Edgar Filing: EVANS BANCORP INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

10-Q

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended June 30, 2011

¨	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 001-35021

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

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

(716) 926-2000

(Registrant’s telephone number, including area code)

Not applicable

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

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

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 x No ¨

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

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

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: 4,108,103 shares as of August 1, 2011

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES


		PAGE
PART 1.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets – June 30, 2011 and December 31, 2010		1

	Unaudited Consolidated Statements of Income – Three months ended June 30, 2011 and 2010		2

	Unaudited Consolidated Statements of Income – Six months ended June 30, 2011 and 2010		3

	Unaudited Consolidated Statements of Stockholders’ Equity – Six months ended June 30, 2011 and 2010		4

	Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2011 and 2010		5

	Notes to Unaudited Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44

Item 4.	Controls and Procedures		45

PART II.	OTHER INFORMATION

Item 6.	Exhibits		45

SIGNATURES			46

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2011 AND DECEMBER 31, 2010

(in thousands, except share and per share amounts)


	June 30, 2011		December 31, 2010
ASSETS
Cash and due from banks	$	13,509	$	13,467
Interest-bearing deposits at banks		14,106		255
Securities:
Available for sale, at fair value (cost: $89,269 at June 30, 2011; $86,096 at December 31, 2010)		92,007		87,422
Held to maturity, at amortized cost (fair value: $2,482 at June 30, 2011; $2,130 at December 31, 2010)		2,487		2,140
Federal Home Loan Bank common stock, at amortized cost and fair value		1,830		2,362
Federal Reserve Bank common stock, at amortized cost and fair value		1,415		1,408
Loans and leases, net of allowance for loan and lease losses of $10,667 in 2011 and $10,424 in 2010		531,827		517,554
Properties and equipment, net of depreciation of $12,570 in 2011 and $12,054 in 2010		10,503		10,841
Goodwill		8,101		8,101
Intangible assets		912		1,168
Bank-owned life insurance		12,603		12,389
Other assets		13,532		14,416

TOTAL ASSETS	$	702,832	$	671,523

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Demand	$	104,814	$	98,016
NOW		44,193		32,683
Regular savings		277,564		249,410
Muni-vest		26,333		22,000
Time		133,863		142,348

Total deposits		586,767		544,457

Securities sold under agreement to repurchase		5,581		5,227
Other short-term borrowings		3,010		13,669
Other liabilities		10,831		11,776
Junior subordinated debentures		11,330		11,330
Long-term borrowings		19,000		22,000

Total liabilities		636,519		608,459

CONTINGENT LIABILITIES AND COMMITMENTS

STOCKHOLDERS’ EQUITY:

Common stock, $.50 par value, 10,000,000 shares authorized; 4,108,103 at June 30, 2011 and 4,081,960 at December 31, 2010 shares issued and outstanding, respectively,		2,054		2,041
Capital surplus		40,961		40,660
Retained earnings		22,867		20,836
Accumulated other comprehensive income (loss), net of tax		431		(473	)

Total stockholders’ equity		66,313		63,064

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	702,832	$	671,523

See Notes to Unaudited Consolidated Financial Statements

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED JUNE 30, 2011 AND 2010

(in thousands, except share and per share amounts)


	Three Months Ended June 30,
	2011		2010
INTEREST INCOME
Loans and leases	$	7,081	$	7,049
Interest bearing deposits at banks		7		3
Securities:
Taxable		538		381
Non-taxable		389		403

Total interest income		8,015		7,836
INTEREST EXPENSE
Deposits		1,461		1,420
Other borrowings		185		234
Junior subordinated debentures		82		83

Total interest expense		1,728		1,737
NET INTEREST INCOME		6,287		6,099
PROVISION FOR LOAN AND LEASE LOSSES		1,009		309

NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES		5,278		5,790
NON-INTEREST INCOME
Bank charges		416		480
Insurance service and fees		1,601		1,629
Data center income		192		198
Net gain on sales and calls of securities		—		13
Gain on loans sold		20		16
Bank-owned life insurance		110		133
Other		586		510

Total non-interest income		2,925		2,979
NON-INTEREST EXPENSE
Salaries and employee benefits		3,912		3,727
Occupancy		816		710
Repairs and maintenance		155		179
Advertising and public relations		247		257
Professional services		407		388
Technology and communications		220		163
Amortization of intangibles		126		228
FDIC insurance		135		217
Other		744		679

Total non-interest expense		6,762		6,548

INCOME BEFORE INCOME TAXES		1,441		2,221
INCOME TAX PROVISION		469		590

NET INCOME	$	972	$	1,631

Net income per common share-basic	$	0.24	$	0.47

Net income per common share-diluted	$	0.24	$	0.47

Cash dividends per common share	$	0.00	$	0.00

Weighted average number of common shares outstanding		4,100,201		3,456,562

Weighted average number of diluted shares outstanding		4,106,371		3,460,225

See Notes to Unaudited Consolidated Financial Statements

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(in thousands, except share and per share amounts)


	Six Months Ended June 30,
	2011		2010
INTEREST INCOME
Loans and leases	$	14,233	$	13,990
Interest bearing deposits at banks		11		4
Securities:
Taxable		1,024		782
Non-taxable		760		805

Total interest income		16,028		15,581
INTEREST EXPENSE
Deposits		2,882		2,769
Other borrowings		400		472
Junior subordinated debentures		163		163

Total interest expense		3,445		3,404
NET INTEREST INCOME		12,583		12,177
PROVISION FOR LOAN AND LEASE LOSSES		1,497		1,523

NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES		11,086		10,654
NON-INTEREST INCOME
Bank charges		802		991
Insurance service and fees		3,690		3,875
Data center income		431		432
Net gain on sales and calls of securities		—		7
Gain on loans sold		72		25
Bank-owned life insurance		213		241
Other		1,178		1,110

Total non-interest income		6,386		6,681
NON-INTEREST EXPENSE
Salaries and employee benefits		7,816		7,334
Occupancy		1,593		1,481
Repairs and maintenance		314		361
Advertising and public relations		377		358
Professional services		809		802
Technology and communications		454		388
Amortization of intangibles		256		458
FDIC Insurance		364		443
Other		1,383		1,374

Total non-interest expense		13,366		12,999

INCOME BEFORE INCOME TAXES		4,106		4,336
INCOME TAX PROVISION		1,259		1,258

NET INCOME	$	2,847	$	3,078

Net income per common share-basic	$	0.70	$	0.98

Net income per common share-diluted	$	0.69	$	0.98

Cash dividends per common share	$	0.20	$	0.20

Weighted average number of common shares outstanding		4,092,896		3,139,118

Weighted average number of diluted shares outstanding		4,100,635		3,142,311

See Notes to Unaudited Consolidated Financial Statements

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(in thousands, except share and per share amounts)


	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance, January 1, 2010	$	1,407	$	27,279		$	17,381		($	108	)	$	45,959
Comprehensive income:
Net Income							3,078						3,078
Unrealized gain on available-for-sale securities, net of reclassification of gain of $4 (after tax), net of tax effect of ($406)										657			657
Amortization of prior service cost and net loss net of tax effect of ($27)										40			40

Total comprehensive income													3,775

Cash dividends ($0.20 per common share)							(565	)					(565	)
Stock options expense				103									103
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, June 30, 2010	$	2,034	$	40,376		$	19,894		$	589		$	62,893


Balance, January 1, 2011	$	2,041	$	40,660		$	20,836		($	473	)	$	63,064
Comprehensive income:
Net Income							2,847						2,847
Unrealized gain on available-for-sale securities, net of tax effect of ($547)										865			865
Amortization of prior service cost and net loss net of tax effect of ($23)										39			39

Total comprehensive income													3,751

Cash dividends ($0.20 per common share)							(816	)					(816	)
Excess tax benefit from stock-based compensation				9									9
Stock options expense				127									127
Issued 6,172 shares under dividend reinvestment plan		3		84									87
Issued 7,784 shares under employee stock purchase plan		4		87									91
Issued 12,260 restricted shares		6		(6	)								—

Balance, June 30, 2011	$	2,054	$	40,961		$	22,867		$	431			66,313

See Notes to Unaudited Consolidated Financial Statements

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(in thousands)


	Six Months Ended June 30,
	2011			2010
OPERATING ACTIVITIES:
Interest received	$	15,833		$	15,639
Fees received		6,327			6,583
Interest paid		(3,493	)		(3,376	)
Cash paid to employees and vendors		(12,007	)		(10,736	)
Income taxes paid		(1,712	)		(2,380	)
Proceeds from sale of loans held for resale		13,116			4,821
Originations of loans held for resale		(15,590	)		(4,755	)

Net cash provided by operating activities		2,474			5,796

INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(10,290	)		(76,737	)
Proceeds from maturities and calls		7,470			59,364
Held to maturity securities:
Purchases		(435	)		—
Proceeds from maturities and calls		91			282
Additions to properties and equipment		(176	)		(1,983	)
Sale of other real estate		—			96
Increase in loans, net of repayments		(13,609	)		(14,450	)

Net cash used in investing activities		(16,949	)		(33,428	)

FINANCING ACTIVITIES:
Proceeds from borrowings		—			5,671
Repayments of borrowings		(13,304	)		(19,145	)
Net increase in deposits		42,310			36,068
Dividends paid		(816	)		(565	)
Issuance of common stock		178			13,621

Net cash provided by financing activities		28,368			35,650

Net increase in cash and equivalents		13,893			8,018

CASH AND CASH EQUIVALENTS:
Beginning of period		13,722			12,983

End of period	$	27,615		$	21,001


		(continued)

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(in thousands)


	Six Months Ended June 30,
	2011			2010
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Net income	$	2,847		$	3,078

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		662			923
Deferred tax expense		109			13
Provision for loan and lease losses		1,497			1,523
Net gain on sales of assets		—			(1	)
Premium on loans sold		(72	)		(25	)
Stock options expense		127			103
Proceeds from sale of loans held for resale		13,116			4,821
Originations of loans held for resale		(15,590	)		(4,755	)
Changes in assets and liabilities affecting cash flow:
Other assets		(607	)		(1,487	)
Other liabilities		385			1,603

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	2,474		$	5,796

See Notes to Unaudited Consolidated Financial Statements

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

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, LLC (“SDS”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“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 2010 unaudited consolidated financial statements to conform to the presentation used in 2011.

