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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to_____________.
Commission file number 0-18539
EVANS BANCORP, INC .
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-1332767
------------------------------- ----------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14-16 North Main Street, Angola, New York 14006
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(716) 549-1000 .
--------------------------
(Issuer's telephone number)
Not applicable .
-------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the exchange Act) Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Common Stock, $.50 Par Value--2,342,780 shares as of June 30, 2003
INDEX
EVANS BANCORP, INC. AND SUBSIDIARY
PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets-June 30, 2003 and
December 31, 2002 1
Consolidated Statements of Income-Three months
ended June 30, 2003 and 2002 2
Consolidated Statements of Income-Six months
ended June 30,2003 and 2002 3
Consolidated Statements of Stockholders' Equity-Six months
ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows-Six months
ended June 30, 2003 and 2002 5-6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings
Item 2. Changes In Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 22
PART I - FINANCIAL INFORMATION PAGE 1
ITEM I - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(Unaudited)
June 30, December 31,
2003 2002
ASSETS ------------ ------------
Cash and due from banks $ 15,820,834 $ 11,308,727
Federal funds sold - 8,450,000
------------ ------------
Total cash and cash equivalents 15,820,834 19,758,727
Interest bearing accounts in other banks 877,230 877,230
Securities:
Available-for-sale, at fair value 124,354,854 103,031,200
Held-to-maturity, at amortized cost 4,050,229 3,640,714
Loans, net of allowance for loan losses of $2,381,507 in 2003
and $2,145,606 in 2002 167,246,246 148,997,646
Properties and equipment, net 5,381,067 5,348,994
Goodwill 2,944,913 2,944,913
Intangible assets 880,551 787,115
Bank-owned life insurance 6,317,000 662,733
Other assets 4,020,235 2,661,588
------------ ------------
TOTAL ASSETS $331,893,159 $288,710,860
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABIILITIES
Deposits:
Demand $ 52,037,502 $ 44,664,537
NOW and money market accounts 10,778,544 10,535,456
Regular savings 108,075,771 94,907,508
Time deposits, $100,000 and over 33,784,611 28,440,994
Other time accounts 68,920,444 60,958,340
------------ ------------
Total deposits 273,596,872 239,506,835
Other borrowed funds 14,908,054 8,110,964
Securities sold under agreements to repurchase 6,452,618 6,543,456
Other liabilities 4,188,634 3,687,604
------------ ------------
Total liabilities 299,146,178 257,848,859
------------ ------------
CONTINGENT LIABILITIES AND COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 10,000,000 shares authorized;
2,342,780 shares issued, and 2,334,162 in 2002 1,171,390 1,167,081
Capital surplus 16,789,986 16,578,868
Retained earnings 12,507,366 11,179,871
Accumulated other comprehensive income 2,278,239 1,942,295
------------ ------------
32,746,981 30,868,115
Less: Treasury stock - (6,114)
------------ ------------
Total stockholders' equity 32,746,981 30,862,001
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $331,893,159 $288,710,860
============ ============
See Notes to Consolidated Statements
PART I - FINANCIAL INFORMATION PAGE 2
ITEM I - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended June 30, 2003 and 2002
(Unaudited)
Three Months Ended
June 30,
2003 2002
---------- ----------
INTEREST INCOME
Loans $2,678,213 $2,677,586
Federal funds sold & interest on deposits in other banks 14,538 11,777
Securities:
Taxable 604,223 719,622
Non-taxable 580,550 494,334
---------- ----------
Total Interest Income 3,877,524 3,903,319
INTEREST EXPENSE
Interest on deposits 1,027,960 1,137,350
Interest on borrowings 171,678 138,317
---------- ----------
Total Interest Expense 1,199,638 1,275,667
NET INTEREST INCOME 2,677,886 2,627,652
PROVISION FOR LOAN LOSSES 120,000 105,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,557,886 2,522,652
NON-INTEREST INCOME:
Service charges 451,944 283,350
Insurance service and fees 858,925 714,606
Commission fees 71,132 59,741
Net (loss) gain on sales of securities (36,967) 101,067
Premium on loans sold 26,389 8,695
Other 450,694 129,489
---------- ----------
Total non-interest income 1,822,117 1,296,948
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,599,531 1,346,788
Occupancy 342,450 318,005
Supplies 84,182 59,187
Repairs and maintenance 96,277 99,607
Advertising and public relations 70,645 46,147
Professional services 188,144 119,908
FDIC assessments 9,545 8,655
Other insurance 61,425 75,614
Other 620,485 501,603
---------- ----------
Total non-interest expense 3,072,684 2,575,514
---------- ----------
Income before income taxes 1,307,319 1,244,086
INCOME TAXES 295,163 317,000
---------- ----------
NET INCOME $1,012,156 $927,086
========== ==========
NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $0.43 $0.40
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,342,787 2,324,642
========== ==========
*Adjusted for 5% stock dividend paid January 29, 2003
See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 3
ITEM I - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months ended June 30, 2003 and 2002
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ----------
INTEREST INCOME
Loans $5,318,254 $5,427,750
Federal funds sold & interest on deposits in other banks
Securities: 62,652 40,182
Taxable 1,176,679 1,423,963
Non-taxable 1,141,117 955,467
---------- ----------
Total Interest Income 7,698,702 7,847,362
INTEREST EXPENSE
Interest on deposits 2,041,221 2,314,868
Interest on borrowings 293,177 287,658
---------- ----------
Total Interest Expense 2,334,398 2,602,526
NET INTEREST INCOME 5,364,304 5,244,836
PROVISION FOR LOAN LOSSES 240,000 210,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,124,304 5,034,836
NON-INTEREST INCOME:
Service charges 901,701 556,733
Insurance service and fees 1,900,235 1,506,409
Commission fees 111,284 94,664
Net gain on sales of securities 211,998 111,302
Premium on loans sold 45,853 21,241
Other 788,610 360,566
