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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 September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to_____________ 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
---------------------------
(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 -- 2,473,421 shares as of October 19, 2004
EVANS BANCORP, INC. AND SUBSIDIARY
PAGE
----
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2004 and
December 31, 2003 (Unaudited) 1
Consolidated Statements of Income - Three months
ended September 30, 2004 and 2003 (Unaudited) 2
Consolidated Statements of Income-Nine months
ended September 30, 2004 and 2003 (Unaudited) 3
Consolidated Statements of Stockholders' Equity - Nine months ended
September 30, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine months ended September
30, 2004 and 2003 (Unaudited) 5-6
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
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity 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
SIGNATURES 24
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
(Unaudited)
September 30, December 31,
2004 2003
------------- ------------
(In thousands except share and
per share amounts)
ASSETS
Cash and due from banks $ 20,628 $ 8,509
Federal funds sold - -
------------- ------------
Total cash and cash equivalents 20,628 8,509
Interest bearing accounts in other banks 984 98
Securities:
Available-for-sale, at fair value 174,386 116,807
Held-to-maturity, at amortized cost 5,066 3,749
Loans, net 203,839 185,528
Properties and equipment, net 7,425 5,982
Goodwill 2,945 2,945
Intangible assets 1,742 1,177
Bank-owned life insurance 7,890 7,323
Other assets 4,540 2,559
------------- ------------
TOTAL ASSETS $ 429,445 $ 334,677
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 53,520 $ 51,885
NOW accounts 10,861 11,464
Regular savings 167,813 105,599
Time deposits 100,854 97,377
------------- ------------
Total deposits 333,048 266,325
Other borrowed funds 48,451 25,388
Securities sold under agreements to repurchase 7,327 5,460
Dividend Payable 842 -
Other liabilities 5,005 4,180
------------- ------------
Total liabilities 394,673 301,353
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 10,000,000 shares authorized;
2,491,188 and 2,459,246 shares issued, respectively, and
2,472,046 and 2,444,285 shares outstanding, respectively 1,245 1,230
Capital surplus 20,194 19,359
Retained earnings 12,815 11,145
Accumulated other comprehensive income, net of tax 975 1,918
Less: Treasury stock, at cost (19,142 and 14,961 shares, respectively) (457) (328)
------------- ------------
Total stockholders' equity 34,772 33,324
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 429,445 $ 334,677
============= ============
See Notes to Unaudited Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months ended September 30, 2004 and 2003 (Unaudited)
Three Months Ended
September 30,
------------------------------
2004 2003
---------- ----------
(In thousands except share and
per share amounts)
INTEREST INCOME
Loans $ 3,006 $ 2,678
Federal funds sold & interest on deposits in other banks 23 14
Securities:
Taxable 926 380
Non-taxable 524 573
---------- ----------
Total Interest Income 4,479 3,645
INTEREST EXPENSE
Interest on deposits 1,049 961
Interest on borrowings 183 165
---------- ----------
Total Interest Expense 1,232 1,126
NET INTEREST INCOME 3,247 2,519
PROVISION FOR LOAN LOSSES 121 120
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,126 2,399
NON-INTEREST INCOME:
Service charges 484 451
Insurance service and fees 1,143 897
Commission fees 16 56
Net gain on sales of securities 24 59
Premium on loans sold 3 57
Other 360 515
---------- ----------
Total non-interest income 2,030 2,035
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,920 1,742
Occupancy 529 349
Supplies 66 54
Repairs and maintenance 124 81
Advertising and public relations 90 56
Professional services 170 98
FDIC assessments 12 11
Other insurance 85 82
Other 719 659
---------- ----------
Total non-interest expense 3,715 3,132
---------- ----------
Income before income taxes 1,441 1,302
INCOME TAXES 367 293
---------- ----------
NET INCOME $ 1,074 $ 1,009
========== ==========
Net income per common share-basic $ 0.43 $ 0.41
========== ==========
Net income per common share-diluted $ 0.43 $ 0.41
========== ==========
Weighted average number of common shares 2,472,205 2,452,318
========== ==========
Weighted average number of diluted shares 2,472,845 2,452,705
========== ==========
See notes to Unaudited Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Nine Months ended September 30, 2004 and 2003 (Unaudited)
Nine Months Ended
September 30,
2004 2003
---------- ----------
(In thousands except share and
per share amounts)
INTEREST INCOME
Loans $ 8,661 $ 7,996
Federal funds sold & interest on deposits in other banks 74 77
Securities:
Taxable 2,508 1,557
Non-taxable 1,617 1,714
---------- ----------
Total Interest Income 12,860 11,344
INTEREST EXPENSE
Interest on deposits 2,907 3,002
Interest on borrowings 546 459
---------- ----------
Total Interest Expense 3,453 3,461
NET INTEREST INCOME 9,407 7,883
PROVISION FOR LOAN LOSSES 394 360
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,013 7,523
NON-INTEREST INCOME:
Service charges 1,394 1,353
Insurance service and fees 3,539 2,797
Commission fees 104 168
Net gain on sales of securities 168 271
Premium on loans sold 11 102
Other 1,085 1,304
---------- ----------
Total non-interest income 6,301 5,995
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,775 5,028
Occupancy 1,335 1,096
Supplies 222 222
Repairs and maintenance 334 296
Advertising and public relations 263 203
Professional services 533 553
FDIC assessments 33 29
Other insurance 257 212
Other 2,143 1,876
---------- ----------
Total non-interest expense 10,895 9,515
---------- ----------
Income before income taxes 4,419 4,003
INCOME TAXES 1,098 908
---------- ----------
NET INCOME $ 3,321 $ 3,095
Net Income per common share-basic $ 1.34 $ 1.26
========== ==========
Net Income per common share-diluted $ 1.34 $ 1.26
========== ==========
Weighted average number of common shares 2,474,040 2,454,276
========== ==========
Weighted average number of diluted shares 2,475,480 2,454,612
========== ==========
See notes to Unaudited Consolidated Financial Statements
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 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:
2003 net income 3,095 3,095
Unrealized gain on available
for sale securities,
net of reclassification
adjustment and tax effect of $3 5 5
--------
Total comprehensive income 3,100
--------
Cash dividends ($.63 per common share) (1,534) (1,534)
Issued 8,618 shares under dividend
reinvestment plan 4 185 189
Reissued 300 shares treasury stock
under dividend reinvestment plan 1 6 7
Stock options expense 75 75
Fractional shares paid in cash on
stock dividend (12) (12)
Purchased 26,295 shares for treasury (576) (576)
5 percent stock dividend-issued
115,824 shares 58 2,479 (2,537)
------- ------- -------- ------------- -------- --------
Balance, September 30, 2003 $ 1,229 $19,318 $ 10,193 $ 1,947 $ (576) $ 32,111
======= ======= ======== ============= ======== ========
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 3,321 3,321
Unrealized loss on available
for sale securities,
net of reclassification
adjustment and tax effect of $101 (943) (943)
--------
Total comprehensive income 2,378
--------
Cash dividends ($.67 per common share) (1,658) (1,658)
Stock options expense 127 127
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
insurance agencies 15 708 723
Purchased 15,900 shares for treasury (386) (386)
------- ------- -------- ------------- -------- --------
Balance, September 30, 2004 $ 1,245 $20,194 $ 12,815 $ 975 $ (457) $ 34,772
======= ======= ======== ============= ======== ========
See Notes to Unaudited Consolidated Financial Statements
PART I-FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited)
Nine Months Ended
September 30,
2004 2003
-------- --------
(In thousands)
OPERATING ACTIVITIES
Interest received $ 12,709 $ 11,541
Fees and commissions received 5,972 5,466
Interest paid (3,472) (3,497)
Cash paid to suppliers and employees (9,958) (9,761)
Income taxes paid (1,289) (910)
-------- --------
Net cash provided by operating activities 3,962 2,839
INVESTING ACTIVITIES
Available for sales securities
Purchases (97,447) (99,677)
Proceeds from sales 15,807 26,064
Proceeds from maturities 22,357 50,527
Held to maturity securities
Purchases (3,873) (2,768)
Proceeds from maturities 1,572 2,640
Cash paid for bank owned life insurance (264) (6,200)
Additions to properties and equipment (1,984) (351)
Increase in loans, net of repayments (20,264) (39,535)
Proceeds from sales of loans 1,677 13,039
Acquisition of insurance agencies (138) -
-------- --------
Net cash used in investing activities (82,557) (56,261)
FINANCING ACTIVITIES
Increase in deposits 66,723 34,608
Proceeds of borrowings 30,000 11,103
Payments on borrowings (5,071) (889)
Treasury stocks, net (122) (569)
Dividends paid, net (816) (569)
-------- --------
Net cash provided by financing activities 90,714 43,684
Net increase (decrease) in cash and equivalents 12,119 (9,738)
Cash and cash equivalents, beginning of period 8,509 19,759
-------- --------
Cash and cash equivalents, end of period $ 20,628 $ 10,021
======== ========
6
PART I-FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited)
Nine Months Ended
September 30,
2004 2003
------- -------
(In thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,321 $ 3,095
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,192 892
Provision for loan loss 394 360
Net gain on sales of securities (168) (271)
Premiums on loans sold (11) (102)
Stock options expensed 127 75
Decrease in accrued interest payable (19) (36)
Increase in accrued interest receivable (495) (472)
Increase (decrease) in other liabilities 518 (17)
Increase in other assets (897) (685)
------- -------
Total adjustments 641 (256)
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 3,962 $ 2,839
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENTS
AND FINANCIAL ACTIVITIES
Acquisition of insurance agencies:
Fair value of assets acquired $ 861 $ 202
Cash Paid (138) -
-------
Liabilities assumed - $ 202
------- =======
Securities issued $ 723
=======
See notes to Unaudited Consolidated Financial Statements
7
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(Unaudited)
1. GENERAL
The accounting and reporting policies followed by Evans Bancorp, Inc.