The results of operations for the three and six month periods ended June 30, 2011 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, 2010. 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 June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011
	(in thousands)
			Unrealized
	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
Available for Sale:
Debt securities:
U.S. government agencies	$	24,011	$	866	$	(3	)	$	24,874
States and political subdivisions		34,411		1,036		(4	)		35,443

Total debt securities	$	58,422	$	1,902	$	(7	)	$	60,317

Mortgage-backed securities:
FNMA	$	13,462	$	451	$	(4	)	$	13,909
FHLMC		8,369		207		—			8,576
GNMA		6,577		163		—			6,740
CMO’S		2,439		26		—			2,465

Total mortgage-backed securities	$	30,847	$	847	$	(4	)	$	31,690

Total securities designated as available for sale	$	89,269	$	2,749	$	(11	)	$	92,007

Held to Maturity:
Debt securities:
U.S. government agencies		—		—		—			—
States and political subdivisions		2,487		23		(28	)		2,482

Total securities designated as held to maturity	$	2,487	$	23	$	(28	)	$	2,482

Total securities	$	91,756	$	2,772	$	(39	)	$	94,489


	December 31, 2010
	(in thousands)
			Unrealized
	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
Available for Sale:
Debt securities:
U.S. government agencies	$	23,130	$	609	$	(95	)	$	23,644
States and political subdivisions		35,796		726		(225	)		36,297

Total debt securities	$	58,926	$	1,335	$	(320	)	$	59,941

Mortgage-backed securities:
FNMA	$	10,207	$	320	$	(65	)	$	10,462
FHLMC		9,541		79		(53	)		9,567
GNMA		4,763		38		0			4,801
CMO’S		2,659		11		(19	)		2,651

Total mortgage-backed securities	$	27,170	$	448	$	(137	)	$	27,481

Total securities designated as available for sale	$	86,096	$	1,783	$	(457	)	$	87,422

Held to Maturity:
Debt securities:
U.S. government agencies		—		—		—			—
States and political subdivisions		2,140		22		(32	)		2,130

Total securities designated as held to maturity	$	2,140	$	22	$	(32	)	$	2,130

Total securities	$	88,236	$	1,805	$	(489	)	$	89,552

Available for sale securities with a total fair value of $88.8 million and $65.6 million at June 30, 2011 and December 31, 2010, 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 $22.0 million and $35.6 million in borrowed funds with FHLBNY at June 30, 2011 and December 31, 2010, 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 $1.8 million and $2.4 million in FHLBNY stock as of June 30, 2011 and December 31, 2010, respectively, at fair value.

The scheduled maturities of debt and mortgage-backed securities at June 30, 2011 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.


	June 30, 2011
	Amortized		Estimated
	cost		fair value
	(in thousands)
Debt securities available for sale:
Due in one year or less	$	3,791	$	3,837
Due after one year through five years		16,326		16,779
Due after five years through ten years		21,997		22,834
Due after ten years		16,308		16,867

		58,422		60,317

Mortgage-backed securities available for sale		30,847		31,690

	$	89,269	$	92,007

Debt securities held to maturity:
Due in one year or less	$	1,165	$	1,162
Due after one year through five years		441		444
Due after five years through ten years		280		293
Due after ten years		601		583

		2,487		2,482

Mortgage-backed securities held to maturity		—		—

		2,487		2,482

Total Securities	$	91,756	$	94,489

Information regarding unrealized losses within the Company’s available for sale securities at June 30, 2011 and December 31, 2010, is summarized below. The securities are primarily U.S. government-guaranteed agency securities or municipal securities. All unrealized losses are considered temporary and related to market interest rate fluctuations.


	June 30, 2011
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(in thousands)
Available for Sale:
Debt securities:
U.S. government agencies	$	797	($	3	)	$	—	$	—		$	797	($	3	)
States and political subdivisions		481		(4	)		—		—			481		(4	)

Total debt securities	$	1,278	($	7	)	$	—	$	—		$	1,278	($	7	)
Mortgage-backed securities:
FNMA	$	1,626	($	4	)	$	—	$	—		$	1,626	($	4	)
FHLMC		—		—			—		—			—		—
GNMA		—		—			—		—			—		—
CMO’S		—		—			—		—			—		—

Total mortgage-backed securities	$	1,626	($	4	)	$	—	$	—		$	1,626	($	4	)
Held To Maturity:
Debt securities:
States and political subdivisions	$	1,167	($	6	)	$	567	($	22	)	$	1,734	($	28	)

Total temporarily impaired securities	$	4,071	($	17	)	$	567	($	22	)	$	4,638	($	39	)


	December 31, 2010
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(in thousands)
Available for Sale:
Debt securities:
U.S. government agencies	$	3,705	($	95	)	$	—	$	—		$	3,705	($	95	)
States and political subdivisions		9,144		(225	)		—		—			9,144		(225	)

Total debt securities	$	12,849	($	320	)	$	—	$	—		$	12,849	($	320	)
Mortgage-backed securities:
FNMA	$	3,113	($	65	)	$	—	$	—		$	3,113	($	65	)
FHLMC		7,897		(53	)		—		—			7,897		(53	)
CMO’S		2,011		(19	)		—		—			2,011		(19	)

Total mortgage-backed securities	$	13,021	($	137	)	$	—	$	—		$	13,021	($	137	)
Held To Maturity:
Debt securities:
States and political subdivisions	$	466	($	28	)	$	862	($	4	)	$	1,328	($	32	)

Total temporarily impaired securities	$	26,336	($	485	)	$	862	($	4	)	$	27,198	($	489	)

In regard to municipal securities, the Company’s general investment policy is that in-state securities must be rated at least Moody’s Baa (or equivalent) at the time of purchase. The Company reviews the ratings report and municipality financial statements and prepares a pre-purchase analysis report before the purchase of any municipal securities. Out-of-state issues must be rated by Moody’s at least Aa (or equivalent) at the time of purchase. The Company did not own any out-of-state municipal bonds at June 30, 2011 or December 31, 2010. Bonds rated below A are reviewed periodically to ensure their continued credit worthiness. While purchase of non-rated municipal securities is permitted, such purchases are limited to bonds issued by municipalities in the Company’s general market area. Those municipalities are typically customers of the Bank whose financial situation is familiar to management. The financial statements of the issuers of non-rated securities are reviewed by the Bank and a credit file of the issuers is kept on each non-rated municipal security with relevant financial information.

Although concerns have been raised in the marketplace recently about the health of municipal bonds, the Company has not experienced any credit troubles in this portfolio and does not believe any credit troubles are imminent. Aside from the non-rated municipal securities to local municipalities discussed above that are considered held-to-maturity, all of the Company’s available-for-sale municipal bonds are investment-grade government obligation (“G.O.”) bonds. G.O. bonds are generally considered safer than revenue bonds because they are backed by the full faith and credit of the government while revenue bonds rely on the revenue produced by a particular project. All of the Company’s municipal bonds are to municipalities in New York State. There has never been a default of a NY G.O. in the history of the state. Historical performance does not guarantee future performance, but the Company believes that it does indicate that the risk of loss on default of a G.O. municipal bond for the Company is relatively low.

Management has assessed the securities available for sale in an unrealized loss position at June 30, 2011 and December 31, 2010 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 2011 or 2010, the gross unrealized losses amounted to less than 0.1% of the total fair value of the securities portfolio at June 30, 2011 and December 31, 2010, and the gross unrealized loss position decreased by $0.5 million from December 31, 2010 to June 30, 2011. 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 and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

There are three levels of inputs to fair value measurements:

•

Level 1, meaning the use of quoted prices for identical instruments in active markets;

•

Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted 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.

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010:


	Level 1		Level 2		Level 3		Fair Value
June 30, 2011
Securities available-for-sale:
U.S. government agencies	$	—	$	24,874	$	—	$	24,874
States and political subdivisions		—		35,443		—		35,443
Mortgage-backed securities		—		31,690		—		31,690
Mortgage servicing rights		—		—		442		442

December 31, 2010
Securities available-for-sale:
U.S. government agencies	$	—	$	23,644	$	—	$	23,644
States and political subdivisions		—		36,297		—		36,297
Mortgage-backed securities		—		27,481		—		27,481
Mortgage servicing rights		—		—		388		388

Securities available for sale

Fair values for securities are determined using independent pricing services and market-participating brokers. The pricing service and brokers use a variety of techniques to arrive at fair value including market maker bids, quotes, and pricing models. Inputs to their pricing models include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Management obtains a single market quote or price estimate for each security. Securities available for sale are classified as Level 2 in the fair value hierarchy as the valuation provided by the third-party provider uses observable market data.

Mortgage servicing rights

Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices. Accordingly, the Company obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment predictions and other economic factors. The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. All assumptions are market driven. Mortgage servicing rights are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.

The following table summarizes the changes in fair value for items measured at fair value (Level 3) on a recurring basis using significant unobservable inputs during the three and six month periods ended June 30, 2011:


Mortgage servicing rights - March 31, 2011	$	435

Gains (losses) included in earnings		(41	)
Mortgage originations		48

Mortgage servicing rights - June 30, 2011	$	442


Mortgage servicing rights - December 31, 2010	$	388

Gains (losses) included in earnings		(36	)
Mortgage originations		90

Mortgage servicing rights - June 30, 2011	$	442

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010:


	Level 1		Level 2		Level 3		Fair Value
June 30, 2011
Impaired loans	$	—	$	—	$	8,947	$	8,947

December 31, 2010
Impaired loans	$	—	$	—	$	7,787	$	7,787

Impaired loans

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. The Company has an appraisal policy in which appraisals are obtained upon a loan being downgraded on the Company’s internal loan rating scale to a 5 (special mention) or a 6 (substandard) depending on the amount of the loan, the type of loan and the type of collateral. All impaired loans are either graded a 6 or 7 on the internal loan rating scale. Subsequent to the downgrade, if the loan remains outstanding and impaired for at least one year more, management may require another follow-up appraisal. Between receipts of updated appraisals, if necessary, management may perform an internal valuation based on any known changing conditions in the marketplace such as sales of similar properties, a change in the condition of the collateral, or feedback from local appraisers. Impaired loans had a gross value of $9.9 million, with a valuation allowance of $1.0 million, at June 30, 2011, compared with a gross value of $9.3 million, with a valuation allowance of $1.5 million, at December 31, 2010.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At June 30, 2011 and December 31, 2010, the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows:


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)				(in thousands)
Financial assets:
Cash and cash equivalents	$	27,616	$	27,616	$	13,722	$	13,722
Available for sale securities		92,007		92,007		87,422		87,422
Held to maturity securities		2,487		2,482		2,140		2,130
FHLB and FRB stock		3,245		3,245		3,770		3,770
Loans and leases, net		531,827		541,236		517,554		535,338
Mortgage servicing rights		442		442		388		388
Financial liabilities:
Deposits	$	586,767	$	589,432	$	544,457	$	544,889
Other borrowed funds and securities soldunder agreements to repurchase		27,591		28,830		40,896		41,710
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 available for sale. 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.

