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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 September 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
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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--2,440,338 shares as of October 17, 2003
INDEX
EVANS BANCORP, INC. AND SUBSIDIARY
PAGE
----
PART 1. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets-September 30, 2003 and
December 31, 2002 1
Consolidated Statements of Income-Three months
ended September 30, 2003 and 2002 2
Consolidated Statements of Income-Nine months
ended September 30, 2003 and 2002 3
Consolidated Statements of Stockholders' Equity-Nine months
ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows-Nine months
ended September 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
September 30, 2003 and December 31, 2002
(Unaudited)
September 30, December 31,
ASSETS 2003 2002
---------------- -----------------
Cash and due from banks $10,020,937 $11,308,727
Federal funds sold - 8,450,000
---------------- -----------------
Total cash and cash equivalents 10,020,937 19,758,727
Interest bearing accounts in other banks 682,739 877,230
Securities:
Available-for-sale, at fair value 126,120,039 103,031,200
Held-to-maturity, at amortized cost 3,641,812 3,640,714
Loans, net of allowance for loan losses of $2,496,410 in 2003 175,275,062 148,997,646
and $2,145,606 in 2002
Properties and equipment, net 5,403,765 5,348,994
Goodwill 2,944,913 2,944,913
Intangible assets 830,185 787,115
Bank-owned life insurance 7,162,044 662,733
Other assets 3,550,315 2,661,588
---------------- -----------------
TOTAL ASSETS $335,631,811 $288,710,860
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $49,494,508 $44,664,537
NOW and money market accounts 11,071,519 10,535,456
Regular savings 111,693,220 94,907,508
Time deposits, $100,000 and over 32,149,756 28,440,994
Other time accounts 69,646,569 60,958,340
---------------- -----------------
Total deposits 274,055,572 239,506,835
Other borrowed funds 17,875,238 8,110,964
Securities sold under agreements to repurchase 6,993,385 6,543,456
Dividend Payable 787,607 -
Other liabilities 3,808,186 3,687,604
---------------- -----------------
Total liabilities 303,519,988 257,848,859
---------------- -----------------
CONTINGENT LIABILITIES AND COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 10,000,000 shares authorized;
2,432,309 shares outstanding in 2003, and 2,450,564 shares
outstanding in 2002 * 1,229,303 1,167,081
Capital surplus 19,318,671 16,578,868
Retained earnings 10,191,815 11,179,871
Accumulated other comprehensive income 1,947,651 1,942,295
---------------- -----------------
32,687,440 30,868,115
Less: Treasury stock (575,617) (6,114)
---------------- -----------------
Total stockholders' equity 32,111,823 30,862,001
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $335,631,811 $288,710,860
================ =================
*Adjusted for 5 percent stock dividend paid January 29, 2003 and
a 5 percent stock dividend declared September 16, 2003
See Notes to Consolidated Financial 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 September 30, 2003 and 2002
(Unaudited)
Three Months Ended
September 30,
2003 2002
------------------ ------------------
INTEREST INCOME
Loans $2,677,837 $2,689,269
Federal funds sold & interest on deposits in other banks 14,672 13,856
Securities:
Taxable 380,052 580,543
Non-taxable 572,930 510,743
------------------ ------------------
Total Interest Income 3,645,491 3,794,411
INTEREST EXPENSE
Interest on deposits 960,781 1,037,567
Interest on borrowings 165,586 130,600
------------------ ------------------
Total Interest Expense 1,126,367 1,168,167
NET INTEREST INCOME 2,519,124 2,626,244
PROVISION FOR LOAN LOSSES 120,000 105,000
------------------ ------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,399,124 2,521,244
NON-INTEREST INCOME:
Service charges 451,270 260,993
Insurance service and fees 897,005 737,126
Commission fees 56,285 88,402
Net gain on sales of securities 58,957 0
Premium on loans sold 56,455 13,019
Other 515,016 274,964
------------------ ------------------
Total non-interest income 2,034,988 1,374,504
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,741,669 1,412,706
Occupancy 348,600 325,057
Supplies 54,484 61,132
Repairs and maintenance 81,024 97,485
Advertising and public relations 56,207 49,523
Professional services 97,822 146,335
FDIC assessments 10,985 8,876
Other insurance 82,470 72,253
Other 658,715 495,471
