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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2004
[ ] 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) 926-2000
------------------------------
(Registrant'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 -- 2,472,446 shares as of July 29, 2004
EVANS BANCORP, INC. AND SUBSIDIARY
PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2004 (Unaudited) and
December 31, 2003 1
Consolidated Statements of Income - Three months
ended June 30, 2004 and 2003 (Unaudited) 2
Consolidated Statements of Income -Six months
ended June 30, 2004 and 2003 (Unaudited) 3
Consolidated Statements of Stockholders' Equity - Six months
ended June 30, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows - Six months
ended June 30, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 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 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings
Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities
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 24
PART I - FINANCIAL INFORMATION Page 1
ITEM I- FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
June 30, December 31,
2004 2003
---- ----
(Unaudited)
(In thousands except share and
per share amounts)
ASSETS
Cash and due from banks $ 10,521 $ 8,509
Federal funds sold - -
-------- --------
Total cash and cash equivalents 10,521 8,509
Interest bearing deposits at other banks 1,083 98
Securities:
Available-for-sale, at fair value 152,029 116,807
Held-to-maturity, at amortized cost 4,813 3,749
Loans, net 198,382 185,528
Properties and equipment, net 7,143 5,982
Goodwill 2,945 2,945
Intangible assets 1,827 1,177
Bank-owned life insurance 7,525 7,323
Other assets 4,883 2,559
-------- --------
TOTAL ASSETS $391,151 $334,677
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 53,810 $ 51,885
NOW and money market 12,254 11,464
Regular savings 154,427 105,599
Time deposits 100,865 97,377
-------- --------
Total deposits 321,356 266,325
Other borrowed funds 24,287 25,388
Securities sold under agreements to repurchase 7,823 5,460
Other liabilities 4,708 4,180
-------- --------
Total liabilities 358,174 301,353
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 10,000,000 shares authorized;
2,491,188 and 2,459,246 shares issued, respectively, and
2,472,446 and 2,444,285 shares outstanding, respectively 1,245 1,230
Capital surplus 20,148 19,359
Retained earnings 12,581 11,145
Accumulated other comprehensive (loss) income, net of tax (549) 1,918
Less: Treasury stock, at cost (18,742 and 14,961 shares, respectively) (448) (328)
-------- --------
Total stockholders' equity 32,977 33,324
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $391,151 $334,677
======== ========
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
Three Months (Unaudited) ended June 30, 2004 and 2003
Three Months Ended
June 30,
2004 2003
---- ----
(In thousands except share
and per share amounts)
INTEREST INCOME
Loans $ 2,885 $ 2,678
Federal funds sold & interest on deposits in other banks 30 15
Securities:
Taxable 904 604
Non-taxable 539 581
---------- ----------
Total interest income 4,358 3,878
INTEREST EXPENSE
Interest on deposits 1,012 1,028
Interest on borrowings 183 172
---------- ----------
Total interest expense 1,195 1,200
NET INTEREST INCOME 3,163 2,678
PROVISION FOR LOAN LOSSES 136 120
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,027 2,558
NON-INTEREST INCOME:
Service charges 480 452
Insurance services and fees 1,041 859
Commission fees 53 71
Net loss on sales of securities - (37)
Premiums on loans sold 2 26
Other 362 451
---------- ----------
Total non-interest income 1,938 1,822
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,876 1,600
Occupancy 397 342
Supplies 69 84
Repairs and maintenance 109 96
Advertising and public relations 89 71
Professional services 187 188
FDIC assessments 10 10
Other insurance 86 61
Other 722 621
---------- ----------
Total non-interest expense 3,545 3,073
---------- ----------
Income before income taxes 1,420 1,307
INCOME TAXES 342 295
---------- ----------
NET INCOME $ 1,078 $ 1,012
========== ==========
Net income per common share-basic* $ 0.44 $ 0.41
========== ==========
Net income per common share-diluted* $ 0.44 $ 0.41
========== ==========
Weighted average number of common shares* 2,474,379 2,459,926
========== ==========
Weighted average number of diluted shares* 2,476,096 2,459,926
========== ==========
*2003 amounts have been adjusted for 5 percent stock dividend paid December 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
Six Months (Unaudited) ended June 30, 2004 and 2003
Six Months Ended
June 30,
2004 2003
---- ----
(In thousands except share
and per share amounts)
INTEREST INCOME
Loans $ 5,656 $ 5,318
Federal funds sold & interest on deposits in other banks 51 63
Securities:
Taxable 1,581 1,177
Non-taxable 1,093 1,141
---------- ----------
Total interest income 8,381 7,699
INTEREST EXPENSE
Interest on deposits 1,858 2,041
Interest on borrowings 363 293
---------- ----------
Total interest expense 2,221 2,334
NET INTEREST INCOME 6,160 5,365
PROVISION FOR LOAN LOSSES 272 240
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,888 5,125
NON-INTEREST INCOME:
Service charges 910 902
Insurance services and fees 2,395 1,900
Commission fees 88 111
Net gain on sales of securities 144 212
Premiums on loans sold 7 46
Other 725 789
---------- ----------