Securities held to maturity. 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 consistent with our loan and credit guidelines. 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.

FHLB and FRB stock. The carrying value of FHLB and FRB stock approximate fair value.

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.

Mortgage servicing rights. Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, the Company obtains the fair value of the MSRs using a third-party pricing provider. The provider uses a combination of market and income valuation methodologies. All assumptions are market driven.

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

Other Borrowed Funds and Securities Sold Under Agreement to Repurchase. The fair value of the short-term portion of other borrowed funds approximates its carrying value. The fair value of the long-term portion of other 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 June 30, 2011 and December 31, 2010. Such financial instruments consist of commitments to extend permanent financing and letters of credit. If the options are exercised by the prospective borrowers, these financial instruments will become interest-earning assets of the Company. If the options expire, the Company retains any fees paid by the counterparty in order to obtain the commitment or guarantee. The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The fair value of these off-balance sheet items at June 30, 2011 and December 31, 2010 approximates the recorded amounts of the related fees, which are not considered material.

4. LOANS, LEASES, AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their outstanding unpaid principal balances adjusted for unamortized deferred fees or costs. Interest income is accrued on the unpaid principal balance and is recognized using the interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective yield method of accounting.

Loans become past due when the payment date has been missed. If payment has not been received within 30 days, then the loan is delinquent. Delinquent loans are placed into three categories; 30-59 days past due, 60-89 days past due, or 90+ days past due. Loans 90 or more days past due are considered non-performing.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in process of collection. If the credit is not well secured and in the process of collection, the loan is placed on non-accrual status and is subject to charge-off if collection of principal or interest is considered doubtful.

All interest due but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cost-recovery method, until it again qualifies for an accrual basis. Any cash receipts on non-accrual loans reduce the carrying value of the loans. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current, the adverse circumstances which resulted in the delinquent payment status are resolved, and payments are made in a timely manner for a period of time sufficient to reasonably assure their future dependability.

The Bank considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect principal or interest due according to the contractual terms of the loan. Commercial mortgage, commercial and industrial (“C&I”), and large balance leases (greater than $100,000) are identified for evaluation and individually considered impaired. These loans and leases are assessed for any impairment. Loan impairment is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Consumer loans and smaller balance leases are collectively evaluated for impairment. Since these loans and leases are not individually identified and evaluated, they are not considered impaired loans.

The Bank monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The

primary CQI for its commercial mortgage and C&I portfolios is the individual loan’s credit risk rating. The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan and lease losses:

•

1-3-Pass: Risk Rated 1-3 loans are loans with a slight risk of loss. The loan is secured by collateral of sufficient value to cover the loan by an acceptable margin. The financial statements of the company demonstrate sufficient net worth and repayment ability. The company has established an acceptable credit history with the bank and typically has a proven track record of performance. Management is experienced, and has an at least average ability to manage the company. The industry has an average or less than average susceptibility to wide fluctuations in business cycles.

This risk rating includes all accruing consumer loans, including residential mortgages and home equities, that are less than 60 days past due.

•

4-Watch: Although generally acceptable, a higher degree of risk is evident in these watch credits. Obligor assessment factors may have elements which reflect marginally acceptable conditions warranting more careful review and analysis and monitoring.

The obligor’s balance sheet reflects generally acceptable asset quality with some elements weak or marginally acceptable. Liquidity may be somewhat strained, but is at an acceptable level to support operations. Obligor may be fully leveraged with ratios higher than industry averages. High leverage is negatively impacting the company, leaving it vulnerable to adverse change. Inconsistent or declining capability to service existing debt requirements evidenced by debt service coverage temporarily below or near acceptable level. The margin of collateral may be adequate, but declining or fluctuating in value. Company management may be unproven, but capable. Rapid expansion or acquisition may increase leverage or reduce cash flow.

Negative industry conditions or weaker management could also be characteristic. Proper consideration should be given to companies in a high growth phase or in development business segments that may not have achieve sustainable earnings.

Obligors demonstrate sufficient financial flexibility to react to and positively address the root cause of the adverse financial trends without significant deviations from their current business strategy. The rating is also used for borrowers that have made significant progress in resolving their financial weaknesses.

•

5-O.A.E.M. (Other Assets Especially Mentioned): Special Mention (“SM”) – A special mention asset has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. SM assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

SM assets have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the institution’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g. increasing inventory without an increase in sales, high leverage, tight liquidity).

Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating.

Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices.

The SM rating is designed to identify a specific level of risk and concern about asset quality. Although an SM asset has a higher probability of default than a pass asset, its default is not imminent.

This risk rating includes the pool of consumer loans, including residential mortgages and home equities, that are 60-89 days past due.

•

6-Substandard: A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. They require more intensive supervision by bank management.

Substandard assets are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk subsidies. For some substandard assets, the likelihood of full collection of interest and principal may be in doubt; such assets should be placed on non-accrual. Although substandard assets in the aggregate will have distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated substandard. These loans are periodically reviewed and tested for impairment.

This risk rating includes the pool of consumer loans, including residential mortgages and home equities, that are 90 or more days past due or in non-accrual status.

•

7-Doubtful: An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of loss is deferred.

Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing.

Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because of high probability of loss, non-accrual accounting treatment is required for doubtful assets.

•

8-Loss: Assets classified loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be achieved in the future.

With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest. When access to collateral, rather than the value of the collateral, is a problem, a less severe classification may be appropriate. However, management should not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are to be recorded in the period an obligation becomes uncollectible.

Leases

The Bank’s leasing operations consist principally of the leasing of various types of small ticket commercial equipment. The Company follows ASC Topic 840, “Leases,” for all of its direct financing leases. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values, less

unearned income, net of the remaining mark. In the third quarter of 2009, the Company announced its intention to sell the leasing portfolio. As a result, the Company classified the leasing portfolio as held-for-sale and marked the portfolio down to its fair market value as of June 30, 2009. As of September 30, 2009, management decided to service the portfolio to maturity and transferred it to held-for-investment. The carrying value of the leasing portfolio amounted to $10.0 million and $15.5 million at June 30, 2011 and December 31, 2010, respectively. The CQI used for leases are delinquency and accruing status. The leasing CQI’s are discussed in more detail in the Credit Quality Indicators section of this footnote.

Loan and Lease Portfolio Composition

The following table presents selected information on the composition of the Company’s loan and lease portfolio as of the dates indicated:


	June 30, 2011			December 31, 2010
	(in thousands)
Mortgage loans on real estate:
Residential mortgages	$	68,046		$	69,958
Commercial and multi-family		278,339			261,371
Construction - residential		1,787			1,320
Construction - commercial		25,613			32,332
Home equities		54,385			53,120

Total real estate loans		428,170			418,101

Direct financing leases		9,957			15,475
Commercial and industrial loans		101,357			91,445
Consumer loans		1,898			2,458
Other		783			252
Net deferred loan origination costs		329			247

Total gross loans		542,494			527,978
Allowance for loan losses		(10,667	)		(10,424	)

Loans, net	$	531,827		$	517,554

Residential Mortgages: The Company originates adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. They are amortized over 10 to 30 years. Loans on one-to-four-family residential real estate are mostly originated in amounts of no more than 80% of appraised value or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling.

Due to the lack of foreclosure activity and absence of any ongoing litigation, the Company has no accrual for loss contingencies or potential costs associated with foreclosure-related activities.

The Bank sells certain fixed rate residential mortgages to FNMA, while maintaining the servicing rights for those mortgages. During the three month period ended June 30, 2011, the Bank sold mortgages to FNMA totaling $5.8 million, as compared with $2.8 million sold during the three month period ended June 30, 2010. During the six month period ended June 30, 2011, the Bank sold mortgages to FNMA totaling $13.1 million, as compared with $4.8 million during the six month period ended June 30, 2010. At June 30, 2011, the Bank had a loan servicing portfolio principal balance of $54.6 million upon which it earns servicing fees, as compared with $49.8 million at March 31, 2011 and $44.2 million at December 31, 2010. The value of the mortgage servicing rights for that portfolio was $0.4 million at June 30, 2011, March 31, 2011, and December 31, 2010. Residential mortgage loans held-for-sale were $0 at June 30, 2011 compared with $1.4 million at March 31, 2011 and $2.9 million at December 31, 2010. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud, and no reserve for repurchases has been recorded.

Commercial and Multi-Family Mortgages: Commercial real estate loans are made to finance the purchases of real estate with completed structures or in the midst of being constructed. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, hotels, retail stores or plazas, healthcare facilities, and other non-owner-occupied facilities. These loans are less risky than commercial and industrial loans, since they are secured by real estate and buildings. The Company offers commercial mortgage loans with up to an 80% LTV ratio for up to 20 years on a variable and fixed rate basis. Many of these mortgage loans either mature or are subject to a rate call after three to five years. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition, and the underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property. Construction loans have a unique risk, because they are secured by an incomplete dwelling.

Home Equities: The Company originates home equity lines of credit and second mortgage loans (loans secured by a second lien position on owner-occupied one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans as they are in a second position relating to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower’s financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Direct Financing Leases: From January 2005 to April 2009 the Company originated direct financing leases of commercial small-ticket general business equipment to companies located throughout the United States. These leases carry a high risk of loss. As a result of the increase in credit risks, poor performance in the portfolio, the lack of strategic fit with the Company’s community banking philosophy, and with the intention of reallocating capital back to its core business, management announced its exit from the national leasing business in April 2009. As a result of management’s decision to sell the portfolio a mark-to-market adjustment of $7.2 million was made on June 30, 2009. The mark was charged off against the allowance. 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 and servicing it to maturity 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 have been applied to the remaining mark, rather than charged off through the allowance. There is an allowance for lease losses of $1.5 million at June 30, 2011.

