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EVANS BANCORP INC - Quarter Report: 2006 June (Form 10-Q)

e10vq
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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
(Mark One)
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
For quarterly period ended June 30, 2006
 
   
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
For the transition period from                  to                 
Commission file number 0-18539
EVANS BANCORP, INC.
 
(Exact name of registrant as specified in its charter)
     
New York   16-1332767
     
(State of other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
14 -16 North Main Street, Angola, New York   14006
     
(Address of principal executive offices)   (Zip Code)
(716) 926-2000
 
(Registrant’s telephone number, including area code)
Not applicable
 
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):
         
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $.50 par value 2,725,601 shares as of August 2, 2006
 
 

 


 

INDEX
EVANS BANCORP, INC. AND SUBSIDIARIES
             
        PAGE  
PART 1. FINANCIAL INFORMATION
 
           
Item 1. Financial Statements
 
           
 
  Unaudited Consolidated Balance Sheets–June 30, 2006 and        
 
  December 31, 2005     1  
 
           
 
  Unaudited Consolidated Statements of Income-Three months        
 
  ended June 30, 2006 and 2005     2  
 
           
 
  Unaudited Consolidated Statements of Income-Six months        
 
  Ended June 30, 2006 and 2005     3  
 
           
 
  Unaudited Consolidated Statements of Stockholders' Equity-Six months  
 
  ended June 30, 2006 and 2005     4  
 
           
 
  Unaudited Consolidated Statements of Cash Flows–Six months        
 
  ended June 30, 2006 and 2005     5  
 
           
 
  Notes to Unaudited Consolidated Financial Statements     7  
 
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
 
           
Item 3. Quantitative and Qualitative Disclosures About Market Risk     21  
 
           
Item 4. Controls and Procedures     22  
 
           
PART II. OTHER INFORMATION        
 
           
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     23  
 
           
Item 4. Submission of Matters to a Vote of Security Holders     23  
 
           
Item 6. Exhibits     24  
 
           
SIGNATURES     25  
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 


Table of Contents

1

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND DECEMBER 31, 2005
(in thousands, except share and per share amounts)
 
                 
    June 30,     December 31,  
    2006     2005  
ASSETS
               
Cash and cash equivalents:
               
Cash and due from banks
  $ 13,110     $ 15,635  
Securities:
               
Available for sale, at fair value
    143,627       155,610  
Held to maturity, at amortized cost
    4,429       4,342  
Loans and leases, net of allowance for loan and lease losses of $3,604 in 2006 and $3,211 in 2005
    269,383       256,810  
Properties and equipment, net
    8,161       8,151  
Goodwill
    9,639       9,639  
Intangible assets
    2,704       2,728  
Bank-owned life insurance
    9,819       9,586  
Other assets
    7,193       6,045  
 
           
TOTAL ASSETS
  $ 468,065     $ 468,546  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES
               
Deposits:
               
Demand
  $ 68,178     $ 71,183  
NOW
    11,636       12,401  
Regular savings
    89,748       86,558  
Muni-vest
    34,676       27,521  
Time
    138,770       139,145  
 
           
Total deposits
    343,008       336,808  
Federal funds purchased and agreements to repurchase securities
    5,934       8,985  
Other short-term borrowings
    32,178       34,585  
Other liabilities
    7,512       6,629  
Junior subordinated debentures
    11,330       11,330  
Long-term borrowings
    30,874       33,333  
 
           
Total liabilities
    430,836       431,670  
 
           
CONTINGENT LIABILITIES AND COMMITMENTS
               
STOCKHOLDERS’ EQUITY:
               
Common stock, $.50 par value; 10,000,000 shares authorized; 2,745,338 and 2,745,338 shares issued, respectively, and 2,727,101 and 2,729,779 shares outstanding, respectively
    1,373       1,373  
Capital surplus
    26,153       26,155  
Retained earnings
    12,636       11,087  
Accumulated other comprehensive loss, net of tax
    (2,543 )     (1,387 )
Less: Treasury stock, at cost (18,237 and 15,559 shares, respectively)
    (390 )     (352 )
 
           
Total stockholders’ equity
    37,229       36,876  
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 468,065     $ 468,546  
 
           
See Notes to Unaudited Consolidated Financial Statements


Table of Contents

2

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2006 AND 2005
(in thousands, except share and per share amounts)
 
                 
    Three Months Ended  
    June 30,  
    2006     2005  
INTEREST INCOME
               
Loans
  $ 4,892     $ 3,886  
Federal funds sold/Interest bearing deposits at other banks
    19       63  
Securities:
               
Taxable
    1,075       1,257  
Non-taxable
    483       488  
 
           
Total interest income
    6,469       5,694  
INTEREST EXPENSE
               
Deposits
    2,126       1,599  
Other borrowings
    557       342  
Junior subordinated debentures
    206       158  
 
           
Total interest expense
    2,889       2,099  
NET INTEREST INCOME
    3,580       3,595  
PROVISION FOR LOAN AND LEASE LOSSES
    228       188  
 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    3,352       3,407  
NON-INTEREST INCOME:
               
Bank charges
    477       500  
Insurance service and fees
    1,510       1,549  
Net gain on sales of securities
          12  
Premium on loans sold
    1       3  
Bank-owned life insurance
    128       103  
Life insurance proceeds
          80  
Other
    423       260  
 
           
Total non-interest income
    2,539       2,507  
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
    2,440       2,280  
Occupancy
    501       480  
Supplies
    83       92  
Repairs and maintenance
    134       146  
Advertising and public relations
    190       112  
Professional services
    251       259  
Amortization of intangibles
    135       127  
Other Insurance
    90       102  
Other
    660       704  
 
           
Total non-interest expense
    4,484       4,302  
 
           
INCOME BEFORE INCOME TAXES
    1,407       1,612  
INCOME TAXES
    336       437  
 
           
NET INCOME
  $ 1,071     $ 1,175  
 
           
Net income per common share-basic
  $ 0.39     $ 0.44  
 
           
Net income per common share-diluted
  $ 0.39     $ 0.44  
 
           
Cash dividends per common share
  $ 0.00     $ 0.00  
 
           
Weighted average number of common shares
    2,724,710       2,723,641  
 
           
Weighted average number of diluted shares
    2,727,803       2,726,588  
 
           
See Notes to Unaudited Consolidated Financial Statements


Table of Contents

3

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(in thousands, except share and per share amounts)
 
