FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended March 31, 2002 [ ] 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 --------------- (Issuer's telephone number) Not applicable -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check (X) whether the issuer (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 [ ] 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--2,206,467 shares as of March 31, 2002
INDEX EVANS BANCORP, INC. AND SUBSIDIARY <TABLE> <CAPTION> PAGE <S> <C> PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets-March 31, 2002 and December 31, 2001 1 Consolidated statements of income-Three months ended March 31, 2002 and 2001 2 Consolidated statements of stockholders' equity-Three months ended March 31, 2002 and 2001 3 Consolidated statements of cash flows-Three months ended March 31, 2002 and 2001 4 Notes to consolidated financial statements- March 31, 2002 and 2001 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 17 PART II. OTHER INFORMATION 18 Item 1. Legal Proceedings Item 2. Changes In 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 19 </TABLE>
PART I - FINANCIAL INFORMATION PAGE 1 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 2002 (Unaudited) and December 31, 2001 <TABLE> <CAPTION> March 31, December 31, ASSETS 2002 2001 ------------ ------------ <S> <C> <C> Cash and due from banks $ 6,330,028 $ 7,835,530 Federal Funds sold 3,450,000 2,800,000 Securities: Classified as available-for-sale, at fair value 90,764,000 81,735,376 Classified as held-to-maturity, at amortized cost 2,654,391 2,329,855 Loans, net 142,177,091 142,469,032 Properties and equipment, net 4,254,434 4,122,733 Goodwill, net 2,932,913 2,760,113 Other intangible assets, net 348,550 83,250 Other assets 5,525,646 5,017,523 ------------ ------------ TOTAL ASSETS $258,437,053 $249,153,412 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand $ 39,769,680 $ 39,597,700 NOW and money market accounts 9,671,065 9,604,537 Regular savings 70,332,489 64,351,240 Time Deposits, $100,000 and over 32,631,086 28,864,608 Other time accounts 61,733,155 61,841,977 ------------ ------------ 214,137,475 204,260,062 Other borrowed funds 9,604,369 9,660,748 Securities sold under agreements to repurchase 3,004,712 4,006,669 Other liabilities 4,613,606 4,265,164 ------------ ------------ TOTAL LIABILITIES 231,360,162 222,192,643 ------------ ------------ STOCKHOLDERS' EQUITY Common Stock, $.50 par value; 10,000,000 shares authorized; 2,206,467 shares issued 1,103,234 1,103,234 Capital surplus 13,727,084 13,727,084 Retained earnings 11,725,823 11,464,273 Accumulated other comprehensive income (net of tax) 520,750 666,178 ------------ ------------ Total stockholders' equity 27,076,891 26,960,769 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $258,437,053 $249,153,412 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
PART I - FINANCIAL INFORMATION PAGE 2 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Three Months ended March 31, 2002 and 2001 (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2002 2001 ---------- ---------- <S> <C> <C> INTEREST INCOME Loans $2,750,203 $2,802,240 Federal funds sold 28,365 62,676 Securities: Taxable 704,342 756,790 Non-taxable 461,133 379,386 ---------- ---------- Total Interest Income 3,944,043 4,001,092 INTEREST EXPENSE Interest on deposits 1,177,519 1,694,838 Short term borrowing 149,341 98,534 ---------- ---------- NET INTEREST INCOME 2,617,183 2,207,720 PROVISION FOR LOAN LOSSES 105,000 75,000 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,512,183 2,132,720 ---------- ---------- NON-INTEREST INCOME: Service charges 273,383 236,022 Premium on loans sold-SLMA 200 355 Premium/Discount on loans sold-FNMA 12,346 1,440 Insurance service and fees 791,803 675,120 ENB Associates 34,923 17,350 Other 231,077 196,061 Securities gain(loss) 10,235 15,744 ---------- ---------- Total Non-interest Income 1,353,967 1,142,092 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,344,537 1,242,766 Occupancy 319,735 291,173 Supplies 50,333 64,597 Repairs and maintenance 106,540 95,224 Advertising and public relations 49,805 28,141 Professional services 159,329 84,562 FDIC assessments 8,571 8,616 Other insurance 62,326 86,854 Amortization of goodwill 0 79,620 Evans Bancorp expense 67,912 5,798 Other 443,711 352,724 ---------- ---------- Total non-interest expense 2,612,799 2,340,075 ---------- ---------- Income before income taxes 1,253,351 934,737 ---------- ---------- INCOME TAXES 374,000 279,600 ---------- ---------- NET INCOME $ 879,351 $ 655,137 ========== ========== NET INCOME PER COMMON SHARE-BASIC $ 0.40 $ 0.30 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,206,467 2,199,465 ========== ========== </TABLE> See Notes to Consolidated Financial Statements.
