President and CEO
(Principal Executive Officer) 
 
 
DATE    
November 3, 2010  /s/ Gary A. Kajtoch    
  Gary A. Kajtoch   
  Treasurer
(Principal Financial Officer) 
 

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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  

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