                 
    Six Months Ended  
    June 30,  
    2006     2005  
INTEREST INCOME
               
Loans
  $ 9,507     $ 7,414  
Federal funds sold/Interest bearing deposits at other banks
    30       99  
Securities:
               
Taxable
    2,179       2,402  
Non-taxable
    957       978  
 
           
Total interest income
    12,673       10,893  
INTEREST EXPENSE
               
Deposits
    4,021       2,849  
Other borrowings
    1,040       786  
Junior subordinated debentures
    398       301  
 
           
Total interest expense
    5,459       3,936  
NET INTEREST INCOME
    7,214       6,957  
PROVISION FOR LOAN AND LEASE LOSSES
    510       339  
 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    6,704       6,618  
NON-INTEREST INCOME:
               
Bank charges
    975       988  
Insurance service and fees
    3,687       3,576  
Net gain on sales of securities
          105  
Premium on loans sold
    4       12  
Bank-owned life insurance
    233       206  
Life insurance proceeds
          80  
Other
    796       568  
 
           
Total non-interest income
    5,695       5,535  
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
    4,941       4,647  
Occupancy
    1,033       988  
Supplies
    168       197  
Repairs and maintenance
    271       294  
Advertising and public relations
    261       273  
Professional services
    395       548  
Amortization of intangibles
    265       254  
Other Insurance
    177       196  
Other
    1,459       1,390  
 
           
Total non-interest expense
    8,970       8,787  
 
           
INCOME BEFORE INCOME TAXES
    3,429       3,366  
INCOME TAXES
    952       929  
 
           
NET INCOME
  $ 2,477     $ 2,437  
 
           
Net income per common share-basic
  $ 0.91     $ 0.90  
 
           
Net income per common share-diluted
  $ 0.91     $ 0.90  
 
           
Cash dividends per common share
  $ 0.34     $ 0.32  
 
           
Weighted average number of common shares
    2,723,835       2,722,118  
 
           
Weighted average number of diluted shares
    2,725,870       2,725,411  
 
           
See Notes to Unaudited Consolidated Financial Statements


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4

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(in thousands, except share and per share amounts)
 
                                                 
                            Accumulated              
                            Other              
    Common     Capital     Retained     Comprehensive     Treasury        
    Stock     Surplus     Earnings     Income (Loss)     Stock     Total  
 
                                               
Balance, January 1, 2005
  $ 1,307     $ 23,361     $ 10,808     $ 563     $ (565 )   $ 35,474  
Comprehensive income:
                                               
Net income
                    2,437                       2,437  
Unrealized loss on available-for-sale securities, net of tax effect of $247 and reclassification adjustment of $(105)
                            (387 )             (387 )
 
                                             
Total comprehensive income
                                            2,050  
 
                                             
Cash dividends ($0.32 per common share)
                    (857 )                     (857 )
Stock options expense
            94                               94  
Reissued 7,760 shares treasury stock under dividend reinvestment plan
                    2               176       178  
Reissued 5,057 shares treasury stock under employee stock purchase plan
                    (23 )             115       92  
Reissued 840 shares treasury stock under director stock option plan
                    (2 )             19       17  
Purchased 11,760 shares for treasury
                                    (262 )     (262 )
 
                                   
Balance, June 30, 2005
  $ 1,307     $ 23,455     $ 12,365     $ 176     $ (517 )   $ 36,786  
 
                                   
 
                                               
Balance, January 1, 2006
  $ 1,373     $ 26,155     $ 11,087     $ (1,387 )   $ (352 )   $ 36,876  
Comprehensive income:
                                               
Net Income
                    2,477                       2,477  
Unrealized loss on available-for-sale securities, net of tax effect of $737
                            (1,156 )             (1,156 )
 
                                             
Total comprehensive income
                                            1,321  
 
                                             
Cash dividends ($0.34 per common share)
                    (928 )                     (928 )
Stock options expense
            60                               60  
Reissued 9,642 shares treasury stock under dividend reinvestment plan
            (33 )                     219       186  
Reissued 5,773 shares treasury stock under employee stock purchase plan
            (29 )                     129       100  
Purchased 18,050 shares for treasury
                                    (386 )     (386 )
 
                                   
Balance, June 30, 2006
  $ 1,373     $ 26,153     $ 12,636     $ (2,543 )   $ (390 )   $ 37,229  
 
                                   
See Notes to Unaudited Consolidated Financial Statements


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5

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(in thousands)
 
                 
    Six Months Ended  
    June 30,  
    2006     2005  
OPERATING ACTIVITIES:
               
Interest received
  $ 13,025     $ 11,080  
Fees received
    5,413       5,145  
Interest paid
    (5,523 )     (3,717 )
Cash paid to employees and suppliers
    (7,806 )     (7,499 )
Income taxes paid
    (897 )     (702 )
Proceeds from sale of loans held for resale
    684       1,808  
Originations of loans held for resale
    (887 )     (1,433 )
 
           
Net cash provided by operating activities
    4,009       4,682  
 
               
INVESTING ACTIVITIES:
               
Available for sales securities:
               
Purchases
    (333 )     (23,085 )
Proceeds from sales
          7,062  
Proceeds from maturities
    10,328       13,871  
Held to maturity securities:
               
Purchases
    (2,052 )     (1,799 )
Proceeds from maturities
    1,861       344  
Additions to properties and equipment
    (409 )     (969 )
Increase in loans, net of repayments
    (12,943 )     (23,582 )
Acquisitions
    (184 )      
Cash paid on earn-out agreements
    (57 )     (313 )
 
           
Net cash used in investing activities
    (3,789 )     (28,471 )
 
               
FINANCING ACTIVITIES:
               
Repayments of short-term borrowings
    (5,458 )     (26,766 )
Repayments of long-term borrowings
    (2,459 )     (2,543 )
Increase in deposits
    6,200       60,117  
Dividends paid
    (928 )     (857 )
Purchase of treasury stock
    (386 )     (262 )
Re-issuance of treasury stock
    286       287  
 