------------------ ------------------
Total non-interest expense 3,131,976 2,668,838
------------------ ------------------
Income before income taxes 1,302,136 1,226,910
INCOME TAXES 292,953 292,189
------------------ ------------------
NET INCOME $1,009,183 $934,721
================== ==================
NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $0.41 $0.38
================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,452,318 2,436,691
================== ==================
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES* 2,452,921 2,436,691
================== ==================
*Adjusted for 5 percent stock dividend paid January 29, 2003 and
a 5 percent stock dividend declared September 16, 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 Nine Months ended September 30, 2003 and 2002
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------------ -------------------
INTEREST INCOME
Loans $7,996,091 $8,117,019
Federal funds sold & interest on deposits in other banks 77,324 54,037
Securities:
Taxable 1,556,731 2,004,507
Non-taxable 1,714,047 1,466,210
------------------ -------------------
Total Interest Income 11,344,193 11,641,773
INTEREST EXPENSE
Interest on deposits 3,002,002 3,352,435
Interest on borrowings 458,763 418,258
------------------ -------------------
Total Interest Expense 3,460,765 3,770,693
NET INTEREST INCOME 7,883,428 7,871,080
PROVISION FOR LOAN LOSSES 360,000 315,000
------------------ -------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,523,428 7,556,080
NON-INTEREST INCOME:
Service charges 1,352,971 817,726
Insurance service and fees 2,797,240 2,243,535
Commission fees 167,569 183,066
Net gain on sales of securities 270,955 111,302
Premium on loans sold 102,308 34,260
Other 1,303,626 635,530
------------------ -------------------
Total non-interest income 5,994,669 4,025,419
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,027,566 4,104,031
Occupancy 1,095,610 962,797
Supplies 222,469 170,652
Repairs and maintenance 296,031 303,632
Advertising and public relations 203,242 145,475
Professional services 553,084 425,572
FDIC assessments 29,430 26,101
Other insurance 211,750 210,193
Other 1,875,855 1,508,699
------------------ -------------------
Total non-interest expense 9,515,037 7,857,152
------------------ -------------------
Income before income taxes 4,003,060 3,724,347
INCOME TAXES 907,900 983,189
------------------ -------------------
NET INCOME $3,095,160 $2,741,158
================== ===================
NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $1.26 $1.13
================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,454,276 2,433,048
================== ===================
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES* 2,452,621 2,433,048
================== ===================
*Adjusted for 5 percent stock dividend paid January 29, 2003 and
a 5 percent stock dividend declared September 16, 2003
See notes to Consolidated Financial Statements
PAGE 4
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME 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 2,741,158 2,741,158
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $506,753 1,700,146 1,700,146
-----------
Total comprehensive income 4,441,304
-----------
Cash dividends ($.54 per
common share) (1,304,585) (1,304,585)
Purchase of 880 shares for treasury (16,748) (16,748)
Issued 9,871 shares under dividend
reinvestment plan 4,487 158,481 - - - 162,968
---------- ----------- ----------- ---------- --------- ------------
Balance, September 30, 2002 $ 1,107,721 $ 13,885,565 $ 12,900,846 $ 2,366,324 $ (16,748) $ 30,243,708
========== =========== =========== ========== ========= ============\
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME 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 3,095,160 3,095,160
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $3,415 5,356 5,356
----------
Total comprehensive income 3,100,516
----------
Cash dividends ($.63 per common share) (1,534,447) (1,534,447)
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 75,148 75,148
Fractional shares paid in cash on stock dividend - - (12,138) - - (12,138)
Purchased 26,295 shares for treasury (575,617) (575,617)
5 percent stock dividend-issued 115,824 shares 57,913 2,479,212 (2,537,125) - - -
--------- ----------- ------------ ---------- --------- -----------
Balance, September 30, 2003 $ 1,229,303 $ 19,318,671 $ 10,191,815 $ 1,947,651 $ (575,617) $ 32,111,823
========= =========== ============ ========== ========= ===========
