Evans Bancorp - 10-Q quarterly report FY

(Mark One)

     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):

     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

EVANS BANCORP, INC. AND SUBSIDIARIES

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

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

PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

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.

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.

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.

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.

     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.

     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.

     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.

     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.

     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.

     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.

     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.