           
Net cash (used in) provided by financing activities
    (2,745 )     29,976  
Net (decrease) increase in cash and equivalents
    (2,525 )     6,187  
 
               
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    15,635       8,124  
 
           
End of period
  $ 13,110     $ 14,311  
 
           


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6

PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(in thousands)
 
                 
    Six Months Ended  
    June 30,  
    2006     2005  
 
               
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
               
 
               
Net income
  $ 2,477     $ 2,437  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    861       978  
Deferred tax benefit
    (303 )     (74 )
Provision for loan and lease losses
    510       339  
Net gain on sales of securities
          (105 )
Premiums on loans sold
    (4 )     (12 )
Stock options expense
    60       94  
Changes in assets and liabilities affecting cash flow:
               
Other assets
    (325 )     (316 )
Other liabilities
    733       1,341  
 
           
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 4,009     $ 4,682  
 
           
See Notes to Unaudited Consolidated Financial Statements


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7

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans National Bank (the “Bank”), and its subsidiaries, Evans National Leasing, Inc. (“ENL”) and Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, Inc. (“ENFS”), and its subsidiary ENB Insurance Agency, Inc. (“ENBI”) and its subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENB”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with accounting principles generally accepted in the United States of America and with general practice within the banking industry. Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”
The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature.
The results of operations for the three and six month period ended June 30, 2006 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, 2005.
2.    SECURITIES
Securities which the Company has the positive ability and intent to hold to maturity are stated at amortized cost. Securities which the Company has identified as available-for-sale are stated at fair value with unrealized gains and losses excluded from earnings and reported net of deferred income taxes, in accumulated other comprehensive income (loss), a component of stockholders equity. Available-for-sale securities are net of unrealized losses of $4.0 million, $3.3 million and $2.1 million as of June 30, 2006, March 31, 2006, and December 31, 2005, respectively. As of June 30, 2006, March 31, 2006, and December 31, 2005, the securities portfolio did not contain any other than temporary declines in fair value.
3.    ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses represents the amount charged against the Bank’s earnings to establish an allowance for probable loan and lease losses based on the Bank’s management’s evaluation of the loan and lease portfolio. Factors considered by the Bank’s management in establishing the allowance include: the collectibility of individual loans and leases, current loan and lease concentrations, charge-off history, delinquent loan and lease percentages, input from regulatory agencies and general economic conditions.
On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan and lease losses. In making this determination, the Bank’s management analyzes the ultimate collectibility of the loans and leases in its portfolio by incorporating feedback provided by the Bank’s internal loan staff, an independent internal loan review function and information provided by examinations performed by regulatory agencies.
The analysis of the allowance for loan and lease losses is composed of three components: specific credit allocation, general portfolio allocation and subjectively by determined allocation. The specific credit allocation includes a detailed review of the credit in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures,” and allocation is made based on this analysis. The general portfolio allocation consists of an assigned reserve percentage based on the actual credit rating of the loan or lease.


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The subjective portion of the allowance reflects management’s evaluation of various conditions, and involves a higher degree of uncertainty because this component of the allowance is not identified with specific problem credits of portfolio segments. The conditions evaluated in connection with this component include the following: industry and regional conditions; seasoning of the loan and lease portfolio and changes in the composition of and growth in the loan and lease portfolio; the strength and duration of the business cycle; existing general economic and business conditions in the lending areas; credit quality trends in nonaccruing loans and leases; historical loan and lease charge-off experience; and the results of bank regulatory examinations.
The following table sets forth information regarding the allowance for loan and lease losses for the six month periods ended June 30, 2006 and 2005.
Allowance for loan losses
                 
    Six months ended June 30,  
    2006     2005  
    (in thousands)  
 
               
Beginning balance, January 1
  $ 3,211     $ 2,999  
Charge-offs:
               
Commercial
    (105 )     (175 )
Real estate mortgages
          (1 )
Installment loans
    (28 )     (42 )
Overdrafts
    (14 )      
Direct financing leases
    (105 )      
 
           
Total charge-offs
    (252 )     (218 )
Recoveries:
               
Commercial
    41        
Real estate mortgages
           
Installment loans
    56        
Overdrafts
    9        
Direct financing leases
    29       45  
 
           
Total recoveries
    135       45  
 
           
Net charge-offs
    (117 )     (173 )
Provision for loan and lease losses
    510       339  
 
           
Ending balance, June 30
  $ 3,604     $ 3,165  
 
           
Ratio of net charge-offs to average net loans and leases outstanding (annualized)
    0.09 %     0.30 %
 
           
4.    PER SHARE DATA
The common stock per share information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. The Company’s potential dilutive securities included 3,093 and 2,035 dilutive shares for the three and six month periods ended June 30, 2006. There were 2,947 and 3,293 dilutive shares for the three and six month periods ended June 30, 2005. On February 21, 2006, the Company declared a cash dividend of $0.34 per share payable on April 3, 2006 to shareholders of record as of March 13, 2006. All June 30, 2005 share and per share amounts have been adjusted to reflect a 5% stock dividend paid in December 2005.
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive. In accordance with SFAS No. 128, “Earnings Per Share,” these shares were not included in calculating diluted earnings per share. As of the three and six month periods ended June 30, 2006, there were approximately 46 thousand and 59 thousand shares, respectively, that are not included in calculating diluted earnings per share because their effect was anti-dilutive. As of the three and six month periods ended June


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30, 2005, there were approximately 12 thousand shares that are not included in calculating diluted earnings per share because their effect was anti-dilutive.
5.    TREASURY STOCK
During the quarter ended June 30, 2006 the Company repurchased 7,950 shares of common stock at an average cost of $22.01 per share, pursuant to the Company’s publicly announced common stock repurchase program.
6.    SEGMENT INFORMATION
The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and six month periods ended June 30, 2006 and 2005.
Three Months Ended
June 30, 2006
(in thousands)
                         
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 3,694     $ (114 )   $ 3,580  
Provision for loan and lease losses
    228             228  
 