---------- ----------
Total non-interest income 3,959,681 2,650,915
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,285,897 2,691,325
Occupancy 747,010 637,740
Supplies 167,985 109,520
Repairs and maintenance 215,007 206,147
Advertising and public relations 147,035 95,952
Professional services 455,262 279,237
FDIC assessments 18,445 17,225
Other insurance 129,280 137,940
Other 1,217,140 1,013,228
---------- ----------
Total non-interest expense 6,383,061 5,188,314
---------- ----------
Income before income taxes 2,700,924 2,497,437
INCOME TAXES 614,947 691,000
---------- ----------
NET INCOME $2,085,977 $1,806,437
========== ==========
NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $ 0.89 $ 0.78
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,338,353 2,320,717
========== ==========
*Adjusted for 5 percent stock dividend paid January 29, 2003
See notes to Consolidated Financial Statements
PAGE 4
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME ( LOSS) STOCK TOTAL
Balance, January 1, 2002 $1,103,234 $13,727,084 $11,464,273 $ 666,178 $ - $ 26,960,769
Comprehensive income:
2002 net income 1,806,437 1,806,437
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $506,753 783,352 783,352
-------------
Total comprehensive income 2,589,789
-------------
Cash dividends ($.28 per common share) (617,799) (617,799)
Issued 8,974 shares under dividend reinvestment
plan 4,487 158,481 - - - 162,968
---------- ----------- ----------- -------------- -------- -------------
Balance, June 30, 2002 $1,107,721 $13,885,565 $12,652,911 $ 1,449,530 $ - $ 29,095,727
========== =========== =========== ============== ======== =============
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME ( LOSS) STOCK TOTAL
Balance, January 1, 2003 $1,167,081 $16,578,868 $11,179,871 $ 1,942,295 $ (6,114) $ 30,862,001
Comprehensive income:
2003 net income 2,085,977 2,085,977
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $214,331 335,944 335,944
-------------
Total comprehensive income 2,421,921
-------------
Cash dividends ($.32 per common share) (746,838) (746,838)
Issued 8,618 shares under dividend
reinvestment plan 4,309 185,443 189,752
Reissued 300 shares treasury stock
under dividend reinvestment plan 494 6,114 6,608
Stock options expense 25,675 25,675
Fractional shares paid in cash on stock dividend - - (12,138) - - (12,138)
---------- ----------- ----------- -------------- -------- -------------
Balance, June 30, 2003 $1,171,390 $16,789,986 $12,507,366 $ 2,278,239 $ - $ 32,746,981
========== =========== =========== ============== ======== =============
See Notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 5
ITEM I - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------- -------------
OPERATING ACTIVITIES
Interest received $ 7,966,079 $ 7,931,801
Fees and commissions received 3,600,942 2,437,606
Interest paid (2,288,454) (2,636,958)
Cash paid to suppliers and employees (6,497,299) (4,931,754)
Income taxes paid (632,600) (748,800)
------------- -------------
Net cash provided by operating activities 2,148,668 2,051,895
INVESTING ACTIVITIES
Available for sale securities
Purchases (65,344,294) (27,334,287)
Proceeds from sales 14,992,146 8,450,326
Proceeds from maturities 29,419,166 13,412,319
Held to maturity securities
Purchases (2,009,024) (1,485,816)
Proceeds from maturities 1,479,058 972,820
Cash paid for bank owned life insurance (6,200,000) 0
Additions to properties and equipment (166,604) (639,747)
Increase in loans, net of repayments (21,162,906) (9,954,923)
Proceeds from sales of loans 2,792,722 4,623,681
Proceeds from sales of other real estate owned 0 71,620
Acquisition of insurance agencies (179,997) (50,000)
------------- -------------
Net cash used in investing activities (46,379,733) (11,934,007)
FINANCING ACTIVITIES
Increase in deposits 34,149,538 13,695,590
Proceeds (repayments) of borrowings 6,706,250 (1,683,089)
Dividends paid, net (562,616) (454,831)
------------- -------------
Net cash provided by financing activities 40,293,172 11,557,670
------------- -------------
Net (decrease) increase in cash and cash
equivalents (3,937,893) 1,675,558
Cash and cash equivalents, beginning of period 19,758,727 10,694,087
------------- -------------
Cash and cash equivalents, end of period 15,820,834 12,369,645
============= =============
See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 6
ITEM I - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------- -------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 2,085,977 $ 1,806,437
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 773,966 468,746
Provision for loan losses 240,000 210,000
Gain on sale of assets (257,851) (70,752)
Stock options expensed 25,675 -
Decrease (increase) in accrued interest payable 45,943 (34,432)
Increase in accrued interest receivable (296,512) (1,800)
Increase (decrease) in other liabilities 210,873 (302,199)
Decrease in other assets (679,403) (24,105)
------------- -------------
Total adjustments 62,691 245,458
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 2,148,668 $ 2,051,895
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENTS AND
FINANCIAL ACTIVITIES
Acquisition of insurance agencies
debt incurred $ 202,000 $ 457,800
See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
1. GENERAL
The accounting and reporting policies followed by Evans Bancorp, Inc.,
(the "Company") a bank holding company, and its wholly-owned
subsidiary, Evans National Bank, (the "Bank") and the Bank's
wholly-owned subsidiaries, ENB Associates Inc., ("ENB"), M&W Agency,
Inc., ("M&W") and Evans National Holding Corp ("ENHC") in the
preparation of the accompanying interim financial statements conform
with accounting principles generally accepted in the United States of
America and with general practice within the banking industry.
The accompanying consolidated financial statements are unaudited. In
the opinion of management, all adjustments necessary for a fair
presentation of financial position and results of operations for the
interim periods have been made. Such adjustments are of a normal
recurring nature.
The results of operations for the six month period ended June 30, 2003
are not necessarily indicative of the results to be expected for the
full year.