PAGE 3 EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED) <TABLE> <CAPTION> ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL ---------- ------------ ------------ ------------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 $ 879,801 $ 13,810,991 $ 9,953,780 $ 534,500 $ 0 $ 25,179,072 Comprehensive income: 2001 net income 655,137 655,137 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $218,149 516,451 516,451 ------------ Total comprehensive income 1,171,588 ------------ Cash dividends ($.22 per common share) (475,092) (475,092) Purchase of 1,626 shares for treasury (61,147) (61,147) --------- ------------ ------------ ----------- --------- ------------ Balance, March 31, 2001 $ 879,801 $ 13,810,991 $ 10,133,825 $ 1,050,951 $ (61,147) $ 25,814,421 ========= ============ ============ =========== ========= ============ </TABLE> THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED) <TABLE> <CAPTION> ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL ---------- ------------ ------------ ------------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2002 $ 1,103,234 $ 13,727,084 $ 11,464,273 $ 666,178 $ 0 $ 26,960,769 Comprehensive income: 2002 net income 879,351 879,351 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $94,079 (145,428) (145,428) ------------ Total comprehensive income 733,923 ============ Cash dividends ($.28 per common share), net (617,801) (617,801) ----------- ------------ ------------ --------- ------- ------------ Balance, March 31, 2002 $ 1,103,234 $ 13,727,084 $ 11,725,823 $ 520,750 $ 0 $ 27,076,891 =========== ============ ============ ========= ======= ============ </TABLE> See Notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 4 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2002 and 2001 (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2002 2001 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Interest received $ 3,787,388 $ 3,931,659 Fees and commissions received 1,187,044 914,230 Interest paid (1,434,846) (1,815,462) Cash paid to suppliers and employees (2,622,172) (592,904) Income taxes paid (73,800) (255,000) ------------ ------------ Net cash provided by operating activities 843,614 2,182,523 ------------ ------------ INVESTING ACTIVITIES Available for sale securities Purchases (15,314,345) (11,731,688) Proceeds from sales 671,376 1,757,991 Proceeds from maturities 5,299,063 4,384,019 Held to maturity securities Purchases (436,812) (74,823) Proceeds from maturities 137,476 849,044 Additions to properties and equipment (287,183) (256,591) Increase in loans, net of repayments (2,506,698) (2,990,511) Proceeds from sales of loans 2,821,741 930,944 Cash paid in acquisition of Eden Agency (50,000) 0 ------------ ------------ Net cash used in investing activities (9,665,382) (7,131,615) ------------ ------------ FINANCING ACTIVITIES Increase in deposits 9,877,413 6,025,390 Repayment of short term borrowing, net (1,293,336) (1,505,201) Purchase of treasury stock 0 (61,147) Dividends paid (617,811) (474,824) ------------ ------------ Net cash provided by financing activities 7,966,266 3,984,218 ------------ ------------ Net decrease in cash and cash equivalents (855,502) (964,874) Cash and cash equivalents, January 1 10,635,530 9,358,912 ------------ ------------ Cash and cash equivalents, March 31 $ 9,780,028 $ 8,394,038 ============ ============ </TABLE> See Notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 5 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2002 and 2001 (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2002 2001 ----------- ----------- <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 879,351 $ 655,137 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 251,153 443,893 Provision for loan losses 105,000 75,000 Gain on sale of assets (22,781) (17,539) Decrease in accrued interest payable (107,987) (22,090) Increase in accrued interest receivable (213,073) (68,973) Increase(Decrease) in other liabilities 187,617 (272,911) (Increase)Decrease in other assets (235,666) 1,390,006 ----------- ----------- Total adjustments (35,737) 1,527,386 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 843,614 $ 2,182,523 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net unrealized gain on available for sale securities $ 857,626 $ 1,545,515 =========== =========== </TABLE> See Notes to Consolidated Financial Statements