Commercial and Industrial Loans: These loans generally include term loans and lines of credit. Such loans are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and equipment purchases. As a general practice, a collateral lien is placed on equipment or other assets owned by the borrower. These loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which typically consist of business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to secure real estate as collateral and obtain personal guarantees of the borrowers. To further reduce risk and enhance liquidity, these loans generally carry variable rates of interest, re-pricing in three- to five-year periods, and have a maturity of ten years or less. Lines of credit generally carry floating rates of interest (e.g., prime plus a margin).

Consumer Loans: The Company funds a variety of consumer loans, including direct automobile loans, recreational vehicle loans, boat loans, aircraft loans, home improvement loans, and personal loans (collateralized and uncollateralized). Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging up to five years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed. A minimal amount of loans are unsecured, which carry a high risk of loss.

Other Loans: These loans include $1.2 million and $0.3 million at June 30, 2011 and December 31, 2010, respectively, of overdrawn deposit accounts classified as loans.

Net loan commitment fees or costs for commitment periods greater than one year are deferred and amortized into fee income or other expense on a straight-line basis over the commitment period.

Credit Quality Indicators

The following tables provide data, at the class level, of credit quality indicators of certain loans and leases for the dates specified:


June 30, 2011
(in thousands)
Corporate Credit Exposure - By Credit Rating	Commercial Real Estate Construction		Commercial Real Estate Other		Total Commercial Real Estate		Commercial and Industrial
3	$	19,953	$	232,814	$	252,767	$	68,646
4		2,744		34,282	$	37,026		21,395
5		1,419		1,674	$	3,093		5,874
6		1,497		9,569	$	11,066		4,912
7		—		—		—		530

Total	$	25,613	$	278,339	$	303,952	$	101,357


December 31, 2010
(in thousands)
Corporate Credit Exposure - By Credit Rating	Commercial Real Estate Construction		Commercial Real Estate Other		Total Commercial Real Estate		Commercial and Industrial
3	$	25,584	$	212,825	$	238,409	$	60,728
4		2,703		37,393		40,096		19,692
5		2,565		2,176		4,741		4,699
6		1,480		8,977		10,457		4,966
7		—		—		—		1,360

Total	$	32,332	$	261,371	$	293,703	$	91,445

The Company’s risk ratings are monitored by the individual relationship managers and changed as deemed appropriate after receiving updated financial information from the borrowers or deterioration or improvement in the performance of a loan is evident in the customer’s payment history. Each commercial relationship is individually assigned a risk rating. The Company also maintains a loan review process that monitors the management of the Company’s commercial loan portfolio by the relationship managers. The Company’s loan review function reviews at least 40% of the commercial and commercial mortgage portfolio annually.

The Company’s consumer loans, including residential mortgages and home equity loans, are not individually risk rated or reviewed in the Company’s loan review process. Consumers are not required to provide the Company with updated financial information as a commercial customer is. Consumer loans are also smaller in balances. Given the lack of updated information since the initial underwriting of the loan and small size of individual loans, the Company uses the delinquency status as the credit quality indicator for consumer loans. The delinquency table is shown below. The Company does not lend to sub-prime borrowers. Unless the loan is well secured and in the process of collection, all consumer loans that are more than 90 days past due are placed in non-accrual status.

Similar to consumer loans, direct financing leases are evaluated in pools according to delinquency and accruing status rather than assigned risk ratings. Given the comparable lower credit quality of the leasing portfolio, leases are rarely kept in accruing status beyond 30 days past due. Non-accrual leases are assigned a reserve percentage based on the historical loss history of the Company’s non-accrual lease portfolio. Evaluating non-accruing leases as a pool is appropriate as they are small-balance and homogeneous in nature. On a quarterly basis, large leases (defined as leases greater than $100,000 in balances) are evaluated for any deterioration not readily apparent through payment performance. If any risk factors become apparent during the review such as deteriorating financial performance for the customer’s business or requests for a restructuring from the original terms of the contract, management places

those large leases that are performing from a payment perspective but have some indications of credit deterioration into a second pool. These large leases with additional risk are assigned a reserve percentage reflective of the additional risk characteristics while taking into account the adequate payment performance. The Company performs specific impairment tests for two large leases because they contain significantly different risk characteristics than the remaining leasing portfolio. One of the leases is with a local borrower with whom the Bank has a developed relationship and a restructuring plan is in place. The second lease is with a large public company that recently declared bankruptcy. The Bank is considered a secured creditor in the bankruptcy and has received payments as scheduled in 2011. While the two large leases have characteristics of troubled credits and are classified as nonaccrual, management does not believe these two leases have similar characteristics as compared with the remaining lease portfolio. Management believes appropriate reserves have been established on an individual basis for the two leases. All other leases are placed in a third pool and assigned a reserve percentage commensurate with the credit history of the Company’s leasing portfolio, delinquency trends, non-accrual trends, charge-off trends, and general macro-economic factors.

Past Due Loans and Leases

The following tables provide an analysis of the age of the recorded investment in loans and leases that are past due as of the dates indicated:


June 30, 2011
(in thousands)
	30-59 days		60-89 days		90+ days		Total Past Due		Current Balance		Total Balance		90+ Days Accruing		Non- accruing Loans and Leases
Commercial and industrial	$	1,442	$	269	$	1,241	$	2,952	$	98,405	$	101,357	$	21	$	1,390
Residential real estate:
Residential		—		542		141		683		67,363		68,046		—		688
Construction		—		—		180		180		1,607		1,787		—		180
Commercial real estate:
Commercial		—		3,469		3,133		6,602		271,737		278,339		—		6,670
Construction		—		—		1,462		1,462		24,151		25,613		—		1,462
Home equities		478		113		234		825		53,560		54,385		—		478
Direct financing leases		428		62		874		1,364		8,593		9,957		—		1,747
Consumer		75		67		3		145		1,753		1,898		—		142
Other		—		—		—		—		1,112		1,112		—		—

Total Loans	$	2,423	$	4,522	$	7,268	$	14,213	$	528,281	$	542,494	$	21	$	12,757


December 31, 2010
(in thousands)
	30-59 days		60-89 days		90+ days		Total Past Due		Current Balance		Total Balance		90+ Days Accruing		Non- accruing Loans and Leases
Commercial and industrial	$	403	$	200	$	1,827	$	2,430	$	89,015	$	91,445	$	—	$	2,203
Residential real estate:
Residential		684		393		662		1,739		68,219		69,958		—		696
Construction		—		—		186		186		1,134		1,320		—		186
Commercial real estate:
Commercial		351		4,196		2,014		6,561		254,810		261,371		—		5,724
Construction		6,277		—		1,655		7,932		24,400		32,332		805		850
Home equities		437		—		118		555		52,565		53,120		—		256
Direct financing leases		609		224		1,578		2,411		13,064		15,475		1		2,930
Consumer		83		135		190		408		2,050		2,458		—		276
Other		1		—		—		1		498		499		—		—

Total Loans	$	8,845	$	5,148	$	8,230	$	22,223	$	505,755	$	527,978	$	806	$	13,121

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 inherent in the portfolio 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 quantitative and 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 loans pooled by loan grade and by portfolio segment. The Company does not have sufficient meaningful data to perform a traditional loss migration analysis and thus has implemented alternative procedures. Loans graded 5 or worse (“criticized loans”) that exceed a material balance threshold are evaluated by the Company’s credit department to determine if the collateral for the loan is worth less than the loan. All of these “shortfalls” are added together and divided by the respective loan pool to calculate the quantitative factor applied to the respective pool. These loans are not considered impaired because the cash flow of the customer and the payment history of the loan suggest that it is not probable that the Company will be unable to collect the full amount of principal and interest as contracted and are thus still accruing interest.

Loans that are graded 4 or better (“non-criticized loans”) are reserved in separate loan pools in the general portfolio

allocation. A weighted average 5-year historical charge-off ratio by portfolio segment is calculated and applied against these loan pools.

For both the criticized and non-criticized loan pools in the general portfolio allocation, additional qualitative factors are applied. 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. Due to the nature of the loans, the criticized loan pools carry significantly higher qualitative factors than the non-criticized pools.

Direct financing leases are segregated from the rest of the loan portfolio in determining the appropriate allowance for that portfolio segment. Unlike the loan portfolio, the Company does have sufficient historical loss data to perform a migration analysis for non-accruing leases. Management periodically updates this analysis by examining the non-accruing lease portfolio at different points in time and studying what percentage of the non-accruing portfolio ends up being charged off. There are selected large leases in non-accruing status which carry different characteristics than the rest of the portfolio. The Company has more information on these particular lessees. The underwriting for these leases was different due to the size of the leases and the subsequent servicing of these leases was also more intensive. Due to the elevated level of information on these leases, the Company is able to specifically analyze these leases and allocate an appropriate specific reserve based on the information available including cash flow, payment history, and collateral value. These selected large leases are not considered when performing the migration analysis. All of the remaining leases not in non-accrual are allocated a reserve based on several factors including: delinquency and non-accrual trends, charge-off trends, and national economic conditions.

