10-Q 1 l06869ae10vq.txt EVANS BANCORP 10-Q/QTR END 3-31-2004 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 March 31, 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) 549-1000 ---------------------------------- (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--2,477,599 shares as of April 23, 2004 EVANS BANCORP, INC. AND SUBSIDIARY
PAGE PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets-March 31, 2004 (Unaudited) and December 31, 2003 1 Consolidated Statements of Income (Unaudited)-Three months ended March 31, 2004 and 2003 2 Consolidated Statements of Stockholders' Equity (Unaudited)-Three months ended March 31, 2004 and 2003 3 Consolidated Statements of Cash Flows (Unaudited)-Three months ended March 31, 2004 and 2003 4 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risks 19 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION 20 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 21
PAGE 1 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 2004 and December 31, 2003
March 31, December 31, 2004 2003 --------- ------------ (Unaudited) (In thousands except share and per share amounts) ASSETS Cash and due from banks $ 11,027 $ 8,509 Federal funds sold 22,525 - --------- --------- Total cash and cash equivalents 33,552 8,509 Interest bearing deposits at other banks 1,083 98 Securities: Available-for-sale, at fair value 150,742 116,807 Held-to-maturity, at amortized cost 3,681 3,749 Loans, net 189,441 185,528 Properties and equipment, net 6,215 5,982 Goodwill 2,945 2,945 Intangible assets 1,913 1,177 Bank-owned life insurance 7,424 7,323 Other assets 3,342 2,559 --------- --------- TOTAL ASSETS $ 400,338 $ 334,677 ========= ========= LIABILITIES AND STOCKHOLDERS EQUITY LIABILITIES Deposits: Demand $ 51,105 $ 51,885 NOW and money market 11,363 11,464 Regular savings 168,113 105,599 Time deposits 101,707 97,377 --------- --------- Total deposits 332,288 266,325 Other borrowed funds 21,476 25,388 Securities sold under agreements to repurchase 6,947 5,460 Dividend payable 817 - Other liabilities 4,549 4,180 --------- --------- Total liabilities 366,077 301,353 --------- --------- CONTINGENT LIABILITIES AND COMMITMENTS (Note 9) STOCKHOLDERS' EQUITY Common stock, $.50 par value; 10,000,000 shares authorized; 2,491,188 and 2,459,246 shares issued, respectively, and 2,470,827 and 2,444,285 shares outstanding, respectively 1,246 1,230 Capital surplus 20,104 19,359 Retained earnings 11,496 11,145 Accumulated other comprehensive income, net of tax 1,878 1,918 Less: Treasury stock, at cost (20,361 and 14,961 shares, respectively) (463) (328) --------- --------- Total stockholders' equity 34,261 33,324 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 400,338 $ 334,677 ========= =========
See Notes to Consolidated Financial Statements PAGE 2 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Three Months (Unaudited) ended March 31, 2004 and 2003
Three Months Ended March 31, 2004 2003 ---------- ---------- (In thousands except share and per share amounts) INTEREST INCOME Loans $ 2,771 $ 2,640 Federal funds sold & interest on deposits in other banks 20 48 Securities: Taxable 678 572 Non-taxable 554 561 ---------- ---------- Total interest income 4,023 3,821 INTEREST EXPENSE Interest on deposits 846 1,013 Interest on borrowings 180 122 ---------- ---------- Total interest expense 1,026 1,135 NET INTEREST INCOME 2,997 2,686 PROVISION FOR LOAN LOSSES 136 120 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,861 2,566 NON-INTEREST INCOME: Service charges 430 450 Insurance service and fees 1,354 1,041 Commission fees 35 40 Net gain on sales of securities 143 249 Premiums on loans sold 5 20 Other 363 338 ---------- ---------- Total non-interest income 2,330 2,138 NON-INTEREST EXPENSE: Salaries and employee benefits 1,979 1,686 Occupancy 410 404 Supplies 87 84 Repairs and maintenance 102 119 Advertising and public relations 84 76 Professional services 176 267 FDIC assessments 11 9 Other insurance 86 68 Other 700 597 ---------- ---------- Total non-interest expense 3,635 3,310 ---------- ---------- Income before income taxes 1,556 1,394 INCOME TAXES 388 320 ---------- ---------- NET INCOME $ 1,168 $ 1,074 ========== ========== Net income per common share-basic* $ 0.47 $ 0.44 ========== ========== Net income per common share-diluted* $ 0.47 $ 0.44 ========== ========== Weighted average number of common shares* 2,475,574 2,450,870 ========== ========== Weighted average number of diluted shares* 2,476,715 2,450,870 ========== ========== *Adjusted for 5 percent stock dividend paid December 2003