PAGE 6 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 and 2001 (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 generally accepted accounting principles 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, 2002 are not necessarily indicative of the results to be expected for the full year. 2. SECURITIES Securities which the Bank has the positive ability and intent to hold to maturity are stated at cost, plus discounts accrued and less premiums amortized. Securities which the Bank has identified as available for sale are stated at fair value. 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 expected loan losses based on management's evaluation of the loan portfolio. Factors considered include future loan concentrations, charge-off history, delinquent loan percentages, input from regulatory agencies and general economic conditions. Management's provision for loan losses reflects its current assessment of the New York State and local economy. Both have lagged behind national prosperity, which is now unsettled. Marginal job growth, in conjunction with a declining population base, has left the Bank's market more susceptible to potential credit problems during an economic downturn. This is particularly true of commercial borrowers. Commercial loans represent a segment of significant past growth as well as concentration in the Company's real estate portfolio. Commercial real estate values may be susceptible to decline in an adverse economy. Management believes that the reserve is also in accordance with regulations promulgated by the OCC, and is reflective of its assessment of the local environment as well as a continued growth trend in commercial loans. 4. REVENUE RECOGNITION The Bank's primary sources of revenue are interest income from loans and investments and service charge income. The revenue is recognized in the period in which it is earned. M&W's revenue is derived mainly from insurance commissions. The revenue is recognized on the accrual basis of accounting in accordance with generally accepted accounting principles. 5. INCOME TAXES Provision for deferred income taxes are made as a result of timing differences between financial and taxable income. These differences relate principally to directors deferred compensation, pension premiums payable and deferred loan origination expenses. 6. PER SHARE DATA The per share of common stock information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. Only basic earnings per share is disclosed because the Company does not have any dilutive securities or other contracts to issue common stock or convert to common stock.
PAGE 7 7. DIVIDEND A cash dividend of $0.28 per share was paid on April 2, 2002 to shareholders of record as of March 12, 2002. A total of $617,811 was paid on 2,206,467 shares. 8. STOCK SPLIT A 5 for 4 stock split was distributed on June 12, 2001 to shareholders of record as of May 25, 2001. Fractional shares were redeemed for cash. The stock split resulted in the issuance of 439,441 shares of common stock as well as fractional shares paid in cash totaling $21,597. All share and per share data reflect the split. 9. TREASURY STOCK During the quarter ended March 31, 2001, the Company repurchased 1,626 shares of common stock at a cost of $37.60 per share. These shares were subsequently issued to shareholders who elected to receive shares in lieu of cash under the Company's Dividend Reinvestment Plan. 10. SEGMENT INFORMATION Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information was adopted by the Company during 2000. This Statement establishes standards for the way that the Company reports information about its operating segments. The Company is comprised of two primary business segments, banking and insurance. The following table sets forth information regarding these segments for the three month periods ended March 31, 2002 and 2001. Three Months Ended March 31, 2002 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL ------------------ -------------------- ----- <S> <C> <C> <C> Net Interest Income(loss) $2,622,878 ($ 5,695) $2,617,183 Provision for credit losses 105,000 0 105,000 ---------- ---------- ---------- Net interest income(loss) after provision for credit losses 2,517,878 (5,695) 2,512,183 Non-interest income 551,929 0 551,929 Insurance Commissions & Fees 0 791,803 791,803 Net securities gains 10,235 0 10,235 Non-interest expense 2,090,602 522,197 2,612,799 ---------- ---------- ---------- Income before income taxes 989,440 263,911 1,253,351 Income tax expense 268,457 105,543 374,000 ---------- ---------- ---------- Net income $ 720,983 $ 158,368 $ 879,351 ========== ========== ========== </TABLE>