(the "Company"), a financial holding company, and its wholly-owned
subsidiary, Evans National Bank (the "Bank"), and the Bank's
wholly-owned subsidiaries, ENB Associates Inc., ("ENB"), ENB Insurance
Agency (f/k/a M&W Agency Inc.) ("ENBI"), Evans National Financial
Services, Inc. ("ENFS"), 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,
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 Annual 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
staff, and independent loan review for 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 actual 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 of 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.
8
The following table sets forth information regarding the allowance for
loan losses for the nine month period ended September 30, 2004 and
2003.
ALLOWANCE FOR LOAN LOSSES
Nine months ended
September 30,
2004 2003
------- -------
(In thousands)
Beginning balance, January 1 $ 2,539 $ 2,146
Total charge offs (12) (10)
Total recoveries 63 1
------- -------
Net recoveries (charge offs) 51 (9)
------- -------
Provision for loan losses 394 360
------- -------
Ending balance, September 30 $ 2,984 $ 2,497
======= =======
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.
ENBI'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 the
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. The Company's potential
dilutive securities included 640 and 1,440 dilutive shares for the
three and nine months ended September 30, 2004, respectively. There
were 387 and 410 dilutive shares for the three and nine months ended
September 30, 2003, respectively.
6. TREASURY STOCK
During the quarter ended September 30, 2004 the Company repurchased 400
shares of common stock at an average cost of $22.27 per share. Nine
months ended September 30, 2004 the Company purchased 15,900 shares of
common stock at an average cost of $24.25 per share.
9
7. 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 nine month periods ended
September 30, 2004 and 2003.
Three Months Ended
September 30, 2004
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- ------
Net interest income (expense) $3,251 ($ 4) $3,247
Provision for loan losses 121 - 121
------ ------- ------
Net interest income (expense) after
provision for loan losses 3,130 (4) 3,126
Non-interest income 887 - 887
Insurance service and fees - 1,143 1,143
Non-interest expense 2,862 853 3,715
------ ------- ------
Income before taxes 1,155 286 1,441
Income taxes 253 114 367
------ ------- ------
Net income $ 902 $ 172 $1,074
====== ======= ======
Nine Months Ended
September 30, 2004
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
Net interest income (expense) $9,421 ($ 14) $9,407
Provision for loan losses 394 - 394
------ ------- ------
Net interest income (expense) after
provision for loan losses 9,027 (14) 9,013
Non-interest income 2,762 - 2,762
Insurance service and fees - 3,539 3,539
Non-interest expense 8,249 2,646 10,895
------ ------- ------
Income before taxes 3,540 879 4,419
Income taxes 746 352 1,098
------ ------- ------
Net income $2,794 $ 527 $3,321
====== ======= ======
10
Three Months Ended
September 30, 2003
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- ------
Net interest income (expense) $2,525 ($ 6) $2,519
Provision for loan losses 120 - 120
------ ----- ------
Net interest income (expense) after
provision for loan losses 2,405 (6) 2,399
Non-interest income 1,138 - 1,138
Insurance service and fees - 897 897
Non-interest expense 2,423 709 3,132
------ ----- ------
Income before taxes 1,120 182 1,302
Income taxes 221 72 293
------ ----- ------
Net income $ 899 $110 $1,009
====== ===== ======
Nine Months Ended
September 30, 2003
(in thousands)
INSURANCE
BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL
------------------ ----------------- ------
Net interest income (expense) $7,901 ($ 18) $7,883
Provision for loan losses 360 - 360
------ ------- ------
Net interest income (expense) after
provision for loan losses 7,541 (18) 7,523
Non-interest income 3,198 - 3,198
Insurance service and fees - 2,797 2,797
Non-interest expense 7,426 2,089 9,515
------ ------- ------
Income before taxes 3,313 690 4,003
Income taxes 633 275 908
------ ------- ------
Net income $2,680 $ 415 $3,095
====== ======= ======
11
8. 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, 2004 and 2003 is as follows:
2004 2003
------- -------
(in thousands)
Commitments to extend credit $54,025 $51,442
Standby letters of credit 1,810 2,373
------- -------
Total $55,835 $53,815
======= =======
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 Company's 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 is subject to possible litigation proceedings in the normal
course of business. As of September 30, 2004, the Company had no
asserted claims pending against the Company that management considered
to be significant.
9. RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial
statements to conform with the presentation used in 2004.
10. NET PERIODIC BENEFIT COSTS
The Bank has a defined benefit pension plan covering substantially all
of its employees, including the employees of all its subsidiaries. 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 amortized 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.