                 
Net interest income (expense) after provision for loan and lease losses
    3,466       (114 )     3,352  
Non-interest income
    1,029             1,029  
Insurance service and fees
          1,510       1,510  
Non-interest expense
    3,369       1,115       4,484  
 
                 
Income before income taxes
    1,126       281       1,407  
Income taxes
    224       112       336  
 
                 
Net income
  $ 902     $ 169     $ 1,071  
 
                 
Six Months Ended
June 30, 2006
(in thousands)
                         
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 7,446     $ (232 )   $ 7,214  
Provision for loan and lease losses
    510             510  
 
                 
Net interest income (expense) after provision for loan and lease losses
    6,936       (232 )     6,704  
Non-interest income
    2,008             2,008  
Insurance service and fees
          3,687       3,687  
Non-interest expense
    6,651       2,319       8,970  
 
                 
Income before income taxes
    2,293       1,136       3,429  
Income taxes
    498       454       952  
 
                 
Net income
  $ 1,795     $ 682     $ 2,477  
 
                 


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Three Months Ended
June 30, 2005
(in thousands)
                         
            Insurance        
    Banking Activities     Agency Activities     Total  
Net interest income (expense)
  $ 3,691     $ (96 )   $ 3,595  
Provision for loan and lease losses
    188             188  
 
                 
Net interest income (expense) after provision for loan and lease losses
    3,503       (96 )     3,407  
Non-interest income
    958             958  
Insurance service and fees
          1,549       1,549  
Non-interest expense
    3,203       1,099       4,302  
 
                 
Income before income taxes
    1,258       354       1,612  
Income taxes
    296       141       437  
 
                 
Net income
  $ 962     $ 213     $ 1,175  
 
                 
Six Months Ended
June 30, 2005
(in thousands)
                         
            Insurance Agency        
    Banking Activities     Activities     Total  
Net interest income (expense)
  $ 7,140     $ (183 )   $ 6,957  
Provision for loan and lease losses
    339             339  
 
                 
Net interest income (expense) after provision for loan and lease losses
    6,801       (183 )     6,618  
Non-interest income
    1,959             1,959  
Insurance service and fees
          3,576       3,576  
Non-interest expense
    6,443       2,344       8,787  
 
                 
Income before income taxes
    2,317       1,049       3,366  
Income taxes
    510       419       929  
 
                 
Net income
  $ 1,807     $ 630     $ 2,437  
 
                 


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7.    CONTINGENT LIABILITIES AND COMMITMENTS
The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at June 30, 2006 and 2005 is as follows:
                 
    2006     2005  
    (in thousands)  
 
               
Commitments to extend credit
  $ 54,966     $ 65,716  
Standby letters of credit
    2,080       2,244  
 
           
Total
  $ 57,046     $ 67,960  
 
           
Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance of the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank has not incurred any losses on its commitments during the past two years.
Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The changes in the fair value of these commitments due to interest rate risk are not recorded on the consolidated balance sheets as these derivatives are not considered material.
The Company is subject to possible litigation proceedings in the normal course of business. As of June 30, 2006, there were no claims pending against the Company that management considered to be material.
8.    RECLASSIFICATIONS
Certain reclassifications have been made to the 2005 unaudited consolidated financial statements to conform with the presentation used in 2006.
9.    NET PERIODIC BENEFIT COSTS
The Bank has a defined benefit pension plan covering substantially all Company employees. The plan provides benefits that are based on the employees’ compensation and years of service. The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortized method the Bank is using recognizes the prior service cost and net gains or losses over the average remaining service period of active employees.
The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.


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The following table represents net periodic benefit costs recognized:
Three months ended June 30,
(in thousands)
                                 
                    Supplemental Executive  
    Pension Benefits     Retirement Plan  
    2006     2005     2006     2005  
Service cost
  $ 79     $ 72     $ 29     $ 26  
Interest cost
    49       44       38       37  
Expected return on plan assets
    (58 )     (48 )            
Amortization of prior service cost
    (4 )     (4 )     14       15  
Amortization of the net loss
    6       1       4       4  
 
                       
Net periodic benefit cost
  $ 72     $ 65     $ 85     $ 82  
 
                       
Six months ended June 30,
(in thousands)
                                 
                    Supplemental Executive  
    Pension Benefits     Retirement Plan  
    2006     2005     2006     2005  
Service cost
  $ 158     $ 144     $ 58     $ 52  
Interest cost
    98       88       76       74  
Expected return on plan assets
    (116 )     (96 )            
Amortization of prior service cost
    (8 )     (8 )     28       30  
Amortization of the net loss
    12       2       8       8  
 
                       
Net periodic benefit cost
  $ 144     $ 130     $ 170     $ 164  
 
                       
10.    STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the fair value approach in SFAS No. 123(R) is similar to the fair value approach described in SFAS No. 123. In 2005, the Company used the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. The Company adopted SFAS No. 123(R), using the modified-prospective method, beginning January 1, 2006. Based on the terms of its equity compensation plans, the adoption of SFAS No. 123(R) did not require the Company to record a cumulative effect of adjustment. The Company also elected to continue to estimate the fair value of stock options using the Black-Scholes-Merton formula.
In the first six months of 2006, because the fair value recognition provisions of SFAS No. 123, Stock-Based Compensation, and SFAS No. 123(R) were materially consistent under the Company’s valuation of its equity plans, the adoption of SFAS No. 123(R) did not have a significant impact on the Company’s financial position or the Company’s results of operations. Further, the Company believes the adoption of SFAS No. 123(R) will not have a material impact on the Company’s future stock-based compensation expense.
Under the Company’s 1999 Employee Stock Option and Long-Term Incentive Plan, as amended (the “Option Plan”), the Company may grant options to its officers, directors and key employees for up to 289,406 shares of common stock (as adjusted for stock dividends). Under the Option Plan, the exercise price of each option is not to be less than 100% of the market price of the Company’s stock on the date of