PAGE 8 Three Months Ended March 31, 2001 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL ------------------ -------------------- ----- <S> <C> <C> <C> Net Interest Income(loss) $2,215,877 $ (8,157) $2,207,720 Provision for credit losses 75,000 0 75,000 ---------- ---------- ---------- Net interest income(loss) after provision for credit losses 2,140,877 (8,157) 2,132,720 Non-interest income 451,280 0 451,280 Insurance Commissions & Fees 0 675,068 675,068 Net securities gains 15,744 0 15,744 Non-interest expense 1,831,985 508,090 2,340,075 ---------- ---------- ---------- Income before income taxes 775,916 158,821 934,737 Income tax expense 211,600 68,000 279,600 ---------- ---------- ---------- Net income $ 564,316 $ 90,821 $ 655,137 ========== ========== ========== </TABLE> 11. SUBSIDIARIES OF THE BANK Evans National Holding Corp. was incorporated in February, 2002 as a subsidiary of the Bank. In March, 2002, the Bank assigned its interests in approximately $65.7 million in real estate mortgages to Evans National Holding Corp. in exchange for 10 shares of common stock, 1,600 shares of preferred stock and 2,400 shares of excess stock, which represented all of the outstanding stock at that time. Evans National Holding Corp. also entered into a Management and Servicing Agreement with the Bank to provide management and other services to it. Evans National Holding Corp. will be operated as a real estate investment trust (REIT) which will provide additional flexibility and planning opportunities for the business of the Bank. It is anticipated that Evans National Holding Corp. will issue additional shares of non-voting preferred stock to raise additional capital during 2002. 12. GOODWILL AND INTANGIBLE ASSETS On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, which eliminates the pooling of interests method of accounting for all business combinations entered initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The Company has adopted this accounting standard for business combinations initiated after June 30, 2001. As of January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the balance sheet, and no longer be amortized but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle.
PAGE 9 In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the pro forma amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows: <TABLE> <CAPTION> Three Months Ended March 31, 2002 2001 ----------- ----------- <S> <C> <C> Reported net income $ 879,351 $ 655,137 Add: Goodwill amortization, net of tax 0 79,620 ----------- ----------- Pro forma adjusted net income $ 879,351 $ 734,757 =========== =========== Reported earnings per share $ 0.40 $ 0.30 Add: Goodwill amortization, net of tax per share 0.00 0.03 ----------- ----------- Pro forma adjusted earnings per share $ 0.40 $ 0.33 =========== =========== </TABLE> Changes in the carrying amount of goodwill for the quarter ended March 31, 2002, by operating segment, are as follows: <TABLE> <CAPTION> Banking Insurance Activities Activities Total ---------- ---------- ---------- <S> <C> <C> <C> Balance as of January 1, 2002 $ 0 $2,760,113 $2,760,113 Goodwill acquired during the period 0 172,800 172,800 ---------- ---------- ---------- Balance as of March 31, 2002 $ 0 $2,932,913 $2,932,913 ========== ========== ========== </TABLE> As required by the statement, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. As a result of the Company's analysis, no reclassifications were required as of March 31, 2002. Information regarding the Company's other intangible assets follows: <TABLE> <CAPTION> As of March 31, 2002 Carrying Accumulated Amount Amortization Net ------ ------------ -------- <S> <C> <C> <C> Noncompete agreements $209,000 $ 12,700 $196,300 Insurance expirations 185,000 32,750 152,250 -------- -------- -------- Total $394,000 $ 45,450 $348,550 ======== ======== ======== </TABLE> <TABLE> <CAPTION> As of December 31, 2001 Carrying Accumulated Amount Amortization Net ------ ------------ -------- <S> <C> <C> <C> Noncompete agreements $ 9,000 $ 2,250 $ 6,750 Insurance expirations 100,000 23,500 76,500 -------- -------- -------- Total $109,000 $ 25,750 $ 83,250 ======== ======== ======== </TABLE>