See notes to Consolidated Financial Statements PAGE 3 EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 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 1,074 1,074 Unrealized loss on available for sale securities, net of reclassification adjustment $107 (167) (167) ------ Total comprehensive income 907 ------ Cash dividends ($.30 per common share) (747) (747) Fractional shares paid in cash on stock dividend (12) (12) ------ ------ ------ ----- --- ------ Balance, March 31, 2003 $1,167 16,579 11,495 1,775 (6) 31,010 ====== ====== ====== ===== === ======
THREE MONTHS ENDED MARCH 31, 2004 (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, 2004 $1,230 19,359 11,145 1,918 (328) 33,324 Comprehensive income: Net income 1,168 1,168 Unrealized loss on available for sale securities, net of reclassification adjustment $86 (40) (40) ------ Total comprehensive income 1,128 ------ Cash dividends ($.33 per common share) (817) (817) Stock options expense 37 37 Issued 31,942 shares for purchase of 16 708 724 insurance agencies Purchased 5,400 shares for treasury (135) (135) ------ ------ ------ ----- ---- ------ Balance, March 31, 2004 $1,246 20,104 11,496 1,878 (463) 34,261 ====== ====== ====== ===== ==== ======
PAGE 4 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2004 and 2003 (Unaudited)
Three Months Ended March 31, 2004 2003 -------- -------- (In thousands) OPERATING ACTIVITIES Interest received $ 3,844 $ 3,598 Fees and commissions received 2,111 1,832 Interest paid (1,067) (1,198) Cash paid to suppliers and employees (3,299) (3,540) Income taxes paid (319) (18) -------- -------- Net cash provided by operating activities 1,270 674 INVESTING ACTIVITIES Available for sale securities Purchases (52,921) (54,048) Proceeds from sales 8,878 8,680 Proceeds from maturities 9,938 11,696 Held to maturity securities Purchases (1,091) (151) Proceeds from maturities 180 466 Cash paid for bank owned life insurance - (6,200) Additions to properties and equipment (408) (66) Increase in loans, net of repayments (4,943) (11,869) Proceeds from sales of loans 881 2,871 Proceeds from sales of other real estate owned (6) - Acquisition of insurance agencies (138) (180) -------- -------- Net cash used in investing activities (39,630) (48,801) FINANCING ACTIVITIES Increase in deposits 65,963 36,523 (Repayments) proceeds of borrowings (2,426) 5,267 Purchase of treasury stock (134) - Dividends paid, net - (12) -------- -------- Net cash provided by financing activities 63,403 41,778 -------- -------- Net increase (decrease) in cash and cash equivalents 25,043 (6,349) Cash and cash equivalents, beginning of period 8,509 19,758 -------- -------- Cash and cash equivalents, end of period $ 33,552 $ 13,409 ======== ========
See notes to Consolidated Financial Statements PAGE 5 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2004 and 2003 (Unaudited)
Three Months Ended March 31, 2004 2003 ------- ------- (In thousands) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 1,168 $ 1,074 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 440 265 Provision for loan losses 136 120 Gain on sale of assets (137) (249) Premiums on loans sold (5) (20) Stock options expensed 37 - Increase in accrued interest payable (41) (63) Increase in accrued interest receivable (358) (462) Increase in other liabilities 263 170 Decrease in other assets (233) (161) ------- ------- Total adjustments 102 (400) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,270 $ 674 ======= ======= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of insurance agencies $ 724 $ 202
See notes to Consolidated Financial Statements 6 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 three month period ended March 31, 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. 7 The following table sets forth information regarding the allowance for loan losses for the three month periods ended March 31, 2004 and 2003. ALLOWANCE FOR LOAN LOSSES
Three months ended March 31, 2004 2003 ------- ------- (In thousands) Beginning balance, January 1 $ 2,539 $ 2,146 Total charge offs (1) - Total recoveries 57 - ------- ------- Net recoveries 56 - Provision for loan losses 136 120 ------- ------- Ending balance, March 31 $ 2,731 $ 2,266 ======= =======
