UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended September 30, 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		(I.R.S. Employer
incorporation or organization)		Identification No.)

(Address of principal executive offices) (Zip Code)

(716) 926-2000

Not applicable

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 2,730,483 shares as of October 31, 2006

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

		PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets–September 30, 2006 and December 31, 2005			1
Unaudited Consolidated Statements of Income-Three months ended September 30, 2006 and 2005			2
Unaudited Consolidated Statements of Income-Nine months Ended September 30, 2006 and 2005			3
Unaudited Consolidated Statements of Stockholders’ Equity-Nine months ended September 30, 2006 and 2005			4
Unaudited Consolidated Statements of Cash Flows–Nine months ended September 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			23
Item 4. Controls and Procedures			25
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 5. Other Information			26
Item 6. Exhibits			27
SIGNATURES			28
EX-3.2.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(in thousands, except share and per share amounts)

		September 30,				December 31,
		2006				2005
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	11,740			$	15,635
Securities:
Available for sale, at fair value			136,533				155,610
Held to maturity, at amortized cost			4,294				4,342
Loans and leases, net of allowance for loan and lease losses of $3,680 in 2006 and $3,211 in 2005			275,271				256,810
Properties and equipment, net			8,119				8,151
Goodwill			9,639				9,639
Intangible assets			2,566				2,728
Bank-owned life insurance			9,952				9,586
Other assets			7,340				6,045
TOTAL ASSETS		$	465,454			$	468,546
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand		$	70,073			$	71,183
NOW			11,542				12,401
Regular savings			90,085				86,558
Muni-vest			35,362				27,521
Time			152,105				139,145
Total deposits			359,167				336,808
Federal funds purchased and agreements to repurchase securities			9,352				8,985
Other short-term borrowings			14,207				34,585
Other liabilities			7,997				6,629
Junior subordinated debentures			11,330				11,330
Long-term borrowings			24,674				33,333
Total liabilities			426,727				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 2,722,401 and 2,729,779 shares outstanding, respectively			1,373				1,373
Capital surplus			26,179				26,155
Retained earnings			12,991				11,087
Accumulated other comprehensive loss, net of tax			(1,323	)			(1,387	)
Less: Treasury stock, at cost (22,937 and 15,559 shares, respectively)			(493	)			(352	)
Total stockholders’ equity			38,727				36,876
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	465,454			$	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 SEPTEMBER 30, 2006 AND 2005
(in thousands, except share and per share amounts)

		Three Months Ended
		September 30,
		2006				2005
INTEREST INCOME
Loans		$	5,242			$	4,307
Federal funds sold/Interest bearing deposits at other banks			5				13
Securities:
Taxable			1,030				1,154
Non-taxable			470				478
Total interest income			6,747				5,952
INTEREST EXPENSE
Deposits			2,408				1,653
Other borrowings			469				368
Junior subordinated debentures			223				173
Total interest expense			3,100				2,194
NET INTEREST INCOME			3,647				3,758
PROVISION FOR LOAN AND LEASE LOSSES			305				215
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			3,342				3,543
NON-INTEREST INCOME:
Bank charges			533				558
Insurance service and fees			1,460				1,508
Net gain on sales of securities			114				2
Premium on loans sold			2				4
Bank-owned life insurance			132				96
Life insurance proceeds			—				15
Other			486				322
Total non-interest income			2,727				2,505
NON-INTEREST EXPENSE:
Salaries and employee benefits			2,403				2,296
Occupancy			496				497
Supplies			48				73
Repairs and maintenance			140				136
Advertising and public relations			82				105
Professional services			207				237
Amortization of intangibles			141				132
Other Insurance			79				86
Other			720				732
Total non-interest expense			4,316				4,294
INCOME BEFORE INCOME TAXES			1,753				1,754
INCOME TAXES			471				498
NET INCOME		$	1,282			$	1,256
Net income per common share-basic		$	0.47			$	0.46
Net income per common share-diluted		$	0.47			$	0.46
Cash dividends per common share		$	0.34			$	0.34
Weighted average number of common shares			2,724,940				2,721,633
Weighted average number of diluted shares			2,727,307				2,724,272