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 Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------------ -------------------
OPERATING ACTIVITIES
Interest received $11,541,985 $11,620,469
Fees and commissions received 5,466,099 3,833,511
Interest paid (3,497,491) (3,946,881)
Cash paid to suppliers and employees (9,581,081) (7,537,471)
Income taxes paid (910,490) (1,107,877)
------------------ -------------------
Net cash provided by operating activities 3,019,022 2,861,751
INVESTING ACTIVITIES
Available for sale securities
Purchases (99,676,891) (42,210,419)
Proceeds from sales 26,063,631 8,463,344
Proceeds from maturities 50,527,362 29,512,656
Held to maturity securities
Purchases (2,768,262) (2,076,777)
Proceeds from maturities 2,640,264 1,532,038
Cash paid for bank owned life insurance (6,200,000) 0
Additions to properties and equipment (350,724) (1,206,352)
Increase in loans, net of repayments (39,535,646) (13,875,915)
Proceeds from sales of loans 13,039,250 7,750,943
Proceeds from sales of other real estate owned 0 69,420
Acquisition of insurance agencies (180,000) (50,000)
------------------ -------------------
Net cash used in investing activities (56,441,016) (12,091,062)
FINANCING ACTIVITIES
Increase in deposits 34,608,237 11,725,295
Proceeds (repayments) of borrowings 10,214,203 (1,570,022)
Treasury Stock, net (569,503) (16,748)
Dividends paid, net (568,733) (454,832)
------------------ -------------------
Net cash provided by financing activities 43,684,204 9,683,693
------------------ -------------------
Net (decrease) increase in cash and cash
equivalents (9,737,790) 454,382
Cash and cash equivalents, beginning of period 19,758,727 10,694,087
------------------ -------------------
Cash and cash equivalents, end of period 10,020,937 11,148,469
================== ===================
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 Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------------- -------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $3,095,160 $2,741,158
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,072,202 736,455
Provision for loan losses 360,000 315,000
Gain on sale of assets (373,263) (56,570)
Stock options expensed 75,148 -
Increase in accrued interest payable (36,726) (176,188)
Increase in accrued interest receivable (471,757) (175,319)
Decrease in other liabilities (16,768) (57,802)
Decrease in other assets (684,974) (464,983)
------------------- -------------------
Total adjustments (76,138) 120,593
------------------- -------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $3,019,022 $2,861,751
=================== ===================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENTS AND
FINANCIAL ACTIVITIES
Acquisition of insurance agencies
debt incurred $202,000 $457,800
See notes to Consolidated Financial Statements
7
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)
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 nine month period ended September 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.
8
The following table sets forth information regarding the allowance for
loan losses for the nine month period ended September 30, 2003 and 2002.
ALLOWANCE FOR LOAN LOSSES
Nine Months Ended September 30,
2003 2002
---- ----
Beginning balance, January 1 $2,145,606 $1,786,115
Total charge offs (10,027) (32,180)
Total recoveries 831 15,300
--- ------
Net charge offs (9,196) (16,880)
Provision for loan losses 360,000 315,000
------- -------
Ending balance, September 30 $2,496,410 $2,084,235
========== ==========
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 for the periods ending
September 30, 2003 and 2002. The Company's potential dilutive securities
included 387 and 410 dilutive shares for the three months and nine
months ended September 30, 2003, respectively.
6. CASH DIVIDEND
A cash dividend of $0.32 per share, restated for the 5 percent stock
dividend declared September 16, 2003, was declared on August 19, 2003 to
shareholders of record as of September 10, 2003. A total of $787,607 was
paid on 2,432,309 shares on October 1, 2003.
7. STOCK DIVIDEND
A five percent stock dividend was paid on January 29, 2003, to
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. Additionally, a five percent stock dividend to be paid
on December 1, 2003, was declared on September 16, 2003 for shareholders
of record as of October 14, 2003. The stock dividend will result in the
issuance of approximately 116,000 shares of common stock before
determination of fractional shares, which will be paid in cash.