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. Basic earnings per share and diluted earnings per share are the same for the periods ending March 31, 2004 and 2003. The Company's potential dilutive securities included 1,141 dilutive shares for the three months ended March 31, 2004. There were no dilutive shares for the three months ended March 31, 2003. All 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 March 31, 2004 the Company repurchased 5,400 shares of common stock at an average cost of $24.86 per share. 8 8. SEGMENT INFORMATION The Company is comprised of two primary business segments, banking and insurance agency activities. The following table sets forth information regarding these segments for the three month periods ended March 31, 2004 and 2003. Three Months Ended March 31, 2004 (in thousands)
INSURANCE BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL Net interest income (expense) $ 3,002 ($ 5) $ 2,997 Provision for loan losses 136 0 136 ------- ------- ------- Net interest income (expense) after provision for loan losses 2,866 (5) 2,861 Non-interest income 976 0 976 Insurance commissions and fees 0 1,354 1,354 Non-interest expense 2,695 940 3,635 ------- ------- ------- Income before income taxes 1,147 409 1,556 Income taxes 224 164 388 ------- ------- ------- Net income $ 923 $ 245 $ 1,168 ======= ======= =======
Three Months Ended March 31, 2003 (in thousands)
INSURANCE BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL Net interest income (expense) $ 2,693 ($ 7) $ 2,686 Provision for loan losses 120 - 120 ------- ------- ------- Net interest income (expense) after provision for loan losses 2,573 (7) 2,566 Non-interest income 1,097 - 1,097 Insurance commissions and fees - 1,041 1,041 Non-interest expense 2,576 734 3,310 ------- ------- ------- Income before income taxes 1,094 300 1,394 Income taxes 200 120 320 ------- ------- ------- Net income $ 894 $ 180 $ 1,074 ======= ======= =======
9 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 March 31, 2004 and 2003 is as follows:
2004 2003 (In thousands) Commitments to extend credit $44,199 $39,374 Standby letters of credit 1,724 2,457 ------- ------- Total $45,923 $41,831 ======= =======
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 March 31, 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 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. 10 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 === === === ===
11 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "expect", "intend", "may", and similar expressions identify such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based largely on the expectations of the Company or the Company's management and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, and other factors affecting the Company's operations, markets, products and services, as well as expansion strategies and other factors discussed elsewhere in this report and other reports filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise. The Company's results of operations are dependent primarily on net interest income, which is the difference between the income earned on loans and securities and the Company's cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for loan losses, investment activities, loan origination, insurance service and fees, loan sale and servicing activities, service charges and fees collected on deposit accounts. Noninterest expense primarily consists of salaries and employee benefits, occupancy and equipment expense and technology and communication expenses. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES The Company's consolidated financial statements, are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such have a greater possibility of producing results that could be materially different than originally reported. The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and valuation of goodwill to be the accounting areas that require the most subjective or complex 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 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. 