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

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(in thousands, execept share and per share amounts)

		Nine Months Ended
		September 30,
		2006				2005
INTEREST INCOME
Loans		$	14,749			$	11,721
Federal funds sold/Interest bearing deposits at other banks			35				112
Securities:
Taxable			3,209				3,556
Non-taxable			1,427				1,456
Total interest income			19,420				16,845
INTEREST EXPENSE
Deposits			6,429				4,502
Other borrowings			1,509				1,154
Junior subordinated debentures			621				474
Total interest expense			8,559				6,130
NET INTEREST INCOME			10,861				10,715
PROVISION FOR LOAN AND LEASE LOSSES			815				554
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES			10,046				10,161
NON-INTEREST INCOME:
Bank charges			1,508				1,546
Insurance service and fees			5,147				5,084
Net gain on sales of securities			114				107
Premium on loans sold			6				16
Bank-owned life insurance			365				302
Life insurance proceeds			—				95
Other			1,282				890
Total non-interest income			8,422				8,040
NON-INTEREST EXPENSE:
Salaries and employee benefits			7,344				6,943
Occupancy			1,529				1,485
Supplies			216				270
Repairs and maintenance			411				430
Advertising and public relations			343				378
Professional services			602				785
Amortization of intangibles			406				386
Other Insurance			256				282
Other			2,179				2,122
Total non-interest expense			13,286				13,081
INCOME BEFORE INCOME TAXES			5,182				5,120
INCOME TAXES			1,423				1,427
NET INCOME		$	3,759			$	3,693
Net income per common share-basic		$	1.38			$	1.36
Net income per common share-diluted		$	1.38			$	1.36
Cash dividends per common share		$	0.68			$	0.65
Weighted average number of common shares			2,724,207				2,721,955
Weighted average number of diluted shares			2,726,486				2,725,745

See Notes to Unaudited Consolidated Financial Statements

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(in thousands, except share and per share amounts)

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive				Treasury
		Stock				Surplus				Earnings				Income				Stock				Total
Balance, January 1, 2005		$	1,307			$	23,361			$	10,808			$	563			$	(565	)		$	35,474
Comprehensive income:
Net Income											3,693												3,693
Unrealized loss on available-for-sale securities, net of tax effect of $918 and reclassification adjustment of $(107)															(1,439	)							(1,439	)
Total comprehensive income																							2,254
Cash dividends ($0.65 per common share)											(1,762	)											(1,762	)
Stock options expense							148																148
Reissued 7,391 shares treasury stock under dividend reinvestment plan											2								176				178
Reissued 4,817 shares treasury stock under employee stock purchase plan											(23	)							115				92
Reissued 800 shares treasury stock under director stock option plan											(2	)							19				17
Purchased 16,400 shares for treasury																			(380	)			(380	)
Balance, September 30, 2005		$	1,307			$	23,509			$	12,716			$	(876	)		$	(635	)		$	36,021
Balance, January 1, 2006		$	1,373			$	26,155			$	11,087			$	(1,387	)		$	(352	)		$	36,876
Comprehensive income:
Net Income											3,759												3,759
Unrealized gain on available-for-sale securities, net of reclassification adjustment of $(114) and tax effect of ($41)															64								64
Total comprehensive income																							3,823
Cash dividends ($0.68 per common share)											(1,855	)											(1,855	)
Stock options expense							86																86
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 22,750 shares for treasury																			(489	)			(489	)
Balance, September 30, 2006		$	1,373			$	26,179			$	12,991			$	(1,323	)		$	(493	)		$	38,727

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

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(in thousands)