Changes in the allowance for loan and lease losses for the six months ended June 30, 2011 and 2010 are as follows:


	2011			2010
	(in thousands)
Beginning balance, January 1	$	10,424		$	6,971
Provision for loan and lease losses		1,497			1,523
Recoveries		23			12
Loans and leases charged off		(1,277	)		(201	)

Ending balance, June 30	$	10,667		$	8,305

The following tables summarize the allowance for loan and lease losses according to portfolio segment, as of June 30, 2011:


(in thousands)	Commercial and Industrial			Commercial Real Estate Mortgages*			Consumer ^			Residential Mortgages*		Home equities		Direct Financing Leases		Unallocated		Total
Allowance for loan and lease losses:
Beginning balance	$	3,435		$	4,252		$	29		$	548	$	540	$	1,471	$	149	$	10,424
Charge-offs		(1,124	)		(142	)		(11	)		—		—		—		—		(1,277	)
Recoveries		16			—			6			—		1		—		—		23
Provision		1,244			184			20			30		19		—		—		1,497

Ending balance	$	3,571		$	4,294		$	44		$	578	$	560	$	1,471	$	149	$	10,667

Allowance for loan and lease losses:
Individually evaluated for impairment	$	209		$	721		$	12		$	—	$	—	$	41	$	—	$	983
Collectively evaluated for impairment		3,362			3,573			32			578		560		1,430		149		9,684
Loans acquired with deteriorated credit quality		—			—			—			—		—		—		—		—

Total	$	3,571		$	4,294		$	44		$	578	$	560	$	1,471	$	149	$	10,667

Loans and leases:
Ending balance:
Individually evaluated for impairment	$	1,390		$	8,132		$	58		$	—	$	—	$	271	$	—	$	9,851
Collectively evaluated for impairment		99,967			295,820			2,544			69,833		54,385		9,686		—		532,235
Loans acquired with deteriorated credit quality		—			—			79			—		—		—		—		79

Total**	$	101,357		$	303,952		$	2,681		$	69,833	$	54,385	$	9,957	$	—	$	542,165

*	Includes construction loans

^	Includes other loans

**	Excludes net deferred loan origination costs

Impaired Loans and Leases

The following tables provide data, at the class level, of impaired loans and leases as of the dates indicated:


	At June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
	(in thousands)
With no related allowance recorded:
Commercial and industrial	$	606	$	1,361	$	—	$	921	$	53	$	—
Residential real estate:
Residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate:
Commercial		1,963		2,237		—		2,088		124		—
Construction		1,462		1,497		—		1,259		25		3
Home equities		—		—		—		—		—		—
Direct financing leases		—		—		—		—		—		—
Consumer		79		168		—		82		7		—
Other		—		—		—		—		—		—

Total impaired loans and leases	$	4,110	$	5,263	$	—	$	4,350	$	209	$	3


	At June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
	(in thousands)
With a related allowance recorded:
Commercial and industrial	$	784	$	928	$	209	$	1,021	$	20	$	3
Residential real estate:
Residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate:
Commercial		4,707		4,825		721		4,332		148		12
Construction		—		—		—		—		—		—
Home equities		—		—		—		—		—		—
Direct financing leases		271		289		41		397		16		—
Consumer		58		61		12		66		2		—
Other		—		—		—		—		—		—

Total impaired loans and leases	$	5,820	$	6,103	$	983	$	5,816	$	186	$	15


	At June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
	(in thousands)
Total
Commercial and industrial	$	1,390	$	2,289	$	209	$	1,942	$	73	$	3
Residential real estate:
Residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate:
Commercial		6,670		7,062		721		6,420		272		12
Construction		1,462		1,497		—		1,259		25		3
Home equities		—		—		—		—		—		—
Direct financing leases		271		289		41		397		16		—
Consumer		137		229		12		148		9		—
Other		—		—		—		—		—		—

Total impaired loans and leases	$	9,930	$	11,366	$	983	$	10,166	$	395	$	18


	At December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
Commercial and industrial	$	2,203	$	2,610	$	803
Residential real estate:
Residential		—		—		—
Construction		—		—		—
Commercial real estate:
Commercial		5,724		6,515		616
Construction		850		867		15
Home equities		—		—		—
Direct financing leases		522		524		78
Consumer		—		—		—
Other		—		—		—

Total impaired loans and leases	$	9,299	$	10,516	$	1,512

At December 31, 2010, the Company did not have any impaired loans for which there is no related allowance for credit loss. The interest income in the preceding tables as of June 30, 2011 was interest income recognized prior to these loans and leases being identified as impaired and placed on non-accrual. The Company did not recognize any interest income on those loans and leases while they were on non-accrual and impaired.

Non-performing loans and leases

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


	June 30, 2011			December 31, 2010
	(in thousands)
Non-accruing loans and leases:
Mortgage loans on real estate:
Residential mortgages	$	688		$	696
Commercial and multi-family		6,670			5,724
Construction-residential		180			186
Construction-commercial		1,462			850
Home equities		478			256

Total real estate loans		9,478			7,712

Direct financing leases		1,747			2,930
Commercial loans		1,390			2,203
Consumer loans		142			276
Other		—			—

Total non-accruing loans and leases	$	12,757		$	13,121

Accruing loans 90+ days past due		21			806

Total non-performing loans and leases	$	12,778		$	13,927

Total non-performing loans and leases to total assets		1.82	%		2.07	%
Total non-performing loans and leases to total loans and leases		2.36	%		2.64	%

Troubled debt restructurings

The Company had $5.5 million in loans and leases that were restructured in a troubled debt restructuring (“TDR”) at June 30, 2011, compared with $6.0 million at March 31, 2011 and $2.5 million at December 31, 2010. $4.2 million, $4.4 million and $1.3 million of those balances were in non-accrual status at June 30, 2011, March 31, 2011 and December 31, 2010, respectively. Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months. None of the restructurings are covered under loss-sharing arrangements with the FDIC or were made under a government assistance program. These restructurings were allowed in an effort to maximize the Company’s ability to collect on loans and leases where borrowers were experiencing financial difficulty.

Prior to 2011, most of the Company’s TDRs have been in the leasing portfolio. The most common modification and concession made by the Company is to permit the borrower to skip a lease payment and add an additional payment to the end of the lease. The increase in 2011 in commercial real estate TDR’s compared with December 31, 2010 is due to the addition of a single loan in the amount of $3.5 million. The loan, which was placed on nonaccrual in the fourth quarter of 2010 and considered impaired as of December 31, 2010, was restructured to a reduced payment structure in the first quarter of 2011. The decrease in overall TDR balances in the second quarter of 2011 was due to payments made on existing TDR’s, no loans moving to a TDR status in the second quarter, and the removal of one loan from TDR status for $0.1 million. This was due to the borrower making timely payments, at a market rate of interest, for a period of one year. Modifications made to loans in a troubled debt restructuring did not have a material impact on the Company’s net income for the three and six month periods ended June 30, 2011 and 2010.

The general practice of the Bank is to work with borrowers so that they are able to pay back their loan or lease in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR, the loan or lease will be placed on non-accrual or charged off. TDRs are reserved similarly to the rest of the portfolio in that their CQIs are considered. The reserve for an impaired TDR is based upon the present value of the future expected cash flows discounted at the

loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At June 30, 2011, there were no commitments to lend additional funds to debtors owing loans or leases whose terms have been modified in TDRs. The following table summarizes the loans and leases that were classified as troubled debt restructurings as of the dates indicated.


	June 30, 2011		December 31, 2010
	(in thousands)
Commerical and industrial	$	274	$	166
Residential real estate:
Residential		279		—
Construction		—		—
Commerical real estate:
Commercial and multi family		3,469		139
Construction		—		—
Home equities		66		68
Direct financing leases		1,378		2,155
Consumer loans		—		—
Other		—		—

Total troubled restructured loans and leases	$	5,466	$	2,528

Covered Loans and the Related Allowance

On July 24, 2009, the Bank entered into a definitive purchase and assumption agreement with the FDIC under which the Bank assumed approximately $51.0 million in liabilities, consisting almost entirely of deposits, and purchased substantially all of the assets of Waterford Village Bank. The loan portfolio acquired in the transaction was $42.0 million. The loans acquired in that acquisition are referred to as “covered” loans because they are “covered” by a loss sharing agreement with the FDIC. The agreement calls for the FDIC to reimburse the Bank for 80% of losses up to $5.6 million and to reimburse the Bank for 95% of losses beyond that threshold. At acquisition, the Company marked the covered loan portfolio to its market value and the allowance for loan and lease losses related to the covered loans was zero. Since acquisition, management has provisioned for any incremental increases in estimated credit losses due to deterioration in specific loans or increased risk factors on pools of loans. As a result of the FDIC guarantees, the provision for loan and lease losses and the allowance for loan and lease losses at June 30, 2011 and December 31, 2010 are presented net of FDIC guarantees related to covered loans. The following table depicts the allowance for loan and lease losses related to covered loans as of June 30, 2011 and December 31, 2010:


	June 30, 2011			December 31, 2010
	(in thousands)
Covered loans	$	29,568		$	34,157

Incremental estimated credit losses since acquisition		635			593
FDIC guarantee		(508	)		(474	)

Allowance for loan and lease losses	$	127		$	119

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 6,170 and 7,739 dilutive shares for the three and six month periods ended June 30, 2011, respectively. For the three and six month periods ended June 30, 2010 the Company had 3,663 and 3,193 dilutive shares, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three and six month periods ended June 30, 2011 there were approximately 210,890 and 155,151 shares, respectively, that were not included in

calculating diluted earnings per share because their effect was anti-dilutive. There were 168,808 and 169,725 potentially anti-dilutive shares for the three and six month periods ended June 30, 2010.

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 six month periods ended June 30, 2011 and 2010.


	Three Months Ended June 30, 2011
	(in thousands)
	Banking Activities		Insurance Agency Activities			Total
Net interest income (expense)	$	6,316	($	29	)	$	6,287
Provision for loan and lease losses		1,009		—			1,009

Net interest income (expense) after provision for loan and lease losses		5,307		(29	)		5,278
Non-interest income		1,324		—			1,324
Insurance service and fees		—		1,601			1,601
Non-interest expense		5,348		1,414			6,762

Income before income taxes		1,283		158			1,441
Income tax provision		408		61			469

Net income	$	875	$	97		$	972


	Three Months Ended June 30, 2010
	(in thousands)
	Banking Activities		Insurance Agency Activities			Total
Net interest income (expense)	$	6,150	($	51	)	$	6,099
Provision for loan and lease losses		309		—			309

Net interest income (expense) after provision for loan and lease losses		5,841		(51	)		5,790
Non-interest income		1,350		—			1,350
Insurance service and fees		—		1,629			1,629
Non-interest expense		5,187		1,361			6,548

Income before income taxes		2,004		217			2,221
Income tax provision		506		84			590

Net income	$	1,498	$	133		$	1,631


	Six Months Ended June 30, 2011
	(in thousands)
	Banking Activities		Insurance Agency Activities			Total
Net interest income (expense)	$	12,642	($	59	)	$	12,583
Provision for loan and lease losses		1,497		—			1,497

Net interest income (expense) after provision for loan and lease losses		11,145		(59	)		11,086
Non-interest income		2,696		—			2,696
Insurance service and fees		—		3,690			3,690
Non-interest expense		10,629		2,737			13,366

Income before income taxes		3,212		894			4,106
Income tax provision		914		345			1,259

Net income	$	2,298	$	549		$	2,847


	Six Months Ended June 30, 2010
	(in thousands)
	Banking Activities		Insurance Agency Activities			Total
Net interest income (expense)	$	12,277	($	100	)	$	12,177
Provision for loan and lease losses		1,523		—			1,523

Net interest income (expense) after provision for loan and lease losses		10,754		(100	)		10,654
Non-interest income		2,806		—			2,806
Insurance service and fees		—		3,875			3,875
Non-interest expense		10,164		2,835			12,999

Income before income taxes		3,396		940			4,336
Income tax provision		895		363			1,258

Net income	$	2,501	$	577		$	3,078

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:


	June 30, 2011		December 31, 2010
	(in thousands)
Commitments to extend credit	$	123,074	$	136,549
Standby letters of credit		3,623		3,687

Total	$	126,697	$	140,236

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 and has not recorded a reserve for its commitments.