12
The following table represents net periodic benefit costs recognized:
Three months ended September 30
(in thousands)
SUPPLEMENTAL EXECUTIVE
PENSION BENEFITS 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
==== ==== === ===
Nine months ended September 30
(in thousands)
SUPPLEMENTAL EXECUTIVE
PENSION BENEFITS RETIREMENT PLAN
2004 2003 2004 2003
----- ----- ----- ----
Service cost $ 162 $ 117 $ 66 $ 54
Interest cost 114 120 105 99
Expected return on plan assets (126) (102) - -
Amortization of prior service cost (12) (12) 72 72
Amortization of the net loss 3 12 9 6
----- ----- ----- ----
Net periodic benefit cost $ 141 $ 135 $ 252 $231
===== ===== ===== ====
11. SUBSEQUENT EVENTS
The Company raised $11 million through a trust preferred securities
offering which closed on October 1, 2004. The trust preferred
securities were issued by a newly established subsidiary of the
Company, Evans Capital Trust I, a Delaware statutory business trust.
The securities were sold to NBC Capital Markets Group, Inc., a private
transaction, pursuant to an applicable exemption from registration
under the Securities Act of 1933. The trust preferred securities are
expected to qualify as Tier I capital for regulatory purposes and will
bear a floating rate equal to three-month Libor plus 2.65%. The rate,
which adjusts quarterly, is currently equal to 4.53%. The trust
preferred securities mature in thirty years, and are redeemable,
subject to certain conditions including regulatory approval, without
penalty on or after October 1, 2009, or earlier under certain
circumstances.
Additionally, Evans Bancorp, Inc. has reorganized its corporate
structure. The former corporate structure was vertically aligned with
the ENB Insurance Agency, a wholly-owned subsidiary of Evans Bancorp,
Inc. As a result of the reorganization, ENB Insurance Agency is a
subsidiary of a recently created holding company, Evans National
Financial Services, Inc., which is a direct, wholly-owned subsidiary of
Evans Bancorp, Inc. Evans Bancorp recently received regulatory approval
for the Federal Reserve Bank of New York to become a financial holding
company which facilitated this reorganization.
ENB Insurance Agency, Inc. (f/k/a M&W Agency, Inc.) has entered into a
definitive agreement and has acquired substantially all of the
business, assets and property of Ulrich & Company Inc., a retail
property and casualty insurance agency located in Lockport, New York.
The acquisition, a $6.4 million cash transaction, was entered into and
closed simultaneously on October 1, 2004.
13
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.
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 on Form 10-K for the fiscal year ended December 31, 2003. These
policies, along with the disclosures presented in the other financial statement
notes and in this Management's Discussion and Analysis 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 on Form 10-K, 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.
14
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 non tax-equivalent basis.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------------ -------- ------ -------------- -------- -------
(in thousands) (in thousands)
ASSETS
Interest-earning assets:
Loans, net $ 200,781 $ 3,006 5.99% $ 171,938 $ 2,678 6.23%
Taxable investments 104,882 926 3.53% 70,645 380 2.15%
Tax-exempt investments 49,578 524 4.23% 53,131 573 4.31%
Time deposits-other bank 1,071 4 1.49% 872 5 2.29%
Federal funds sold 5,044 19 1.51% 3,648 9 0.99%
------------------ -------- ------ -------------- --------
Total interest-earning assets 361,356 $ 4,479 4.96% 300,234 $ 3,645 4.86%
======== ========
Noninterest-earning assets
Cash and due from banks 10,471 8,953
Premises and equipment, net 7,318 5,387
Other assets 17,600 14,792
------------------ --------------
Total Assets $ 396,745 $ 329,366
================== ==============
LIABILITIES & STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
Now accounts $ 11,207 $ 6 0.21% $ 11,259 $ 6 0.21%
Savings deposits 155,456 385 0.99% 107,059 220 0.82%
Time deposits 105,996 658 2.48% 102,981 735 2.85%
Fed funds purchased 2,810 11 1.57% 650 2 1.23%
Securities sold u/a to repurchase 6,997 14 0.80% 6,033 13 0.86%
FHLB advances 18,755 153 3.26% 13,573 145 4.27%
Notes payable 667 5 2.40% 852 5 2.35%
------------------ -------- ------ -------------- --------
Total interest-bearing liabilities 301,888 $ 1,232 1.63% 242,407 $ 1,126 1.86%
======== ========
Noninterest-bearing liabilities
Demand deposits 55,138 50,825
Other 5,339 4,303
------------------ --------------
Total liabilities $ 362,365 $ 297,535
Stockholders' equity 34,380 31,831
------------------ --------------
Total Liabilities and Stockholders'
Equity $ 396,745 $ 329,366
================== ==============
Net interest earnings $ 3,247 $ 2,519
======== ========
Net yield on interest earning assets 3.59% 3.36%
15
Loan Activity
Total gross loans have grown to $206.8 million at September 30, 2004, reflecting
a 2.8% or $5.6 million increase from June 30, 2004. Total net loans (loans after
allowance for loan losses) have grown to $203.8 million at September 30, 2004,
reflecting a 2.8% or $5.5 million increase from June 30, 2004. Commercial loans
total $141.6 million at September 30, 2004, reflecting a 0.9% or $1.3 million
increase from June 30, 2004. Consumer loans total $64.7 million at September 30,
2004, reflecting a 7.1% or $4.3 million increase from June 30, 2004. During the
quarter ended September 30, 2004, the Bank continued to portfolio a larger
percentage of fixed rate residential real estate loans with desired maturities,
as a result of generally improving interest rates and the capability to absorb
the corresponding interest rate risk within the Company's tolerance ranges.