Total non-interest income 4,269 3,960
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,855 3,286
Occupancy 806 747
Supplies 156 168
Repairs and maintenance 211 215
Advertising and public relations 173 147
Professional services 363 455
FDIC assessments 21 19
Other insurance 173 129
Other 1,422 1,218
---------- ----------
Total non-interest expense 7,180 6,384
---------- ----------
Income before income taxes 2,977 2,701
INCOME TAXES 730 615
---------- ----------
NET INCOME $ 2,247 $ 2,086
========== ==========
Net income per common share-basic* $ 0.91 $ 0.85
========== ==========
Net income per common share-diluted* $ 0.91 $ 0.85
========== ==========
Weighted average number of common shares* 2,474,973 2,455,271
========== ==========
Weighted average number of diluted shares* 2,476,881 2,455,271
========== ==========
*2003 amounts have been adjusted for 5 percent stock dividend paid December 2003
See notes to Consolidated Financial Statements
Page 4
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
----- ------- -------- ------ ----- -----
(In thousands except share and per share amounts)
Balance, January 1, 2003 $1,167 $16,579 $11,180 $1,942 $(6) $30,862
Comprehensive income:
Net income 2,086 2,086
Unrealized gain on available
for sale securities, net of reclassification
and tax effect $129 336 336
-------
Total comprehensive income 2,422
-------
Cash dividends ($.30 per common share) (747) (747)
Issued 8,618 shares under dividend
reinvesment plan 4 185 189
Reissued 300 shares treasury stock
under dividend reinvestment plan 1 6 7
Stock options expense 26 26
Fractional shares paid in cash on stock dividend (12) (12)
------ ------- ------- ------ --- -------
Balance, June 30, 2003 $1,171 $16,790 $12,508 $2,278 $ 0 32,747
====== ======= ======= ====== === =======
SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME(LOSS) STOCK TOTAL
----- ------- -------- ------------ ----- -----
(In thousands except share and per share amounts)
Balance, January 1, 2004 $1,230 $19,359 $11,145 $1,918 $(328) $33,324
Comprehensive income:
Net income 2,247 2,247
Unrealized loss on available
for sale securities, net of reclassification
and tax effect $86 (2,467) (2,467)
-------
Total comprehensive loss (220)
-------
Cash dividends ($.33 per common share) (818) (818)
Stock options expense 81 81
Reissued 7,472 shares treasury stock
under dividend reinvestment plan 16 164 180
Reissued 4,247 shares treasury stock
under employee stock purchase plan (9) 93 84
Issued 31,942 shares for purchase of 15 708 723
insurance agencies
Purchased 15,500 shares for treasury (377) (377)
------ ------- ------- ------ ----- -------
Balance, June 30, 2004 $1,245 $20,148 $12,581 $ (549) $(448) $32,977
====== ======= ======= ====== ===== =======
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, 2004 and 2003
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
(In thousands)
OPERATING ACTIVITIES
Interest received $ 8,443 $ 7,966
Fees and commissions received 4,016 3,601
Interest paid (2,211) (2,288)
Cash paid to suppliers and employees (6,604) (6,497)
Income taxes paid (871) (633)
-------- --------
Net cash provided by operating activities 2,773 2,149
INVESTING ACTIVITIES
Available for sale securities
Purchases (66,938) (65,344)
Proceeds from sales 12,266 14,992
Proceeds from maturities 15,258 29,419
Held to maturity securities
Purchases (3,237) (2,009)
Proceeds from maturities 1,194 1,479
Cash paid for bank owned life insurance - (6,200)
Additions to properties and equipment (1,511) (167)
Increase in loans, net of repayments (14,305) (21,163)
Proceeds from sales of loans 1,254 2,793
Proceeds from sales of other real estate owned (6) -
Acquisition of insurance agencies (98) (180)
-------- --------
Net cash used in investing activities (56,123) (46,380)
FINANCING ACTIVITIES
Increase in deposits 55,031 34,150
Proceeds from borrowings, net 1,262 6,706
Purchase of treasury stock, net (129) 6
Dividends paid, net (802) (569)
-------- --------
Net cash provided by financing activities 55,362 40,293
-------- --------
Net increase (decrease) in cash and cash
equivalents 2,012 (3,938)
Cash and cash equivalents, beginning of period 8,509 19,758
-------- --------
Cash and cash equivalents, end of period $ 10,521 $ 15,820
======== ========
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, 2004 and 2003
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
(In thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $2,247 $2,086
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 778 774
Provision for loan losses 272 240
Gain on sale of assets (138) (212)
Premiums on loans sold (7) (46)
Stock options expensed 81 26
Increase in accrued interest payable 10 46
Increase in accrued interest receivable (181) (297)
Increase in other liabilities 297 211
Decrease in other assets (586) (679)
------ ------
Total adjustments 526 63
------ ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $2,773 $2,149
====== ======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of insurance agencies $ 724 $ 202
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, 2004 and 2003
(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 six month period ended June 30, 2004 are
not necessarily indicative of the results to be expected for the full
year. The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes
thereto included in our Report on Form 10-K for the year ended December
31, 2003.
