OVERVIEW

This discussion is intended to compare the performance of the Company for the years ended December 31, 2012, 2011 and 2010. The review of the information presented should be read in conjunction with Part I, Item 1: "Business" and Part II, Item 6: "Selected Financial Data" and Item 8: "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The Company is a financial holding company registered under the BHCA. The Company currently conducts its business through its two direct wholly-owned subsidiaries: the Bank and the Bank's subsidiaries, ENL and ENHC; and ENFS and its subsidiary, TEA. The Company does not engage in any other substantial business. Unless the context otherwise requires, the term "Company" refers collectively to Evans Bancorp, Inc. and its subsidiaries.

Summary

In 2012, the Company experienced strong earnings results largely driven by a significantly lower provision for loan and lease losses. The Company's stated public intentions are to continue to grow to increase market share and achieve scale while improving profitability and returning value to shareholders. Net income in 2012 was $8.1 million, a 32.8% increase over the 2011 net income of $6.1 million and well above the 2010 net income of $4.8 million. The Company's net income trend reflects the improving credit quality of its loan and lease portfolio. In 2010, the Company recorded $1.5 million in provision for lease losses despite ceasing new lease origination in April 2009 as credit quality continued to deteriorate. The Company also recorded $2.4 million in provision for loan losses in 2010. Non-performing loans and leases as a percentage of total loans and leases was 2.64% as of December 31, 2010. In 2011, the Company reduced its allowance for lease losses by $0.5 million as the level of leasing losses decreased to a point that management determined that a reduction in the allowance was appropriate. The provision for loan losses was increased to $3.0 million in 2011. In 2012, the leasing portfolio was reduced to only $1.6 million (down from a high of $58.6 million at December 31, 2008) and the provision for lease losses was a negative $0.9 million as performance continued to improve and further reductions in reserves were necessary. The loan portfolio's credit performance also improved in 2012 with the non-performing loans and leases as a percentage of total loans and leases declining to 1.41% at December 31, 2012, compared to 2.60% at December 31, 2011. This improvement, combined with relatively flat loan growth in 2012, resulted in a provision for loan losses of only $0.8 million. Overall, the provision for loan and lease losses for the Company decreased from $3.9 million in 2010 to $2.5 million in 2011 to negative $0.1 million in 2012.

As for the Company's core performance, 2012 was marked by solid growth in deposits and flat loan balances in the face of the continued headwinds of a sluggish economy and a very competitive local market in Western New York. The Company experienced some large loan pay-offs in the fourth quarter of 2012, in contrast to the fourth quarter of 2011 which saw significant balance growth. The overall result was a year-over-year decline in total gross loans of $0.5 million, or 0.1% as of December 31, 2012, but an increase in average total loans and leases of $44.0 million, or 8.2%, in 2012 when compared with 2011. The growth in average loans and leases combined with the 10.8% increase in average deposits in 2012 helped drive a 6.9% increase in net interest income, despite a 15 basis point decrease in net interest margin to 3.84% as the ultra low interest rate environment continued to put pressure on the Company's net interest margin. To support the Company's high organic growth rates and increasing regulatory requirements, management has needed to make investments in people and infrastructure, resulting in an increase in non-interest expenses. Most notably, the Bank opened its newest branch in Williamsville, NY in the fourth quarter of 2012. Non-interest income increased 3.2% in 2012 when compared with 2011, driven by a considerable increase in its premiums on loans sold to Fannie Mae, and with measured increases in the Company's two largest sources on non-interest income, service charges of deposits and insurance agency revenue.

Strategy

To sustain future growth and to meet the Company's financial objectives, the Company has defined a number of strategies. Five of the more important strategies are:

· Growing the business to achieve better scale and leverage investments in the banking and insurance agency business for enhanced profitability;

· Opportunistic growth through acquisition;

· Continuing growth of non-interest income through insurance agency internal growth, financial services revenues, employee benefits insurance and retirement programs sales, and cash management;

· Continue to develop opportunities with a segmented market approach to develop more profitable relationships, less sensitive to pricing, positively impacting earnings; and

· Maintaining a community based focus and providing a personal touch to customer service.