PAGE 10 Amortization expense for the three months ended March 31, 2002 was $19,700. Estimated amortization expense for each of the five succeeding fiscal years is as follows: <TABLE> <CAPTION> Year ending December 31, Amount ------ <S> <C> 2002 $78,800 2003 78,800 2004 78,800 2005 73,350 2006 57,000 </TABLE> 13. NEW ACCOUNTING STANDARDS PRONOUNCEMENTS SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000. This statement replaces SFAS No. 125, and requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities of the Company occurring after March 31, 2001 and did not have a material impact on the Company's financial statements. SFAS No. 141, Business Combinations issued on June 29, 2001 requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. Specifically identifiable intangible assets acquired, other than goodwill, will be amortized over their estimated useful economic life. This pronouncement had no effect on the Company's financial statements. SFAS No. 142, Goodwill and Other Intangible Assets, issued on June 29, 2001, addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This statement results in the end to systematic goodwill and other intangible amortization and require impairment testing on those balances at least annually or if circumstances arise that suggest that impairment may be an issue. SFAS No. 142 is effective for the Company beginning on January 1, 2002 and is applicable to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized.
PAGE 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. 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 credit losses, investment activities, loan origination, sale and servicing activities, service charges and fees collected on deposit accounts, and insurance services and fees. Noninterest expense primarily consists of salaries and employee benefits, occupancy and equipment expense and technology and communication expenses. 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. Interest income on loans does not include interest on loans for which the Bank has ceased to accrue interest. Interest and yields are not presented on a tax-equivalent basis.
PAGE 12 <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2002 THREE MONTHS ENDED MARCH 31, 2001 AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE (000) (000) (000) (000) <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Loans, net $142,431 $2,750 7.72% $129,507 $2,802 8.66% Taxable investments 48,385 705 5.82% 43,664 757 6.93% Tax-exempt investments 39,857 461 4.63% 31,501 379 4.82% Federal funds sold 7,275 28 1.56% 3,672 63 6.83% -------- ------ ----- -------- ------ ----- Total interest-earning assets $237,948 $3,944 6.63% $208,344 $4,001 7.68% ====== ====== Noninterest-earning assets Cash and due from banks 9,088 7,719 Premises and equipment, net 4,115 3,747 Other assets 8,203 8,421 --------- --------- Total Assets $259,354 $228,231 ========= ========= LIABILITIES & SHAREHOLDER'S EQUITY Interest-bearing liabilities: NOW accounts $ 9,479 $ 11 0.48% $ 8,594 $21 0.97% Savings deposits 70,518 215 1.22% 62,665 426 2.72% Time deposits 92,862 952 4.10% 84,928 1,247 5.88% Fed funds purchased & securities sold u/a to repurchase and other 4,945 24 1.96% 3,242 35 4.28% FHLB advances 9,722 125 5.14% 4,822 64 5.29% -------- ------ ----- -------- ------ ----- Total interest-bearing liabilities $187,526 $1,327 2.83% $164,251 $1,793 4.37% ====== ====== Noninterest-bearing liabilities: Demand deposits 39,790 34,215 Other 4,670 4,475 Total liabilities $231,986 $202,941 -------- -------- Shareholders' equity 27,368 25,290 -------- -------- Total Liabilities and Equity $259,354 $228,231 ======== ======== Net interest earnings $2,617 $2,208 ====== ====== Net yield on interest earning assets 4.40% 4.24% </TABLE>
PAGE 13 Total net loans outstanding decreased slightly by 0.2% to $142.2 million at March 31, 2002 from $142.5 million at December 31, 2001. During the quarter, the Company continued to shift its loan mix towards higher-yielding commercial loans. Total commercial loans increased 0.9% to approximately $96.2 million at March 31, 2002 from approximately $95.4 million at December 31, 2001. Total consumer loans decreased 2.2% to approximately $47.5 million at March 31, 2002 from approximately $48.5 million at December 31, 2001. A decrease of $0.9 million in overdraft balances accounted for a significant portion of the decrease in consumer loans for the quarter. These results also continue to reflect the Company's strategy to deal with the current interest rate environment by continuing to emphasize commercial loan originations while selling fixed rate residential real estate loans originated under a certain interest rate level. For the three months ended March 31, 2002, the Company sold residential mortgages to the Federal National Mortgage Association ("FNMA") totaling approximately $2.8 million as compared to approximately $0.8 million during the same period in 2001. The Company maintains servicing rights on the loans that it sells to FNMA and earns a fee thereon.