2. SECURITIES
Securities which the Company has the positive ability and intent to
hold to maturity are stated at amortized cost. Securities which the
Company has identified as available for sale are stated at fair value
with changes in fair value included as a component of stockholders'
equity.
3. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses. Recoveries on loans previously charged off are credited
directly to the allowance for loan losses. The allowance is an amount
that management believes is adequate to absorb estimated losses on
existing loans. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan-loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrowers' ability to repay, estimated value of any underlying
collateral, and current economic conditions.
In addition, various regulatory agencies, as part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgments of information available to them at the time
of their examination.
Management's allowance for loan losses reflects its current assessment
of the New York State and local economy. Both have historically lagged
behind the national economy, which is now unsettled. Marginal job
growth, in conjunction with a declining population base, has left the
Bank's market increasingly susceptible to potential credit problems.
This is particularly true of commercial lending, which is a segment of
significant past growth as well as a concentration in the Company's
commercial real estate portfolio. Commercial real estate values may be
susceptible to decline in an adverse economy. Management believes that
the reserve is also in accordance with regulations promulgated by the
Office of the Comptroller of the Currency (OCC), and is reflective of
management's assessment of the local environment as well as a continued
growth trend in commercial loans.
The following table sets forth information regarding the allowance for
loan losses for the six month period ended June 30, 2003 and 2002.
ALLOWANCE FOR LOAN LOSSES
Six Months Ended June 30,
2003 2002
---- ----
Beginning balance, January 1 $2,145,606 $1,786,115
Total charge offs (4,930) (20,623)
Total recoveries 831 7,568
---------- ----------
Net charge offs (4,099) (13,055)
Provision for loan losses 240,000 210,000
---------- ----------
Ending balance, June 30 $2,381,507 $1,983,060
========== ==========
4. REVENUE RECOGNITION
The Bank's primary sources of revenue are interest income from loans
and investments and service charge income from loans and deposits. The
revenue is recognized in the period in which it is earned. M&W's
revenue is derived mainly from insurance commissions. The revenue is
recognized on the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America.
5. 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. Basic earnings per share
and diluted earnings per share are the same. The Company's potential
dilutive securities to issue common stock or convert to common stock
are antidilutive at June 30, 2003.
6. DIVIDEND
A cash dividend of $0.32 per share was paid on April 1, 2003 to
shareholders of record as of March 11, 2003. A total of $746,838 was
paid on 2,333,869 shares.
7. STOCK DIVIDEND
A five percent stock dividend was paid on January 29, 2003, for
shareholders of record as of December 2, 2002. The stock dividend
resulted in the issuance of 110,589 shares of common stock. All share
and per share amounts have been restated to reflect the issuance of the
stock dividend.
8. COMMON STOCK
During the quarter ended June 30, 2003, the Company issued 8,618 shares
of common stock. These shares were issued to shareholders on April 1,
2003 who elected to receive shares in lieu of cash in the Company's
dividend reinvestment plan.
9. TREASURY STOCK
During the quarter ended June 30, 2003 the Company reissued 300 shares
from Treasury Stock. These shares were reissued to shareholders on
April 1, 2003 who elected to receive shares in lieu of cash in the
Company's dividend reinvestment plan.
10. BANK-OWNED LIFE INSURANCE
During the first quarter of 2003, the Bank purchased $6.2 million of
additional insurance on the lives of certain officers and directors.
The policies accumulate asset value to meet future liabilities
including the payment of certain employee retirement benefits.
Effective April 1, 2003 the Company implemented a non-qualified
deferred compensation plan whereby certain directors and officers may
defer a portion of their base pre-tax compensation. Effective April 1,
2003 , the Company implemented a non-qualified executive incentive
retirement plan, whereby the Company will defer on behalf of certain
officers a portion of their base compensation as well as an incentive
based upon Company performance, until retirement or termination of
service, subject to certain vesting arrangements. Also, effective April
1, 2003, the Company implemented a group term replacement plan for life
insurance benefit which includes an endorsement split-dollar benefit to
directors and certain officers. Costs pertaining to such plans are
recorded in the Statements of Income. The amount of bank owned life
insurance is included in other assets on the balance sheet and the
increase in the cash surrender value is recorded as other income in the
statements of income.
11. OTHER BORROWED FUNDS
The Company borrowed an additional $7.0 million from the Federal Home
Loan Bank ("FHLB") during the first quarter 2003 to fund a leverage
strategy which included the purchase of certain mortgage backed and
agency securities. The borrowing is a 10 year repurchase advance at an
interest rate of 3.39%. The debt is callable by the FHLB if LIBOR
("London Inter-Bank Offer Rate") is 7.5% or more after February 2005.
The debt is collateralized at the Federal Home Loan Bank by the
purchased securities.
12. SEGMENT INFORMATION
Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures about Segments of an Enterprise and Related Information was
adopted by the Company during 2000. This Statement establishes
standards for the way that the Company reports information about its
operating segments. The Company is comprised of two primary business
segments, banking and insurance. The following table sets forth
information regarding these segments for the three and six month
periods ended June 30, 2003 and 2002.
