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EVANS BANCORP INC - Quarter Report: 2007 March (Form 10-Q)

EVANS BANCORP 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2007
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-18539
EVANS BANCORP, INC.
(Exact name of registrant as specified in its charter)
     
New York   16-1332767
     
(State of other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
14 -16 North Main Street, Angola, New York   14006
     
(Address of principal executive offices)   (Zip Code)
(716) 926-2000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant 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—2,748,013 shares as of May 1, 2007
 
 

 


 

INDEX
EVANS BANCORP, INC. AND SUBSIDIARIES
             
        PAGE
PART 1. FINANCIAL INFORMATION        
 
           
  Financial Statements        
 
           
 
  Unaudited Consolidated Balance Sheets–March 31, 2007 and December 31, 2006     1  
 
           
 
  Unaudited Consolidated Statements of Income-Three months ended March 31, 2007 and 2006     2  
 
           
 
  Unaudited Consolidated Statements of Stockholders’ Equity-Three months ended March 31, 2007 and 2006     3  
 
           
 
  Unaudited Consolidated Statements of Cash Flows–Three months ended March 31, 2007 and 2006     4  
 
           
 
  Notes to Unaudited Consolidated Financial Statements     6  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     11  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     17  
 
           
  Controls and Procedures     18  
 
           
PART II. OTHER INFORMATION        
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     19  
  Exhibits     20  
 
           
SIGNATURES     21  
 EX-10.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


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1

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006
(in thousands, except share and per share amounts)
                 
    March 31,     December 31,  
    2007     2006  
ASSETS
               
Cash and cash equivalents:
               
Cash and due from banks
  $ 14,340     $ 12,592  
 
               
Securities:
               
Available for sale, at fair value
    149,957       133,519  
Held to maturity, at amortized cost
    4,142       4,211  
 
               
Loans and leases, net of allowance for loan and lease losses of $3,885 in 2007 and $3,739 in 2006
    290,467       285,367  
 
               
Properties and equipment, net
    8,695       8,743  
Goodwill
    10,003       10,003  
Intangible assets
    2,154       2,298  
Bank-owned life insurance
    10,280       10,140  
Other assets
    7,354       7,021  
 
           
 
               
TOTAL ASSETS
  $ 497,392     $ 473,894  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
LIABILITIES
               
Deposits:
               
Demand
  $ 70,830     $ 72,125  
NOW
    12,929       11,253  
Regular savings
    86,637       85,084  
Muni-vest
    46,745       31,240  
Time
    162,797       156,047  
 
           
 
               
Total deposits
    379,938       355,749  
 
               
Securities sold under agreement to repurchase
    6,281       8,954  
Other short-term borrowings
    26,350       24,753  
Other liabilities
    11,067       9,089  
Junior subordinated debentures
    11,330       11,330  
Long-term borrowings
    22,285       24,476  
 
           
 
               
Total liabilities
    457,251       434,351  
 
           
 
               
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 2,729,556 and 2,733,056 shares outstanding, respectively
    1,373       1,373  
Capital surplus
    26,184       26,160  
Retained earnings
    14,555       14,196  
Accumulated other comprehensive loss, net of tax
    (1,629 )     (1,917 )
Less: Treasury stock, at cost (15,782 and 12,282 shares, respectively)
    (342 )     (269 )
 
           
Total stockholders’ equity
    40,141       39,543  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 497,392     $ 473,894  
 
           
See Notes to Unaudited Consolidated Financial Statements

 


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2

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(in thousands, except share and per share amounts)
                 
    Three Months Ended  
    March 31,  
    2007     2006  
INTEREST INCOME
               
Loans
  $ 5,600     $ 4,615  
Federal funds sold/Interest bearing deposits at other banks
    87       11  
Securities:
               
Taxable
    1,012       1,104  
Non-taxable
    443       474  
 
           
Total interest income
    7,142       6,204  
INTEREST EXPENSE
               
Deposits
    2,704       1,895  
Other borrowings
    350       483  
Junior subordinated debentures
    218       192  
 