PAGE 14 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. <TABLE> <CAPTION> MARCH 31, 2002 PERCENTAGE DECEMBER 31, 2001 PERCENTAGE ($000) ($000) <S> <C> <C> <C> <C> COMMERCIAL LOANS Real Estate $ 73,382 51.0% $ 73,863 51.3% Installment 11,508 8.0% 10,549 7.3% Lines of Credit 10,425 7.3% 10,001 7.0% Lease Financing 863 0.6% 898 0.6% Cash Reserve 50 0.0% 52 0.0% --------- ----- --------- ----- Total Commercial Loans 96,228 66.9% 95,363 66.2% Consumer Loans Real Estate 22,239 15.5% 22,228 15.5% Home Equity 21,702 15.1% 21,681 15.1% Installment 2,575 1.8% 2,761 1.9% Overdrafts 261 0.2% 1,113 0.8% Credit Card 273 0.2% 334 0.2% Student Loans 307 0.2% 234 0.2% Other 135 0.1% 188 0.1% --------- ----- --------- ----- Total Consumer Loans 47,492 33.1% 48,539 33.8% --------- ----- --------- ----- Total Loans 143,720 100.0% 143,902 100.0% ========= ===== ========= ===== Net Deferred Costs & 363 363 Unearned Discounts Allowance for Loan Losses (1,896) (1,786) --------- --------- Total Loans, Net $ 142,177 $ 142,469 ========= ========= </TABLE> The Company's total non-accruing loans, expressed as a percentage of total loans, was 0.31% at March 31, 2002 as compared to 0.50% at December 31, 2001. Actual charge-offs for the three months ended March 31, 2002 were $9 thousand compared to $15 thousand for the same period in 2001. The decrease in non-accruing loans is the result of payoffs received on four outstanding non-accrued loans. The Company's allowance for loan losses increased to approximately $1.9 million at March 31, 2002 from approximately $1.8 million at December 31, 2001. The allowance for loan losses as a percentage of total loans was 1.32% at March 31, 2002 compared to 1.24% at December 31, 2001. This increase is a result of the increased amount of commercial loans. The increase in the loan portfolio, especially the increase in commercial loans, which tend to have higher credit risk than consumer loans, is reflected in the additional credit loss reserve levels reflected at March 31, 2002 and December 31, 2001.