The Company's strategies are designed to direct tactical investment decisions supporting its financial objectives. While the Company intends to focus its efforts on the pursuit of these strategies, there can be no assurance that the Company will successfully implement these strategies or that the strategies will produce the desired results. The Company's most significant revenue source continues to be net interest income, defined as total interest income less interest expense. Net interest income accounted for approximately 68% of total revenue in 2012. To produce net interest income and consistent earnings growth over the long-term, the Company must generate loan and deposit growth at acceptable margins within its market area. To generate and grow loans and deposits, the Company must focus on a number of areas including, but not limited to, opportunistic branch expansion, sales practices, customer and employee satisfaction and retention, competition, evolving customer behavior, technology, product innovation, interest rates, credit performance of its customers and vendor relationships.

The Company also considers non-interest income important to its continued financial success. Fee income generation is partly related to the Company's loan and deposit operations, such as deposit service charges, as well as to its financial products, such as commercial and personal insurance sold through TEA. Improved performance in non-interest income can help increase capital ratios because most of the non-interest income is generated without recording assets on the balance sheet. The Company has and will continue to face challenges in increasing its non-interest income as the regulatory environment changes.

While the Company reviews and manages all customer units, it has focused increased efforts on targeted segments in its community such as (1) smaller businesses with smaller credit needs but rich in deposits and other services;
(2) middle market commercial businesses; (3) commercial real estate lending; and
(4) retail customers. The overarching goal is to cross-sell between our insurance, financial services and banking lines of business to deepen our relationships with all of our customers. The Company believes that these efforts resulted in growth in the commercial loan portfolio and core deposits during fiscal 2012 and 2011.

The Bank opened a new branch office in Williamsville, NY in October 2012. With all new and existing branches, the Company has strived to provide a personal touch to customer service and is committed to maintaining a local community based philosophy. The Bank has emphasized hiring local branch and lending personnel with strong ties to the specific local communities it enters and serves.

The Bank serves its market through 14 banking offices in Western New York, located in Amherst, Buffalo, Clarence, Derby, Evans, Forestville, Hamburg, Lancaster, North Boston, Tonawanda, West Seneca, and Williamsville. The Company's principal source of funding is through deposits, which it reinvests in the community in the form of loans and investments. Deposits are insured up to the maximum permitted by the Insurance Fund of the FDIC. The Bank is regulated by the OCC.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The Company's Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") 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 Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements. Accordingly, as this information changes, the 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.

The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. These policies, along with the disclosures presented in the other Notes to the Company's Consolidated Financial Statements contained in this 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 Consolidated Financial Statements and how those values are determined.

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.

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 portfolio also represents the largest asset type on the Company's consolidated balance sheets.

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 collectability of the loans and leases in its portfolio by incorporating feedback provided by the Bank's internal loan and lease staff, an independent internal loan and lease review function and information provided by examinations performed by regulatory agencies.

The analysis of the allowance for loan and lease losses is composed of two components: specific credit allocation and general portfolio allocation. The specific credit allocation includes a detailed review of each impaired loan and allocation is made based on this analysis. Factors may include the appraisal value of the collateral, the age of the appraisal, the type of collateral, the performance of the loan to date, the performance of the borrower's business based on financial statements, and legal judgments involving the borrower. The Company has an appraisal policy in which appraisals are obtained upon a loan being downgraded on the Company's internal loan rating scale to a 5 (special mention) or a 6 (substandard) depending on the amount of the loan, the type of loan and the type of collateral. All impaired loans are either graded a 6 or 7 on the internal loan rating scale. Subsequent to the downgrade, if the loan remains outstanding and impaired for at least one year more, management may require another follow-up appraisal. Between receipts of updated appraisals, if necessary, management may perform an internal valuation based on any known changing conditions in the marketplace such as sales of similar properties, a change in the condition of the collateral, or feedback from local appraisers. The general portfolio allocation consists of an assigned reserve percentage based on the historical loss experience and other quantitative and qualitative factors of the loan or lease category.