           
Total interest expense
    3,272       2,570  
NET INTEREST INCOME
    3,870       3,634  
PROVISION FOR LOAN AND LEASE LOSSES
    315       282  
 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    3,555       3,352  
 
               
NON-INTEREST INCOME:
               
Bank charges
    471       498  
Insurance service and fees
    2,129       2,177  
Net loss on sales of securities
    (1 )      
Premium on loans sold
    1       3  
Bank-owned life insurance
    140       105  
Other
    405       373  
 
           
Total non-interest income
    3,145       3,156  
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
    2,668       2,501  
Occupancy
    603       532  
Supplies
    78       85  
Repairs and maintenance
    139       137  
Advertising and public relations
    88       71  
Professional services
    252       144  
Amortization of intangibles
    144       130  
Other Insurance
    90       87  
Other
    870       799  
 
           
 
               
Total non-interest expense
    4,932       4,486  
 
           
 
               
INCOME BEFORE INCOME TAXES
    1,768       2,022  
 
               
INCOME TAXES
    481       616  
 
           
NET INCOME
  $ 1,287     $ 1,406  
 
           
 
               
Net income per common share-basic
  $ 0.47     $ 0.52  
 
           
Net income per common share-diluted
  $ 0.47     $ 0.52  
 
           
Cash dividends per common share
  $ 0.34     $ 0.34  
 
           
Weighted average number of common shares
    2,730,499       2,722,950  
 
           
Weighted average number of diluted shares
    2,731,925       2,724,583  
 
           
See Notes to Unaudited Consolidated Financial Statements

 


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3

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(in thousands, except share and per share amounts)
                                                 
                            Accumulated              
                            Other              
    Common     Capital     Retained     Comprehensive     Treasury        
    Stock     Surplus     Earnings     Income     Stock     Total  
Balance, January 1, 2006
  $ 1,373     $ 26,155     $ 11,087     $ (1,387 )   $ (352 )   $ 36,876  
 
                                               
Impact of adopting SAB 108, net of tax $12
                    43                       43  
Comprehensive income:
                                               
Net Income
                    1,406                       1,406  
 
                                               
Unrealized loss on available-for-sale securities, net of tax effect of $453
                            (711 )             (711 )
 
                                             
 
                                               
Total comprehensive income
                                            738  
 
                                             
 
                                               
Cash dividends ($0.34 per common share)
                    (928 )                     (928 )
 
                                               
Stock options expense
            30                               30  
 
                                               
Purchased 10,100 shares for treasury
                                    (211 )     (211 )
 
                                   
 
                                               
Balance, March 31, 2006
  $ 1,373     $ 26,185     $ 11,608     $ (2,098 )   $ (563 )   $ 36,505  
 
                                   
 
                                               
Balance, January 1, 2007
  $ 1,373     $ 26,160     $ 14,196     $ (1,917 )   $ (269 )   $ 39,543  
 
                                               
Comprehensive income:
                                               
Net Income
                    1,287                       1,287  
 
                                               
Unrealized gain on available-for-sale securities, net of reclassification adjustment of ($1) and tax effect of $(176)
                            275               275  
 
                                               
Amortization of prior service cost and net loss, net of tax effect $(8)
                            13               13  
 
                                             
 
                                               
Total comprehensive income
                                            1,575  
 
                                             
 
                                               
Cash dividends ($0.34 per common share)
                    (928 )                     (928 )
 
                                               
Stock options expense
            24                               24  
 
                                               
Purchased 3,500 shares for treasury
                                    (73 )     (73 )
 
                                   
 
                                               
Balance, March 31, 2007
  $ 1,373     $ 26,184     $ 14,555     $ (1,629 )   $ (342 )   $ 40,141  
 
                                   
See Notes to Unaudited Consolidated Financial Statements

 


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PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(in thousands)
                 
    Three Months Ended  
    March 31,  
    2007     2006  
OPERATING ACTIVITIES:
               