12 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 MARCH 31, 2004 MARCH 31, 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 $185,900 $ 2,771 5.96% $154,194 $ 2,640 6.85% Taxable investments 73,584 678 3.68% 65,766 572 3.48% Tax-exempt investments 51,417 554 4.31% 50,739 561 4.42% Time deposits-other bank 185 1 1.69% 877 6 2.60% Federal funds sold 9,597 19 0.82% 14,252 42 1.19% -------- -------- ------- -------- -------- ------- Total interest-earning assets 320,683 4,023 5.02% 285,828 3,821 5.35% ======== ======== Noninterest-earning assets Cash and due from banks 9,851 9,845 Premises and equipment, net 6,140 5,414 Other assets 14,613 11,388 -------- -------- Total Assets $351,287 $312,475 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 11,069 6 0.20% $ 9,904 $ 6 0.24% Savings deposits 118,782 228 0.77% 109,659 293 1.07% Time deposits 100,266 612 2.44% 97,896 714 2.92% Fed funds purchased 4,082 11 1.04% - - 0.00% Securities sold u/a to repurchase 7,789 16 0.86% 5,606 16 1.14% FHLB advances 17,773 148 3.32% 8,095 99 4.89% Notes payable 787 5 2.62% 669 7 3.95% -------- -------- ------- -------- -------- -------- Total interest-bearing liabilities 260,548 $ 1,026 1.58% 231,829 $ 1,135 1.96% -------- -------- Noninterest-bearing liabilities: Demand deposits 52,083 44,764 Other 4,142 4,801 -------- -------- Total liabilities $316,773 $281,394 Stockholders' equity 34,514 31,081 -------- -------- Total Liabilities and Stockholders' Equity $351,287 $312,475 ======== ======== Net interest earnings $ 2,997 $ 2,686 ======== ======== Net yield on interest earning assets 3.74% 3.76%
13 Total gross loans have grown to $192.2 million at March 31, 2004, reflecting a 2.2% or $4.1 million increase from December 31, 2003. Total net loans (loans after allowance for loan losses) have grown to $189.4 million at March 31, 2004, reflecting a 2.1% or $3.9 million increase from December 31, 2003. During the quarter, the Bank has continued to shift its loan portfolio composition toward higher-yielding commercial loans, especially those secured by real estate. Commercial loans total $136.7 million at March 31, 2004, reflecting a 2.7% or $3.6 million increase from December 31, 2003. Consumer loans total $55.0 million at March 31, 2004, reflecting a 1.0% or $0.5 million increase from December 31, 2003. Given the current low interest rate environment, the Bank continues to sell certain fixed rate residential loans originated below a designated interest rate level, while maintaining the servicing rights to such loans. During the first quarter 2004, the Bank sold loans to FNMA totaling $0.9 million as compared to $2.9 million during the first quarter 2003. At March 31, 2004, the Bank had a loan servicing portfolio principal balance of $30.9 million upon which it earns a servicing fee. This loan servicing portfolio balance compares to $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.
MARCH 31, 2004 DECEMBER 31, 2003 ($000) PERCENTAGE ($000) PERCENTAGE COMMERCIAL LOANS Real Estate $ 111,052 57.9% $ 108,325 57.8% Installment 13,448 7.0% 14,033 7.5% Lines of credit 12,083 6.3% 10,645 5.7% Cash Reserve 93 0.1% 81 0.0% ---------- ---------- ---------- ---------- Total Commercial Loans 136,676 71.3% 133,084 71.0% CONSUMER LOANS Real Estate 24,120 12.6% 24,270 12.9% Home Equity 27,973 14.6% 26,857 14.3% Installment 2,018 1.1% 2,046 1.1% Overdrafts 531 0.3% 811 0.4% Credit Card 260 0.1% 292 0.2% Other 70 0.0% 170 0.1% ---------- ---------- ---------- ---------- Total Consumer Loans 54,972 28.7% 54,446 29.0% ---------- ---------- ---------- ---------- Total Loans 191,648 100.0% 187,530 100.0% ---------- ---------- ---------- ---------- Net Deferred Costs & Unearned Discounts 524 537 Allowance for Loan Losses (2,731) (2,539) ---------- ---------- Loans, net $ 189,441 $ 185,528 ========== ==========
14 Loan quality has remained stable with $1 thousand in charge offs and $57 thousand in loan loss recoveries, incurred during he three months ended March 31 2004. Non-performing loans, defined as accruing loans greater than 90 days past due and non-accrual loans, totaled 0.11% of total loans outstanding at March 31, 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 at December 31, 2003 of $493 thousand being paid off in January 2004. No loans were considered impaired at March 31, 2004. The allowance for loan losses totaled $2.7 million or 1.42% of gross loans outstanding at March 31, 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.