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 represents the amount charged against the
Bank's earnings to establish a reserve or allowance sufficient to absorb
probable loan losses based on management's evaluation of the loan
portfolio. Factors considered include current loan concentrations,
charge-off history, delinquent loan percentages, input from regulatory
agencies and general economic conditions.
On a quarterly basis, management of the Bank meets to review the adequacy
of the allowance for loan losses. In making this determination, the Bank
analyzes the ultimate collectibility of the loans in its portfolio by
incorporating feedback provided by internal loan staff, an independent
loan review function and information provided by examinations performed by
regulatory agencies.
The analysis of the allowance for loan losses is composed of three
components: specific credit allocation, general portfolio allocation and
subjectively by determined allocation. The specific credit allocation
includes a detailed review of the credit in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 114 and No. 118, and
allocation is made based on this analysis. The general portfolio
allocation consists of an assigned reserve percentage based on the credit
rating of the loan.
The subjective portion of the allowance reflects management's evaluation
of various conditions, and involves a higher degree of uncertainty because
this component of the allowance is not identified with specific problem
credits or portfolio segments. The conditions evaluated in connection with
this element include the following: industry and regional conditions;
seasoning of the loan portfolio and changes in the composition of and
growth in the loan portfolio; the strength and duration of the business
cycle; existing general economic and business conditions in the lending
areas; credit quality trends in nonaccruing loans; historical loan
charge-off experience; and the results of bank regulatory examinations.
The following table sets forth information regarding the allowance for
loan losses for the six month periods ended June 30, 2004 and 2003.
ALLOWANCE FOR LOAN LOSSES
Six months ended June 30,
2004 2003
---- ----
(In thousands)
Beginning balance, January 1 $2,539 $2,146
Total charge offs (9) (5)
Total recoveries 62 1
------ ------
Net recoveries (charge offs) 53 (4)
Provision for loan losses 272 240
------ ------
Ending balance, June 30 $2,864 $2,382
====== ======
4. GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired in connection with the Company's acquisition of
the M&W Group, Inc. The goodwill is not amortized but the Company
periodically assesses whether events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired.
5. REVENUE RECOGNITION
The Bank's primary sources of revenue are interest income from loans and
investments and service charge income from loans and deposits. M&W's
revenue is derived mainly from insurance commissions. Revenue is
recognized in the period in which it is earned. The revenue is recognized
on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.
6. PER SHARE DATA
The common stock per share information is based upon the weighted average
number of shares outstanding during each period, retroactively adjusted
for stock dividends and stock splits. The Company's potential dilutive
securities included 1,621 and 1,870 dilutive shares for the three and six
months ended June 30, 2004, respectively. There were no dilutive shares
for the three and six months ended June 30, 2003. All 2003 share and per
share amounts have been adjusted to reflect a 5 percent stock dividend
paid in December 2003.
7. TREASURY STOCK
During the quarter ended June 30, 2004 the Company repurchased 10,100
shares of common stock at an average cost of $24.00 per share.
8. SEGMENT INFORMATION
The Company is comprised of two primary business segments, banking and
insurance agency activities. The following tables set forth information
regarding these segments for the three and six month periods ended June
30, 2004 and 2003.