Interest received
  $ 7,120     $ 6,125  
Fees received
    2,854       3,098  
Proceeds from sales of loans
    527       492  
Origination of loans held for resale
    (1,014 )     (584 )
Interest paid
    (3,327 )     (2,607 )
Cash paid to employees and suppliers
    (3,674 )     (3,909 )
Income taxes paid
    (20 )     (108 )
 
           
 
               
Net cash provided by operating activities
    2,466       2,507  
 
               
INVESTING ACTIVITIES:
               
Available for sales securities:
               
Purchases
    (63,938 )     (82 )
Proceeds from sales
    575        
Proceeds from maturities
    47,258       5,419  
Held to maturity securities:
               
Purchases
    (24 )     (240 )
Proceeds from maturities
    93       92  
Additions to properties and equipment
    (195 )     (201 )
Increase in loans, net of repayments
    (5,133 )     (1,569 )
Cash paid on earn-out agreements
    (202 )     (56 )
 
           
 
               
Net cash (used in) provided by investing activities
    (21,566 )     3,363  
 
               
FINANCING ACTIVITIES:
               
Proceeds from borrowings
    7,848        
Repayments of short-term borrowings
    (8,926 )     (38,205 )
Repayments of long-term borrowings
    (2,190 )     (2,033 )
Increase in deposits
    24,189       31,431  
Dividends paid
          (928 )
Purchase of treasury stock
    (73 )     (211 )
 
           
 
               
Net cash provided by (used in) financing activities
    20,848       (9,946 )
 
               
Net increase (decrease) in cash and equivalents
    1,748       (4,076 )
 
               
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    12,592       15,635  
 
           
 
               
End of period
  $ 14,340     $ 11,559  
 
           

 


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PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(in thousands)
                 
    Three Months Ended  
    March 31,  
    2007     2006  
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
               
 
               
Net income
  $ 1,287     $ 1,406  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    519       411  
Deferred tax benefit
    (122 )     (215 )
Provision for loan and lease losses
    315       282  
Net gain on sales of securities
    1        
Proceeds from sale of loans held for resale
    527       492  
Originations of loans held for resale
    (1,014 )     (584 )
Premiums on loans sold
    (1 )     (3 )
Stock options expense
    24       30  
Changes in assets and liabilities affecting cash flow:
               
Other assets
    561       (155 )
Other liabilities
    369       843  
 
           
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 2,466     $ 2,507  
 
           
See Notes to Unaudited Consolidated Financial Statements

 


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PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company organized as a New York business corporation and incorporated under the laws of the State of New York on October 28, 1988, for the purpose of becoming a bank 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 Claim Services, Inc. (“FCS”) and ENB Associates Inc. (“ENB”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with generally accepted accounting principles 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 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 month period ended March 31, 2007 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, 2006.
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 changes in fair value included as a component of stockholders’ equity. Available-for-sale securities are net of unrealized losses of $1.5 million and $1.9 million as of March 31, 2007 and December 31, 2006, respectively. As of March 31, 2007, 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 Bank 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 three month periods ended March 31, 2007 and 2006.
Allowance for loan and lease losses
                 
    Three months ended March 31,  
    2007     2006  
    (in thousands)  
Beginning balance, January 1
  $ 3,739     $ 3,211  
Charge-offs:
               
Commercial
    (23 )     (100 )
Installment loans
    (1 )     (5 )
Overdrafts
    (7 )     (6 )
Direct financing leases
    (170 )     (47 )
 
           
Total charge-offs
    (201 )     (158 )
 
               
Recoveries:
               
Commercial
    4        
Installment loans
    1       9  
Overdrafts
    5       6  
Direct financing leases
    22       14  
 
           
Total recoveries
    32       29  
 
           
 
               
Net charge-offs
    (169 )     (129 )
 
               
Provision for loan and lease losses
    315       282  
 
           
 
               
Ending balance, March 31
  $ 3,885     $ 3,364  
 
           
 
               
Ratio of net charge-offs to average net loans and leases outstanding (annualized)
    0.23 %     0.20 %
 
           
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 1,426 dilutive shares for the three month period ended March 31, 2007. There were 1,633 dilutive shares for the three month period ended March 31, 2006. On February 23, 2007, the Company declared a cash dividend of $0.34 per share payable on April 2, 2007 to shareholders of record as of March 12, 2007.
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 March 31, 2007 and 2006, there were 55 thousand and 59 thousand shares, respectively, that are not included in calculating diluted earnings per share because their effect was anti-dilutive.