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grant and an option’s maximum term is ten years. The Company normally issues shares out of its treasury for any options exercised. The options have vesting schedules from 1 1/2 years through 9 years. At June 30, 2006, there were a total of 196,970 shares available for grant under the Option Plan.
As of December 31, 2005 there were 88,577 stock options outstanding under the Option Plan with a weighted-average exercise price of $21.32. During the three and six month period ended June 30, 2006 there were no options granted, exercised, forfeited, or expired. At June 30, 2006 there were 88,577 stock options outstanding under the Option Plan with a weighted-average exercise price of $21.32, an intrinsic value of $93 thousand, and a weighted-average remaining contractual term of 8.06 years. At June 30, 2006 there were 38,502 options exercisable at a weighted average exercise price of $21.77, an intrinsic value of $23 thousand, and a weighted-average remaining contractual term of 7.85 years.
On February 18, 2003, the Board of Directors of the Company adopted the Evans Bancorp, Inc. Employee Stock Purchase Plan (the “Purchase Plan”). As of June 30, 2006, there were 84,090 shares of common stock available to issue to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Purchase Plan, employees can choose each year to have up to 15% of their annual base earnings withheld to purchase the Company’s common stock. The Company grants options on January 1 and July 1 of each year during the term of the Purchase Plan. The purchase price of the stock is 85% of the lower of its price on the grant date or the exercise date. Compensation cost is recognized for the fair value of the employees’ purchase rights, which was estimated using the Black-Scholes-Merton model.
As of June 30, 2006, there was approximately $151 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s equity plans. That cost is expected to be recognized over a weighted-average period of 2.2 years. This expected cost does not include the impact of any future stock-based compensation awards. The compensation cost charged against income for those plans was $30 thousand and $60 thousand for the three and six month periods ended June 30, 2006, respectively, and $49 thousand and $96 thousand for the same periods of 2005.
11.    RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (SFAS 156). This Statement amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. It permits an entity to choose either the amortization method or the fair value measurement method for subsequent measurement for each class of separately recognized servicing assets and servicing liabilities. This Statement will be effective for fiscal years beginning after September 15, 2006. The adoption of this Statement is not expected to have a material impact on the Company’s financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. This interpretation will be effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on the Company’s financial statements.


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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.
These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Report on Form 10-Q, as well as in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are beyond the Company’s control and are difficult to predict.
Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation, to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The Company’s Unaudited Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Company are presented in Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K. These policies, along with the disclosures presented in the other Notes to the Company’s Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are valued in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance


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for loan and lease losses and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new information becomes available.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management’s estimate of probable losses in the Bank’s loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.
Goodwill
The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.
ANALYSIS OF FINANCIAL CONDITION
Loan and Lease Activity
     Total gross loans and leases grew to $273.0 million at June 30, 2006, reflecting an $11.5 million or 4.4% increase from March 31, 2006 and a $13.0 million or 5.0% increase from December 31, 2005. Gross loans and leases are net of $6.3 million, $4.9 million and $4.0 million unearned income on direct financing leases as of June 30, 2006, March 31, 2006 and December 31, 2005, respectively. Commercial loans and leases totaled $190.0 million at June 30, 2006, reflecting an $8.1 million or 4.4% increase from March 31, 2006 and a $7.4 million or 4.1% increase from December 31, 2005. Growth in direct financing leases of $4.8 million or 23.1%, commercial real estate of $1.2 million or 0.9%, and commercial lines of credit of $1.3 million or 13.7%, were largely responsible for the increase from March 31, 2006. Growth in direct financing leases of $8.5 million or 50.2%, offset by decreases in commercial lines of credit of $1.0 million or 8.2% were largely responsible for the increase from December 31, 2005. Consumer loans totaled $82.3 million at June 30, 2006, reflecting a $3.4 million or 4.4% increase from March 31, 2006 and a $5.6 million or 7.3% increase from December 31, 2005. Consumer real estate loans increased $3.2 million or 7.5% from March 31, 2006 and $4.7 million or 11.7% from December 31, 2005. The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended June 30, 2006, the Bank sold mortgages to FNMA totaling $0.2 million, as compared to $0.1 million during the three month period ended June 30, 2005. During the six month period ended June 30, 2006, the Bank sold mortgages to FNMA totaling $0.7 million, as compared to $1.8 million during the six month period ended June 30, 2005. At June 30, 2006, the Bank had a loan servicing portfolio principal balance of $28.6 million upon which it earns servicing fees, as compared to $28.9 million at March 31, 2006, and $28.8 million at December 31, 2005.


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Loan and Lease Portfolio Composition
     The following table presents selected information on the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated.
                                 
    June 30, 2006     Percentage     December 31, 2005     Percentage  
    (in thousands)             (in thousands)          
Commercial Loans and Leases
                               
Real Estate
  $ 135,259       49.6 %   $ 135,425       52.1 %
Installment
    18,601       6.8 %     18,588       7.1 %
Direct Financing Leases
    25,456       9.3 %     16,945       6.5 %
Lines of Credit
    10,646       3.9 %     11,603       4.5 %
Cash Reserve
    40       0.0 %     38       0.0 %
 
                       
Total Commercial Loans and Leases
    190,002       69.6 %     182,599       70.2 %
Consumer Loans
                               
Real Estate
    45,322       16.7 %     40,586       15.6 %
Home Equity
    33,527       12.3 %     33,114       12.7 %
Installment
    2,477       0.9 %     2,254       0.9 %
Overdrafts
    603       0.2 %     219       0.1 %
Credit Card
    269       0.1 %     307       0.1 %
Other
    136       0.0 %     288       0.1 %
 
                       
Total Consumer Loans
    82,334       30.2 %     76,768       29.5 %
Net Deferred Costs & Unearned Discounts
    651       0.2 %     654       0.3 %
 
                       
Total Loans and Leases
    272,987       100.0 %     260,021       100.0 %
Allowance for Loan and Lease Losses
    (3,604 )             (3,211 )        
 
                           
Loans and Leases, net
  $ 269,383             $ 256,810          
 
                           
     Net loan and lease recoveries were $12 thousand in the three month period ended June 30, 2006 as compared to net charge-offs of $202 thousand in the same period of 2005. Net charge-offs were $117 thousand for the six month period ended June 30, 2006 as compared to $173 thousand in the same period of 2005. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.37% of total loans and leases outstanding at June 30, 2006 as compared to 0.38% at March 31, 2006 and 0.72% at December 31, 2005. The allowance for loan and lease losses totaled $3.6 million or 1.32% of total loans and leases outstanding at June 30, 2006 as compared to $3.4 million or 1.29% of total loans and leases at March 31, 2006 and $3.2 million or 1.23% of total loans and leases outstanding at December 31, 2005.
     The adequacy of the Company’s allowance for loan and lease losses is reviewed quarterly by the Company’s management with consideration given to loan and lease concentrations, charge-off history, delinquent loan and lease percentages, and general economic conditions. Management believes the allowance for loan and lease losses is adequate for losses from existing loans and leases.