The general portfolio allocation is segmented into pools of loans with similar characteristics. Separate pools of loans include loans pooled by loan grade and by portfolio segment. Loans graded a 5 or worse ("criticized loans") that exceed a material balance threshold are evaluated by the Company's credit department to determine if the collateral for the loan is worth less than the loan. All of these "shortfalls" are added together and divided by the respective loan pool to calculate the quantitative factor applied to the respective pool as this represents a potential loss exposure. These loans are not considered individually impaired because the cash flow of the customer and the payment history of the loan suggest that it is not probable that the Company will be unable to collect the full amount of principal and interest as contracted and are thus still accruing interest.

Loans that are graded 4 or better ("non-criticized loans") are reserved in separate loan pools in the general portfolio allocation. A weighted average 5-year historical charge-off ratio by portfolio segment is calculated and applied against these loan pools.

For both the criticized and non-criticized loan pools in the general portfolio allocation, additional qualitative factors are applied. The qualitative factors applied to the general portfolio allocation reflect management's evaluation of various conditions. The conditions evaluated 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 non-accruing loans and leases; timing of the identification of downgrades; historical loan and lease charge-off experience; and the results of bank regulatory examinations. Due to the nature of the loans, the criticized loan pools carry significantly higher qualitative factors than the non-criticized pools.

Direct financing leases are segregated from the rest of the loan portfolio in determining the appropriate allowance for that portfolio segment. The Company performs a migration analysis for non-accruing leases based on historical loss data. Management periodically updates this analysis by examining the non-accruing lease portfolio at different points in time and studying what percentage of the non-accruing portfolio ends up being charged off. All of the remaining leases not in non-accrual are allocated a reserve based on several factors including: delinquency and non-accrual trends, charge-off trends, and national economic conditions.

For further discussion on the allowance for loan and lease losses, please see Note 1 and Note 3 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Goodwill and Intangible Assets

The amount of goodwill reflected in the Company's Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill in an 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. As of December 31, 2012, TEA had $8.1 million in goodwill. The banking and ENL reporting units do not have any goodwill. All of the goodwill at TEA stems from the acquisition of various insurances agencies, not the purchase of diverse companies in which goodwill was subjectively allocated to different reporting units. Therefore, total market capitalization reconciliation was not performed because not all of the reporting units had goodwill. As a result, such an analysis would not be meaningful.

Management valued TEA, the reporting unit with goodwill, using cash flow modeling and earnings multiple techniques. When using the cash flow models, management considered historical information, the operating budget for 2013, economic and insurance market cycles, and strategic goals in projecting net income and cash flows for the next five years. The fair value calculated substantially exceeded the book value of TEA. The value based on a multiple to earnings before interest, taxes, depreciation, and amortization ("EBITDA") was higher, a result of conservative growth assumptions used by the Company in the cash flow model as well as an implied control premium in the multiple. The multiple used was based on historical industry data and consistent with the previous year's assumption.

While the fair values determined in the impairment tests were substantially higher than the carrying value for TEA, the risk of a future impairment charge still exists. Management used growth rates that are achievable over the long run through both soft and hard insurance cycles. A soft insurance market has persisted for several years, resulting in a slight increase in revenue of 0.9% in 2012 compared with 2011. A worsening of the soft insurance market over the long term could result in lower than projected revenue and profitability growth rates and result in depressed pricing multiples in the acquisition marketplace. Further softening of the insurance market is the biggest risk to the Company's valuation model.

For further discussion of the Company's accounting for goodwill and other intangible assets, see Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

Note 1 to the Company's Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K discusses new accounting policies adopted by the Company during fiscal 2012. Below is an accounting policy recently issued or proposed but not yet required to be adopted. To the extent management believes the adoption of new accounting standards materially affects the Company's financial condition, results of operations, or liquidity, the impacts are discussed below.