March 31, 2004 December 31, 2003 --------------- ----------------- ($000) ($000) Non-accruing loans: One-to-four family $ - $ - Home Equity - - Commercial real estate and multifamily 175 256 Consumer - - Commercial Business - 40 ------ ------ Total $ 175 $ 296 ------ ------ Accruing loans 90+ days past due 30 627 ------ ------ Total non-performing loans $ 205 $ 923 ====== ====== Total non-performing loans as a percentage of total assets 0.05% 0.27% ====== ====== Total non-performing loans as a percentage of total loans 0.11% 0.49% ====== ======
15 The following table sets forth information regarding the allowance for loan losses for the three month periods ended March 31, 2004 and 2003.
Three Months Ended March 31, 2004 2003 ---- ---- ($000) ($000) Beginning balance $ 2,539 $ 2,146 Total charge offs (1) - Total recoveries 57 - ------- ------- Net recoveries 56 - Provision for loan losses 136 120 ------- ------- Ending balance $ 2,731 $ 2,266 ======= =======
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Balance at Balance at 3/31/2004 12/31/2003 Attributable to : Attributable to : ----------------- ----------------- ($000) ($000) Real Estate Loans $1,614 $1,619 Commercial Loans and Leases 370 384 Consumer Loans 143 147 All other loans 8 - Unallocated 596 389 ------ ------ Total $2,731 $2,539 ====== ======
Investing Activities The Company's securities portfolio increased by 28.1% to approximately $154.4 million at March 31, 2004 as compared to approximately $120.6 million at December 31, 2003. The growth in the securities portfolio of 28.1% for the three months ended March 31, 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 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 assets within the portfolio is 3.8 years as of March 31, 2004, as compared to 3.9 years at December 31, 2003. Available-for-sale securities with a total fair value of $144.5 million at March 31, 2004 were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 16 Funding Activities Total deposits during the quarter increased 24.8% to $332.3 million at March 31, 2004 from $266.3 million at December 31, 2003. Demand deposits decreased 1.5% to $51.1 million at March 31, 2004. Regular savings deposits increased to $168.1 million at March 31, 2004, reflecting a 59.2% or $62.5 million increase for the quarter, primarily due to the Bank's success in attracting these municipal deposits with Muni-Vest. Typically, in the first quarter of each year, the Bank experiences an influx of tax deposits from municipalities which can be expected to decrease as they pay expenses as the year progresses. As these deposits are drawn down throughout the year, the Bank expects to supplement and offset the roll-off of those deposits with growth of other core deposits. Core deposits (all deposits excluding time deposits greater than $100,000) increased to $293.4 million, reflecting a 27.2% or $62.7 million increase for the quarter. Demand deposits decreased 1.5%, regular savings increased 59.2%, time deposits $100 thousand and over increased 9.2%, other time accounts increased 1.7%, and securities sold under agreement to repurchase increased 27.2% from December 31, 2003 all of which vary day to day within a range based on customer transaction volume and represent normal deposit activity. 17 ANALYSIS OF RESULTS OF OPERATIONS Net Income Net income was $1.2 million or $0.47 per share for the quarter ended March 31, 2004 as compared to $1.1 million or $0.44 per share for the quarter ended March 31, 2003. Net income represented a return on average assets of 1.33% for the quarter ended March 31, 2004, compared to 1.37% for the same period in 2003. The return on average equity for the first quarter of 2004 was 13.54%, compared to 13.82% for the first quarter of 2003. Other Operating Results Net interest income increased $0.3 million, or 11.6%, for the quarter ended March 31, 2004, compared to the same time period in 2003. Total interest income in the first quarter 2004 increased 5.3% and interest paid on deposits and borrowings decreased 9.6% from the first quarter of 2003. Interest income increased due to the $34.9 million, or 12.2% increase in average interest-earning assets to $320.7 million for the first quarter of 2004 from $285.8 million for the first quarter of 2003. The interest expense decrease reflects the effect of interest rate reductions made by the Company since March 31, 2003 in spite of the offsetting $28.7 million, or 12.4% increase in average interest-bearing liabilities to $260.5 million for the first quarter of 2004 from $231.8 million for the first quarter of 2003. The