Three Months Ended
June 30, 2003
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $2,683,911 $ (6,025) $2,677,886
Provision for loan losses 120,000 0 120,000
---------- --------- ----------
Net interest income (expense) after
provision for loan losses 2,563,911 (6,025) 2,577,886
Non-interest income 963,192 0 963,192
Insurance commissions and fees 0 858,925 858,925
Non-interest expense 2,428,217 644,467 3,072,684
---------- --------- ----------
Income before income taxes 1,098,886 208,433 1,307,319
Income taxes 212,220 82,943 295,163
---------- --------- ----------
Net income $ 886,666 $ 125,490 $1,012,156
========== ========= ==========
Six Months Ended
June 30, 2003
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $5,376,890 ($ 12,586) $5,364,304
Provision for loan losses 240,000 0 240,000
---------- ----------- ----------
Net interest income (expense) after
provision for loan losses 5,136,890 (12,586) 5,124,304
Non-interest income 2,059,446 0 2,059,446
Insurance commissions and fees 0 1,900,235 1,900,235
Non-interest expense 5,003,607 1,379,454 6,383,061
---------- ----------- ----------
Income before income taxes 2,192,729 508,195 2,700,924
Income taxes 412,086 202,861 614,947
---------- ----------- ----------
Net income $1,780,643 $ 305,334 $2,085,977
========== =========== ==========
Three Months Ended
June 30, 2002
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $2,632,933 $ (5,281) $2,627,652
Provision for loan losses 105,000 0 105,000
---------- ---------- ----------
Net interest income (expense) after
provision for loan losses 2,527,933 (5,281) 2,522,652
Non-interest income 582,342 0 582,342
Insurance commissions and fees 0 714,606 714,606
Non-interest expense 2,088,220 487,294 2,575,514
---------- ---------- ----------
Income before income taxes 1,022,055 222,031 1,244,086
Income taxes 229,000 88,000 317,000
---------- ---------- ----------
Net income $ 793,055 $ 134,031 $ 927,086
========== ========== ==========
Six Months Ended
June 30, 2002
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $5,255,812 $ (10,976) $5,244,836
Provision for loan losses 210,000 0 210,000
---------- ---------- ----------
Net interest income (expense) after
provision for loan losses 5,045,812 (10,976) 5,034,836
Non-interest income 1,144,506 0 1,144,506
Insurance commissions and fees 0 1,506,409 1,506,409
Non-interest expense 4,178,823 1,009,491 5,188,314
---------- ---------- ----------
Income before income taxes 2,011,495 485,942 2,497,437
Income taxes 497,457 193,543 691,000
---------- ---------- ----------
Net income $1,514,038 $ 292,399 $1,806,437
========== ========== ==========
13. CONTINGENT LIABILITIES AND COMMITMENTS
The 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 are commitments to extend credit and standby letters of
credit. A summary of the Bank's commitments and contingent liabilities
at June 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Commitments to extend credit $51,495,000 $34,040,000
Standby letters of credit 2,421,000 1,547,000
----------- -----------
Total $53,916,000 $ 35,587,00
=========== ===========
Commitments to extend credit and standby letters of credit include
exposure to some 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 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 to the Bank. The Bank has not
incurred any losses on its commitments during the past three years.
Certain lending commitments for conforming residential mortgage loans
to be sold into the secondary market are considered derivative
instruments under the guidelines of SFAS No. 133. The changes in the
fair value of these commitments due to interest rate risk are not
recorded on the balance sheet as these derivatives are not considered
material.
The Company and its subsidiary, M&W Agency, Inc., lease certain
offices, land, and equipment under long-term operating leases. The
aggregate minimum annual rental commitments under these leases total
approximately $146,000 in 2003, $265,000 in 2004, $175,000 in 2005,
$173,000 in 2006, $179,000 in 2007, and $1,727,000 thereafter.
The Company is subject to possible litigation proceedings in the normal
course of business. As of June 30, 2003, the Company had no asserted
claims pending against the Company that management considers to be
significant.
14 STOCK OPTIONS
The first of the Company's stock options were awarded during the
quarter ended June 30, 2003 under the Company's Stock Option and
Long-Term Incentive Plan (the "Plan"). The Board of Directors were
awarded 11,000 options on the date of the annual meeting, April 22,
2003. The options have a six month vesting period and have an exercise
price of $22.92, which was the fair market value of the Company's stock
on April 22, 2003, as determined by the closing trade price of such
stock on the NASDAQ National Market at the date of grant.
The Company accounts for the stock options under the fair value
recognition provisions of Standard of Financial Accounting Statement
("SFAS") 123, "Accounting for Stock-Based Compensation". For the
quarter ended June 30, 2003 the Company recognized approximately
$25,000 of stock based compensation.
15. RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial
statements to conform with the presentation used in 2003.
16. REGULATORY LEGISLATION
Sarbanes-Oxley Act. On July 30, 2002, the Sarbanes-Oxley Act for 2002
("SOA") was signed into law. The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties
for accounting and auditing improprieties at publicly traded companies
and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws.
The SOA includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of
certain issues by the SEC and the Comptroller General. The SOA
represents significant federal involvement in matters traditionally
left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a
board of directors and its committees.
The SOA addresses, among other matters: audit committees; certification
of financial statements by the Chief Executive Officer and the Chief
Financial Officer; the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer's securities by
directors and senior officers in the twelve month period following
initial publication of any financial statements that later require
restatement; a prohibition on insider trading during pension plan black
out periods; disclosure of off-balance sheet transactions; a
prohibition on certain loans to directors and officers; expedited
filing requirements for Forms 4; disclosure of a code of ethics and
filing a Form 8-K for a change or waiver of such code; "real time"
filing of periodic reports; the formation of a public accounting
oversight board; auditor independence; and various increased criminal
penalties for violations of securities laws.
The SOA contains provisions that became effective upon enactment, and
provisions that will become effective from within 30 days to one year
from enactment. The SEC has been delegated the task of enacting rules
to implement various provisions with respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.
PART I - FINANCIAL INFORMATION
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 1993, 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", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Company or the Company's management and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report and other reports filed by the
Company with the Securities and Exchange Commission. Many of these factors are
beyond the Company's control. 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 results of operations are dependent primarily on net
interest income, which is the difference between the income earned on loans and
securities and the Company's cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for loan losses, investment activities, loan origination, insurance
service and fees, loan sale and servicing activities, service charges and fees
collected on deposit accounts. Noninterest expense primarily consists of
salaries and employee benefits, occupancy and equipment expense and technology
and communication expenses.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The Company's consolidated financial statements, are prepared in
accordance with accounting principles generally accepted in the United States of
America and follow general practices within the industries in which it operates.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements.