Prior to the first quarter of 2004, the Bank sold the majority of residential
mortgages to FNMA to minimize interest rate risk in the historically low
interest rate environment. During the third quarter 2004, the Bank sold loans to
FNMA totaling $423,000 as compared to $6.7 million during the third quarter
2003. At September 30, 2004, the Bank had a loan servicing portfolio principal
balance of $29.4 million upon which it earns servicing fees. This loan servicing
portfolio balance compares to $29.7 million at June 30, 2004 and $30.9 million
at 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.
September 30, 2004 Percentage December 31, 2003 Percentage
($000) ($000)
COMMERCIAL LOANS
Real Estate $ 115,051 55.8% $ 108,325 57.8%
Installment 14,325 6.9% 14,033 7.5%
Lines of Credit 12,124 5.9% 10,645 5.7%
Cash Reserve 79 0.0% 81 0.0%
---------- ---------- ---------- ----------
Total Commercial Loans 141,579 68.6% 133,084 71.0%
CONSUMER LOANS
Real Estate 31,026 15.0% 24,270 12.9%
Home Equity 30,339 14.7% 26,857 14.3%
Installment 2,622 1.3% 2,046 1.1%
Overdrafts 201 0.1% 811 0.4%
Credit Card 326 0.2% 292 0.2%
Other 141 0.1% 170 0.1%
---------- ---------- ---------- ----------
Total Consumer Loans 64,655 31.4% 54,446 29.0%
---------- ---------- ---------- ----------
Total Loans 206,234 100.0% 187,530 100.0%
---------- ----------
Net Deferred Costs &
Unearned Discounts 589 537
Allowance for Loan Losses (2,984) (2,539)
---------- ----------
Loans, net $ 203,839 $ 185,528
========== ==========
16
Asset quality continues to remain strong with net charge offs of $2,000
in the third quarter of 2004, and total net recoveries of $51,000 for the year
to date. Non-performing loans, defined as accruing loans greater than 90 days
past due and non-accrual loans, totaled 0.24% of total loans outstanding at
September 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 $493,000 at December 31, 2003 being paid off in January 2004. One
loan for $200,000 was considered impaired at September 30, 2004. The allowance
for loan losses totaled $3.0 million or 1.44% of gross loans outstanding at
September 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 as of
the dates specified.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(in thousands)
Non-accruing loans:
One-to-four family $ 0 $ 0
Home Equity 0 0
Commercial real estate and multifamily $287 256
Consumer 0 0
Commercial Business 200 40
---- ----
Total $487 $296
---- ----
Accruing loans 90+ days past due 6 627
---- ----
Total non-performing loans $493 $923
==== ====
Total non-performing loans as a percentage
of total assets 0.11% 0.27%
==== ====
Total non-performing loans as a percentage
of total loans 0.24% 0.49%
==== ====
17
The following table sets forth information regarding the allowance for loan
losses for the nine month period ended September 30, 2004 and 2003.