 


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8

5.   TREASURY STOCK
During the quarter ended March 31, 2007 the Company repurchased 3,500 shares of common stock at an average cost of $20.77 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 month periods ended March 31, 2007 and 2006.
Three Months Ended
March 31, 2007
(in thousands)
                         
            Insurance        
    Banking Activities     Agency Activities     Total  
Net interest income (expense)
  $ 3,990   ( $ 120 )   $ 3,870  
 
                       
Provision for loan and lease losses
    315             315  
 
                 
 
                       
Net interest income (expense) after provision for loan and lease losses
    3,675       (120 )     3,555  
 
                       
Non-interest income
    1,016             1,016  
 
                       
Insurance commissions and fees
          2,129       2,129  
 
                       
Non-interest expense
    3,783       1,149       4,932  
 
                 
 
                       
Income before income taxes
    908       860       1,768  
 
                       
Income taxes
    137       344       481  
 
                 
 
                       
Net income
  $ 771     $ 516     $ 1,287  
 
                 

 


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Three Months Ended
March 31, 2006
(in thousands)
                         
            Insurance        
    Banking Activities     Agency Activities     Total  
Net interest income (expense)
  $ 3,752   ( $ 118 )   $ 3,634  
 
                       
Provision for loan and lease losses
    282             282  
 
                       
Net interest income (expense) after provision for loan and lease losses
    3,470       (118 )     3,352  
 
                       
Non-interest income
    979             979  
 
                       
Insurance commissions and fees
          2,177       2,177  
 
                       
Non-interest expense
    3,282       1,204       4,486  
 
                 
 
                       
Income before income taxes
    1,167       855       2,022  
 
                       
Income taxes
    274       342       616  
 
                 
 
                       
Net income
  $ 893     $ 513     $ 1,406  
 
                 
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 March 31, 2007 and 2006 is as follows:
                 
    2007     2006  
    (in thousands)  
Commitments to extend credit
  $ 72,687     $ 69,600  
 
Standby letters of credit
    1,992       1,996  
 
           
 
Total
  $ 74,679     $ 71,596  
 
           
    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 considered inconsequential.


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    The Company is subject to possible litigation proceedings in the normal course of business. As of March 31, 2007, there were no claims pending against the Company that management considered to be significant.
 
8.   RECLASSIFICATIONS
 
    Certain reclassifications have been made to the 2006 consolidated financial statements to conform with the presentation used in 2007.
 
9.   NET PERIODIC BENEFIT COSTS
 
    The Bank has a defined benefit pension plan covering substantially all Bank 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 used by the Bank 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 used by 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 March 31,          
            (in thousands)          
                    Supplemental Executive  
    Pension Benefits     Retirement Plan  
    2007     2006     2007     2006  
Service cost
  $ 91     $ 79     $ 15     $ 29  
 
Interest cost
    61       49       40       38  
 
Expected return on plan assets
    (62 )     (58 )            
 
Amortization of prior service cost
    (4 )     (4 )     14       14  
 
Amortization of the net loss
    7       6       4       4  
 
                       
 
Net periodic benefit cost
  $ 93     $ 72     $ 73     $ 85  
 
                       
10.   RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Servicing of Financial Assets (SFAS 156) - 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. The adoption of the fair value measurement method under this statement on January 1, 2007, did not have a material impact on the Company’s financial statements.
Accounting for Uncertainty in Income Taxes – In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” to set out a consistent framework for tax preparers to use to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained.