Three Months Ended
June 30, 2004
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- -----
Net interest income (expense) $ 3,168 ($5) $ 3,163
Provision for loan losses 136 - 136
-------- ----- -------
Net interest income (expense) after
provision for loan losses 3,032 (5) 3,027
Non-interest income 897 - 897
Insurance commissions and fees - 1,041 1,041
Non-interest expense 2,692 853 3,545
-------- ----- -------
Income before income taxes 1,237 183 1,420
Income taxes 269 73 342
-------- ----- -------
Net income $ 968 $ 110 $ 1,078
======== ===== =======
Six Months Ended
June 30, 2004
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- -----
Net interest income (expense) $ 6,170 ($10) $ 6,160
Provision for loan losses 272 - 272
-------- ----- -------
Net interest income (expense) after
provision for loan losses 5,898 (10) 5,888
Non-interest income 1,874 - 1,874
Insurance commissions and fees - 2,395 2,395
Non-interest expense 5,387 1,793 7,180
-------- ----- -------
Income before income taxes 2,385 592 2,977
Income taxes 493 237 730
-------- ----- -------
Net income $ 1,892 $ 355 $ 2,247
======== ===== =======
Three Months Ended
June 30, 2003
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- -----
Net interest income (expense) $ 2,684 ($6) $ 2,678
Provision for loan losses 120 - 120
-------- ----- -------
Net interest income (expense) after
provision for loan losses 2,564 (6) 2,558
-------- ----- -------
Non-interest income 963 - 963
Insurance commissions and fees - 859 859
Non-interest expense 2,428 645 3,073
-------- ----- -------
Income before income taxes 1,099 208 1,307
Income taxes 212 83 295
-------- ----- -------
Net income $ 887 $ 125 $ 1,012
======== ===== =======
Six Months Ended
June 30, 2003
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- -----
Net interest income (expense) $ 5,378 ($13) $ 5,365
Provision for loan losses 240 - 240
-------- ----- -------
Net interest income (expense) after
provision for loan losses 5,138 (13) 5,125
Non-interest income 2,060 - 2,060
Insurance commissions and fees - 1,900 1,900
Non-interest expense 5,005 1,379 6,384
-------- ----- -------
Income before income taxes 2,193 508 2,701
Income taxes 412 203 615
-------- ----- -------
Net income $ 1,781 $ 305 $ 2,086
======== ===== =======
9. 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, 2004 and
2003 is as follows:
2004 2003
---- ----
(In thousands)
Commitments to extend credit $ 44,777 $ 51,495
Standby letters of credit 1,640 2,421
---------- -----------
Total $ 46,417 $ 53,916
========== ===========
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 Bank 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
$305,000 in 2004, $268,000 in 2005, $227,000 in 2006, $224,000 in 2007,
$203,000 in 2008 and $2,676,000 thereafter. The Company is subject to
possible litigation proceedings in the normal course of business. As of
June 30, 2004, the Company had no asserted claims pending against the
Company that management considered to be significant.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial statements
to conform with the presentation used in 2004.
11. NET PERIODIC BENEFIT COSTS
The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees'
compensation and years of service. The Bank uses an actuarial method of
amortizing prior service cost and unrecognized net gains or losses which
result from actual experience and assumptions being different than those
that are projected. The amortization method the Bank is using recognizes
the prior service cost and net gains or losses over the average remaining
service period of active employees.
The Bank also maintains a nonqualified supplemental executive retirement
plan covering certain members of senior management. The Bank uses an
actuarial method of amortizing unrecognized net gains or losses which
result from actual expense and assumptions being different than those that
are projected. The amortization method the Bank is using recognizes the
net gains or losses over the average remaining service period of active
employees.
The following table represents net periodic benefit costs recognized:
THREE MONTHS ENDED MARCH 31
(in thousands)
PENSION BENEFITS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
2004 2003 2004 2003
--------------------- ------------------------------
Service cost $ 54 $ 39 $ 22 $ 18
Interest cost 38 40 35 33
Expected return on plan assets (42) (34) - -
Amortization of prior service cost (4) (4) 24 24
Amortization of the net loss 1 4 3 2
---- ---- ---- ----
Net periodic benefit cost $ 47 $ 45 $ 84 $ 77
==== ==== ==== ====
SIX MONTHS ENDED JUNE 30
(in thousands)
PENSION BENEFITS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
2004 2003 2004 2003
--------------------- ---------------------------------------
Service cost $108 $ 78 $ 44 $ 36
Interest cost 76 80 70 66
Expected return on plan assets (84) (68) - -
Amortization of prior service cost (8) (8) 48 48
Amortization of the net loss 2 8 6 4
---- ---- ---- ----
Net periodic benefit cost $ 94 $ 90 $168 $154
==== ==== ==== ====
12. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The consensus
provides guidance for evaluating whether an investment is
other-than-temporarily impaired and requires certain disclosures for
equity investments accounted for under the cost method. Disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments that were required under an earlier EITF 03-1 consensus remain
in effect. The EITF 03-1 guidance for determining other-than-temporary
impairment is effective for the Company's quarter ending September 30,
2004 and the disclosures for the cost method investments are effective for
the Company's fiscal year ending December 31, 2004. The determination of
whether a decline in market value is other-than-temporary is necessarily a
matter of subjective judgment. The timing and amount of any realized
losses reported in the Company's financial statements could vary if
conclusions other than those made by management were to determine whether
an other-than-temporary impairment exists. This EITF is not expected to
have a material impact on the Company's consolidated financial statements.
In March 2004, the FASB issued a Proposed Statement of Financial
Accounting Standards ("the Proposed Statement"), "Share-Based Payment."
The Proposed Statement addresses the accounting for transactions in which
an enterprise exchanges its equity instruments for employee services or
incurs liabilities that are based on the fair value of the enterprise's
equity instruments or that may be settled by the issuance of such equity
instruments. The Proposed Statement would eliminate the ability to account
for share-based compensation transactions using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
generally would require instead that such transactions be accounted for
using a fair value-based method. Effective January 1, 2003, the Company
began recognizing expense for stock-based compensation using the fair
value method of accounting described in SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended. As a result, the Proposed
Statement, if ultimately adopted by the FASB as proposed, is not expected
to have a material impact on the Company's consolidated financial
statements.
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
services 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 statement, 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.