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 June 30, 2011 and December 31, 2010, there were no claims pending against the Company that management considered material.

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 have not accrued any additional benefits since then. 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 also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the six month periods ended June 30, 2011 and 2010:


	Six months ended June 30,
	(in thousands)
	Pension Benefits						Supplemental Executive Retirement Plan
	2011			2010			2011		2010
Service cost	$	—		$	—		$	90	$	82
Interest cost		109			107			95		94
Expected return on plan assets		(114	)		(97	)		—		—
Amortization of prior service cost		—			—			44		44
Amortization of the net loss		13			18			5		5

Net periodic cost	$	8		$	28		$	234	$	225

9. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The new standard was issued to provide largely identical guidance about fair value measurement and disclosure requirements for IFRS and U.S. GAAP. The new standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it is already required or permitted. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. The new guidance is effective for interim and annual periods beginning after December 15, 2011. The ASU should not have a significant impact on the Company’s fair value measurements or disclosures.

ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate the convergence of U.S. GAAP and IFRS, the Financial Accounting Standards Board (“FASB”) decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this ASU will be applied retrospectively. The amendments are effective for fiscal years, and interim periods with those years, beginning after December 15, 2011. As the Company currently reports comprehensive income as part of its statement of changes in stockholders’ equity, this ASU will change how the Company reports its comprehensive income once it is adopted.

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

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

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the 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, 2010. 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 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, 2010. 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, 2010, 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 31^st. No impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its fair value.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

Total net loans and leases grew to $531.8 million at June 30, 2011, reflecting a $10.7 million or 2.0% increase from March 31, 2011 and a $14.3 million or 2.8% increase from December 31, 2010. The national direct financing lease portfolio declined $2.5 million during the second quarter to $10.0 million at June 30, 2011 as the Company ceased lease originations in the second quarter of 2009 and is winding down the portfolio and exiting this business line. The national direct financing lease portfolio comprised 1.8% of the Company’s total loan and lease portfolio at June 30, 2011, down from 2.3% at March 31, 2011 and 2.9% at December 31, 2010.

Core loans, defined as total gross loans less leases, were $532.5 million at June 30, 2011, a $13.4 million, or 2.6% increase from $519.2 million at March 31, 2011, and a $20.0 million, or 3.9% increase from $512.5 million at December 31, 2010. The annualized growth rate for the core loan portfolio improved in the second quarter to 10.3% from 5.2% in the first quarter of 2011.

Loans secured by real estate were $428.2 million at June 30, 2011, an increase of $3.7 million or 0.9% from $424.5 million at March 31, 2011, and an increase of $10.1 million or 2.4% from $418.1 million at December 31, 2010. The strongest growth continues to be in commercial and multi-family real estate loans, which increased $4.2 million or 1.5% in the second quarter of 2011. Commercial real estate lending has historically been a strength of the Company’s commercial loan officers and continues to drive loan growth for the Company.

Residential mortgages decreased slightly from $70.0 million at December 31, 2010 and $69.8 million at March 31, 2011 to $68.0 million at June 30, 2011. The sluggish national residential real estate market has kept long-term fixed rate mortgage loan rates near all-time historic lows. As a result, the Company has sold the majority of its originated

residential mortgage loans. This, along with prepayments from existing customers re-financing their homes, has resulted in the slight decrease in residential mortgage balances in the second quarter of 2011. Residential mortgage originations increased sharply with $8.6 and $17.6 million in originations in the three and six month periods ended June 30, 2011, respectively, compared with $5.1 and $9.2 million in the three and six month periods ended June 30, 2010, respectively.

The Bank sells certain fixed rate residential mortgages to FNMA, while maintaining the servicing rights for those mortgages. During the three and six month periods ended June 30, 2011, the Bank sold mortgages to FNMA totaling $5.8 and $13.1 million, respectively, as compared with $2.8 and $4.8 million sold during the three and six month periods ended June 30, 2010. At June 30, 2011, the Bank had a loan servicing portfolio principal balance of $54.6 million upon which it earns servicing fees, as compared with $49.8 million at March 31, 2011 and $44.2 million at December 31, 2010. The value of the mortgage servicing rights for that portfolio was $0.4 million at June 30, 2011, March 31, 2011 and December 31, 2010. The increase in the value of the mortgage servicing rights, as a result of the increase in the size of the servicing portfolio, has been mostly offset by the lower calculated value due to the decrease in market rates. Lower mortgage interest rates cause accelerated prepayment speeds in the valuation model which decreases the duration of the serviced mortgages. Residential mortgage loans held-for-sale were $0 at June 30, 2011, compared with $1.4 million at March 31, 2011 and $2.9 million at December 31, 2010. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.

The Company continues to focus on C&I lending as a way to diversify its loan portfolio, which has historically experienced strong growth rates in commercial real estate loans. The C&I portfolio grew $9.2 million, or 10.0%, for the three months ended June 30, 2011, compared to growth of $0.7 million, or 0.8% during the first quarter of 2011. The Company has bolstered its C&I potential in the past year with new loan officers and improvements to its cash management capabilities via personnel, processes, and technology.

Leasing Portfolio

As noted above, management made 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 and service it to maturity, 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 June 30, 2011, 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 second quarter of 2011, $0.1 million in leases were written off and the difference between the principal value and carrying value of the leases declined from $0.9 million to $0.8 million. The second quarter write-offs represented a decline from the $0.6 million in net write-offs in the first quarter of 2011 and the second quarter of 2010. Non-performing leases also declined in the second quarter. The balance of non-performing leases was $1.7 million at June 30, 2011 down from $2.1 million at March 31, 2011 and $2.9 million at December 31, 2010. The decrease in non-accruing leases is due to both write-offs and pay-downs of those leases outpacing the rate of new leases going into non-accrual. With both leasing write-offs and non-accruing lease balances declining, management determined that there was no need to add to the existing allowance for leasing losses at June 30, 2011. The following table illustrates the write-off and allowance activity related to the leasing portfolio over the past five quarters.


	($ in thousands)
	2011						2010
	June 30,			March 31,			December 31,			September 30,			June 30,
Leasing Principal Balance	$	10,736		$	13,339		$	16,968		$	20,869		$	25,142
Mark		(779	)		(890	)		(1,493	)		(2,124	)		(2,469	)

Leasing Carrying Value	$	9,957		$	12,449		$	15,475		$	18,745		$	22,673

Mark-to-Market Adjustment	$	890		$	1,493		$	2,124		$	2,469		$	3,084
Net Write-Offs		(111	)		(603	)		(631	)		(345	)		(615	)

Remaining Mark	$	779		$	890		$	1,493		$	2,124		$	2,469


	For the three months ended
	2011						2010
	June 30,			March 31,			December 31,			September 30,			June 30,
Allowance for lease losses	$	1,471		$	1,471		$	1,077		$	772		$	772
Provision for leases		—			—			394			305			—
Leasing net charge-offs		—			—			—			—			—

Allowance for lease losses	$	1,471		$	1,471		$	1,471		$	1,077		$	772

Total mark plus allowance	$	2,250		$	2,361		$	2,964		$	3,201		$	3,241
Mark + allowance/leasing principal balance		20.96	%		17.70	%		17.47	%		15.34	%		12.89	%

Credit Quality of Loan Portfolio

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 $12.8 million, or 2.36% of total loans and leases outstanding, compared with $13.4 million, or 2.53% of total loans and leases outstanding at March 31, 2011 and $13.9 million, or 2.64% of total loans and leases outstanding at December 31, 2010. In the first quarter of 2011, two commercial real estate loans with an aggregate balance of $0.9 million, one commercial construction loan with a balance of $0.6 million, and two home equity loans with an aggregate balance of $0.2 million were moved into non-accrual. The total impairment on those loans was $0.1 million and was included in the provision for loan and lease losses in the six month period ended June 30, 2011. In the second quarter of 2011, one commercial relationship was placed into nonaccrual. The borrower has a $0.4 million commercial real estate loan and a $0.1 million C&I loan. The loans were acquired in the Waterford transaction discussed in Note 4 to the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and are covered under the FDIC loss-sharing agreement. The decline of $0.6 million and $1.1 million in non-performing loans and leases during the three and six month periods ended June 30, 2011 is attributable to charge-offs and pay-downs, somewhat offset by the loans and leases placed into non-accrual in the first and second quarters of 2011. The charge-offs are discussed in more detail below.

The allowance for loan and lease losses totaled $10.7 million or 1.97% of total loans and leases outstanding at June 30, 2011, as compared with $10.5 million or 1.97% of total loans and leases outstanding at March 31, 2011 and $10.4 million or 1.97% of total loans and leases outstanding at December 31, 2010. The increase in the allowance from the prior quarter-end and year-end resulted from provision for loan and lease losses somewhat offset by net charge-offs. The provision for loan and lease losses of $1.0 million in the second quarter resulted from growth in the commercial loan portfolio, an increase in specific reserves for an impaired commercial real estate loan, and the charge-off of a short-term unsecured commercial term note that was not previously reserved for. The provision for loan and lease losses of $1.5 million for the six month period ended June 30, 2011 also included some provision for increases in loans categorized as special mention (risk rating of 5) or substandard (risk rating of 6) in the Company’s internal credit ratings.

The $0.8 million in net charge-offs for the second quarter of 2011 equates to a 0.63% annualized ratio as a percentage of net loans and leases. This compares with a 0.33% ratio in the first quarter of 2011 and a 0.14% ratio in the second quarter of 2010. $0.6 million of the $0.8 million in charge-offs in the second quarter of 2011 stemmed

from partial charge-offs of three commercial loan relationships that were already identified as impaired and on nonaccrual and adequately reserved as of March 31, 2011. The remaining $0.2 million in charge-offs related to a short-term unsecured commercial term note which unexpectedly charged off and was not reserved for at March 31, 2011. The $1.3 million in net charge-offs for the six-month period ended June 30, 2011 equates to a 0.47% annualized ratio as a percentage of net loans and leases, compared with $0.2 million in net charge-offs and a 0.08% ratio in the six-month period ended June 30, 2010.