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The amount of the benefit is then measured to be the highest tax benefit that is greater than 50 percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company adopted FIN 48 as of January 1, 2007. There were no unrecognized tax benefits or penalties at the date of adoption.
The Internal Revenue Service (IRS) commenced examinations of the Company’s U.S. Federal income tax returns for 2003, 2004, and 2005 in the first quarter of 2007. It is anticipated that the examination related to these returns will be completed within the next twelve months. To date, there are no proposed adjustments that will have a material impact on the Company’s financial position or results of operations. All penalties or interest on adjustments, if any, will be expensed as income tax expense.
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 generally accepted accounting principles and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.


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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
Average Balance Sheet
The following table presents 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.


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    Three Months Ended     Three Months Ended  
    March 31, 2007     March 31, 2006  
    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
  $ 286,986     $ 5,600       7.81 %   $ 257,874     $ 4,615       7.16 %
Taxable securities
    94,387       1,011       4.28 %     112,352       1,104       3.93 %
Tax-exempt securities
    41,241       443       4.30 %     45,479       474       4.17 %
Federal funds sold
    7,062       87       4.93 %     1,162       11       3.79 %
 
                                   
 
                                               
Total interest-earning assets
    429,676       7,141       6.65 %     416,867       6,204       5.95 %
 
                                       
 
                                               
Non-interest-earning assets
                                               
 
                                               
Cash and due from banks
    10,987                       12,642                  
Premises and equipment, net
    8,708                       8,156                  
Other assets
    29,558                       28,146                  
 
                                           
 
                                               
Total Assets
  $ 478,929                     $ 465,811                  
 
                                           
 
                                               
LIABILITIES & STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities
                                               
NOW
  $ 12,057     $ 6       0.20 %   $ 11,562     $ 5       0.17 %
Regular savings
    88,254       252       1.14 %     89,628       188       0.84 %
Muni-Vest savings
    47,927       518       4.32 %     34,125       330       3.87 %
Time deposits
    157,473       1,927       4.89 %     149,397       1,372       3.67 %
Other borrowed funds
    34,000       336       3.95 %     51,495       466       3.62 %
Junior subordinated debentures
    11,330       218       7.70 %     11,330       192       6.78 %
Securities sold U/A to repurchase
    7,445       14       0.75 %     8,068       17       0.84 %
 
                                   
 
                                               
Total interest-bearing liabilities
    358,486     $ 3,271       3.65 %     355,605     $ 2,570       2.89 %
 
                                       
Non-interest-bearing liabilities
                                               
Demand deposits
    70,935                       65,806                  
Other
    9,451                       7,006                  
 
                                           
Total liabilities
  $ 438,872                     $ 428,417                  
Stockholders’ equity
    40,057                       37,394                  
 
                                           
Total Liabilities and Equity
  $ 478,929                     $ 465,811                  
 
                                           
Net interest earnings
          $ 3,870                     $ 3,634          
 
                                           
 
Net yield on interest earning assets
                    3.60 %                     3.49 %
 
                                           
 
                                               
Interest rate spread
                    3.00 %                     3.06 %
 
                                           
Loan and Lease Activity
     Total gross loans and leases grew to $294.4 million at March 31, 2007, reflecting a 1.8% or $5.2 million increase from December 31, 2006. Gross loans and leases are net of $8.2 million and $7.8 million unearned income on direct financing leases as of March 31, 2007 and December 31, 2006, respectively. Commercial loans and leases totaled $207.0 million at March 31, 2007, reflecting a 2.6% or $5.3 million increase from December 31, 2006. Increases in direct financing leases and installment loans of $2.5 million and $1.2 million, respectively, were largely responsible for this increase. Consumer loans totaled $86.7 million at March 31, 2007, which was unchanged from the balance at December 31, 2006. Increases in consumer real estate and home equity loans were offset by decreases in installment, credit card, and other balances. 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. The Bank sold mortgages to FNMA totaling $0.5 million during the first quarters of 2007 and 2006. At March 31, 2007, the Bank had a loan servicing portfolio


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principal balance of $28.9 million upon which it earns servicing fees, compared to $28.7 million at December 31, 2006.
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.
                                 