		Nine Months Ended
		September 30,
		2006				2005
OPERATING ACTIVITIES:
Interest received		$	19,721			$	16,901
Fees received			8,054				7,314
Interest paid			(8,363	)			(5,967	)
Cash paid to employees and suppliers			(12,073	)			(10,913	)
Income taxes paid			(1,650	)			(1,571	)
Proceeds from sale of loans held for resale			1,599				2,569
Originations of loans held for resale			(1,593	)			(2,052	)
Net cash provided by operating activities			5,695				6,281
INVESTING ACTIVITIES:
Available for sales securities:
Purchases			(331	)			(23,077	)
Proceeds from sales			2,086				7,067
Proceeds from maturities			17,312				20,545
Held to maturity securities:
Purchases			(2,104	)			(1,891	)
Proceeds from maturities			2,048				695
Additions to properties and equipment			(588	)			(1,119	)
Increase in loans, net of repayments			(19,400	)			(32,205	)
Proceeds from life insurance			—				665
Acquisitions			(187	)			(117	)
Cash paid on earn-out agreements			(57	)			(420	)
Net cash used in investing activities			(1,221	)			(29,857	)
FINANCING ACTIVITIES:
Proceeds from borrowings			2,917				—
Repayments of short-term borrowings			(28,928	)			(15,202	)
Repayments of long-term borrowings			(2,659	)			(9,072	)
Increase in deposits			22,359				52,947
Dividends paid			(1,855	)			(1,762	)
Purchase of treasury stock			(489	)			(380	)
Re-issuance of treasury stock			286				287
Net cash (used in) provided by financing activities			(8,369	)			26,818
Net (decrease) increase in cash and equivalents			(3,895	)			3,242
CASH AND CASH EQUIVALENTS:
Beginning of period			15,635				8,124
End of period		$	11,740			$	11,366

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(in thousands)

		Nine Months Ended
		September 30,
		2006				2005
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income		$	3,759			$	3,693
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,359				1,405
Deferred tax benefit			(102	)			(109	)
Provision for loan and lease losses			815				554
Net gain on sales of securities			(114	)			(107	)
Premiums on loans sold			(6	)			(16	)
Stock options expense			86				148
Net change in loans held for resale			—				517
Changes in assets and liabilities affecting cash flow:
Other assets			(1,286	)			(1,001	)
Other liabilities			1,184				1,197
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	5,695			$	6,281

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

NINE MONTHS ENDED SEPTEMBER 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 U.S. 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 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 nine month period ended September 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 $2.0 million and $2.1 million as of September 30, 2006 and December 31, 2005, respectively. As of September 30, 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 nine month periods ended September 30, 2006 and 2005.

Allowance for loan and lease losses

		Nine months ended September 30,
		2006				2005
		(in thousands)
Beginning balance, January 1		$	3,211			$	2,999
Charge-offs:
Commercial			(205	)			(175	)
Real estate mortgages			—				(2	)
Installment loans			(42	)			(84	)
Overdrafts			(28	)			(23	)
Direct financing leases			(250	)			(50	)
Total charge-offs			(525	)			(334	)
Recoveries:
Commercial			48				40
Real estate mortgages			—				—
Installment loans			61				10
Overdrafts			15				6
Direct financing leases			55				51
Total recoveries			179				107
Net charge-offs			(346	)			(227	)
Provision for loan and lease losses			815				554
Ending balance, September 30		$	3,680			$	3,326
Ratio of net charge-offs to average net loans and leases outstanding (annualized)			0.17	%			0.13	%

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 2,367 and 2,279 dilutive shares for the three and nine month periods ended September 30, 2006. There were 2,639 and 3,790 dilutive shares for the three and nine month periods ended September 30, 2005. On August 17, 2006, the Company declared a cash dividend of $0.34 per share payable on October 2, 2006 to shareholders of record as of September 8, 2006. All September 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 nine month periods ended September 30, 2006, there were approximately 55 thousand shares that are not included in calculating diluted earnings per share because their effect was anti-dilutive. As of the three and nine month periods ended September 30, 2005, there were approximately 42 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 September 30, 2006 the Company repurchased 4,700 shares of common stock at an average cost of $21.74 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 nine month periods ended September 30, 2006 and 2005.