8. COMMON STOCK
During the fourth quarter the Company issued 8,030 shares of common
stock. These shares were issued to shareholders on October 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 September 30, 2003 the Company repurchased
25,000 shares of common stock at an average cost of $21.94 per share.
Additionally the Company received into treasury stock 1,295 shares
released from an escrow account related to the final settlement of the
M&W purchase at a cost of $20.93 per share.
9
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 consolidated
statements of income. The increase in the cash surrender value of such
policies is recorded as other non-interest income in the consolidated
statements of income.
11. OTHER BORROWED FUNDS
The Company borrowed an additional $7.0 million from the Federal Home
Loan Bank of New York ("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 nine month periods ended
September 30, 2003 and 2002.
Three Months Ended
September 30, 2003
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $2,524,787 ($5,663) $2,519,124
Provision for loan losses 120,000 0 120,000
------------------------ ------------------------ ----------------------
Net interest income (expense) after
provision for loan losses 2,404,787 (5,663) 2,399,124
Non-interest income 1,137,983 0 1,137,983
Insurance commissions and fees 0 897,005 897,005
Non-interest expense 2,422,505 709,471 3,131,976
------------------------ ------------------------ ----------------------
Income before income taxes 1,120,265 181,871 1,302,136
Income taxes 220,988 71,965 292,953
------------------------ ------------------------ ----------------------
Net income $899,277 $109,906 $1,009,183
======================== ======================== ======================
10
Nine Months Ended
September 30, 2003
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $7,901,677 ($18,249) $7,883,428
Provision for loan losses 360,000 0 360,000
------------------------ ------------------------ ----------------------
Net interest income (expense) after
provision for loan losses 7,541,677 (18,249) 7,523,428
Non-interest income 3,197,429 0 3,197,429
Insurance commissions and fees 0 2,797,240 2,797,240
Non-interest expense 7,426,112 2,088,925 9,515,037
------------------------ ------------------------ ----------------------
Income before income taxes 3,312,994 690,066 4,003,060
Income taxes 633,074 274,826 907,900
------------------------ ------------------------ ----------------------
Net income $2,679,920 $415,240 $3,095,160
======================== ======================== ======================
Three Months Ended
September 30, 2002
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $2,631,222 ($4,978) $2,626,244
Provision for loan losses 105,000 0 105,000
------------------------ ------------------------ ----------------------
Net interest income (expense) after
provision for loan losses 2,526,222 (4,978) 2,521,244
Non-interest income 637,378 0 637,378
Insurance commissions and fees 0 737,126 737,126
Non-interest expense 2,160,382 508,456 2,668,838
------------------------ ------------------------ ----------------------
Income before income taxes 1,003,218 223,692 1,226,910
Income taxes 203,483 88,706 292,189
------------------------ ------------------------ ----------------------
Net income $799,735 $134,986 $934,721
======================== ======================== ======================\
11
Nine Months Ended
September 30, 2002
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net interest income (expense) $7,887,034 ($15,954) $7,871,080
Provision for loan losses 315,000 0 315,000
------------------------ ------------------------ ----------------------
Net interest income (expense) after
provision for loan losses 7,572,034 (15,954) 7,556,080
Non-interest income 1,781,884 0 1,781,884
Insurance commissions and fees 0 2,243,535 2,243,535
Non-interest expense 6,339,205 1,517,947 7,857,152
------------------------ ------------------------ ----------------------
Income before income taxes 3,014,713 709,634 3,724,347
Income taxes 700,940 282,249 983,189
------------------------ ------------------------ ----------------------
Net income $2,313,773 $427,385 $2,741,158
======================== ======================== ======================
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 September 30, 2003
and 2002 is as follows:
2003 2002
---- ----
Commitments to extend credit $51,442,000 $35,928,000
Standby letters of credit 2,373,000 1,791,000
------------------- ----------------
Total $53,815,000 $37,719,000
=================== ================
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 two 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
consolidated balance sheets 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
$80,000 in 2003, $294,000 in 2004, $203,000 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 September 30, 2003, the Company had no
asserted claims pending against the Company that management considered
to be significant.