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     The following table sets forth information regarding non-performing loans and leases as of the dates specified.
                 
    June 30, 2006     December 31, 2005  
    (in thousands)  
Non-accruing loans and leases:
               
Mortgage loans on real estate
               
Residential 1-4 family
  $     $  
Commercial and multi-family
    160       600  
Construction
    100        
Second mortgages
           
Home equity lines of credit
           
 
           
Total mortgage loans on real estate
    260       600  
Direct financing leases
           
Commercial loans
    553       1,175  
Consumer installment loans
               
Personal
           
Credit cards
           
Other
           
 
           
Total consumer installment loans
           
Total non-accruing loans and leases
  $ 813     $ 1,775  
 
           
Accruing loans and leases 90+ days past due
    199       95  
 
           
Total non-performing loans and leases
    1,012       1,870  
 
           
Total non-performing loans and leases as a percentage of total assets
    0.22 %     0.41 %
Total non-performing loans and leases as a percentage of total loans and leases
    0.37 %     0.72 %
     For the three and six month periods ended June 30, 2006, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $20 thousand and $54 thousand, respectively. For the three and six month periods ended June 30, 2005, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $36 thousand and $67 thousand, respectively. There was no interest income included in net income for the three and six month periods ended June 30, 2006 and 2005 on non-accruing loans and leases.
Investing Activities
     Total securities declined to $148.1 million at June 30, 2006, reflecting a $5.4 million or 3.5% decrease from March 31, 2006, and an $11.9 million or 7.4% decrease from December 31, 2005. The decline in the securities portfolio was due in part to available funds being used for increased lending. The Company monitors extension and prepayment risk in the portfolio to limit potential exposures. Management believes the average expected life of the portfolio is 3.7 years as of June 30, 2006, as compared to 3.6 years as of March 31, 2006 and 3.5 years as of December 31, 2005. Available-for-sale securities with a total fair value of $137.6 million at June 30, 2006 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.
Funding Activities
     Total deposits at June 30, 2006 were $343.0 million, reflecting a $25.2 million or 6.9% decrease from March 31, 2006. The decrease in deposits from March 31, 2006 was primarily attributable to a decrease in time deposits of $30.9 million or 18.2%. Due to higher short-term rates, the Bank has elected to utilize, when favorable, short-term borrowings in place of higher cost time deposit funding. Short-term borrowing from other correspondent banks and the Federal Home Loan Bank of New York was $32.2 million at June 30, 2006 as compared to no short-term borrowings at March 31, 2006 and $37.1 million at December 31, 2005. Additionally, Muni-vest balances decreased $3.6 million or 9.4% from March 31, 2006 as municipalities generally draw from these funds deposited in


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the first fiscal quarter of the year throughout the remainder of the year to pay for their expenditures. These decreases were partially offset by increases of $5.0 million or 8.0% in demand deposits and $4.2 million or 4.9% in savings deposits, respectively, from March 31, 2006. Total deposits increased $6.2 million or 1.8% increase from December 31, 2005. The increase in deposits from December 31, 2005 was primarily attributable to an increase in muni-vest deposits of $7.2 million or 26.0%, which was the result of municipal tax collections in the first fiscal quarter of 2006. Additionally, savings deposits increased $3.2 million or 3.7% from December 31, 2005, while demand deposits decreased $3.0 million or 4.2% from December 31, 2005
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, 2006     June 30, 2005  
    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
  $ 264,064     $ 4,892       7.41 %   $ 232,111     $ 3,886       6.70 %
Taxable securities
    106,830       1,075       4.03 %     133,412       1,257       3.77 %
Tax-exempt securities
    45,151       483       4.28 %     46,371       488       4.21 %
Federal funds sold
    1,458       19       5.21 %     5,188       63       4.86 %
 
                                   
Total interest-earning assets
    417,503       6,469       6.20 %     417,082       5,694       5.46 %
 
                                       
Non interest-earning assets:
                                               
Cash and due from banks
    12,507                       10,101                  
Premises and equipment, net
    8,194                       8,326                  
Other assets
    28,865                       26,157                  
 
                                           
Total Assets
  $ 467,069                     $ 461,666                  
 
                                           
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
NOW
  $ 11,659     $ 6       0.21 %   $ 12,165     $ 5       0.18 %
Regular savings
    87,352       220       1.01 %     94,666       194       0.82 %
Muni-Vest savings
    43,123       458       4.25 %     64,377       437       2.71 %
Time deposits
    142,847       1,442       4.04 %     128,648       963       2.99 %
Other borrowed funds
    53,715       546       4.07 %     42,611       332       3.12 %
Junior subordinated debentures
    11,330       206       7.27 %     11,330       158       5.58 %
Securities sold U/A to repurchase
    6,373       11       0.69 %     5,324       10       0.73 %
 
                                   
Total interest-bearing liabilities
    356,399     $ 2,889       3.24 %     359,121     $ 2,099       2.34 %
 
                                       
Noninterest-bearing liabilities:
                                               
Demand deposits
    66,149                       60,958                  
Other
    7,598                       5,962                  
 
                                           
Total liabilities
  $ 430,146                     $ 426,041                  
Stockholders’ equity
    36,923                       35,625                  
 
                                           
Total Liabilities and Equity
  $ 467,069                     $ 461,666                  
 
                                           
Net interest earnings
          $ 3,580                     $ 3,595          
 
                                           
Net yield on interest earning assets
                    3.43 %                     3.45 %
 
                                           
Interest rate spread
                    2.96 %                     3.12 %
 
                                           