Accordingly, as this information changes, the 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 consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes and
in this financial review, provide information on how significant assets and
liabilities are valued in 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 losses and valuation of goodwill to be the accounting areas that require
the most subjective or complex judgements and as such could be most subject to
revision as new information becomes available.
The allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio. Determining the amount of
the allowance for loan losses is considered a critical accounting estimate
because it requires significant judgement and the use of estimates related to
the amount and timing of expected future cash flows on the impaired loans,
estimated losses on pools of homogeneous loans 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 consolidated balance sheets.
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 on the identified
reporting unit is considered a critical accounting estimate because it requires
judgement and the use of estimates related to the growth assumptions and market
multiples used in the valuation model.
ANALYSIS OF FINANCIAL CONDITION
Average Balance Sheet
The following table presents the significant categories of the assets
and liabilities of the Company, interest income and interest expense, and the
corresponding yields earned and rates paid for the periods indicated. The assets
and liabilities are presented as daily averages. The average loan balances
include both performing and non-performing loans. Investments are included at
amortized cost. Interest and yields are presented on a tax-equivalent basis.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest-earning assets:
Loans, net $162,642 $2,678 6.59% $144,414 $2,677 7.41%
Taxable investments 82,014 604 2.96% 50,440 720 5.71%
Tax-exempt investments 52,893 883 6.67% 43,104 751 6.96%
Time Deposits-Other Bank 877 6 2.63% 0 0 0.00%
Federal funds sold 2,117 9 4.60% 3,538 12 1.36%
-------- ------ ---- -------- ------ ----
Total interest-earning assets 300,543 $4,180 5.56% 241,496 $4,160 6.89%
====== ======
Noninterest-earning assets
Cash and due from banks 8,390 8,306
Premises and equipment, net 5,404 4,361
Other assets 14,370 8,435
-------- --------
Total Assets $328,707 $262,598
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 10,600 $ 6 0.24% $ 9,973 $ 14 0.56%
Savings deposits 113,053 293 1.03% 70,228 201 1.14%
Time deposits 101,105 730 2.88% 94,415 923 3.91%
Fed funds purchased 1,035 4 1.93% 23 0 0.00%
Securities sold u/a to repurchase and other 5,240 13 1.01% 3,460 16 1.84%
FHLB advances 13,866 148 4.27% 9,008 117 5.19%
Notes payable 912 6 2.65% 486 5 4.11%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 245,811 $1,200 1.95% 187,593 $1,276 2.72%
------ ------
Noninterest-bearing liabilities:
Demand deposits 47,254 42,159
Other 4,014 4,631
-------- --------
Total liabilities 297,079 $234,383
Stockholders' equity 31,628 28,215
-------- --------
Total Liabilities and Stockholders' Equity $328,707 $262,598
======== ========
Net interest earnings $2,980 $2,884
====== ======
Net yield on interest earning assets 3.61% 4.17%
Total gross loans have grown to $169.6 million at June 30, 2003, reflecting a
5.9% or $9.5 million increase for the quarter. Total net loans (loans after
allowance for loan losses) have grown to $167.2 million at June 30, 2003,
reflecting a 5.9% or $9.3 million increase for the quarter. During the quarter,
the Bank has continued to shift its loan portfolio composition toward
higher-yielding commercial loans, especially those secured by real estate.
Commercial loans total $120.3 million at June 30, 2003, reflecting a 6.2% or
$7.0 million increase for the quarter. Consumer loans total $48.9 million at
June 30, 2003, reflecting a 5.1% or $2.4 million increase for the quarter. Given
the current low interest rate environment, the Bank continues to sell certain
fixed rate residential loans originated under a certain interest rate level,
while maintaining the servicing rights to such loans. During the second quarter
2003, the Bank sold loans to FNMA totaling $3.5 million as compared to $1.7
million during the second quarter 2002. At June 30, 2003, the Bank had a loan
servicing portfolio principal balance of $26.0 million upon which it earns a
servicing fee. This loan servicing portfolio balance compares to $24.0 million
at December 31, 2002.
Loan Portfolio Composition
The following table presents selected information on the composition of
the Company's loan portfolio in dollar amounts and in percentages as of the
dates indicated.
JUNE 30, 2003 PERCENTAGE DECEMBER 31, 2002 PERCENTAGE
($000) ($000)
Commercial Loans
Real Estate $ 96,924 57.3% $ 84,581 56.1%
Installment 13,545 8.0% 12,512 8.3%
Lines of Credit 9,755 5.8% 8,333 5.5%
Cash Reserve 50 0.0% 47 0.0%
-------- ----- -------- -----
Total Commercial Loans 120,274 71.1% 105,473 69.9%
Consumer Loans
Real Estate 21,281 12.5% 19,789 13.1%
Home Equity 24,991 14.8% 23,132 15.3%
Installment 1,929 1.1% 1,886 1.3%
Overdrafts 269 0.2% 104 0.1%
Credit Card 306 0.2% 298 0.2%
Other 123 0.1% 126 0.1%
-------- ----- -------- -----
Total Consumer Loans 48,899 28.9% 45,335 30.1%
-------- ----- -------- -----
Total Loans 169,173 100.0% 150,808 100.0%
======== ===== ======== =====
Net Deferred Costs &
Allowance for Loan Losses (2,382) (2,146)
-------- --------
Loans, Net $167,246 $148,998
======== ========
Loan quality has remained stable with $4 thousand in net charge offs
incurred during the second quarter ended June 30, 2003. Non-performing loans,
defined as accruing loans greater than 90 days past due and non-accrual loans,
totaled 0.07% of total loans outstanding at June 30, 2003 as compared to 0.79%
at December 31, 2002. The decrease in non-accrual loans was due to the
refinancing with a new borrower of one large commercial loan with a principal
balance at December 31, 2002 of $853,253. At June 30, 2003, the same loan, with
an outstanding principal balance of $682,044, was considered impaired and has a
reserve of $326,000. No loans were considered impaired at December 31, 2002. The
allowance for loan losses totaled $2.4 million or 1.40% of gross loans
outstanding at June 30, 2003 as compared to $2.1 million or 1.42% of gross loans
outstanding at December 31, 2002.