14 STOCK OPTIONS
Stock options were awarded during the quarter ended September 30, 2003
under the Company's Stock Option and Long-Term Incentive Plan (the
"Plan"). Certain employees of the Bank and its subsidiaries were awarded
15,500 options on August 19, 2003. The options have vesting schedules
from two years through nine years and have an exercise price of $22.28.
Additionally, the Company implemented the Evans Bancorp, Inc. Employee
Stock Purchase Plan (the "Stock Purchase Plan") on July1, 2003. The Stock
Purchase Plan allows participants to purchases shares of Common Stock at
an option price equal to the lesser of 85% of the fair market value of
the Common Stock on the date of grant or 85% of the fair market value on
the date of exercise. The Company granted options on July 1, 2003 based
on participant's selected deferral compensation percentages.
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 September 30, 2003 the Company recognized approximately $75,000 of
stock based compensation expense.
15. RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statements
to conform with the presentation used in 2003.
16. SUBSEQUENT EVENTS
Subsequent to September 30, 2003, M&W Agency, Inc. completed its
acquisition of the assets, business and certain liabilities of Tarbox
Inc. a retail property and insurance agency located in Gowanda, New York.
The pro forma impact of this acquisition is not material to the net
sales, net income, or basic earnings per share assuming the acquisition
had taken place on January 1, 2003.
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. Yields are presented on a tax-equivalent basis.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
ASSETS (000'S) (000'S) (000'S) (000'S)
Interest-earning assets:
Loans, net $171,938 $2,678 6.23% $147,771 $2,689 7.28%
Taxable investments 70,644 380 2.15% 45,184 580 5.14%
Tax-exempt investments 53,131 573 6.56%* 45,107 511 6.89%*
Time Deposits-Other Bank 872 6 2.60% 0 0 0.00%
Federal funds sold 3,648 9 0.99% 3,323 14 1.66%
--------------- --------- --------- ------------- --------- -------------
Total interest-earning assets 300,233 $3,646 5.25% 241,385 $3,794 6.72%
========= =========
Noninterest-earning assets
Cash and due from banks 8,953 8,676
Premises and equipment, net 5,387 4,483
Other assets 14,791 8,441
--------------- -------------
Total Assets $329,364 $262,985
=============== =============
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $11,259 $6 0.21% $9,642 $12 0.50%
Savings deposits 107,059 220 0.82% 74,937 195 1.04%
Time deposits 102,980 735 2.85% 88,208 831 3.77%
Fed funds purchased 650 2 1.23% 0 0 0.00%
Securities sold u/a to repurchase and other 6,033 13 0.86% 3,344 13 1.55%
FHLB advances 13,573 145 4.27% 8,729 112 5.12%
Notes payable 852 6 2.82% 455 5 4.44%
--------------- --------- --------- ------------- --------- -------------
Total interest-bearing liabilities 242,406 $1,127 1.86% 185,315 $1,168 2.72%
--------- ---------
Non interest-bearing liabilities:
Demand deposits 50,825 42,589
Other 4,302 5,596
--------------- -------------
Total liabilities 297,533 $233,500
Stockholders' equity 31,831 29,485
--------------- -------------
Total Liabilities and Stockholders' Equity $329,364 $262,985
=============== =============
Net interest earnings $2,519 $2,626
========= =========
Net yield on interest earning assets 3.37% 4.00%
* Internal investment decisions utilize tax-equivalent yields, which are
presented for consistency. GAAP basis yields for tax-exempt investments were
4.31% and 4.53% for the three months ended September 30, 2003 and 2002,
respectively.
Total gross loans have grown to $177.8 million at September 30, 2003, reflecting
a 4.8% or $8.1 million increase from June 30, 2003. Total net loans (loans after
allowance for loan losses) have grown to $175.3 million at September 30, 2003,
reflecting a 4.8% or $8.0 million increase from June 30, 2003. 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 $126.1 million at September 30, 2003, reflecting a 4.8%
or $5.8 million increase from June 30, 2003. Consumer loans total $51.2 million
at September 30, 2003, reflecting a 4.7% or $2.3 million increase from June 30,
2003. 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
third quarter 2003, the Bank sold loans to FNMA totaling $6.7 million as
compared to $2.9 million during the third quarter 2002.