The most significant accounting policies followed by the Company are
presented in Note 1 to the consolidated financial statements in the Company's
Annual Report. 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 judgments 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 in the loan portfolio. Determining the amount of the allowance for
loan losses is considered a critical accounting estimate because it requires
significant judgment 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. Note 1, in the Company's Annual Report, to the
Consolidated Financial Statements describes the methodology used to determine
the allowance for loan losses.
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 judgment
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. Yields are presented on a non
tax-equivalent basis.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
------------------------------- -----------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ OUTSTANDING EARNED/
BALANCE PAID YIELD/ BALANCE PAID YIELD/
(000) (000) RATE (000) (000) RATE
----------- -------- ------- ----------- -------- ------
ASSETS
Interest-earning assets:
Loans, net $192,691 $2,885 5.99% $162,642 $2,678 6.59%
Taxable investments 106,238 904 3.40% 82,014 604 2.96%
Tax-exempt investments 49,821 539 4.33% 52,893 581 4.39%
Time deposits-other bank 1,083 4 1.63% 877 6 2.63%
Federal funds sold 9,268 26 1.11% 2,117 9 4.60%
-------- ------ ---- -------- ------ ----
Total interest-earning assets 359,101 4,358 4.85% 300,543 3,878 5.16%
====== ======
Noninterest-earning assets
Cash and due from banks 10,642 8,390
Premises and equipment, net 6,516 5,404
Other assets 16,506 14,370
-------- --------
Total Assets $392,765 $328,707
======== ========
LIABILITIES & STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW accounts $12,195 6 0.20% $10,600 $6 0.24%
Savings deposits 163,785 388 0.95% 113,053 292 1.03%
Time deposits 98,925 618 2.50% 101,105 730 2.88%
Fed funds purchased 551 1 0.89% 1,035 4 1.93%
Securities sold u/a to repurchase 6,269 13 0.82% 5,240 13 1.01%
FHLB advances 18,526 164 3.54% 13,866 149 4.27%
Notes payable 724 5 2.63% 912 6 2.65%
-------- -------- ------ ----
Total interest-bearing liabilities 300,975 $1,195 1.59% 245,811 $1,200 1.95%
====== ======
Noninterest-bearing liabilities:
Demand deposits 53,936 47,254
Other 4,443 4,014
-------- --------
Total liabilities $359,354 $297,079
Stockholders' equity 33,411 31,628
-------- --------
Total Liabilities and
Stockholders'
Equity $392,765 $328,707
======== ========
Net interest earnings $3,163 $2,678
====== ======
Net yield on interest earning
assets 3.52% 3.56%
Loan Activity
Total gross loans have grown to $201.2 million at June 30, 2004, reflecting a
4.7% or $9.1 million increase from March 31, 2004. Total net loans (loans after
allowance for loan losses) have grown to $198.4 million at June 30, 2004,
reflecting a 4.7% or $8.9 million increase from March 31, 2004. Commercial loans
total $140.3 million at June 30, 2004, reflecting a 2.6% or $3.6 million
increase from March 31, 2004. Consumer loans total $60.4 million at June 30,
2004, reflecting a 9.8% or $5.4 million increase from March 31, 2004. During the
quarter, the Bank began to portfolio fixed rate residential real estate loans
with shorter desired maturities, as a result of the interest rate environment
improving during the quarter. Prior to second quarter 2004 the Bank sold the
majority of residential mortgages to FNMA to minimize interest rate risk in the
low interest rate environment. During the second quarter 2004, the Bank sold
loans to FNMA totaling $0.4 million as compared to $3.5 million during the
second quarter 2003. At June 30, 2004, the Bank had a loan servicing portfolio
principal balance of $29.7 million upon which it earns a servicing fee. This
loan servicing portfolio balance compares to $30.9 million both at March 31,
2004 and December 31, 2003.
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, 2004 DECEMBER 31, 2003
($000) PERCENTAGE ($000) PERCENTAGE
------------- ---------- ----------------- ----------
COMMERCIAL LOANS
Real Estate $114,345 57.0% $108,325 57.8%
Installment 12,533 6.2% 14,033 7.5%
Lines of credit 13,333 6.6% 10,645 5.7%
Cash Reserve 84 0.0% 81 0.0%
-------- ----- -------- -----
Total Commercial Loans 140,295 69.8% 133,084 71.0%
CONSUMER LOANS
Real Estate 28,241 14.1% 24,270 12.9%
Home Equity 29,091 14.5% 26,857 14.3%
Installment 2,477 1.2% 2,046 1.1%
Overdrafts 321 0.2% 811 0.4%
Credit Card 296 0.2% 292 0.2%
Other (42) 0.0% 170 0.1%
-------- ----- -------- -----
Total Consumer Loans 60,384 30.2% 54,446 29.0%
-------- ----- -------- -----
Total Loans 200,679 100.0% 187,530 100.0%
-------- ----- -------- -----
Net Deferred Costs &
Unearned Discounts 567 537
Allowance for Loan Losses (2,864) (2,539)
-------- --------
Loans, net $198,382 $185,528
======== ========
Asset quality continues to remain strong with net charge offs of $3
thousand in the second quarter of 2004, and total net recoveries of $53 thousand
for the year to date. Non-performing loans, defined as accruing loans greater
than 90 days past due and non-accruing loans, totaled 0.31% of total loans
outstanding at June 30, 2004 as compared to 0.49% at December 31, 2003. The
decrease in non-performing loans was due to one large commercial loan with a
principal balance of $493 thousand at December 31, 2003 being paid off in
January 2004. No loans were considered impaired at June 30, 2004. The allowance
for loan losses totaled $2.9 million or 1.42% of gross loans outstanding at June
30, 2004 as compared to $2.5 million or 1.35% of gross loans outstanding at
December 31, 2003.