Nine Months Ended
September 30,
2004 2003
---- ----
(in thousands)
Beginning balance, January 1 $ 2,539 $ 2,146
Total charge offs (12) (10)
Total recoveries 63 1
------- -------
Net recoveries(charge offs) 51 (9)
Provision for loan losses 394 360
------- -------
Ending balance, September 30 $ 2,984 $ 2,497
======= =======
The following table sets forth information regarding the allocation of the
allowance for loan losses as of the dates specified.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Balance at Balance at
9/30/2004 12/31/2003
Attributable to: Attributable to:
---------------- ----------------
(in thousands)
Real Estate Loans $1,703 $1,619
Commercial Loans and Leases 598 384
Consumer Loans 156 147
All other loans 26 -
Unallocated 501 389
------ ------
Total $2,984 $2,539
====== ======
Investing Activities
The Company's securities portfolio increased by 14.4%, or $22.6
million, to approximately $179.5 million at September 30, 2004 as compared to
approximately $156.8 million at June 30, 2004. The growth in the securities was
due in part to the Company introducing a competitive retail savings account
which has money market equivalent rates and the Bank utilizing its membership in
the Federal Home Loan Bank of New York ("FHLB") to borrow approximately $30
million in deposits. The borrowings assist in leveraging the Banks excess
capital through the corresponding purchase of investments. Year-to-date the
securities portfolio increased $58.9 million, or 48.9%, to approximately $179.5
million from approximately $120.6 million at December 31, 2003. 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 3.92 years as of
18
September 30, 2004, as compared to 4.2 years as of June 30, 2004, 3.8 years as
of March 31, 2004, 3.9 years as of December 31, 2003 and 4.54 years at September
30, 2003. Available-for-sale securities with a total fair value of $127.6
million at September 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 increased 3.6% to $333.0 million at
September 30, 2004 from $321.4 million at June 30, 2004. Regular savings
deposits increased to $167.8 million at September 30, 2004, reflecting an 8.7%
or $13.4 million increase for the quarter, primarily due to the Bank's new
competitive retail savings account which has money market equivalent rates which
raised $20.9 million for the quarter. Muni-Vest deposits have decreased $4.2
million, or 5.7% for the quarter. This decrease is expected in the last half of
the year as municipalities pay out money collected from taxes. Core deposits
(all deposits excluding time deposits greater than $100,000) increased to $293.2
million, reflecting a 3.6% or $10.3 million increase for the quarter. For the
quarter ended September 30, 2004, regular savings deposits increased 8.7%, time
deposits $100,000 and over decreased 3.6%, other time accounts decreased 2.3%,
and securities sold under agreement to repurchase decreased 6.3% from June 30,
2004 all of which vary day to day within a range based on customer transaction
volume and represent normal deposit activity.
Other Balance Sheet Changes
Other borrowed funds increased to $48.4 million at September 30, 2004
from $25.4 million at December 31, 2003. The increase of approximately $23.1
million is primarily attributed to the Bank utilizing its membership in the FHLB
to borrow approximately $30 million at various maturities. The current
borrowings consisted of five advances with maturities from 1 month to 10 years
with interest rates from 1.96% to 3.55%. The borrowings assist in leveraging the
Banks excess capital through the corresponding purchase of investments. The
remaining balance of other borrowed funds consists of various advances from the
FHLB with interest rates ranging from 1.55% to 5.90% and maturities ranging from
1 month to 10 years.
ANALYSIS OF RESULTS OF OPERATIONS QUARTERLY
Net Income
Net income was $1.1 million or $0.43 per share for the quarter ended
September 30, 2004 as compared to $1.0 million or $0.41 per share for the
quarter ended September 30, 2003. Net income represented a return on average
assets of 1.08% for the quarter ended September 30, 2004 compared to 1.23% for
the same period in 2003. The return on average equity for the third quarter of
2004 was 12.50 % compared to 12.68% for the third quarter of 2003.
Other Operating Results
Net interest income increased $0.7 million, or 28.9%, for the quarter
ended September 30, 2004 compared to the same time period in 2003. Total
interest income for the third quarter of 2004 decreased 22.9% and interest paid
on deposits and borrowings increased 9.4%, from the third quarter of 2003.
Interest income increased due to the $61.1 million, or 20.4% increase in average
interest-earning assets to $361.4 million for the third quarter of 2004 from
$300.2 million for the third quarter of 2003. The interest expense increase of
$0.1 million, despite the interest rate reductions made by the Company since
September 2003, reflects the large increase in interest bearing liabilities to
$301.9 million for the third quarter of 2004, an increase of 24.5% from $242.4
million for the third quarter of 2003. This increase is primarily due to the
Bank's new money market equivalent savings account first offered in the third
quarter of 2004. The Company's net interest margin on earning assets, for the
three month period ended September 30, 2004 was 3.59%, as compared to 3.36% for
the same time period in 2003.
The provision for loan losses has increased to $121,000 for the third
quarter of 2004 from $120,000 for the same time period in 2003. The small third
quarter increase was a result of continued commercial loan growth. Commercial
real estate loans tend to have a higher credit risk than consumer loans. During
the quarter the Bank continued to portfolio fixed rate residential loans, which
tend to have less credit risk than commercial loans.
Non-interest income was $2.0 million for the third quarter of 2004,
which was consistent with the third quarter of 2003. Insurance fee revenue
increased $0.2 million, or 27.4% over the prior year quarter and was offset by a
$0.1 million decline in loan-related fees. The increased insurance fee revenue
in the quarter was primarily the result of acquisitions of two insurance
agencies on January 2, 2004 and one in the third quarter of 2003. The decrease
in loan-related fees reflected lower loan originations and sales volume in
secondary markets compared to the third quarter of 2003, which was a high point
in a historic refinancing period.
19
Non-interest expense was $3.7 million for the third quarter 2004, an
increase of $0.6 million, or 18.6%, over the third quarter 2003.The primary
component of the increase was increased salary and employee benefit expense of
$0.2 million and occupancy expense of $0.2 million, related to Company growth.