The adequacy of the Company's allowance for loan losses is reviewed
quarterly with consideration given to loan concentrations, charge-off history,
delinquent loan percentages, and general economic conditions. Management
believes the allowance for loan losses is adequate to absorb credit losses from
existing loans.
The following table sets forth information regarding non-performing loans.
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
($000) ($000)
Non-accruing loans:
One-to-four family $ 0 $ 0
Home equity 0 0
Commercial real estate and multi-family 70 1,104
Consumer 0 0
Commercial business 32 93
------ ------
Total 102 1,197
------ ------
Accruing loans 90+ days past due 25 0
------ ------
Total non-performing loans $ 127 $1,197
====== ======
Total non-performing loans as a percentage of
total assets 0.04% 0.41%
====== ======
Total non-performing loans as a percentage of
total loans 0.07% 0.79%
====== ======
The following table sets forth information regarding the allowance for loan
losses for the six month period ended June 30, 2003 and 2002.
Six Months Ended June 30,
2003 2002
---- ----
Beginning balance, January 1 $ 2,145,606 $ 1,786,115
Total charge offs (4,930) (20,623)
Total recoveries 831 7,568
----------- -----------
Net charge offs (4,099) (13,055)
Provision for loan losses 240,000 210,000
----------- -----------
Ending balance, June 30 $ 2,381,507 $ 1,983,060
=========== ===========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Balance at Balance at
06/30/03 12/31/02
Attributable to: Attributable to:
---------------- ----------------
($000) ($000)
Real Estate Loans $1,376 $ 844
Commercial Loans and Leases 358 259
Installment Loans (Includes Credit Cards) 129 72
Unallocated 519 971
------ ------
Total allowance for loan losses $2,382 $2,146
====== ======
Investing Activities
The Company's securities portfolio decreased by 8.1% to approximately
$128.4 million at June 30, 2003 as compared to approximately $139.7 million at
March 31, 2003. The Company used investment maturities and pay-downs of
principal in the second quarter as funding for the approximate growth of $9.5
million in loans. The growth in the securities portfolio of 20.4% for the six
months ended June 30, 2003 was due in part to the Company's utilization of an
advance from Federal Home Loan Bank of New York to fund an investment leverage
strategy. Additionally, the success of attracting municipal deposits, with
Muni-Vest, has increased the excess funds available for investment and not used
for lending. Muni-Vest is a product which pays higher money-market equivalent
rates of return to municipalities and school districts in markets where the Bank
operates. Available funds continue to be invested in US government and agency
securities and tax-advantaged bonds issued by New York State municipalities and
school districts. Available-for-sale securities with a total fair value of $70.4
million at June 30, 2003 were pledged as collateral to secure public deposits
and for other purposes required or permitted by law.
Funding Activities
Total deposits during the quarter decreased 0.9% to $273.6 million at
June 30, 2003 from $276.0 million at March 31, 2003. Year to date total deposits
have increased 14.2% from $239.5 million at December 31, 2002. Regular savings
deposits decreased to $108.1 million at June 30, 2003, reflecting a 9.7% or
$11.6 million decrease for the quarter, due to payment of expenses by tax
deposits from municipals. Primarily due to the Bank's success in retaining these
municipal deposits with a revamped money market product called Muni-Vest, the
year to date savings deposits have increased $13.2 million from $94.9 million at
December 31, 2002. Additionally, the decrease for the quarter in savings
deposits was partially offset by an increase in demand deposits of 11.0% to
$52.0 million at June 30,2003. Core deposits (all deposits excluding time
deposits greater than $100,000) decreased to $239.8 million, reflecting a 1.5%
or $3.6 million decrease for the quarter. Demand deposits increased 16.5%, Now
accounts increased 2.3%, and securities sold under agreement to repurchase
decreased 1.4% from December 31, 2002 all of which vary day to day within a
range based on customer transaction volume and represent normal deposit
activity.
Other Balance Sheet Changes
$6.2 million of bank owned life insurance was purchased during the
first quarter 2003. The life insurance contracts (naming the Bank as primary
beneficiary) were established to indirectly fund various employee benefit plans
which were established in the second quarter of 2003.
Other borrowed funds increased $6.8 million at June 30, 2003 from $8.1
million at December 31, 2002. The increase is attributed to a $7 million
borrowing from FHLB as described above under Investing Activities. The borrowing
is a 10 year callable product with an interest rate of 3.39%.
ANALYSIS OF RESULTS OF OPERATIONS
Net Income
Net income was $1.0 million or $0.43 per share for the quarter ended
June 30, 2003 as compared to $0.9 million or $0.40 per share for the quarter
ended June 30, 2002. Year-to-date in 2003, the Company has recorded net income
of $2.1 million or $0.89 per share as compared to $1.8 million or $0.78 per
share for the same period in 2002. All per share amounts reflect the special 5
percent stock dividend paid on January 29, 2003. Net income represented a return
on average assets of 1.23% for the quarter ended June 30, 2003 compared to 1.41%
for the same period in 2002. The return on average equity for the second quarter
of 2003 was 13.63% compared to 13.66% for the second quarter of 2002.