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, 2004 December 31, 2003
------------- -----------------
($000) ($000)
Non-accruing loans:
One-to-four family $ - $ -
Home Equity - -
Commercial real estate and multifamily 289 256
Consumer - -
Commercial Business - 40
----- -----
Total $ 289 $ 296
----- -----
Accruing loans 90+ days past due 340 627
----- -----
Total non-performing loans $ 629 $ 923
===== =====
Total non-performing loans as a percentage
of total assets 0.16% 0.27%
===== =====
Total non-performing loans as a percentage
of total loans 0.31% 0.49%
===== =====
The following tables set forth information regarding the allowance for loan
losses for the six month periods ended June 30, 2004 and 2003.
Six Months Ended June 30,
2004 2003
------- -------
($000) ($000)
Beginning balance, January 1 $ 2,539 $ 2,146
Total charge offs (9) (5)
Total recoveries 62 1
------- -------
Net recoveries(charge offs) 53 (4)
Provision for loan losses 272 240
------- -------
Ending balance, June 30 $ 2,864 $ 2,382
======= =======
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Balance at Balance at
6/30/2004 12/31/2003
Attributable to: Attributable to:
---------------- ----------------
($000) ($000)
Real Estate Loans $ 1,634 $ 1,619
Commercial Loans and Leases 461 384
Consumer Loans 172 147
All other loans 9 -
Unallocated 588 389
------------ ------------
Total $ 2,864 $ 2,539
============ ============
Investing Activities
The Company's securities portfolio increased by 1.6% to approximately
$156.8 million at June 30, 2004, as compared to approximately $154.4 million at
March 31, 2004. The growth in the securities portfolio of 1.6% for the three
months ended June 30, 2004 was due in part to the Company's utilization of an
advance from the 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 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 U.S. 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 assets within the portfolio is 4.2 years as of June 30, 2004, as
compared to 3.8 years at March 31, 2004. Available-for-sale securities with a
total fair value of $118.8 million at June 30, 2004 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 3.3% to $321.4 million at June
30, 2004 from $332.3 million at March 31, 2004. Regular savings deposits
decreased to $154.4 million at June 30, 2004 , reflecting a 8.1% or $13.7
million decrease for the quarter. Typically, in the first quarter of each year,
the Company experiences an influx of tax deposits from municipalities which can
be expected to decrease as they pay expenses as the year progresses. The growth
in the first part of the year from Muni-Vest was due to this normal influx of
tax deposits, supplemented additionally by new municipal depositors. The Company
expects as these deposits are drawn down throughout the year that they will be
supplemented and offset with growth of other core deposits. Core deposits (all
deposits excluding time deposits greater than $100,000) decreased to $282.8
million, reflecting a 3.6% or $10.6 million decrease for the quarter. For the
quarter ended June 30, 2004, demand deposits increased 5.3%, time deposits of
$100 thousand and over decreased 1.0%, other time accounts decreased 0.8%, and
securities sold under agreement to repurchase increased 12.6%, compared to March
31, 2004, all of which vary day to day within a range based on customer
transaction volume and represent normal deposit activity.
ANALYSIS OF RESULTS OF OPERATIONS
Net Income
Net income was $1.1 million or $0.44 per share for the quarter ended June
30, 2004 as compared to $1.0 million or $0.41 per share for the quarter ended
June 30, 2003. Year-to-date in 2004, the Company has recorded net income of $2.2
million or $0.91 per share as compared to $2.1 million or $0.85 per share for
the same period in 2003. 2003 per share amounts have been adjusted for the
special 5 percent stock dividend paid in December 2003. Net income represented a
return on average assets of 1.10% for the quarter ended June 30, 2004, compared
to 1.23% for the same period in 2003. The return on average equity for the
second quarter of 2004 was 12.91%, compared to 12.80% for the second quarter of
2003.