Accounting Standards Update ("ASU") 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. Accounting for a business combination requires that at each subsequent reporting date, an acquirer measure an indemnification asset on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount, and, for an indemnification asset that is not subsequently measured at its fair value, management's assessment of the collectibility of the indemnification asset. The objective of this ASU is to address the diversity in practice about how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). The new guidance is effective for interim and annual periods beginning after December 15, 2012. The Company will adopt this ASU effective January 1, 2013, and is currently addressing the impact on the Company's accounting, which is not expected to be material. The Company does have an indemnification agreement with the FDIC related to its acquisition of Waterford Village Bank ("Waterford") in July 2009. The agreement ends for non-single family loans in July 2014 and for single family loans in July 2019.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 AND DECEMBER 31,
2011

Net Income

Net income of $8.1 million in 2012 consisted of $7.0 million related to the Company's banking activities and $1.1 million in net income related to the Company's insurance agency activities. The total net income of $8.1 million was an increase of 32.8% from $6.1 million in 2011. Earnings per diluted share for 2012 of $1.95 were an increase of 30.9% from $1.49 per diluted share for 2011.

Net Interest Income

Net interest income, the difference between interest income and fee income on earning assets, such as loans and securities, and interest expense on deposits and borrowings, provides the primary basis for the Company's results of operations.

Net interest income is dependent on the amounts and yields earned on interest earning assets as compared to the amounts of and rates paid on interest bearing liabilities.

AVERAGE BALANCE SHEET INFORMATION

The following table presents the significant categories of the assets and liabilities of the Bank, interest income and interest expense, and the corresponding yields earned and rates paid in 2012, 2011 and 2010. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. Interest income on loans does not include interest on loans for which the Bank has ceased to accrue interest. Securities are stated at fair value. Interest and yield are not presented on a tax-equivalent basis.

                                2012                            2011                            2010
                   Average               Yield/    Average               Yield/    Average               Yield/
                   Balance    Interest    Rate     Balance    Interest    Rate     Balance    Interest    Rate
                                                      (dollars in thousands)
Assets
Interest-earning
assets:
 Loans and leases,        $          $    5.23%           $          $    5.44%           $          $    5.68%
net                579,586     30,300              535,526     29,140              494,366     28,102
 Taxable            67,679      1,870     2.76%     62,269      2,115     3.40%     50,149      1,740     3.47%
securities
 Tax-exempt         34,104      1,153     3.38%     37,201      1,434     3.85%     39,330      1,566     3.98%
securities
 Federal funds      42,817         53     0.12%     16,395         26     0.16%      4,642          9     0.19%
sold

Total
interest-earning   724,186     33,376     4.61%    651,391     32,715     5.02%    588,487     31,417     5.34%
assets

Non
interest-earning
assets:
 Cash and due from  11,634                          14,223                          13,281
banks
 Premises and       10,748                          10,607                          10,054
equipment, net
 Other assets       36,009                          35,760                          35,059

     Total Assets         $                               $                               $
                   782,577                         711,981                         646,881

Liabilities & Stockholders' Equity

Interest-bearing
liabilities:
  NOW                     $       615     1.03%           $       548     1.23%           $       251     1.00%
                    59,811                          44,639                          24,981
  Regular savings  341,739      1,931     0.57%    280,606      2,019     0.72%    237,939      1,648     0.69%
deposits
  Muni-vest         24,937         79     0.32%     27,272        131     0.48%     30,005        145     0.48%
savings
  Time deposits    109,508      1,921     1.75%    131,171      2,923     2.23%    142,360      3,616     2.54%
  Other borrowed    20,161        681     3.38%     23,287        760     3.26%     31,721        909     2.87%
funds
  Junior
subordinated
   debentures       11,331        348     3.07%     11,330        331     2.92%     11,330        333     2.94%
  Securities sold
under
   agreement to     10,009         22     0.22%      6,679         15     0.22%      7,531         20     0.27%
repurchase

Total
interest-bearing   577,496      5,597     0.97%    524,984      6,727     1.28%    485,867      6,922     1.42%
liabilities

Non
interest-bearing
liabilities:
 Demand deposits   119,805                         108,522                          92,072
 Other              12,381                          11,829                          11,006

Total liabilities  709,682                         645,335                         588,945

Stockholders'       72,895                          66,646                          57,936
equity

  Total                   $                               $                               $
Liabilities &      782,577                         711,981                         646,881
Equity

Net interest                         $                               $                               $
income                         27,779                          25,988                          24,495

Net interest                              3.84%                           3.99%                           4.16%
margin

Interest rate                             3.64%                           3.74%                           3.92%
spread