Three Months Ended
September 30, 2006
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	3,765				($118	)		$	3,647
Provision for loan and lease losses			305				—				305
Net interest income (expense) after provision for loan and lease losses			3,460				(118	)			3,342
Non-interest income			1,267				—				1,267
Insurance service and fees			—				1,460				1,460
Non-interest expense			3,242				1,074				4,316
Income before income taxes			1,485				268				1,753
Income taxes			363				108				471
Net income		$	1,122			$	160			$	1,282

Nine Months Ended
September 30, 2006
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	11,211				($350	)		$	10,861
Provision for loan and lease losses			815				—				815
Net interest income (expense) after provision for loan and lease losses			10,396				(350	)			10,046
Non-interest income			3,275				—				3,275
Insurance service and fees			—				5,147				5,147
Non-interest expense			9,893				3,393				13,286
Income before income taxes			3,778				1,404				5,182
Income taxes			861				562				1,423
Net income		$	2,917			$	842			$	3,759

Three Months Ended
September 30, 2005
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	3,862				($104	)		$	3,758
Provision for loan and lease losses			215				—				215
Net interest income (expense) after provision for loan and lease losses			3,647				(104	)			3,543
Non-interest income			997				—				997
Insurance service and fees			—				1,508				1,508
Non-interest expense			3,152				1,142				4,294
Income before income taxes			1,492				262				1,754
Income taxes			393				105				498
Net income		$	1,099			$	157			$	1,256

Nine Months Ended
September 30, 2005
(in thousands)

						Insurance Agency
		Banking Activities				Activities				Total
Net interest income (expense)		$	11,002				($287	)		$	10,715
Provision for loan and lease losses			554				—				554
Net interest income (expense) after provision for loan and lease losses			10,448				(287	)			10,161
Non-interest income			2,956				—				2,956
Insurance service and fees			—				5,084				5,084
Non-interest expense			9,595				3,486				13,081
Income before income taxes			3,809				1,311				5,120
Income taxes			903				524				1,427
Net income		$	2,906			$	787			$	3,693

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 September 30, 2006 and 2005 is as follows:

		2006				2005
		(in thousands)
Commitments to extend credit		$	60,343			$	62,926
Standby letters of credit			2,134				1,832
Total		$	62,477			$	64,758

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 September 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 September 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

Nine months ended September 30,
(in thousands)

										Supplemental Executive
		Pension Benefits								Retirement Plan
		2006				2005				2006				2005
Service cost		$	237			$	216			$	87			$	78
Interest cost			147				132				114				111
Expected return on plan assets			(174	)			(144	)			—				—
Amortization of prior service cost			(12	)			(12	)			42				45
Amortization of the net loss			18				3				12				12
Net periodic benefit cost		$	216			$	195			$	255			$	246

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 nine 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 year through 9 years. At September 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 nine month period ended September 30, 2006 there were no options granted, exercised, or expired. During the three and nine month periods ended September 30, 2006 there were 6,520 options forfeited at a weighted average exercise price of $20.94. At September 30, 2006 there were 82,057 stock options outstanding under the Option Plan with a weighted-average exercise price of $21.35, with no intrinsic value, and a weighted-average remaining contractual term of 7.8 years. At September 30, 2006 there were 39,752 options exercisable at a weighted average exercise price of $21.77, with no intrinsic value, and a weighted-average remaining contractual term of 7.64 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 September 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 September 30, 2006, there was approximately $153 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 2.0 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 $26 thousand and $86 thousand for the three and nine month periods ended September 30, 2006, respectively, and $52 thousand and $148 thousand for the same periods of 2005.
11.		RECENT ACCOUNTING PRONOUNCEMENTS
		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We are currently evaluating the potential impact of this statement.
		In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized as a component of other comprehensive income on the Statement of Stockholders’ Equity, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end. This statement is effective for public entities for fiscal years ending after December 15, 2006. We are currently evaluating the potential impact of this statement.
		In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. We will initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006. We are currently evaluating the potential impact of SAB 108 may have on our financial position and results of operations.

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 U.S. 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.

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 $279.0 million at September 30, 2006, reflecting a $6.0 million or 2.2% increase from June 30, 2006 and an $18.9 million or 7.3% increase from December 31, 2005. Gross loans and leases are net of $6.8 million, $6.3 million and $4.0 million unearned income on direct financing leases as of September 30, 2006, June 30, 2006 and December 31, 2005, respectively. Commercial loans and leases totaled $193.5 million at September 30, 2006, reflecting a $3.5 million or 1.9% increase from June 30, 2006 and a $10.9 million or 6.0% increase from December 31, 2005. Growth in direct financing leases of $2.3 million or 9.0% and commercial real estate loans of $1.9 million or 1.4%, offset by decreases in commercial installment loans of $1.3 million or 6.8%, were largely responsible for the increase from June 30, 2006. Growth in direct financing leases of $10.8 million or 63.8%, and commercial real estate loans of $1.8 million or 1.3%, offset by decreases in commercial installment loans of $1.3 million or 6.8%, were largely responsible for the increase from December 31, 2005.