Other Operating Results
Net interest income increased $50.0 thousand, or 1.9%, for the quarter
ended June 30, 2003 compared to the same time period in 2002. Total interest
income in the second quarter 2003 decreased 0.7% and interest paid on deposits
and borrowings decreased 6.0% from the second quarter of 2002. Interest income
decreased in spite of the $59.0 million, or 24.5% increase in average
interest-earning assets to $300.5 million for the second quarter of 2003 from
$241.5 million for the second quarter of 2002, due mainly to deposit growth in
the Muni-Vest product and good growth in demand deposit accounts. The tax
equivalent yield on total interest earning assets decreased to 5.56% for the
quarter ended June 30, 2003 from 6.89% for the quarter ended June 30, 2002. The
interest expense decrease reflects the $58.2 million, or 31.0% increase in
average interest-bearing liabilities to $245.8 million for the second quarter of
2003 from $187.6 million for the second quarter of 2002 as well as the
offsetting effect of interest rate reductions made by the Company since March
31, 2002. The cost of interest-bearing liabilities decreased to 1.95% for the
quarter ended June 30, 2003 from 2.72% for the quarter ended June 30, 2002. The
Company's net interest margin on earning assets, for the three month period
ended June 30, 2003 was 3.97% as compared to 4.78% for the same time period in
2002. The decrease reflects investment and loan prepayments of the assets in the
portfolio with the continued historical low interest rate environment. These
prepayments are being invested in the lower environment. Additionally, a large
volume increase has been realized in this environment. The Company anticipates
that net interest margin will remain challenged in the near term future as a
result of the current low interest rate environment.
The yield on average loans decreased to 6.59% for the second quarter of
2003 from 7.41% for the same time period in 2002. The tax equivalent yield on
federal funds and investments decreased from 6.11% in the second quarter of 2002
to 4.36% in the second quarter of 2003. The cost of funds on interest bearing
balances decreased to 1.95% for the second quarter of 2003 from 2.72% for the
same time period in 2002.
The provision for loan losses has increased to $120 thousand for the
second quarter of 2003 from $105 thousand for the same time period in 2002. The
higher second quarter provision in 2003 was a result of continued commercial
loan growth. The Company believes that the increase in the size of the overall
loan portfolio as well as an increase in the commercial loan composition as a
percentage of the overall portfolio substantiates the current loan loss
provision. Commercial real estate loans tend to have a higher credit risk than
consumer loans.
The decrease in net interest margin is due primarily to two factors:
increased competition from both a loan and deposit pricing perspective and a
decrease in the potential to adjust deposit rates significantly lower as a
result of the historically low interest rate environment.
Non-interest income increased to $1.8 million for the second quarter
2003 as compared to $1.3 million for the second quarter 2002. Service charges
increased to $452 thousand in the second quarter 2003, a 59.5% or $169 thousand
increase over the second quarter 2002, due to a concentrated effort on
increasing fee income in late 2002 and early 2003 and the roll out of the Bank's
Safeguard Overdraft Service in early 2003. M&W Agency insurance commissions
increased to $859 thousand in the second quarter, a 20.1% or $144 thousand
increase over the second quarter 2002, partially due to the M&W acquisition of
the Gutekunst Agency on January 1, 2003 and Frontier Claims Services on December
31, 2003. Due to higher loan activity, the Bank realized additional income, of
approximately $87 thousand during the second quarter of 2003 on loan prepayment
charges, loan servicing charges and letter of credit fees. The Bank also
realized additional income on the increase in cash-surrender value of
approximately $78 thousand on bank-owned life insurance on key employees,
purchased in the first quarter of 2003. The Bank also realized $37 thousand in
losses on sales of securities during the second quarter 2003 as compared to $101
thousand in gains in the second quarter 2002. Other increases include fees on
the Bank's merchant credit card program and ATM fees.
Non interest expense increased by $0.5 million to $3.1 million for the
second quarter 2003 as compared to $2.6 million for the second quarter 2002. The
primary increase is salaries of $0.3 million which is a result of the Bank and
M&W Agency's growth over the past year, as well as normal merit increases.
Professional services have increased $0.1 million primarily as a result of fees
connected with a consulting engagement to increase fee income. Other expenses
have increased $0.1 million due to a number of items including costs associated
with the Bank's conversion to a new item processing data center environment,
which have resulted in increased capacity, capability and opportunity for future
efficiencies, as well as costs pertaining to the recent issuance of stock
options to the Company's Board of Directors. The Company has elected to expense
stock options under the provisions of SFAS No. 123.
Income tax expense totaled $295,163 and $317,000 for the three month
periods ended June 30, 2003 and 2002, respectively. The effective combined tax
rate for the second quarter of 2003 was 22.6% compared to 25.5% for the second
quarter of 2002. The
decrease in the effective tax rate is primarily attributable to state tax
advantages related to the recent establishment of Evans National Holding Corp,
the Bank's subsidiary real estate investment trust, and the tax benefit of the
Bank-owned life insurance increase in cash surrender value.
CAPITAL
The Bank has consistently maintained regulatory capital ratios at, or
above, "well capitalized" standards. Total stockholders' equity was $32.7
million at June 30, 2003, up from $31.0 million at March 31, 2003. Equity as a
percentage of assets was 9.87% at June 30, 2003, compared to 9.35% at March 31,
2003. Book value per common share rose to $13.97 at June 30, 2003, up from
$13.29 at March 31, 2003.
CAPITAL EXPENDITURES
The Bank has approved the construction and furnishing of a new branch
office in Lancaster, New York for 2003. The cost to the Bank is expected to be
approximately $0.8 million. Other planned expenditures include replacing a
number of personal computers, replacing/adding automated teller machines (ATMs)
and miscellaneous other equipment. The Bank believes it has a sufficient capital
base to support these capital expenditures with current assets and retained
earnings.
ITEM 3 - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS AND LIQUIDITY
INTEREST RATE RISK
The Company's asset/liability management strategy is to maximize
earnings and return on capital while limiting exposure to risks associated with
a volatile interest rate environment. The Company's exposure to interest rate
risk is managed primarily through the Company's strategy of selecting the type
and terms of interest earning assets and interest bearing liabilities that
generate favorable earnings, while limiting the potential negative effects of
changes in market interest rates.