    March 31, 2007     Percentage     December 31, 2006     Percentage  
    (in thousands)             (in thousands)          
Commercial Loans and Leases
                               
Real Estate
  $ 141,041       47.9 %   $ 140,376       48.6 %
Installment
    18,463       6.3 %     17,263       6.0 %
Direct Financing Leases
    34,210       11.6 %     31,742       11.0 %
Lines of Credit
    13,206       4.5 %     12,279       4.2 %
Cash Reserve
    54       0.0 %     39       0.0 %
 
                       
 
                               
Total Commercial Loans and leases
    206,974       70.3 %     201,699       69.8 %
Consumer Loans
                               
Real Estate
    49,547       16.8 %     48,877       16.9 %
Home Equity
    34,484       11.7 %     34,453       11.9 %
Installment
    2,443       0.8 %     2,621       0.9 %
Overdrafts
    159       0.1 %     163       0.1 %
Credit Card
    2       0.0 %     298       0.1 %
Other
    111       0.1 %     341       0.1 %
 
                       
 
                               
Total Consumer Loans
    86,746       29.5 %     86,753       30.0 %
 
                               
Net Deferred Costs & Unearned Discounts
    632       0.2 %     654       0.2 %
 
                       
 
                               
Total Loans and Leases
    294,352       100.0 %     289,106       100.0 %
 
                               
Allowance for Loan and Lease Losses
    (3,885 )             (3,739 )        
 
                           
 
                               
Loans and Leases, net
  $ 290,467             $ 285,367          
 
                           
     Net charge-offs were $169 thousand in the first quarter of 2007 as compared to $129 thousand in the first quarter of 2006. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.22% of total loans and leases outstanding at March 31, 2007 as compared to 0.23 % at December 31, 2006. The allowance for loan and lease losses totaled $3.9 million or 1.32% of total loans and leases outstanding at March 31, 2007 as compared to $3.7 million or 1.29% of total loans and leases outstanding at December 31, 2006.
     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.


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    March 31, 2007     December 31, 2006  
    (in thousands)  
Non-accruing loans and leases:
               
Mortgage loans on real estate
               
Residential 1-4 family
  $     $  
Commercial and multi-family
    136       145  
Construction
           
Second mortgages
           
Home equity lines of credit
           
 
           
Total mortgage loans on real estate
    136       145  
 
               
Direct financing leases
           
 
               
Commercial loans
    455       443  
 
               
Consumer installment loans
               
Personal
           
Credit cards
           
Other
           
 
           
Total consumer installment loans
           
 
               
Total non-accruing loans and leases
  $ 591     $ 588  
 
           
 
               
Accruing loans and leases 90+ days past due
    68       74  
 
           
Total non-performing loans and leases
    659       662  
 
           
Total non-performing loans and leases as a percentage of total assets
    0.14 %     0.15 %
Total non-performing loans and leases as a of total loans and leases
    0.22 %     0.23 %
     For the quarter ended March 31, 2007, gross interest income that would have been reported on non-accruing loans and leases, had they been current, was $18 thousand. There was $6 thousand in interest income included in net income for the quarter ended March 31, 2007 on non-accruing loans and leases.
Investing Activities
     The Company’s securities portfolio increased by 11.9%, or $16.4 million, to approximately $154.1 million at March 31, 2007, as compared to approximately $137.7 million at December 31, 2006. The increase in the securities portfolio was mainly due to securities purchased to collateralize seasonal municipal tax deposits, which are expected to decrease by the end of the next quarter end. The Company monitors extension and prepayment risk in the portfolio to limit potential exposures. Management believes the average expected life of the portfolio is 2.7 years as of March 31, 2007. Available-for-sale securities with a total fair value of $121.6 million at March 31, 2007 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.
Funding Activities
     Total deposits during the quarter ended March 31, 2007, increased 6.8% to $379.9 million at March 31, 2007 from $355.7 million at December 31, 2006. Time deposits $100,000 and over increased 4.7%, or $3.8 million, in the quarter, mainly composed of municipal money. Due to higher short-term interest rates, many municipalities have preferred short-term time deposit funding as an investment option. Muni-vest deposits increased 49.6%, or $15.5 million, due to the normal inflow of municipal tax receipts, which occurs during the first quarter of the calendar year. Core deposits (all deposits excluding time deposits greater than $100,000) increased 7.8% or $21.5 million during the quarter ended March 31, 2007. Demand deposits decreased 1.8%, or $1.3 million, while NOW accounts increased 14.9%, or $1.7 million, from December 31, 2006. Securities sold under agreement to repurchase decreased 30.0%, or $2.7 million, from December 31, 2006. Balances in demand deposits, NOW accounts and securities sold under agreement to repurchase vary from day to day based on customer transaction volume and represent normal deposit activity.