     Consumer loans totaled $84.8 million at September 30, 2006, reflecting a $2.4 million or 2.9% increase from June 30, 2006 and a $7.8 million or 10.4% increase from December 31, 2005. Consumer real estate loans increased $1.9 million or 4.3% from June 30, 2006 and $6.7 million or 16.5% 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 September 30, 2006, the Bank sold mortgages to FNMA totaling $0.9 million, as compared to $0.8 million during the three month period ended September 30, 2005. During the nine month period ended September 30, 2006, the Bank sold mortgages to FNMA totaling $1.6 million, as compared to $2.6 million during the nine month period ended September 30, 2005. At September 30, 2006, the Bank had a loan servicing portfolio principal balance of $28.2 million upon which it earns servicing fees, as compared to $28.6 million at June 30, 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.

		September 30, 2006								December 31, 2005
		(in thousands)				Percentage				(in thousands)				Percentage
Commercial Loans and Leases
Real Estate		$	137,198				49.2	%		$	135,425				52.1	%
Installment			17,332				6.2	%			18,588				7.1	%
Direct Financing Leases			27,748				9.9	%			16,945				6.5	%
Lines of Credit			11,207				4.1	%			11,603				4.5	%
Cash Reserve			42				0.0	%			38				0.0	%
Total Commercial Loans and Leases			193,527				69.4	%			182,599				70.2	%
Consumer Loans
Real Estate			47,266				16.9	%			40,586				15.6	%
Home Equity			34,478				12.4	%			33,114				12.7	%
Installment			2,412				0.9	%			2,254				0.9	%
Overdrafts			159				0.1	%			219				0.1	%
Credit Card			304				0.1	%			307				0.1	%
Other			132				0.0	%			288				0.1	%
Total Consumer Loans			84,751				30.4	%			76,768				29.5	%
Net Deferred Costs & Unearned Discounts			673				0.2	%			654				0.3	%
Total Loans and Leases			278,951				100.0	%			260,021				100.0	%
Allowance for Loan and Lease Losses			(3,680	)							(3,211	)
Loans and Leases, net		$	275,271							$	256,810

     Net loan and lease charge-offs were $229 thousand in the three month period ended September 30, 2006 as compared to net charge-offs of $55 thousand in the same period of 2005. Net charge-offs were $346 thousand for the nine month period ended September 30, 2006 as compared to $227 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 0.24% of total loans and leases outstanding at September 30, 2006 as compared to 0.37% at June 30, 2006 and 0.72% at December 31, 2005. The allowance for loan and lease losses totaled $3.7 million or 1.32% of total loans and leases outstanding at September 30, 2006 as compared to $3.6 million or 1.32% of total loans and leases at June 30, 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.

		September 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			151				600
Construction			—				—
Second mortgages			—				—
Home equity lines of credit			—				—
Total mortgage loans on real estate			151				600
Direct financing leases			—				—
Commercial loans			445				1,175
Consumer installment loans
Personal			—				—
Credit cards			—				—
Other			—				—
Total consumer installment loans			—				—
Total non-accruing loans and leases		$	596			$	1,775
Accruing loans and leases 90+ days past due			81				95
Total non-performing loans and leases			677				1,870
Total non-performing loans and leases as a percentage of total assets			0.15	%			0.41	%
Total non-performing loans and leases as a percentage of total loans and leases			0.24	%			0.72	%

     For the three and nine month periods ended September 30, 2006, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $15 thousand and $69 thousand, respectively. For the three and nine month periods ended September 30, 2005, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $34 thousand and $101 thousand, respectively. There was no interest income included in net income for the three and nine month periods ended September 30, 2006 and 2005 on non-accruing loans and leases. Non-accruing commercial loans declined $0.7 million from December 31, 2005 due mainly to a $0.5 million recovery on collateral for one significant non-accrual loan in the first quarter of 2006. Non-accruing commercial mortgage loans on real estate declined $0.4 million from December 31, 2005 due mainly to $0.3 million in payoffs in the first quarter of 2006 and $0.1 million in payoffs in the third quarter of 2006.