The coverage ratio of the allowance for loan and lease losses to non-performing loans and leases increased from 75% at December 31, 2010 and 78% at March 31, 2011 to 83% at June 30, 2011. There are two factors that significantly influence these ratios. The first factor is the covered loan portfolio acquired in the Waterford transaction discussed in Note 4 to the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. The second factor is the leasing portfolio, which carries significantly higher risk, but also has the remaining mark to consider as depicted in the table above. The following table depicts the allowance and non-performing ratios by segregating the covered and non-covered loan portfolios and the leasing portfolio as of the following dates:


	June 30, 2011
	($ in thousands)
	Balance		Allowance for loan and lease losses		Non- performing loans and leases		Allowance for loan and lease losses/Total loans and leases			Non-performing loans and leases/Total loans and leases			Allowance for loan and lease losses/Non- performing loans and leases
Non-covered loans	$	502,969	$	9,069	$	8,512		1.80	%		1.69	%		106.54	%
Covered loans		29,568		127		2,519		0.43	%		8.52	%		5.04	%
Leases		9,957		1,471		1,747		14.77	%		17.55	%		84.20	%

Total	$	542,494	$	10,667	$	12,778		1.97	%		2.36	%		83.48	%


	December 31, 2010
	($ in thousands)
	Balance		Allowance for loan and lease losses		Non-performing loans and leases		Allowance for loan and lease losses/Total loans and leases			Non-performing loans and leases/Total loans and leases			Allowance for loan and lease losses/Non- performing loans and leases
Non-covered loans	$	478,346	$	8,834	$	8,515		1.85	%		1.78	%		103.75	%
Covered loans		34,157		119		2,482		0.35	%		7.27	%		4.80	%
Leases		15,475		1,471		2,930		9.51	%		18.93	%		50.20	%

Total	$	527,978	$	10,424	$	13,927		1.97	%		2.64	%		74.85	%

Investing Activities

Total securities were $97.7 million at June 30, 2011, reflecting a $3.2 million, or 3.2%, decrease from $100.9 million at March 31, 2011, but a $4.4 million, or 4.7%, increase from $93.3 million at December 31, 2010. The increase in securities balances from December 31, 2010 is a result of deposit growth out-pacing loan growth in 2011. Management utilized some of the excess funds raised to purchase investment securities. However, balances decreased in the second quarter as loan growth improved. As is typical every year, several municipal bonds were called in June. Management decided not to replace the bonds in anticipation of replacing those assets with loans. As a result, municipal bonds decreased $3.0 million from $38.4 million at March 31, 2011 to $35.4 million at June 30, 2011. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks, increased from $0.3 million at December 31, 2010 to $17.6 million at March 31, 2011 before decreasing to $14.1 million at June 30, 2011. Securities and interest-bearing deposits at correspondent banks made up 18.3% of the

Bank’s total average interest earning assets in the second quarter of 2011, compared with 16.8% in the first quarter of 2011 and 15.1% in the second quarter of 2010.

The Company’s highest concentration in its securities portfolio continues to be in its tax-advantaged municipal bonds, which comprised 38.8% of the total portfolio at June 30, 2011, as compared with 41.6% of the total portfolio at March 31, 2011 and 42.9% at December 31, 2010. The concentration in government-sponsored mortgage-backed securities increased from 30.7% at December 31, 2010 to 33.3% at March 31, 2011 and 32.4% at June 30, 2011. U.S. government-sponsored agency bonds of various types comprised 25.5% of the portfolio at June 30, 2011 versus 25.1% of the portfolio at March 31, 2011 and 26.4% at December 31, 2010. As a member of both the Federal Reserve System and FHLBNY, the Bank is required to hold stock in those entities. 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 historic lows, the net unrealized gain position of the investment portfolio increased from $1.3 million and $1.5 million at December 31, 2010 and March 31, 2011, respectively, to $2.7 million at June 30, 2011.

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. The average expected life of the securities portfolio was 3.7 years as of June 30, 2011 compared with 3.9 years at March 31, 2011 and 4.0 years as of December 31, 2010. Available-for-sale securities with a total fair value of $88.8 million at June 30, 2011, as compared to $91.4 million and $65.6 million at March 31, 2011 and December 31, 2010, 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 June 30, 2011 were $586.8 million, reflecting a $1.7 million, or 0.3%, increase from March 31, 2011 and a $42.3 million, or 7.8%, increase from December 31, 2010. Deposit growth slowed in the second quarter due to seasonal declines in the muni-vest savings product (decrease of $8.5 million from March 31, 2011 to June 30, 2011 after an increase of $12.8 million from December 31, 2010 to March 31, 2011) and run-off of some non-core time deposits, which is discussed below. Demand deposits at June 30, 2011 were $104.8 million, reflecting a $5.4 million or 5.4% increase from March 31, 2011 and a $6.8 million or 6.9% increase from December 31, 2010. 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 June 30, 2011 of $105.7 million were 3.8% higher than the first quarter of 2011 and 18.1% higher than the prior year’s second quarter. Most of the Company’s growth in demand deposits has come from commercial customers.

The Company’s retail deposit growth vehicle continues to be the complementary Better Checking and Better Savings products, which are included in the NOW and regular savings deposit categories on the Company’s balance sheet, 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 Bank as evidenced by regular use of their debit card, use of direct deposit, and electronic statements. Overall, Better Checking deposits increased $5.0 million, or 20.8%, in the second quarter of 2011, and $8.4 million, or 40.7% for the first half of the year. Regular savings deposits increased $13.7 million, or 5.2%, in the second quarter, and $28.2 million, or 11.3% for the first half of the year. That growth is mostly a result of an increase in Better Savings deposits, partially offset by decreases in legacy savings products.

Time deposits were $133.9 million at June 30, 2011, a decrease of $9.7 million, or 6.8%, from March 31, 2011 and $8.5 million, or 6.0% from December 31, 2010. Time deposit rates industry-wide remain near historic lows. As a result, customers have continued to show a preference for liquid savings products over time deposits. In addition, the Company has allowed higher rate promotional time deposits to roll off without being replaced as management has determined that the Company has ample liquidity and does not need to use promotional rates to attract more deposits.

The Bank’s overnight line of credit remained at $0 at June 30, 2011. The balance was also $0 at March 31, 2011, but was $8.6 million at December 31, 2010. Total short and long-term borrowings at June 30, 2011 remained unchanged from the March 31, 2011 and December 31, 2010 balances. Due to the ample liquidity created at the

Company this year with deposit growth outpacing the loan growth by $28.0 million through June 30, 2011, the Company has not needed to draw on its overnight line of credit or take out any long-term advances with FHLBNY.

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
	June 30, 2011							June 30, 2010
	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	$	524,178	$	7,081		5.40	%	$	492,243	$	7,049		5.73	%
Taxable securities		61,069		538		3.52	%		41,444		381		3.68	%
Tax-exempt securities		39,570		389		3.93	%		39,674		403		4.06	%
Interest bearing deposits at banks		16,952		7		0.17	%		6,678		3		0.18	%

Total interest-earning assets		641,769	$	8,015		5.00	%		580,039	$	7,836		5.40	%

Non interest-earning assets:

Cash and due from banks		16,523							13,082
Premises and equipment, net		10,612							9,443
Other assets		35,382							35,035

Total Assets	$	704,286						$	637,599

LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW	$	44,707	$	131		1.17	%	$	22,388	$	56		1.00	%
Regular savings		268,220		463		0.69	%		233,926		404		0.69	%
Muni-Vest savings		29,483		35		0.47	%		35,076		40		0.46	%
Time deposits		139,727		832		2.38	%		140,952		920		2.61	%
Other borrowed funds		22,029		182		3.30	%		31,491		229		2.91	%
Junior subordinated debentures		11,330		82		2.89	%		11,330		83		2.93	%
Securities sold U/A to repurchase		6,022		3		0.20	%		6,886		5		0.29	%

Total interest-bearing liabilities		521,518	$	1,728		1.33	%		482,049	$	1,737		1.44	%

Noninterest-bearing liabilities:
Demand deposits		105,725							89,550
Other		11,144							10,652

Total liabilities	$	638,387						$	582,251
Stockholders’ equity		65,899							55,348

Total Liabilities and Equity	$	704,286						$	637,599

Net interest earnings			$	6,287						$	6,099

Net interest margin						3.92	%						4.21	%

Interest rate spread						3.67	%						3.96	%


	Six Months Ended							Six Months Ended
	June 30, 2011							June 30, 2010
	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	$	521,228	$	14,233		5.46	%	$	488,261	$	13,990		5.73	%
Taxable securities		59,265		1,024		3.46	%		41,616		782		3.76	%
Tax-exempt securities		39,060		760		3.89	%		39,616		805		4.06	%
Interest bearing deposits at banks		12,731		11		0.17	%		4,535		4		0.18	%

Total interest-earning assets		632,284	$	16,028		5.07	%		574,028	$	15,581		5.43	%

Non interest-earning assets:
Cash and due from banks		15,960							12,158
Premises and equipment, net		10,685							9,342
Other assets		35,689							35,151

Total Assets	$	694,618						$	630,679

LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW	$	41,608	$	237		1.14	%	$	21,020	$	93		0.88	%
Regular savings		262,226		873		0.67	%		232,847		807		0.69	%
Muni-Vest savings		27,072		64		0.47	%		33,013		80		0.48	%
Time deposits		141,436		1,708		2.42	%		140,688		1,789		2.54	%
Other borrowed funds		24,594		393		3.20	%		35,892		461		2.57	%
Junior subordinated debentures		11,330		163		2.88	%		11,330		163		2.88	%
Securities sold U/A to repurchase		6,201		7		0.23	%		7,038		11		0.31	%

Total interest-bearing liabilities		514,467	$	3,445		1.34	%		481,828	$	3,404		1.41	%

Noninterest-bearing liabilities:
Demand deposits		103,772							86,777
Other		11,411							10,828

Total liabilities	$	629,650						$	579,433

Stockholders’ equity		64,968							51,246

Total Liabilities and Equity	$	694,618						$	630,679

Net interest earnings			$	12,583						$	12,177

Net interest margin						3.98	%						4.24	%

Interest rate spread						3.73	%						4.02	%

Net Income

The Company had net income of $1.0 million, or $0.24 per diluted share, in the second quarter of 2011, a decrease from net income of $1.6 million, or $0.47 per diluted share, in the second quarter of 2010. For the six month period ended June 30, 2011, net income was $2.8 million, or $0.69 per diluted share, compared with a net income of $3.1 million, or $0.98 per diluted share, in the comparable period in 2010. The provision for loan and lease losses increased from $0.3 million in the second quarter of 2010 to $1.0 million for the second quarter of 2011, driving the decrease in the second quarter net income in 2011 when compared with 2010’s second quarter. For the year-to-date comparison, net income is down $0.2 million because non-interest income decreased $0.3 million while non-interest expenses increased $0.4 million. These fluctuations were offset by the $0.4 million increase in net interest income. The provision for loan and lease losses was flat year-over-year. The return on average equity

(“ROE”) was 5.90% and 8.76% for the three and six month periods ended June 30, 2011, respectively, compared with 11.79% and 12.01% for the three and six month periods ended June 30, 2010, respectively. The decrease in the ROE was caused by the decrease in net income in the respective periods and the increase in average equity in the 2011 periods stemming from the Company’s issuance of common stock in a registered offering in May 2010.

