Evans Bancorp - 10-Q quarterly report FY

 

 

(Mark One)

Commission file number 0-18539

(Exact name of registrant as specified in its charter)

     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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer o                    Accelerated filer o                    Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ 

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $.50 par value 2,754,450 shares as of November 1, 2007

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 AND DECEMBER 31, 2006

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands, except share and per share amounts)

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands, except share and per share amounts)

PART I-FINANCIAL INFORMATION

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands)

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands)

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

Three Months Ended
September 30, 2007
(in thousands)

Nine Months Ended
September 30, 2007
(in thousands)

Three Months Ended
September 30, 2006
(in thousands)

Nine Months Ended
September 30, 2006
(in thousands)

The unaudited 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 consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at September 30, 2007 and 2006 is as follows:

Commitments to extend credit and standby letters of credit include some exposure to 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 unaudited 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 of the Bank. The Bank has not incurred any losses on its commitments during the past two years.

Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The changes in the fair value of these commitments due to interest rate risk are not recorded on the consolidated balance sheets as the fair value of these derivatives are not considered material.

The Company is subject to possible litigation proceedings in the normal course of business. As of September 30, 2007, there were no claims pending against the Company that management considered to be material.

Certain reclassifications have been made to the 2006 unaudited consolidated financial statements to conform with the presentation used in 2007.

The Bank has a defined benefit pension plan covering substantially all Company 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 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 the Company’s 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 uses recognizes the net gains or losses over the average remaining service period of active employees.

The following table represents net periodic benefit costs recognized:

Income tax expense totaled $559 thousand and $605 thousand for the three and nine month periods ended September 30, 2007, respectively. The effective tax rate for the respective periods were 28.3% and 19.1%. The low effective tax rate for the year-to-date is due to the loss on sale of securities of $2.3 million incurred in the second quarter. Excluding the loss on sale of securities, the effective tax rate on all other income for the nine month period ended September 30, 2007 was 27.4%, compared to 27.5% in the prior year. Excluding the loss on sale of securities, the Company records an effective tax rate for the period that will be reflective of the projected annual tax rate based on expected supportable tax positions.

On July 25, 2007, ENBI completed its acquisition of substantially all of the business, assets, and property of L.R. Frank & Associates (“L.R. Frank”), an insurance agency located in Williamsville, NY, subject to certain of its liabilities. The purchase price of $850,000 included $425,000 in cash and $425,000 of notes payable. The assets acquired included certain fixed assets and intangible assets.

Accounting for Uncertainty in Income Taxes — In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” to set out a consistent framework for tax preparers to use to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50 percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company adopted FIN 48 as of January 1, 2007. There were no unrecognized tax benefits or penalties at the date of adoption.

The Internal Revenue Service (IRS) commenced examinations of the Company’s U.S. Federal income tax returns for 2003, 2004, and 2005 in the first quarter of 2007. The examination related to these returns was completed during the third quarter. There were no proposed adjustments that had a material impact on the Company’s financial position or results of operations. All interest on adjustments has been expensed as income tax expense.

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Report on Form 10-Q, as well as in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are beyond the Company’s control and are difficult to predict.

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. 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 Unaudited Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principals 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 Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

The most significant accounting policies followed by the Company are presented in Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K. These policies, along with the disclosures presented in the other Notes to the Company’s Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are valued in the Company’s Unaudited Consolidated 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 and lease 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 and lease losses represents management’s estimate of probable losses in the Bank’s loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.

The amount of goodwill reflected in the Company’s Unaudited 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 on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.

          Total gross loans and leases grew to $307.6 million at September 30, 2007, reflecting a $5.3 million or 1.8% increase from June 30, 2007 and an $18.5 million or 6.4% increase from December 31, 2006. Gross loans and leases are net of $9.2 million, $8.5 million and $7.8 million unearned income on direct financing leases as of September 30, 2007, June 30, 2007 and December 31, 2006, respectively. Commercial loans and leases totaled $215.3 million at September 30, 2007, reflecting a $1.8 million or 0.8% increase from June 30, 2007, and a $13.6 million or 6.8% increase from December 31, 2006. Growth in direct financing leases of $4.5 million or 12.0% was largely responsible for the increase from June 30, 2007 to September 30, 2007. Direct finance leases are sold through a national channel of brokers with whom the Company has had long standing relations and finance small commercial equipment. Direct leases carry a higher risk than the rest of the loan portfolio, but also provide a higher return. We employ strict underwriting standards in selecting credits for this portion of the portfolio. Our loan composition strategy is to maintain the direct lease portfolio at an optimum percentage of the loan portfolio that weights the risk involved in this type of credit. The growth in leases was somewhat offset by the decreases in commercial installment loans of $2.9 million or 14.4 %, and commercial lines of credit of $0.8 million or 5.9%, from June 30, 2007 to September 30, 2007. Growth in direct financing leases of $9.9 million, or 31.1%, commercial mortgages of $2.3 million, or 1.7%, and commercial lines of credit of $1.2 million, or 9.9%, were responsible for the increase from December 31, 2006 to September 30, 2007.