Management uses income simulation models to quantify the potential
impact on earnings and capital with changes in interest rates. The model uses
cash flows and repricing information from loans and certificates of deposit,
plus repricing assumptions on products without specific repricing dates (e.g.
savings and interest bearing demand accounts), to calculate durations of each of
the Bank's assets and liabilities. In addition, the model uses management
assumptions on growth with duration to project income. The model also projects
the effect on income due to changes in interest rates as well as the value of
the Company's equity in each of the theoretical rate environments.
The Company maintains specific interest rate risk management policy
limits. Based on simulation modeling, these guidelines include a +/- 5.25% of
net interest income and a 6% of capital threshold on the value of the Company's
economic value of equity. At June 30, 2003, the effect of an immediate 200 basis
point increase in interest rate would increase the Company's annual net interest
income by 1.4%, or $ 0.2 million. A 200 basis point decrease in interest rate
would decrease annual net interest income by 3.7% or approximately $ 0.5
million.
LIQUIDITY
The Bank utilizes cash flows from the investment portfolio and federal
funds sold balances to manage the liquidity requirements it experiences due to
loan demand and deposit fluctuations. The Bank also has many borrowing options.
As a member of the Federal Home Loan Bank ("FHLB"), the Bank is able to borrow
funds at competitive rates. Advances of up to $13.1 million can be drawn on the
FHLB via the Overnight Line of Credit Agreement. An amount equal to 25% of the
Bank's total assets could be borrowed through the advance programs under certain
qualifying circumstances. The Bank also has the ability to purchase up to $7
million in federal funds from one of its correspondent banks. By placing
sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could
also borrow at the discount window. Additionally, the Bank has access to capital
markets as a funding source.
The cash flows from the investment portfolio are laddered, so that
securities mature at regular intervals, to provide funds from principal and
interest payments at various times as liquidity needs may arise. Contractual
maturities are also laddered, with consideration as to the volatility of market
prices, so that securities are available for sale from time-to-time without the
need to incur significant losses. At June 30, 2003, approximately 4.9% of the
Bank's securities had maturity dates of one year or less and approximately 19.6%
had maturity dates of five years or less. At June 30, 2003, the Bank had net
short-term liquidity of $20.5 million as compared to $36.9 million at December
31, 2002. Available assets of $121.8 million, less public and purchased funds of
$97.8 million, resulted in a long-term liquidity ratio of 125% at June 30, 2003,
versus 158% at December 31, 2002. The decrease is due to the large increase in
deposits over the six month period, which are considered volatile funds.
Liquidity needs can also be met by aggressively pursuing municipal
deposits, which are normally awarded on the basis of competitive bidding. The
Bank maintains a sufficient level of US government and government agency
securities and New York State municipal bonds that can be pledged as collateral
for these deposits.
MARKET RISK
When rates rise or fall, the market value of the Bank's rate-sensitive
assets and liabilities increases or decreases. As a part of the Bank's
asset/liability policy, the Bank has set limitations on the negative impact to
the market value of its balance sheet that would be acceptable. On a monthly
basis, the balance sheet is shocked for immediate rate increases of 100 and 200
basis points. At June 30, 2003, the Bank determined it would take an immediate
increase in rates in excess of 200 basis points to eliminate the current capital
cushion. The Bank's capital ratios are also reviewed on a quarterly basis.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls (As defined in Exchange Act
Rule 13a-14(c)) are sufficiently effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness,
accuracy and completeness, based on an evaluation of such controls and
procedures conducted within 90 days prior to the date hereof.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referred to above.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None to report
ITEM 2. Changes in Securities - None to report
ITEM 3. Defaults upon Senior Securities - None to report
ITEM 4. Submission of Matters To a Vote of Security Holders
The 2003 Annual Shareholders meeting of the Registrant was held on
April 22, 2003. At the meeting, LaVerne G. Hall, Robert G. Miller, Jr,
James Tilley, and John R. O'Brien were elected as directors for a term
of three years, and Nancy W Ware was elected as a director for a term
of two years. The following votes were cast for the nominees:
FOR
Nancy W Ware 1,527,085
LaVerne G Hall 1,530,661
Robert G Miller, Jr 1,530,661
John R. O'Brien 1,528,880
James Tilley 1,529,663
The following directors also continue their terms of office:
Robert W Allen
William F Barrett
James E Biddle Jr
Phillip Brothman
David M Taylor
Thomas H Waring, Jr
The proposed amendment to Evans Bancorp, Inc. 1999 Stock Option and
Long Term Incentive Plan was approved with 1,118,416 votes for, 124,160
votes cast against, 8,842 votes abstained, and 311,765 broker
non-votes.
The proposed Employee Stock Purchase Plan was approved with 1,165,105
votes for, 47,854 votes cast against, 38,459 votes abstained, and
311,765 broker non-votes.
ITEM 5. Other Information - None to report
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Name Page No.
31.1 Certification of James Tilley pursuant to Rule 13a-14(a) and 23
15d-14(a), as adopted pursuant to section 302 of The
Sarbanes-Oxley Act of 2002.
31.2 Certification of Mark DeBacker pursuant to Rule 13a-14(a) and 25
15d-14(a), as adopted pursuant to section 302 of The
Sarbanes-Oxley Act of 2002.
32.1 Certification of James Tilley pursuant to 18 USC Section 1350 27
Chapter 63 of Title 18, United States Code, as adopted pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002
32.2 Certification of Mark DeBacker pursuant to 18 USC Section 1350 29
Chapter 63 of Title 18, United States Code, as adopted pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K :
The registrant filed a Form 8-K on July 29, 2003 to report under
Item 7 and Item 12 a press release announcing second quarter earnings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
Evans Bancorp, Inc.
DATE
July 31, 2003 /s/ James Tilley
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James Tilley
President and CEO
DATE
July 31, 2003 /s/ Mark DeBacker
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Mark DeBacker
Treasurer