cost of interest-bearing liabilities decreased to 1.58% for the quarter ended March 31, 2004 from 1.96% for the quarter ended March 31, 2003. The Company's net interest margin on earning assets, for the three month period ended March 31, 2004 was 3.74%, as compared to 3.76% for the same time period in 2003. The Company anticipates continuing pressures on its net interest margin 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 first quarter of 2004 from $120 thousand for the same time period in 2003. The higher first quarter provision in 2004 was 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 9.0% to $2.3 million for the first quarter 2004 as compared to $2.1 million for the first quarter 2003. M&W Agency insurance commissions represented the largest increase in the first quarter, a 30.1% or $0.3 million increase over the first quarter 2003, partially due to the M&W acquisition of Tarbox Inc. located in Gowanda, New York, in the third quarter of 2003, and the purchases in the first quarter 2004 of the Easy PA Agency, Inc. and Ellwood Agency, Inc. insurance agencies, located in Hamburg, New York, on January 2, 2004. Net gains on sales of securities decreased $0.1 million, or 42.6% for the first quarter 2004 as compared to the first quarter 2003. Non-interest expense was $3.6 million for the first quarter 2004, an increase of $0.3 million, or 9.8%, over the first quarter 2003. The primary component of the increase of $0.3 million for the quarter was increased salary and employee benefit expense related to Company growth and merit pay increases paid in early 2004. Professional services expense for the quarter was $176 thousand, compared to $267 thousand for the first quarter of 2003. The larger professional services expense in 2003 was primarily related to a project to increase the Bank's fee income. Other miscellaneous expense increased by $103 thousand compared with the first quarter 2003, due to a number of items including increased operating costs for the M&W Agency insurance operations reflecting the two January agency acquisitions, as well as other transaction-based expenses related to the increased size and volume in the Bank's business. Income tax expense totaled $388,000 and $320,000 for the three month periods ended March 31, 2004 and 2003, respectively. The effective combined tax rate for the first quarter of 2004 was 24.9% compared to 23.0% for the first quarter of 2003. The increase in the effective tax rate is primarily attributable to the increase in taxable investment income as a percentage of total income. 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 $34.3 million at March 31, 2004, up from $33.3 million at December 31, 2003. This increase is primarily attributable to the issuance of common stock with the total value of $723,750 related to the purchase of Easy PA Agency and Ellwood Agency on January 2, 2004. Equity as a percentage of assets was 8.6% at March 31, 2004, compared to 10.0% at December 31, 2003. Book value per common share rose to $13.87 at March 31, 2004, up from $13.63 at December 31, 2003. 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. The Bank has also signed a letter of intent to purchase a building in Hamburg, New York, which will function as its administrative building, with occupancy expected in 2004. The cost to the Bank is expected to be approximately $1.0 million. The Bank intends to spend approximately an additional $0.5 million to $0.8 million to ready the building for use and occupancy. 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. 18 LIQUIDITY The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements it experiences due to loan demand and deposit fluctuations. The Bank also has many borrowing options. As a member of the Federal Home Loan Bank ("FHLB"), the Bank is able to borrow funds at competitive rates. Advances of up to $13.1 million can be drawn on the FHLB via the Overnight Line of Credit Agreement. An amount equal to 25% of the Bank's total assets could be borrowed through the advance programs under certain qualifying circumstances. The Bank also has the ability to purchase up to $7 million in federal funds from one of its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could also borrow at the discount window. Additionally, the Bank has access to capital markets as a funding source. The cash flows from the investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices, so that securities are available for sale from time-to-time without the need to incur significant losses. At March 31, 2004, approximately 2.1% of the Bank's securities had maturity dates of one year or less and approximately 16.3% had maturity dates of five years or less. Available assets of $177.8 million, less public and purchased funds of $166.1 million, resulted in a long-term liquidity ratio of 107% at March 31, 2004, versus 123% at December 31, 2003. The decrease is due to the large increase in municipal deposits over the three month period ended March 31, 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 US government and government agency securities and New York State municipal bonds that can be pledged as collateral for these deposits. 