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     The Company also uses borrowings from other correspondent banks and the Federal Home Loan Bank of New York as sources of funding. There was $26.4 million in short-term borrowing at March 31, 2007 as compared to $24.8 million at December 31, 2006.
ANALYSIS OF RESULTS OF OPERATIONS
Net Income
     Net income was $1.3 million or $0.47 per basic and diluted share for the three months ended March 31, 2007, as compared to $1.4 million or $0.52 per basic and diluted share for the same period in 2006. Net income represented a return on average assets of 1.07% and 1.21% for the three month periods ended March 31, 2007 and 2006, respectively. The return on average equity was 12.85% and 15.04% for the three months periods ended March 31, 2007 and 2006, respectively.
Other Operating Results
     Net interest income for the three month period ended March 31, 2007 was $3.9 million, an increase of $0.2 million over the same period in 2006, and is primarily a result of interest income growth related to the loan and lease portfolio, offset by increased interest expense on deposits.
     The net interest margin for the three month period ended March 31, 2007 was 3.60% as compared to 3.49% for the same period in 2006. The increase in interest income was mainly attributable to an increase in the interest earned on loans and leases, due to both higher average balances and elevated yields. Interest free funds contributed 60 basis points to the net interest margin in the three month period ended March 31, 2007 compared to a 43 basis point contribution in the same period of 2006 as average demand deposit balances, other non-interest-bearing liabilities, and stockholders’ equity all increased. These were partially offset by an increase in the Bank’s cost of interest-bearing liabilities, which increased to 3.65% from 2.89% in 2006. Higher interest expense reflects elevated rates paid on deposits.
     The provision for loan and lease losses for the three month period ended March 31, 2007 increased to $315 thousand from $282 thousand for the same period in 2006. The increase was a result of the Company’s expanding direct financing lease portfolio through Evans National Leasing, along with continued commercial loan growth. Commercial loans and direct financing leases tend to have a higher credit risk than consumer loans.
     Non-interest income was $3.1 million for the three month period ended March 31, 2007, which was flat to the same period in 2006. Higher other income, which was primarily volume driven fee revenue related to lending, offset lower service charges and insurance fees.
     Non interest expense was $4.9 million for the three month period ended March 31, 2007, an increase of $0.4 million, or 9.9%, over the same period in 2006. Salaries and employee benefits increased $0.2 million during the quarter ended March 31, 2007. Approximately $0.1 million of that increase are non-recurring expenses as executive management succession is completed. Higher professional services expenses were the result of additional non-recurring items including market analysis for the Company’s distribution network, executive search, and investor relations consulting. Occupancy expenses increased in the first quarter of 2007 compared with the same period for the prior year due to the addition of the Company’s eleventh bank branch, which opened in December 2006. Additionally, the Company experienced a $0.2 million loss related to a branch operational error in processing checks.
     Income tax expense totaled $481 thousand for the three month period ended March 31, 2007, compared to $616 thousand for the same period in 2006. The effective tax rate for the three month period ended March 31, 2007 was 27.2%, compared to 30.5% for the same period in 2006. The Company records an effective tax rate for the period that will be reflective of the projected annual tax rate based on expected supportable tax positions.
     In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” to set out a consistent framework for tax preparers to use to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50 percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company adopted FIN 48 as of January 1, 2007. There were no unrecognized tax benefits or penalties at the date of adoption.