At September 30, 2003, the Bank had a loan servicing portfolio principal balance
of $29.5 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.
SEPTEMBER 30, 2003 PERCENTAGE DECEMBER 31, 2002 PERCENTAGE
($000) ($000)
Commercial Loans
Real Estate $ 103,079 58.1% $ 84,581 56.1%
Installment 13,396 7.6% 12,512 8.3%
Lines of Credit 9,559 5.4% 8,333 5.5%
Cash Reserve 66 0.0% 47 0.0%
--------------------- ---------------- ------------------------- -----------------
Total Commercial Loans 126,100 71.1% 105,473 69.9%
Consumer Loans
Real Estate 21,858 12.3% 19,789 13.1%
Home Equity 26,078 14.7% 23,132 15.3%
Installment 2,173 1.2% 1,886 1.3%
Overdrafts 684 0.4% 104 0.1%
Credit Card 268 0.2% 298 0.2%
Other 133 0.1% 126 0.1%
--------------------- ---------------- ------------------------- -----------------
Total Consumer Loans 51,194 28.9% 45,335 30.1%
--------------------- ---------------- ------------------------- -----------------
Total Loans 177,294 100.0% 150,808 100.0%
===================== ================ ========================= =================
Net Deferred Costs 477 336
Allowance for Loan Losses (2,496) (2,146)
--------------------- -------------------------
Loans, Net $ 175,275 $ 148,998
===================== =========================
Loan quality has remained stable with $9 thousand in net charge offs
incurred during the nine months ended September 30, 2003. Non-performing loans,
defined as accruing loans greater than 90 days past due and non-accrual loans,
totaled 0.15% of total loans outstanding at September 30, 2003 as compared to
0.79% at December 31, 2002. The decrease in non-accrual loans was due to the
assumption by a new borrower of one large commercial loan with a principal
balance at December 31, 2002 of $853,253. At September 30, 2003, the same loan,
with an outstanding principal balance of $676,358, 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 $2.5 million or 1.41% of gross loans
outstanding at September 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.
SEPTEMBER 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 208 1,104
Consumer 0 0
Commercial business 20 93
----------------------- -----------------------
Total 228 1,197
----------------------- -----------------------
Accruing loans 90+ days past due 39 0
----------------------- -----------------------
Total non-performing loans $267 $1,197
======================= =======================
Total non-performing loans as a percentage of
total assets 0.08% 0.41%
======================= =======================
Total non-performing loans as a percentage of
total loans 0.15% 0.79%
======================= =======================
The following table sets forth information regarding the allowance for loan
losses for the nine month period ended September 30, 2003 and 2002.
Nine Months Ended September 30,
2003 2002
---- ----
Beginning balance, January 1 $2,145,606 $1,786,115
Total charge offs (10,027) (32,180)
Total recoveries 831 15,300
--- ------
Net charge offs (9,196) (16,880)
Provision for loan losses 360,000 315,000
------- -------
Ending balance, September 30 $2,496,410 $2,084,235
========== ==========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Balance at Balance at
09/30/03 12/31/02
Attributable to: Attributable to:
($000) ($000)
Real Estate Loans $1,406 $844
Commercial Loans and Leases 382 259
Installment Loans (Includes Credit Cards) 139 72
Unallocated 569 971
--- ---
Total allowance for loan losses $2,496 $2,146
===== =====
Investing Activities
The Company's securities portfolio increased by 1.1% to approximately
$129.8 million at September 30, 2003 as compared to approximately $128.4 million
at June 30, 2003. The growth in the securities portfolio of 21.6% for the nine
months ended September 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. The Company monitors extension and
prepayment risk in the portfolio to limit potential exposures. Management
believes the average expected life of the portfolio is 4.54 years as of
September 30, 2003, as compared to 6.54 years at September 30, 2002.