PAGE 15 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-accrual loans. <TABLE> <CAPTION> March 31, 2002 December 31, 2001 -------------- ----------------- $ (000) $ (000) <S> <C> <C> Non-accruing loans: One-to-four family $ 0 $ 0 Home equity 0 0 Commercial real estate and multi- family 347 545 Consumer 0 0 Commercial business 94 179 ------- ------- Total 441 724 ------- ------- Loans 90+ days past due 4 443 Total non-performing loans $ 445 $ 1,167 ======= ======= Total non-performing loans as a percentage of total assets 0.17% 0.47% ======= ======= Total non-performing loans as a percentage of total loans 0.31% 0.82% ======= ======= </TABLE>
PAGE 16 Investing Activities The Company's securities portfolio increased by 11.1% to approximately $93.4 million at March 31, 2002 as compared to approximately $84.1 million at December 31, 2001. Growth for the quarter is primarily attributable to growth in deposits which may have occurred as a result of low interest rates available in similar investments. 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. Funding Activities Total deposits during the quarter increased by 4.8% to $214.1 million at March 31, 2002 from $204.3 million at December 31, 2001. Tax collections in local municipalities traditionally contribute to increases in total deposits, usually certificates of deposit over $100,000, during the first and third quarters and then decrease in the second and fourth quarters as cash is needed by the municipalities for operations. Time deposits over $100,000 increased 13.0% to $32.6 million at March 31, 2002 from $28.9 million at December 31, 2001. Core deposits (all deposits excluding time deposits greater than $100,000), increased 3.5% to $181.5 million at March 31, 2002 from $175.4 million at December 31, 2001. Premium savings, Statement savings, and Thrift-E savings increased 3.5%, 10.3%, and 7.1%, respectively, for the quarter. Demand deposits and NOW accounts grew slightly by 0.4% and 0.7% , respectively for the quarter. Securities sold under agreements to repurchase decreased 25.0% to $3.0 million at March 31, 2002 from $4.0 million at December 31, 2001. Other Balance Sheet Changes Properties and equipment, net, has increased approximately $126,000 as a result of renovations to a building the Bank owns adjacent to the Derby branch on Erie Road, Derby, New York, for housing of its loan department. Other assets have increased approximately $0.9 million from December 31, 2001. The majority of the increase, $0.5 million is the result of the January 1, 2002 acquisition of the business and assets of the Eden Agency by M&W and related intangible assets acquired in this transaction. Also, the additional increase of approximately $0.4 million in other assets is prepaid expenses and interest receivable on investments. MATERIAL CHANGES IN THE RESULTS OF OPERATIONS Net Income The Company recorded net income of approximately $879,000 for the quarter ended March 31, 2002, an increase of 34.22% over net income of $655,000 for the same quarter in 2001. Earnings per share were $0.40 for the quarter ended March 31, 2002, and $0.30 for the same quarter in 2001. All share and per share information is stated after giving effect to the stock split distributed on June 12, 2001 to shareholders of record on May 25, 2001. Net income represented a return on average assets of 1.36% for the quarter ended March 31, 2002 compared to 1.14% for the same period in 2001. The return on average equity for the first quarter of 2002 was 12.84% compared to 10.36% for the first quarter of 2001. 2002 first quarter net income reflects the January 1, 2002 implementation of SFAS No. 142, which resulted in the end to goodwill amortization. Excluding the effect of goodwill amortization during the first quarter 2001, net income would have been $735,000 or $0.33 per share. Other Operating Results Net interest income increased $409,000, or 18.5%, for the quarter ended March 31, 2002 compared to the same time period in 2001. Total interest income decreased 1.4% and interest paid on deposits decreased 30.5% from the first quarter of 2001. Interest income decreased in spite of the $29.6 million, or 14.2%, increase in average interest-earning assets to $237.9 million for the first quarter of 2002 from $208.3 million for the first quarter of 2001. Interest rate reductions driven by the Federal Reserve monetary policy were the primary reason for the decrease in interest income for the first quarter 2002 as compared to the first quarter 2001. In addition, during the first quarter 2002, the Company realized $86 thousand of interest income on the payoff of a loan for which the Company was not recording interest expense due to late payment history. The increase in average interest-earning assets resulted primarily from continued emphasis on loan originations and increases in the investment securities portfolio as a result of deposit balance increases. The yield on total interest earning assets decreased to 6.63% for the quarter ended March 31, 2002 from 7.68% for the quarter ended March 31, 2001. The interest expense decrease reflects the $23.3 million, or 14.2% increase in average interest-bearing liabilities to $187.5 million for the first quarter of 2002 from $164.3 million for the first quarter of 2001 as well as the offsetting effect of interest rate reductions made by the Bank since March 31, 2001. The yield on interest-bearing liabilities decreased to 2.83% for the quarter ended March 31, 2002 from 4.37% for the quarter ended March 31, 2001. The Bank's net interest margin, for the three month period ended March 31, 2002 was 4.49% as compared to 4.26% for the same time period in 2001. The yield on average loans decreased to 7.72% for the first quarter of 2002 from 8.66% for the same time period in 2001. The tax equivalent yield on federal funds and investments decreased from 7.08% in the first quarter of 2001 to 6.00% in the first quarter of 2002. The cost of funds on interest bearing balances decreased to 2.83% for the first quarter of 2002 from 4.37% for the same time period in 2001.