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CAPITAL
     The Bank has consistently maintained regulatory capital ratios at, or above, federal “well capitalized” standards. Equity as a percentage of assets was 8.1% at March 31, 2007 down slightly from 8.3% at December 31, 2006. Book value per common share was $14.71 at March 31, 2007, compared to $13.41 at December 31, 2006. Total stockholders’ equity was $40.1 million at March 31, 2007, up from $39.5 million at December 31, 2006. The increase is primarily attributable to net income of $1.3 million and unrealized gains in the investment portfolio in first quarter 2007, somewhat offset by the declaration of dividends.
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 March 31, 2007, approximately 24.1% of the Bank’s securities had contractual maturity dates of one year or less and approximately 43.0% had maturity dates of five years or less. Available assets of $154.6 million, less public and purchased funds of $207.3 million, resulted in a long-term liquidity ratio of 75% at March 31, 2007, versus 80% at December 31, 2006. The liquidity ratio decreased due to large municipal collections in the first quarter which increased the percentage of public funds.
     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,


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changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and other financial instruments used for interest rate risk management purposes.
     The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12 month period of time:
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
                 
    Calculated (decrease) increase
    in projected annual net interest income
    (in thousands)
    March 31, 2007   December 31, 2006
Changes in interest rates
               
 
               
+200 basis points
    (872 )     (853 )
+100 basis points
    (432 )     (424 )
 
               
-100 basis points
    387       379  
-200 basis points
    566       551  
     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 March 31, 2007 (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 March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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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  
January 2007 (January 1, 2007 through January 31, 2007)
    2,500     $ 20.69       2,500       42,615  
February 2007 (February 1, 2007 through February 28, 2007)
    600     $ 21.16       600       42,015  
March 2007 (March 1, 2007 through March 31, 2007)
    400     $ 20.64       400       41,615  
 
                         
Total
    3,500     $ 20.77       3,500          
 
                         
     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 a period of two years, unless the program is terminated earlier. The Company did not make any repurchases during the quarter ended March 31, 2007 other than pursuant to this publicly announced program, and there were no other publicly announced plans or programs outstanding during the quarter ended March 31, 2007.


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ITEM 6 – EXHIBITS
             
Exhibit No.   Name   Page No.
10.1
  Summary of Compensation Arrangements of Certain Officers and Directors     23  
 
           
10.2
  Employment Agreement between ENB Insurance Agency, Inc. and Robert G. Miller Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 26, 2007)        
 
           
10.3
  Employment Agreement among Evans Bancorp, Inc., Evans National Bank and Gary A. Kajtoch as of April 1, 2007 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 26, 2007        
 
           
31.1
  Certification of Principal Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     24  
 
           
31.2
  Certification of the Principal Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     25  
 
           
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.     26  
 
           
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.     27  


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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
  /s/ David J. Nasca    
May 15, 2007
 
 
David J. Nasca
       President and CEO
   
 
         (On Behalf of the Registrant and    
 
         as Principal Executive Officer)    
 
       
DATE
  /s/ Gary A. Kajtoch    
May 15, 2007
 
 
Gary A. Kajtoch
   
 
  Treasurer    
 
  (Principal Financial Officer)    


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Exhibit Index
             
Exhibit No.   Name   Page No.
10.1
  Summary of Compensation Arrangements of Certain Officers and Directors     23  
 
           
10.2
  Employment Agreement between ENB Insurance Agency, Inc. and Robert G. Miller Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 26, 2007)        
 
           
10.3
  Employment Agreement among Evans Bancorp, Inc., Evans National Bank and Gary A. Kajtoch as of April 1, 2007 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 26, 2007        
 
           
31.1
  Certification of Principal Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     24  
 
           
31.2
  Certification of the Principal Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.     25  
 
           
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.     26  
 
           
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.     27