Other Operating Results
Net interest income increased $0.5 million, or 18.1%, for the quarter
ended June 30, 2004, compared to the same time period in 2003. Total interest
income in the second quarter 2004 increased 12.4%, and interest paid on deposits
and borrowings decreased 0.4%, from the second quarter of 2003. Interest income
increased due to the $58.6 million, or 19.5%, increase in average
interest-earning assets to $359.1 million for the second quarter of 2004 from
$300.5 million for the second quarter of 2003. The interest expense decrease of
$5 thousand for the quarter, reflects the effect of interest rate reductions
made by the Company since June 30, 2003 in spite of the offsetting $55.2
million, or 22.5% increase in average interest-bearing liabilities to $301.0
million for the second quarter of 2004 from $245.8 million for the second
quarter of 2003. The cost of interest-bearing liabilities decreased to 1.59% for
the quarter ended June 30, 2004 from 1.95% for the quarter ended June 30, 2003.
The Company's net interest margin on earning assets, for the three month period
ended June 30, 2004 was 3.52%, as compared to 3.56% for the same time period in
2003. The Company anticipates that on its net interest margin which will remain
challenged in the near term future as a result of the current low interest rate
environment.
The provision for loan losses increased to $136 thousand for the second
quarter of 2004 from $120 thousand for the same time period in 2003. The higher
second quarter provision in 2004 was primarily a result of continued commercial
loan growth. Commercial real estate loans tend to have a higher credit risk than
consumer loans.
Non-interest income increased 6.4% to $1.9 million for the second quarter
2004 as compared to $1.8 million for the second quarter 2003. M&W Agency
insurance commissions represented the largest increase in the second quarter, a
21.2% or $0.2 million increase over the second quarter 2003, principally due to
the M&W acquisition of Tarbox Inc. located in Gowanda, New York, in the third
quarter of 2003, and the purchases of the Easy PA Agency, Inc. and Ellwood
Agency, Inc. insurance agencies, both located in Hamburg, New York, on January
2, 2004.
Non-interest expense was $3.5 million for the second quarter 2004, an
increase of $0.5 million, or 15.4%, over the second quarter 2003. The primary
component of the increase was increased salary and employee benefit expense of
$276 thousand related to Company growth. Other miscellaneous expense increased
by $102 thousand compared with the second quarter 2003, due to a number of items
including increased operating costs for the M&W Agency insurance operations
reflecting the two agency acquisitions completed in January 2004, as well as
other transaction-based expenses related to the increased size and volume in the
Bank's business.
Income tax expense totaled $342 thousand and $295 thousand for the three
month periods ended June 30, 2004 and 2003, respectively. The effective combined
tax rate for the second quarter of 2004 was 24.1% compared to 22.6% for the
second quarter of 2003. This increase is primarily a result of the decreased
composition of municipal securities as a percentage of the overall investment
portfolio and non-deductible nature of intangibles acquired in the Ellwood
Insurance Agency Acquisition in January 2004.
CAPITAL
The Bank has consistently maintained regulatory capital ratios at, or
above, standards developed by regulatory agencies to be considered "well
capitalized". Total stockholders' equity was $33.0 million at June 30, 2004,
down from $34.3 million at March 31, 2004. The decrease is primarily
attributable to the decrease in accumulated other comprehensive income (loss),
which is due to the decrease in unrealized gains in the investment portfolio as
bond rates in the market moved higher. Equity as a percentage of assets was 8.4%
at June 30, 2004, compared to 8.6% at March 31, 2004. Book value per common
share fell to $13.34 at June 30, 2004, down from $13.87 at March 31, 2004.
CAPITAL EXPENDITURES
The Bank has approved the construction and furnishing of a new branch
office in 2004. The cost to the Bank is expected to be approximately $0.6
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.
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 $7.9 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, 2004, approximately 1.9% of the
Bank's securities had contractual maturity dates of one year or less and
approximately 24.7% had maturity dates of five years or less. Available assets
of $154.9 million, less public and purchased funds of $152.2 million, resulted
in a long-term liquidity ratio of 102% at June 30, 2004, versus 123% at December
31, 2003. The decrease is due to the large increase in municipal deposits over
the six month period ended June 30, 2004.
Liquidity needs can also be met by more aggressively pursuing municipal
deposits, which are normally awarded on the basis of competitive bidding. The
Bank maintains a sufficient level of U.S. government and government agency
securities and New York State municipal bonds that can be pledged as collateral
for these deposits.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Additional information called for by this item is contained in the
Liquidity section of Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Market risk is the risk of loss from adverse changes in market prices
and/or interest rates of the Bank's financial instruments. The primary market
risk the Company is exposed to is interest rate risk. The core banking
activities of lending and deposit-taking expose the Bank to interest rate risk,
which occurs when assets and liabilities reprice at different times and by
different amounts as interest rates change. As a result, net interest income
earned by the Bank is subject to the effects of changing interest rates. The
Bank measures interest rate risk by calculating the variability of net interest
income in the future periods under various interest rate scenarios using
projected balances for interest-earning assets and interest-bearing liabilities.