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19

                                                 
    Six Months Ended     Six Months Ended  
    June 30, 2006     June 30, 2005  
    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
  $ 260,986     $ 9,507       7.29 %   $ 224,678     $ 7,414       6.60 %
Taxable securities
    109,928       2,179       3.96 %     128,704       2,402       3.73 %
Tax-exempt securities
    45,314       957       4.22 %     45,814       978       4.27 %
Time deposits other banks
                0.00 %     433       3       1.39 %
Federal funds sold
    1,320       30       4.55 %     8,827       96       2.18 %
 
                                   
Total interest-earning assets
    417,548       12,673       6.07 %     408,456       10,893       5.33 %
 
                                       
Non interest-earning assets:
                                               
Cash and due from banks
    12,213                       10,197                  
Premises and equipment, net
    8,175                       8,179                  
Other assets
    28,507                       25,562                  
 
                                           
Total Assets
  $ 466,443                     $ 452,394                  
 
                                           
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
NOW
  $ 11,611     $ 11       0.19 %   $ 11,862     $ 11       0.19 %
Regular savings
    88,484       408       0.92 %     97,461       413       0.85 %
Muni-Vest savings
    38,648       788       4.08 %     57,328       722       2.52 %
Time deposits
    146,104       2,814       3.85 %     117,471       1,703       2.90 %
Other borrowed funds
    52,611       1,012       3.85 %     50,495       762       3.02 %
Junior subordinated debentures
    11,330       398       7.03 %     11,330       301       5.31 %
Securities sold U/A to repurchase
    7,216       28       0.78 %     6,324       24       0.76 %
 
                                   
Total interest-bearing liabilities
    356,004     $ 5,459       3.07 %     352,271     $ 3,936       2.23 %
 
                                       
Noninterest-bearing liabilities:
                                               
Demand deposits
    65,978                       58,785                  
Other
    7,304                       5,709                  
 
                                           
Total liabilities
  $ 429,286                     $ 416,765                  
Stockholders’ equity
    37,157                       35,629                  
 
                                           
Total Liabilities and Equity
  $ 466,443                     $ 452,394                  
 
                                           
Net interest earnings
          $ 7,214                     $ 6,957          
 
                                           
Net yield on interest earning assets
                    3.46 %                     3.41 %
 
                                           
Interest rate spread
                    3.00 %                     3.10 %
 
                                           
Net Income
     Net income was $1.1 million or $0.39 per basic and diluted share for the three months ended June 30, 2006, as compared to $1.2 million or $0.44 per basic and diluted share for the same period in 2005. Net income represented a return on average assets of 0.92% and 1.02% for the three month periods ended June 30, 2006 and 2005, respectively. The return on average equity was 11.60% and 13.19% for the three month periods ended June 30, 2006 and 2005, respectively.
     On a year-to-date basis, net income was $2.5 million or $0.91 per basic and diluted share for the six months ended June 30, 2006, as compared to $2.4 million or $0.90 per basic and diluted share for the same period in 2005. Net income represented a return on average assets of 1.06% and 1.08% for the six month periods ended June 30, 2006 and 2005, respectively. The return on average equity was 13.33% and 13.68% for the six month periods ended June 30, 2006 and 2005, respectively.


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Other Operating Results
     Net interest income for the three and six month periods ended June 30, 2006 was $3.6 million and $7.2 million, respectively, flat with and an increase of $0.3 million over the same periods in 2005. This is primarily a result of significant growth in the Bank’s loan and lease portfolio along with higher yields on loans and leases, offset by increased interest expense on time deposits and short-term borrowings.
     The net interest margin for the three and six month periods ended June 30, 2006 was 3.43% and 3.46%, respectively, as compared to 3.45% and 3.41% for the same periods in 2005. The return on interest earning assets increased 74 basis points in the three and six month periods ended June 30, 2006 mainly due to higher rates on loans and a greater concentration of higher-yielding leases. Interest free funds also contributed 47 basis points and 46 basis points in the three and six month periods ended June 30, 2006, respectively, due to an increase in average demand deposits, compared to a 33 basis point and 31 basis point contribution in the same periods of 2005. This strong growth of loans and leases and demand deposits was offset by an increase in the Bank’s cost of interest-bearing liabilities, which increased to 3.24% and 3.07% in the three and six month periods ended June 30, 2006, respectively, from 2.34% and 2.23% in the same periods of 2005. The rise in short-term interest rates on federal funds purchased and time deposits, as a result of the Federal Reserve Bank Open Market Committee’s policy decisions, were the primary drivers of this increase in cost of funds.
     The provision for loan and lease losses for the three and six month periods ended June 30, 2006 increased to $228 thousand and $510 thousand, respectively, from $188 thousand and $339 thousand for the same periods in 2005. The increase was a result of continued consumer and commercial loan growth, particularly the Bank’s expanding direct financing lease portfolio, through Evans National Leasing, which tends to have a higher credit risk than consumer loans and commercial loans collateralized by real estate.
     Non-interest income was $2.5 million for the three month period ended June 30, 2006, which is comparable to the $2.5 million in the same period of 2005. Non-interest income was $5.7 million for the six month period ended June 30, 2006, an increase of $0.2 million or 2.9% from the same period of 2005. Fee income on the expanding loan and lease portfolio, including a $45 thousand commercial prepayment penalty, along with increased ATM and interchange fee revenue from an increased ATM network contributed to non-interest income in the three and six month periods ended June 30, 2006. This was offset by a $0.1 million decrease in life insurance proceeds which were received in the second quarter of 2005, but not 2006. In the six month period ended June 30, 2006, increased insurance fee revenue of $0.1 million was primarily the result of increased profit sharing revenue at ENBI in the first quarter of 2006. This increase was offset by a $0.1 million decline in gains on sales of securities from the six month period ended June 30, 2005 to 2006.
     Non interest expense was $4.5 million for three month period ended June 30, 2006, an increase of $0.2 million or 4.2% from the same period in 2005. Non interest expense was $9.0 million for six month period ended June 30, 2006, an increase of $0.2 million or 2.1% from the same period in 2005. Salary and employee benefit expense for the three and six month periods ended June 30, 2006 increased $0.2 million and $0.3 million, respectively, from the same periods in 2005, due to Company growth, including a new director of internal audit, and merit pay increases awarded in early 2006. Advertising and public relations expense for the three month period ended June 30, 2006 increased $0.1 million from the same period in 2005 for expenses related to the Bank’s redesigned retail deposit product suite. Professional services expense for the six month period ended June 30, 2006 declined $0.2 million from the same period in 2005 mainly due to expenses for certain revenue enhancement projects in the same period of 2005. Other expense for the six month period ended June 30, 2006 increased $0.1 million from the same period in 2005, mainly due to Company growth.
     Income tax expense totaled $336 thousand and $952 thousand for the three and six month periods ended June 30, 2006, respectively, compared to $437 and $929 thousand for the same periods in 2005. The effective tax rate for the three and six month periods ended June 30, 2006 was 23.9% and 27.8%, respectively, compared to 27.1% and 27.6% for the same periods in 2005. The decrease in effective tax rate in 2006 is primarily due to the higher composition of tax advantaged banking division income in the second quarter of 2006.
CAPITAL
     The Bank has consistently maintained regulatory capital ratios at, or above, federal “well capitalized” standards. Equity as a percentage of assets was 8.0% at June 30, 2006 and 7.9% at both March 31, 2006 and December 31, 2005. Book value per common share was $13.65 at June 30, 2006, compared to $13.41 at March 31, 2006 and $13.51 at December 31, 2005. Total stockholders’ equity was $37.2 million at June 30, 2006, up from $36.5 million at March 31, 2006 and $36.9 million at December 31, 2005. The increase is primarily attributable to net income of $1.1 million and $2.5 million in the three and six month periods ended June 30, 2006, offset by $0.9