19 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 gathering 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 changes in 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: SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES
Calculated increase (decrease) in projected annual net interest income ($000) ($000) Changes in interest rates March 31, 2004 December 31, 2003 -------------- ----------------- +200 basis points (332) 515 -200 basis points (1,462) (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 100 and 200 basis point rate changes. In the event that 100 or 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. 20 ITEM 4 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Treasurer have concluded that the Company's disclosure controls 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 CONTROLS There were no changes in the Company's internal controls that occurred in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls. 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 On January 2, 2004, the Company issued 31,942 shares of its common stock to the shareholders of Easy PA Agency, Inc., and Ellwood Agency, Inc. in connection with the acquisition of substantially all of the assets of Easy PA Agency, Inc., and Ellwood Agency, Inc. The shares had an aggregate value of $723,750 at the time of issuance, based upon the average closing price for the ten trading days during the period beginning 15 days and ending 5 days prior to the closing of the transaction. The shares were issued in reliance upon an exemption from registration under Regulation D of the Securities Act of 1933, as amended. The following table includes all issuer repurchases, including those made pursuant to publicly announced plans or programs.
MAXIMUM NUMBER (OR TOTAL NUMBER OF SHARES APPROPRIATE DOLLAR VALUE) OF PURCHASED AS PART OF SHARES THAT MAY YET BE TOTAL NUMBER OF AVERAGE PRICE PUBLICLY ANNOUNCED PLANS PURCHASED UNDER THE PLANS OR PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS PROGRAMS ------------------------------------------------------------------------------------------------------------------------ January, 2004 (January 1, 2004 through January 31, 2004 - - - 50,000 ------------------------------------------------------------------------------------------------------------------------ February, 2004 (February 1, 2004 through February 29, 2004) - - - 50,000 ------------------------------------------------------------------------------------------------------------------------ March, 2004 (March 1, 2004 through March 31, 2004) 5,400 $24.86 5,400 44,600 ------------------------------------------------------------------------------------------------------------------------
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 March 31, 2004. 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 21 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 section 302 of 21 The Sarbanes-Oxley Act of 2002. 31.2 Certification of the Principal Financial Officer pursuant to section 302 of 23 The Sarbanes-Oxley Act of 2002. 32.1 Certification of the Principal Executive Officer pursuant to 18 USC Section 25 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 USC Section 27 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of The Sarbanes -Oxley Act of 2002
(b) Reports on Form 8-K : The registrant filed a form 8-K on January 27, 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 fourth quarter 2003. The registrant filed a Form 8-K on February 18, 2004 to report under Item 9. The report included a press release announcing the semi-annual dividend of $0.33 per common share. The registrant filed a Form 8-K/A on February 27, 2004 under Item 7 and Item 12. The report included a press release correcting its January 27, 2004 earnings press release. 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 April 27, 2004 /s/James Tilley -------------- James Tilley President and CEO DATE April 27, 2004 /s/Mark DeBacker --------------- Mark DeBacker Treasurer