Available-for-sale securities with a total fair value of $75.9 million at
September 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 increased 0.2% to $274.1 million at
September 30, 2003 from $273.6 million at June 30, 2003. Year to date total
deposits have increased 14.4% from $239.5 million at December 31, 2002. Regular
savings deposits increased to $111.7 million at September 30, 2003, reflecting a
3.4% or $3.6 million increase for the quarter, primarily due to the Bank's
success in retaining these municipal deposits with Muni-Vest, the year to date
savings deposits have increased $16.8 million from $94.9 million at December 31,
2002. Additionally, the increase for the quarter in savings deposits was
partially offset by an decrease in demand deposits of 4.9% to $49.5 million at
September 30,2003. Core deposits (all deposits excluding time deposits greater
than $100,000) increased to $241.9 million, reflecting a 0.9% or $2.1 million
increase for the quarter. Demand deposits increased 10.8%, regular savings
increased 17.7%, time deposits $100 thousand and over increased 13.0%, other
time accounts increased 14.3%, and securities sold under agreement to repurchase
increased 6.9% 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 by $9.8 million at September 30, 2003
from $8.1 million at December 31, 2002. The increase is primarily 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%.
Additionally, the Company had federal funds purchased of approximately $3.6
million at September 30, 2003, compared to no federal funds purchased at
December 31, 2002.
ANALYSIS OF RESULTS OF OPERATIONS
Net Income
Net income was $1.0 million or $0.41 per share for the quarter ended
September 30, 2003 as compared to $0.9 million or $0.38 per share for the
quarter ended September 30, 2002. Year-to-date in 2003, the Company has recorded
net income of $3.1 million or $1.26 per share as compared to $2.7 million or
$1.13 per share for the same period in 2002. All per share amounts reflect the
special 5 percent stock dividend paid on January 29, 2003 and special 5 percent
stock dividend declared on September 16, 2003. Net income represented a return
on average assets of 1.23% for the quarter ended September 30, 2003 compared to
1.42% for the same period in 2002. The return on average equity for the third
quarter of 2003 was 13.12% compared to 13.43% for the third quarter of 2002.
Other Operating Results
Net interest income decreased $107.1 thousand, or 4.1%, for the quarter
ended September 30, 2003 compared to the same time period in 2002. Total
interest income in the third quarter 2003 decreased 3.9% and interest paid on
deposits and borrowings decreased 3.6% from the third quarter of 2002. Interest
income decreased in spite of the $58.8 million, or 24.4% increase in average
interest-earning assets to $300.2 million for the third quarter of 2003 from
$241.4 million for the third quarter of 2002, due mainly to deposit growth in
the Muni-Vest product as well as growth in demand deposit accounts. The tax
equivalent yield on total interest earning assets decreased to 5.25% for the
quarter ended September 30, 2003 from 6.72% for the quarter ended September 30,
2002. The interest expense decrease reflects the effect of interest rate
reductions made by the Company since September 30, 2002 as well as the
offsetting $57.1 million, or 30.8% increase in average interest-bearing
liabilities to $242.4 million for the third quarter of 2003 from $185.3 million
for the third quarter of 2002. The cost of interest-bearing liabilities
decreased to 1.86% for the quarter ended September 30, 2003 from 2.72% for the
quarter ended September 30, 2002. The Company's net interest margin on earning
assets, for the three month period ended September 30, 2003 was 3.75% as
compared to 4.79% for the same time period in 2002. The decrease reflects the
result of accelerated amortization of investment security premiums 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. Year-to-date net interest income increased $12.3 thousand, or 0.2%
for the nine months ended September 30, 2003 compared to the same period in
2002. The small increase is due to the same offsetting relationship evidenced in
the third quarter of 2003 between growth in average assets, 295.6 million as of
September 30, 2003 versus $240.3 million at September 30, 2002, and the
reduction of net interest margin , 4.00% and 4.82% for the nine months ended
September 30, 2003 and 2002, respectively.
The provision for loan losses has increased to $120 thousand for the
third quarter of 2003 from $105 thousand for the same time period in 2002. The
provision for loan losses has increased to $360 thousand for the nine months
ended September 30,2003 from $315 thousand for the same time period in 2002. The
higher third quarter and year-to-date 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 three factors:
increased competition from both a loan and deposit pricing perspective, a
decrease in the potential to adjust deposit rates significantly lower as a
result of the historically low interest rate environment, and a large amount of
activity in mortgage refinancing which led to an acceleration of amortization on
investment securities purchased at a premium that were backed by mortgages.