Other miscellaneous expense have increased $60,000 compared with the third
quarter 2003, due to a number of items including increased operating costs for
the ENBI 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. Professional services for the third quarter of
2004 increased $72,000 compared with the third quarter of 2003 due to a number
of items including legal costs and consultative work surrounding compliance with
the Sarbanes-Oxley Act of 2002.
Income tax expense totaled $367,000 and $293,000 for the three month
periods ended September 30, 2004 and 2003, respectively. The effective combined
tax rate for the third quarter of 2004 was 25.5 % compared to 22.5% for the
third quarter of 2003. The increase is primarily a result of the decreased
composition of municipal securities as a percentage of the overall investment
portfolio and the non-deductible nature of intangibles acquired in connection
with the acquisition of Ellwood Agency, Inc. in January 2004.
ANALYSIS OF RESULTS OF OPERATIONS YEAR-TO-DATE
Year-to-date in 2004, the Company has recorded net income of $3.3
million or $1.34 per share as compared to $3.1 million or $1.26 per share for
the same time period in 2003. Net income represented a return on average assets
of 1.16% through September 30, 2004, as compared to 1.28% for the same period in
2003. The year-to-date return on average equity was 12.99% through the third
quarter of 2004, compared to 13.09% through the third quarter of 2003.
Other Operating Results
Net interest income for the nine months ended September 30, 2004
increased $1.5 million, compared to the same time period in 2003. Year-to-date
total interest income increased $1.5 million, or 13.4%, and total interest
expense decreased $8,000 or 0.2%. Interest income increased due to the $51.6
million, or 17.5% increase in average interest earning assets to $347.1 million
through the first nine months of 2004 from $295.6 million through the first nine
months of 2003. The interest expense decrease of $8,000 year-to-date reflects
the effect of interest rate reductions made by the Company since September 30,
2003 in spite of the offsetting $47.8 million, or 19.9% increase in average
interest-bearing liabilities to $287.8 million for the first nine months of
2004, from $240.0 million for the first nine months of 2003. The cost of
interest-bearing liabilities decreased to 1.60% through the first three quarters
of 2004, from 1.92% over the same period in 2003. The Company's net interest
margin on earning assets for the nine month period ended September 30, 2004 was
3.61% as compared to 3.56% for the same time period in 2003.
The provision for loan losses has increased to $394 thousand for the
nine months ended September 30, 2004 from $360 thousand for the same time period
in 2003. The higher year-to-date provision in 2004 was the result of continued
commercial loan growth. Commercial real estate loans tend to have a higher
credit risk than consumer loans.
Non-interest income increased 5.1% to $6.3 million for the nine months
ended September 30, 2004 as compared to $6.0 million for the same time period in
2003. ENBI commissions represented the largest increase of $0.7 million
principally due to the acquisitions of Tarbox Inc., located in Gowanda, New
York, in the third quarter of 2003, and of Easy PA Agency, Inc. and Ellwood
Agency, Inc. insurance agencies both located in Hamburg, New York, on January 2,
2004. Other income for the first nine months of 2004 decreased by $0.2 million,
to $0.1 million, when compared with the same period in 2003. This decrease is
primarily attributable to the competitive interest rate environment during 2003
which resulted in more prepayment fees collected on refinanced loans during the
first nine months of 2003.
Non interest expense totaled $10.9 million for the first nine months of
2004, representing an increase of $1.4 million or 14.5% over the first nine
months of 2003. The primary component of the increase was increased salary and
employee benefit expense of $0.7 million, which were related to Company growth.
An increase in occupancy expense of $0.2 million for the first nine months of
2004 is also related to Company growth. Other miscellaneous expenses have
increased $0.3 million year-to-date over the same period in 2003 due to a number
of items, including increased operating costs for ENBI 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.
20
Income tax expense totaled $1.1 million and $0.9 million for the nine
month periods ended September 30, 2004 and 2003, respectively. The effective
combined tax rate for the nine months in 2004 was 24.8%, compared to 22.7% for
the same nine month period in 2003. The increase is primarily a result of the
decreased composition of municipal portfolio and the non-deductible nature of
intangibles acquired in Ellwood Agency, Inc. acquisition in January 2004.
CAPITAL
The Bank has consistently maintained regulatory capital ratios at, or
above, "well capitalized" standards. Total stockholders' equity was $34.8
million at September 30, 2004, up from $33.0 million at June 30, 2004. This
increase is primarily attributable to unrealized investment gains recognized in
the third quarter of 2004. Equity as a percentage of assets was 8.09% at
September 30, 2004, compared to 8.43% at June 30, 2004. Book value per common
share rose to $14.06 at September 30, 2004, up from $13.34 at June 30, 2004.
CAPITAL EXPENDITURES
The Bank has approved and begun the construction and furnishing of a
new branch office in North Buffalo, New York expected to open in the fourth
quarter of 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 FHLB the Bank is able to borrow funds at competitive rates.