Management's philosophy toward interest rate risk management is to limit the
variability of net interest income. The balances of financial instruments used
in the projections are based on expected growth from forecasted business
opportunities, anticipated prepayments of loans and investment securities and
expected maturities of investment securities, loans and deposits. Management
supplements the modeling technique described above with analysis of market
values of the Bank's financial instruments and changes to such market values
given changes in the interest rates.
The Bank's Asset Liability Committee, which includes members of senior
management, monitors the Bank's interest rate sensitivity with the aid of a
computer model that considers the impact of ongoing lending and deposit taking
activities, as well as interrelationships in the magnitude and timing of the
repricing of financial instruments, including the effect of changing interest
rates on expected prepayments and maturities. When deemed prudent, management
has taken actions, and intends to do so in the future, to mitigate exposure to
interest rate risk through the use of on - or off-balance sheet financial
instruments. Possible actions include, but are not limited to, changing the
pricing of loan and deposit products, and modifying the composition of
interest-earning assets and interest-bearing liabilities, and other financial
instruments used for interest rate risk management purposes.
The following table demonstrates the possible impact of changes in
interest rates on the Bank's net interest income over a 12 month period of time:
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
Calculated increase (decrease)
in projected annual net interest income
($000) ($000)
June 30, 2004 December 31, 2003
------------- -----------------
Changes in interest rates
+200 basis points (344) 515
- -200 basis points (374) (1,390)
Many assumptions were utilized by the Bank to calculate the impact that
changes in interest rates may have on net interest income. The more significant
assumptions related to the rate of prepayments of mortgage-related assets, loan
and deposit volumes and pricing, and deposit maturities. The Bank assumed
immediate changes in rates including 200 basis point rate changes. In the event
that 200 basis point rate changes cannot be achieved, the applicable rate
changes are limited to lesser amounts such that interest rates cannot be less
than zero. These assumptions are inherently uncertain and, as a result, the Bank
cannot precisely predict the impact of changes in interest rates on net interest
income. Actual results may differ significantly due to the timing, magnitude,
and frequency of interest rate changes in market conditions and interest rate
differentials (spreads) between maturity/repricing categories, as well as any
actions, such as those previously described, which management may take to
counter such changes. In light of the uncertainties and assumptions associated
with the process, the amounts presented in the table and changes in such amounts
are not considered significant to the Bank's projected net interest income.
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Treasurer have concluded that
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) 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 CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting that occurred in the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None to report
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table includes all issuer repurchases, including those made
pursuant to publicly announced plans or programs.
TOTAL NUMBER OF MAXIMUM NUMBER (OR
SHARES PURCHASED AS APPROPRIATE DOLLAR VALUE) OF
TOTAL NUMBER AVERAGE PRICE PART OF PUBLICLY SHARES THAT MAY YET BE
OF SHARES PAID ANNOUNCED PLANS OR PURCHASED UNDER THE PLANS
PERIOD PURCHASED PER SHARE PROGRAMS OR PROGRAMS
- -------------------------- ---------------- ------------- ------------------- ----------------------------
April, 2004 (April 1, 2004
through April 30, 2004 800 $24.85 800 43,800
May, 2004 (May 1, 2004
through May 31, 2004) 600 $24.57 600 43,200
June, 2004 (June 1, 2004
through June 30, 2004) 8,700 $23.88 8,700 34,500
------ ------ ------ ------
Total 10,100 $24.00 10,100 34,500
====== ====== ====== ======
All of the foregoing shares were purchased in open market transactions. On
October 22, 2003, the Company announced that its Board of Directors had
authorized the purchase of up to 50,000 shares of the Company's common stock
over a two year period. There were no other publicly announced plans outstanding
as of June 30, 2004.
ITEM 3. Defaults upon Senior Securities - None to report
ITEM 4. Submission of Matters To a Vote of Security Holders
The 2004 Annual Shareholders meeting of the registrant was held on April
20, 2004. At the meeting, Phillip Brothman, David M. Taylor and Thomas H.
Waring, Jr., were reelected as directors for a term of three years, and Mary
Catherine Militello as a new director for a term of three years. The following
votes were cast for the nominees:
For:
Phillip Brothman 1,667,769
David M Taylor 1,672,263
Thomas H Waring, Jr 1,640,608
Mary Catherine Militello 1,616,900
The following directors also continue their terms as officers:
Robert W Allen
William F Barrett
James E Biddle, Jr
LaVerne G Hall
Robert G Miller, Jr
John R O'Brien
James Tilley
Nancy W Ware
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 the Principal Executive Officer pursuant to 26
section 302 of The Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Financial Officer pursuant to 28
section 302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer pursuant to 18 30
USC Section 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 the Principal Financial Officer pursuant to 18 32
USC Section 1350 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 furnished a form 8-K on April 20, 2004 to
report under Item 7 and Item 12. The report included a press
release setting forth results of operations and financial
conditions for the first quarter 2004.
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
August 4, 2004 By: /s/James Tilley
------------------------------
James Tilley
President and CEO
DATE
August 4, 2004 By: /s/Mark DeBacker
-----------------------------
Mark DeBacker
Treasurer