Non-interest income increased to $2.0 million, or 48.1%, for the third
quarter 2003 as compared to $1.4 million for the third quarter 2002. Service
charges increased to $451 thousand in the third quarter 2003, a 72.9% or $190
thousand increase over the third 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 $897 thousand in the third quarter, a 21.7% or $160 thousand
increase over the third quarter 2002, partially due to the M&W acquisition of
the Gutekunst Agency on January 1, 2003 and Frontier Claims Services on December
31, 2002. Due to higher loan activity, the Bank realized additional income, of
approximately $123 thousand during the third quarter of 2003 on loan prepayment
charges, loan servicing charges, Bankers Title Credit, 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 $59
thousand in gains on sales of securities during the third quarter 2003 as
compared to no gains in the third quarter 2002. Other increases include fees on
the Bank's merchant credit card program and ATM fees. Non-interest income
increased $2.0 million, or 48.9% for the nine month ended September 30, 2003,
compared to the same period in 2002.
Non interest expense increased by $0.5 million, or 17.4%, to $3.1
million for the third quarter 2003 as compared to $2.7 million for the third
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. Other expenses have increased $0.2 million due to a number of items
including costs associated with the Bank's conversion to a next generation 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.
Non-interest expense increased $1.7 million, or 21.1% for the nine month ended
September 30, 2003, compared to the same period in 2002.
Income tax expense totaled $292,953 and $292,189 for the three month
periods ended September 30, 2003 and 2002, respectively. Income tax expense
totaled $907,900 and $983,189 for the nine month periods ended September 30,
2003 and 2002, respectively. The effective combined tax rate for the third
quarter of 2003 was 22.5% compared to 23.8% for the third quarter of 2002. The
effective combined tax rate for the first nine months of 2003 was 22.7% compared
to 26.4% for the first nine months 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 $32.1
million at September 30, 2003, down from $32.7 million at June 30, 2003. This
reduction is primarily attributable to stock repurchases during 2003 of
$575,617. Equity as a percentage of assets was 9.57% at September 30, 2003,
compared to 9.87% at June 30, 2003. Book value per common share fell to $13.20
at September 30, 2003, down from $13.31 at June 30, 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 September 30, 2003, based on current models being
utilized by management, the effect of an immediate 200 basis point increase in
interest rate would increase the Company's annual net interest income by
approximately 0.5%, or $0.1million. A 200 basis point decrease in interest rate
would decrease annual net interest income by 3.1% or approximately $0.4 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 September 30, 2003, approximately 2.8 % of
the Bank's securities had maturity dates of one year or less and approximately
19.8% had maturity dates of five years or less. The average contractural
maturity at September 30, 2003 was 9.75 years compared to 14.83 years at
September 30, 2002. At September 30, 2003, the Bank had net short-term liquidity
of $30.3 million as compared to $36.9 million at December 31, 2002. Available
assets of $135.2 million, less public and purchased funds of $102.0 million,
resulted in a long-term liquidity ratio of 132% at September 30, 2003, versus
158% at December 31, 2002. The decrease is due to the large increase in deposits
over the nine 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
position in excess of regulatory requirements. 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 Treasurer 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 - None to report
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) 23
and 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) 25
and 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 27
1350 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 Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of The Sarbanes -Oxley Act of 2002 29
(b) Reports on Form 8-K :
-------------------
The registrant filed a form 8-K on July 29, 2003 to report under
Item 7 and Item 9 a press release setting forth results of operations and
financial conditions for the second quarter 2003.
The registrant filed a Form 8-K on August 20, 2003 to report under
Item 5 and Item 7 a press release announcing the semi-annual dividend of
$.34 per share.
The registrant filed a Form 8-K on September 18, 2003 under Item 5
and Item 7 a press release announcing a special five percent stock
dividend.
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
October 29, 2003 /s/ James Tilley
--------------------------------
James Tilley
President and CEO
DATE
October 29, 2003 /s/ Mark DeBacker
--------------------------------
Mark DeBacker
Treasurer