Investing Activities

     Total securities declined to $140.8 million at September 30, 2006, reflecting a $7.3 million or 4.9% decrease from June 30, 2006, and a $19.1 million or 12.0% 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 3.3 years as of September 30, 2006, as compared to 3.7 years as of June 30, 2006 and 3.5 years as of December 31, 2005. Available-for-sale securities with a total fair value of $130.3 million at September 30, 2006 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

Funding Activities

     Total deposits at September 30, 2006 were $359.2 million, reflecting a $16.2 million or 4.7% increase from June 30, 2006 and a $22.4 million or 6.6% increase from December 31, 2005. These increases were mainly attributable to increases in time deposits of $13.3 million or 9.6% and $13.0 million or 9.3% from June 30, 2006 and December 31, 2005, respectively. In the third quarter, the Bank has chosen to increase non-core funding in time deposits in place of short-term borrowings due to favorable rate and maturity considerations. Based on such, short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York at September 30, 2006 declined $18.0 million or 55.8% from June 30, 2006 and $22.9 million or 61.7% from December 31, 2005. Demand deposits at September 30, 2006 were $70.1 million, reflecting a $1.9 million or 2.8% increase from June 30, 2006 but a $1.1 million or 1.6% decrease from December 31, 2005. Savings deposits at September 30, 2006 were $90.1 million, reflecting a $0.3 million or 0.4% increase from June 30, 2006 and a $3.5 million or 4.1% increase from December 31, 2005. Additionally, due to municipal tax collections in the first and third quarters of 2006, munivest balances and securities sold under agreements to repurchase at September 30, 2006 were $35.4 million and $9.4 million, respectively. These are increases of $0.7 million or 2.0% and $3.4 million or 57.6% from June 30, 2006, and $7.8 million or 28.5% and $2.9 million or 45.3% from December 31, 2005 for munivest and securities sold under agreements to repurchase, respectively.

 20

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

     The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan and lease balances include both performing and non-performing loans and leases. Investments are included at amortized cost. Yields are presented on a non-tax-equivalent basis.

		Three Months Ended												Three Months Ended
		September 30, 2006												September 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		$	272,492			$	5,242				7.69	%		$	245,346			$	4,307				7.02	%
Taxable securities			100,440				1,030				4.10	%			124,928				1,154				3.69	%
Tax-exempt securities			43,570				470				4.31	%			45,917				478				4.16	%
Federal funds sold			514				5				3.89	%			2,770				13				1.88	%
Total interest-earning assets			417,016				6,747				6.47	%			418,961				5,952				5.68	%
Non interest-earning assets:
Cash and due from banks			12,584												10,207
Premises and equipment, net			8,172												8,284
Other assets			29,645												26,083
Total Assets		$	467,417											$	463,535
LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW		$	11,952			$	6				0.20	%		$	12,443			$	5				0.16	%
Regular savings			89,868				272				1.21	%			93,774				200				0.85	%
Muni-Vest savings			34,293				385				4.49	%			50,318				380				3.02	%
Time deposits			152,207				1,745				4.59	%			135,560				1,068				3.15	%
Other borrowed funds			45,680				452				3.96	%			44,873				356				3.17	%
Junior subordinated debentures			11,330				223				7.87	%			11,330				173				6.11	%
Securities sold U/A to repurchase			8,564				17				0.79	%			6,070				12				0.79	%
Total interest-bearing liabilities			353,894			$	3,100				3.50	%			354,368			$	2,194				2.48	%
Noninterest-bearing liabilities:
Demand deposits			66,430												64,900
Other			9,255												7,362
Total liabilities		$	429,579											$	426,630
Stockholders’ equity			37,838												36,905
Total Liabilities and Equity		$	467,417											$	463,535
Net interest earnings						$	3,647											$	3,758
Net yield on interest earning assets											3.50	%											3.59	%
Interest rate spread											2.97	%											3.20	%