Other Results of Operations - Quarterly Comparison

Net interest income was $6.3 million during the second quarter of 2011, flat when compared with the first quarter of 2011 but up 3.1% from the second quarter of 2010. Growth in net interest-earning assets drove the increase from the second quarter of 2010 and more than offset net interest margin contraction relative to the 2010 second quarter. Core loans, which are defined as total loans and leases less national direct financing leases, were $532.5 million at June 30, 2011, an increase of 10.9% from $480.3 million at June 30, 2010, and up 2.6% (10.3% annualized) from $519.2 million at March 31, 2011.

Net interest margin compressed to 3.92% for the second quarter of 2011 compared with 4.05% in the 2011 first quarter and 4.21% in the 2010 second quarter. The drop in net interest margin in the second quarter 2011 when compared to the first quarter of 2011 was partially a result of higher than typical prepayment fees of $0.2 million recorded in the first quarter of 2011. The fees, recorded as interest income, were a result of the refinancing or payoffs of several large commercial loans. When adjusted for the prepayments, net interest margin would have compressed by 2 basis points for the second quarter 2011 compared with the first quarter of 2011. When compared

with the 2010 second quarter, the largest contributing factor to the compression of net interest margin was declining interest rates. As the low interest rate cycle matures, the Company’s loan and investment portfolios continue to re-price into lower yields as evidenced by the 40 basis point decline in yield on interest-earning assets during the second quarter of 2011 when compared with the second quarter of 2010.

The provision for loan and lease losses increased to $1.0 million in the second quarter of 2011 from $0.5 million in the first quarter of 2011 and $0.3 million in the second quarter of 2010. The higher provision in the second quarter of 2011 was largely due to provision recorded for the deterioration in two commercial loans as discussed above under “Analysis of Financial Condition – Credit Quality of Loan Portfolio,” as well as additional provision recorded for the strong commercial loan growth in the quarter.

Non-interest income, which represented 31.8% of total revenue in the second quarter of 2011, declined 1.8%, or $0.1 million, to $2.9 million when compared with the second quarter of 2010 reflecting lower service charges and insurance agency revenue. Non-interest income was 32.8% of total revenue in the second quarter of 2010. Service charges on deposits decreased $64 thousand, or 13.3%, compared with the second quarter 2010, primarily due to amendments to Regulation E pertaining to overdraft fees that became effective in 2010. Insurance agency revenue of $1.6 million was down $28 thousand, or 1.7%, when compared with the 2010 second quarter as the soft insurance market and macro-economic conditions continue to put downward pressure on personal and commercial property and casualty insurance commissions despite strong retention rates. Compared with the trailing first quarter of 2011, insurance agency revenue was down $0.5 million, reflecting the typical revenue cycle seasonality.

Total non-interest expense was $6.8 million in the second quarter of 2011, an increase of $0.2 million, or 3.3%, from $6.5 million in the second quarter of 2010. The largest component of the increase was salaries and employee benefits, which increased $0.2 million, or 5.0%, to $3.9 million in the second quarter of 2011 compared with the prior-year second quarter. This rise reflected merit increases awarded for 2010 performance and an increased number of employees. This was partially off-set by a decline in other expenses, primarily lower amortization expense related to intangible assets acquired in the purchase of Suchak Data Systems, Inc., which were fully amortized at the end of 2010 and a reduction in FDIC insurance expense due to changes in the premium calculation adopted in the second quarter by the FDIC.

As a result of the increase in non-interest expense and the decrease in non-interest income, the efficiency ratio, excluding intangible amortization, increased to 72.04% for the second quarter of 2011, from 69.72% for the second quarter of 2010.

Income tax expense for the quarter ended June 30, 2011 was $0.5 million, representing an effective tax rate of 32.5%, compared with an effective tax rate of 26.56% in the second quarter of 2010. The higher effective tax rate for the second quarter of 2010 reflects a lower percentage of tax-exempt income in 2011, mainly tax-exempt municipal bonds.

Other Results of Operations – Year-to-Date Comparison

Net interest income was $12.6 million during the first six months of 2011, an increase of 3.1% from the same period in 2010. Growth in net interest-earning assets drove the increase in net interest income in 2011 and more than offset net interest margin contraction relative to 2010.

Net interest margin compressed to 3.98% for the first six months of 2011 compared with 4.24% in the first six months of 2010. When compared with 2010, the largest contributing factor to the compression of net interest margin was declining interest rates. As the low interest rate cycle matures, the Company’s loan and investment portfolios continue to re-price into lower yields as evidenced by the 36 basis point decline in yield on interest-earning assets during the first six months 2011 when compared with 2010.

The provision for loan and lease losses of $1.5 million for the six month period ended June 30, 2011 was flat with the comparable period in 2010. The provision recorded for the deterioration of two commercial loans in the six month period ended June 30, 2011 as discussed above under “Analysis of Financial Condition – Credit Quality of Loan Portfolio,” was offset by a $0.8 million lower provision for lease losses in the first six months of 2011 compared with the same period in 2010.

Non-interest income, which represented 33.7% of total revenue in the six month period ended June 30, 2011, declined 4.4%, or $0.3 million, to $6.4 million when compared with the comparable period in 2010, reflecting lower service charges and insurance agency revenue. Service charges on deposits decreased $0.2 million, or 19.1%, in the first half of 2011 when compared with the first half of 2010, primarily due to amendments to Regulation E pertaining to overdraft fees enacted last year. Insurance service and fee revenue of $3.7 million in the first half of 2011 was down $0.2 million, or 4.8%, when compared with the first half of 2010 as the soft insurance market and macro-economic conditions continue to put downward pressure on personal and commercial property and casualty insurance commissions despite strong retention rates.

Total non-interest expense was $13.4 million in the six month period ended June 30, 2011, an increase of $0.4 million, or 2.8%, from $13.0 million in the six month period ended June 30, 2010. The largest component of the increase was salaries and employee benefits, which increased $0.5 million, or 6.6%, to $7.8 million in the 2011 six month period when compared with the prior-year period. This rise reflected merit increases awarded for 2010 performance and an increased number of employees. This was partially offset by a decline in other expenses, primarily due to a $0.2 million decrease in amortization expense related to intangible assets acquired in the purchase of Suchak Data Systems, Inc., which were fully amortized at the end of 2010 and a $0.1 million reduction in FDIC insurance expense due to changes in the premium calculation adopted in the second quarter of 2011 by the FDIC.

As a result of the increase in non-interest expense and the decrease in non-interest income, the efficiency ratio, excluding intangible amortization, increased to 69.11% for the first six months of 2011, from 66.52% in 2010.

Income tax expense for the six month period ended June 30, 2011 was $1.3 million, representing an effective tax rate of 30.7%, compared with an effective tax rate of 29.0% in the six month period ended June 30, 2010. The higher effective tax rate for 2011 reflects a lower percentage of tax-exempt income in 2011, mainly tax-exempt municipal bonds.

CAPITAL

The Company consistently maintains regulatory capital ratios measurably above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 9.80% at June 30, 2011, compared with 9.89% at March 31, 2011 and 9.93% at December 31, 2010. Book value per share of the Company’s common stock was $16.14 at June 30, 2011, compared with $15.71 at March 31, 2011 and $15.45 at December 31, 2010. Tangible book value per share at June 30, 2011 was $13.95, compared with $13.48 at March 31, 2011 and $13.18 at December 31, 2010. The increase in both book value and tangible book value per share is a result of the increase in the Company’s earnings during 2011, offset by the dividend declared in the first quarter of 2011.

On February 15, 2011, 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 April 4, 2011 to shareholders of record as of March 10, 2011. The $0.20 dividend was equal to the previous dividend paid on October 6, 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 $111.8 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 in greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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 June 30, 2011, approximately 5.3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 23.5% had maturity dates of five years or less.

Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies, and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are liquid assets and potential liabilities. Management stresses the potential liabilities calculation to ensure a strong liquidity position. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases. At June 30, 2011, in the Company’s internal stress test, the Company had net short-term liquidity of $73.4 million as compared with $70.2 million at December 31, 2010.

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.

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 increase in projected annual net interest income
	(in thousands)
	June 30, 2011		December 31, 2010
Changes in interest rates

+200 basis points	$	842	$	486
+100 basis points		938		945

-100 basis points		N/A		N/A
-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 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 June 30, 2011 (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 June 30, 2011 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 June 30, 2011 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.

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.

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.		49

31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		50

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.		51

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.		52

101	The following materials from Evans Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – June 30, 2011 and December 31, 2010; (ii) Unaudited Consolidated Statements of Income – Three months ended June 30, 2011 and 2010; (iii) Unaudited Consolidated Statements of Income – Six months ended June 30, 2011 and 2010; (iv) Unaudited Consolidated Statements of Stockholder’s Equity – Six months ended June 30, 2011 and 2010; (v) Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2011 and 2010; and (vi) Notes to Unaudited Consolidated Financial Statements.**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.