          Consumer loans totaled $91.5 million at September 30, 2007, reflecting a $3.5 million, or 4.0%, increase from June 30, 2007, and a $4.7 million, or 5.4%, increase from December 31, 2006. Real estate loans accounted for most of the increase as those loans increased $4.4 million, or 8.7%, from June 30, 2007 to September 30, 2007 and $5.9 million, or 12.0%, from December 31, 2006 to September 30, 2007. The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended September 30, 2007, the Bank sold mortgages to FNMA totaling $0.3 million, as compared to $0.9 million during the three month period ended September 30, 2006. During the nine month period ended September 30, 2007, the

Bank sold mortgages to FNMA totaling $1.5 million, as compared to $1.6 million during the nine month period ended September 30, 2006. At September 30, 2007, the Bank had a loan servicing portfolio principal balance of $28.0 million upon which it earns servicing fees, as compared to $28.4 million at June 30, 2007, and $28.7 million at December 31, 2006.

          The following table presents selected information on the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated.

          Net loan and lease charge-offs were $308 thousand in the three month period ended September 30, 2007 as compared to $229 thousand in the same period of 2006. Net charge-offs were $841 thousand for the nine month period ended September 30, 2007 as compared to $346 thousand in the same period of 2006. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.23% of total loans and leases outstanding at September 30, 2007 as compared to 0.26% at June 30, 2007 and 0.23% at December 31, 2006. The allowance for loan and lease losses totaled $3.8 million or 1.25% of total loans and leases outstanding at September 30, 2007 as compared to $3.9 million or 1.28% of total loans and leases at June 30, 2007 and $3.7 million or 1.29% of total loans and leases outstanding at December 31, 2006.

     The adequacy of the Company’s allowance for loan and lease losses is reviewed quarterly by the Company’s management with consideration given to loan and lease concentrations, charge-off history, delinquent loan and lease percentages, and general economic conditions. Management believes the allowance for loan and lease losses is adequate for losses from existing loans and leases.

     The following table sets forth information regarding non-performing loans and leases as of the dates specified.

          For the three and nine month periods ended September 30, 2007, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $39 thousand and $85 thousand, respectively. For the three and nine month periods ended September 30, 2006, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $15 thousand and $69 thousand, respectively. There was $5 thousand and $23 thousand of interest income included in net income for the three and nine month periods ended September 30, 2007, and no interest income for the same periods in 2006 on non-accruing loans and leases.

          Total securities declined to $95.5 million at September 30, 2007, reflecting a $22.3 million or 18.9% decrease from June 30, 2007, and a $42.2 million or 30.7% decrease from December 31, 2006. Securities and interest-bearing deposits at banks made up 24.0% of the Bank’s total average interest earning assets in the third quarter of 2007 compared to 34.7% in the third quarter of 2006. The decline in the securities portfolio is a result of the Company’s strategy to de-lever a portion of its balance sheet. The Company sold $45 million in securities in June 2007 to initiate the strategy. During the third quarter, the Company reduced funding levels by pricing down

certain municipal accounts and allowing municipal time deposits to roll off. At the conclusion of the third quarter, nearly all of the targeted funding roll-off had been achieved.

          The Bank continues to have a large concentration in tax-advantaged municipal bonds, which make up 40.1% of the portfolio at September 30, 2007 compared with 30.9% at December 31, 2006; and U.S. government-sponsored agency bonds of various types, which comprise 43.2% of the portfolio at September 30, 2007 versus 22.5% at December 31, 2006. After the sale of securities in June 2007, mortgage-backed securities have declined as a percentage of the portfolio from 43.8% to 13.3%. As a member if both the Federal Reserve System and the Federal Home Loan Bank, the Bank is required to hold stock in those entities. These investments made up 3.4% of the portfolio at September 30, 2007 versus 2.8% of the portfolio at December 31, 2006. The credit quality of the securities portfolio is believed to be strong, with 97.5% of the securities portfolio carrying the equivalent of a Moody’s rating of AAA.

          The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Management believes the average expected life of the securities portfolio is 2.4 years as of September 30, 2007 which is consistent with expected life of the portfolio as of June 30, 2007. Available-for-sale securities with a total fair value of $88.5 million at September 30, 2007 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

          Total deposits at September 30, 2007 were $347.2 million, reflecting a $25.9 million or 6.9% decrease from June 30, 2007. Time deposits $100,000 and over decreased $11.4 million, or 15.8%, to $60.6 million mainly due to municipal deposits and run off of time deposits accumulated in promotions in prior periods. Additionally, muni-vest balances decreased $19.2 million or 42.5% from June 30, 2007. The Company has priced down certain muni-vest accounts and allowed certain municipal jumbo time deposits to roll off as part of its de-leverage strategy. Among core deposits, demand deposits increased $3.2 million, or 4.3%, from June 30, 2007. Regular savings also increased $3.0 million, or 3.4%, during the quarter.

          Total deposits decreased $8.5 million, or 2.4%, from December 31, 2006. The decrease in deposits from December 31, 2006 was primarily attributable to the de-leverage strategy. The strategy has resulted in a decrease in time deposits $100,000 and over of $19.6 million, or 24.4%, and in muni-vest deposits of $5.3 million, or 16.9%. Among core deposits, demand deposits increased $5.5 million, or 7.6%, and regular savings accounts increased $5.7 million, or 6.7%, from December 31, 2006.

          Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York was $12.9 million at September 30, 2007, as compared to $5.8 million at June 30, 2007 and $24.8 million at December 31, 2006.

          The following tables present 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 and lease balances include both performing and non-performing loans and leases. Investments are included at amortized cost. Yields are presented on a non-tax-equivalent basis.