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million in dividends in the six month period ended June 30, 2006 and an increase in unrealized losses in the investment portfolio of $0.5 million and $1.2 million in the three and six month periods ended June 30, 2006.
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 Federal Home Loan Bank (“FHLB”) the Bank is able to borrow funds at competitive rates. Advances of up to $45.0 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 also borrow at the discount window. Additionally, the Company has access to capital markets as a funding source.
     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, so that securities are available-for-sale from time-to-time without the need to incur significant losses. At June 30, 2006, approximately 8.3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 32.6% had maturity dates of five years or less. Available assets of $149.1 million, less public and purchased funds of $195.3 million, resulted in a long-term liquidity ratio of 76% at June 30, 2006, versus 85% at March 31, 2005 and 90% at December 31, 2005.
     The Company’s liquidity needs can also be met by more aggressively pursuing municipal deposits, which are normally awarded on the basis of competitive bidding. 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 these 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 the 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 investment securities and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.
     The Bank’s Asset Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a computer model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and other financial instruments used for interest rate risk management purposes.


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     The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12 month period of time:
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
         
    Calculated (decrease) increase
in projected annual net interest income
(in thousands)
 
    June 30, 2006   December 31, 2005
Changes in interest rates
       
 
       
+200 basis points
  (808)   (777)
+100 basis points
  (401)   (386)
 
       
-100 basis points
  373    337 
-200 basis points
  606    542 
     Many assumptions were utilized by management to calculate the impact that changes in the interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the event that the 200 basis point rate changes cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.
ITEM 4 — CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
     The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of June 30, 2006 (the end of the period covered by this Report) have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
     No changes in the Company’s internal control over financial reporting were identified in the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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23

PART II — OTHER INFORMATION
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table includes all Company repurchases of its common stock, $0.50 par value, made on a monthly basis during the period covered by this Report, including those made pursuant to publicly announced plans or programs.
                                 
                    Total number of        
                    shares purchased as     Maximum number of  
    Total number     Average price     part of publicly     shares that may yet be  
    of shares     paid     announced plans or     purchased under the  
          Period   purchased     per share     programs     plans or programs  
April 2006 (April 1, 2006 through
    2,500     $ 20.54       2,500       58,865  
April 30, 2006)
                               
May 2006 (May 1, 2006
    3,850     $ 22.62       3,850       55,015  
through May 31, 2006)
                               
June 2006 (June 1, 2006
    1,600     $ 22.85       1,600       53,415  
through June 30, 2006)
                               
 
                         
Total
    7,950     $ 22.01       7,950          
 
                         
All of the foregoing shares were purchased in open market transactions. On August 18, 2005, the Company announced that its Board of Directors authorized a common stock repurchase program, pursuant to which the Company may repurchase of up to 75,000 shares of the Company’s common stock over the next two years, unless the program is terminated earlier. The Company did not make any repurchases during the quarter ended June 30, 2006 other than pursuant to this publicly announced program, and there were no other publicly announced plans or programs outstanding during the quarter ended June 30, 2006.
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2006 Annual Shareholders meeting of the registrant was held on April 27, 2006. At the meeting LaVerne G. Hall, Robert G. Miller, Jr, John R. O’Brien, and James Tilley were re-elected as directors for a term of three years. The following table reflects the tabulation of votes with respect to each director who was elected at the 2006 annual meeting.
                 
    Number of Votes  
Director Nominees:   For:     Withheld:  
 
               
LaVerne G. Hall
    1,880,975       23,214  
Robert G. Miller, Jr.
    1,825,343       78,846  
John R. O’Brien
    1,839,560       64,629  
James Tilley
    1,874,370       29,819  
The following directors also continue their terms as directors of the company following the 2006 annual meeting:
William F. Barrett
James E. Biddle, Jr.
Phillip Brothman
Kenneth C. Kirst
Mary Catherine Militello
David M. Taylor
Nancy W. Ware
Thomas H. Waring, Jr


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ITEM 6 — EXHIBITS
             
Exhibit No.   Name   Page No.
 
           
31.1
  Certification of Principal Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     27  
 
           
31.2
  Certification of the Principal Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     28  
 
           
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.     29  
 
           
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.     30  


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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 
  Evans Bancorp, Inc.
 
   
DATE
August 4, 2006
  /s/James Tilley
 
James Tilley
President and CEO
(On Behalf of the Registrant and
as Principal Executive Officer)
 
   
DATE
August 4, 2006
  /s/Mark DeBacker
 
Mark DeBacker
Treasurer
(Principal Financial Officer)


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26

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.     27  
 
           
31.2
  Certification of the Principal Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     28  
 
           
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.     29  
 
           
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.     30