Advances of up to $8.7 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 $8 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 the
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 the securities are available for sale from time-to-time without
the need to incur significant losses. At September 30, 2004, approximately 3.1%
of the Bank's securities had contractual maturity dates of one year or less and
approximately 20.6% had maturity dates of five years or less. Available assets
of $184.8 million, less public and purchased funds of $169.9 million, resulted
in a long-term liquidity ratio of 109% at September 30, 2004, versus 123% at
December 31, 2003. The decrease is due to the large increase in municipal
deposits over the nine month period ended September 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.
21
ITEM 3 - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS AND LIQUIDITY
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
(in thousands)
September 30, 2004 December 31, 2003
------------------ -----------------
Changes in interest rates
+200 basis points (474) 515
- -200 basis points (348) (1,390)
Many assumptions were utilized by the Bank to calculate the impact that
changes in the 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 the 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 the 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.
22
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEEDURES
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)) as of September 30, 2004 (the end of the period covered by this
Quarterly Report on Form 10-Q), 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 by the Company's management, with the participation of
its Chief Executive Officer and Treasurer.
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. Unregistered Sales of Equity Securities and Use of Proceeds
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 approximate 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
- -------------------------- ------------ ------------- ------------------- ----------------------------
July 2004
(July 1, 2004, through 0 n/a 0 34,500
July 31, 2004)
August 2004
(August 1, 2004 through 400 $22.27 400 34,100
August 30, 2004)
September 2004
(September 1, 2004 through 0 n/a 0 34,100
September 30, 2004)
--- ------ --- ------
Total 400 $22.27 400 34,100
--- ------ --- ------
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. The Company did not make any repurchases during the
quarter ended September 30, 2004 other than pursuant to this publicly announced
program, and there were no other publicly announced plans outstanding as of
September 30, 2004.
23
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
Exhibit No. Name Page No.
- ----------- ---- --------
31.1 Certification of Principal Executive Officer pursuant to
section 302 of The Sarbanes-Oxley Act of 2002. 26
31.2 Certification of the Principal Financial Officer pursuant to
section 302 of The Sarbanes-Oxley Act of 2002. 27
32.1 Certification of Principal Executive Officer 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 28
32.2 Certification of Principal Financial Officer 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
10.1 Agreement of Sale and Purchase of Assets among ENB Insurance Agency, Inc.,
Ulrich & Company, Inc., Ulrich Development Company, LLC, and
David L. Ulrich dated as of October 1, 2004 30
10.2 Indenture between the Company, as Issuer, and Wilmington Trust
Company, as Trustee, dated as of October 1, 2004 43
10.3 Form of Floating Rate Junior Subordinated Debt Security due 2034
(included as Exhibit A to the Indenture filed as Exhibit 10.2) 95
10.4 Amended and Restated Declaration of Trust of Evans Capital Trust I,
dated as of October 1, 2004 103
10.5 Guarantee Agreement of the Company, dated as of October 1, 2004 174
10.6 Purchase Agreement among the Company, Evans Capital Trust I,
and NBC Capital Markets Group, Inc., dated October 1, 2004 191
10.7 * Form of Incentive Stock Option Agreement (filed as Exhibit 99.2 to
the Company's current report on Form 8-K filed September 30, 2004
and incorporated herein by reference)
*Denotes management contract or arrangement
24
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
November 4, 2004 By:/s/ James Tilley
-------------------------
James Tilley
President and CEO
DATE
November 4, 2004 By:/s/Mark DeBacker
-------------------------
Mark DeBacker
Treasurer
25
EXHIBIT INDEX
Exhibit No. Name Page No.
- ----------- ---- --------
31.1 Certification of Principal Executive Officer pursuant to
section 302 of The Sarbanes-Oxley Act of 2002. 26
31.2 Certification of the Principal Financial Officer pursuant to
section 302 of The Sarbanes-Oxley Act of 2002. 27
32.1 Certification of Principal Executive Officer 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 28
32.2 Certification of Principal Financial Officer 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
10.1 Agreement of Sale and Purchase of Assets among ENB Insurance Agency, Inc.,
Ulrich & Company, Inc., Ulrich Development Company, LLC, and
David L. Ulrich dated as of October 1, 2004 30
10.2 Indenture between the Company, as Issuer, and Wilmington Trust
Company, as Trustee, dated as of October 1, 2004 43
10.3 Form of Floating Rate Junior Subordinated Debt Security due 2034
(included as Exhibit A to the Indenture filed as Exhibit 10.2) 95
10.4 Amended and Restated Declaration of Trust of Evans Capital Trust I,
dated as of October 1, 2004 103
10.5 Guarantee Agreement of the Company, dated as of October 1, 2004 174
10.6 Purchase Agreement among the Company, Evans Capital Trust I,
and NBC Capital Markets Group, Inc., dated October 1, 2004 191
10.7* Form of Incentive Stock Option Agreement (filed as
Exhibit 99.2 to the Company's current report on Form 8-K
filed September 30, 2004 and incorporated herein by
reference)
*Denotes management contract or arrangement