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

 

 

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 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

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

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

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

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

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

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

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.

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

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

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

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.

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

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.

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

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.

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.

     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

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	%