PAGE 17 The provision for loan losses has increased to $105,000 for the first quarter of 2002 from $75,000 for the same time period in 2001. This increase is a result of the increase in the size of the overall loan portfolio as well as an increase in the commercial loan composition as a percentage of the overall portfolio. Commercial loans tend to have a higher credit risk than consumer loans. Non-interest income increased to $1.4 million for the quarter ended March 31, 2002 from $1.1 million for the same period in 2001. This increase of $212,000 is primarily attributable to an increase of $117,000 in sales of insurance products through M&W Agency, Inc. which acquired the Eden Agency on January 1, 2002. The remainder of the increase is attributable to service charges for which rate increases were implemented in June 2001, ENB Associates commissions, premium on loans sold and other miscellaneous income. Non-interest expense totaled $2.6 million for the first quarter of 2002 reflecting an approximate $273,000 increase over the first quarter of 2001 total of $2.3 million. Approximately $102,000 of this increase is attributable to salaries and employee benefits which have risen as a result of normal pay adjustments and an overall increase in the number of employees of the Company. Professional services account for $75,000 of the increase primarily as a result of costs associated with the establishment of Evans National Holding Corp, currently a wholly-owned subsidiary of Evans National Bank which was created to be operated as a real estate investment trust (REIT) which will provide additional flexibility and planning opportunities for the business of the Bank. Evans Bancorp expense has increased approximately $62,000 due mainly to fees related to the Company's common stock on the Nasdaq National Market which occurred on July 9, 2001 as well as professional fees incurred related to the operations of the parent Company. Miscellaneous expenses, whose increase consisted primarily of telephone, appraisal expense, correspondent bank service charges and M&W miscellaneous costs (primarily attributable to the Eden Agency acquisition) increased approximately $91,000 for the quarter ended March 31, 2002 over the quarter ended March 31, 2001. Amortization of goodwill related to the M&W acquisition decreased $79,000 as goodwill is no longer amortized under the provisions of SFAS No. 142 which was adopted on January 1, 2002. Income tax expense totaled $374,000 and $280,000 for the three month periods ended March 31, 2002 and 2001, respectively. The effective combined tax rate for the first quarter of 2002 was 29.8% compared to 29.9% for the first quarter of 2001. The effective tax rate maintained by the Bank is attributable to investments in tax advantaged municipal bonds. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS INTEREST RATE RISK Interest rate risk occurs when interest-earning assets and interest-bearing liabilities mature or reprice at different times or on a different basis. The Asset, Liability Committee, ("ALCO") of the Bank analyzes the gap position on a monthly basis to determine the Bank's exposure to interest rate risk. The gap position is the difference between the total of the Bank's rate-sensitive assets and rate-sensitive liabilities maturing or repricing during a given time frame. A "positive" gap results when more assets than liabilities reprice and a "negative" gap results when more liabilities than assets reprice within a given time period. Because assets historically reprice faster than liabilities, a slightly negative gap position is considered preferable. At March 31, 2002 the Bank was in a negative gap position with $1.5 million more in rate-sensitive liabilities repricing over the next year than in rate-sensitive assets. This "negative" gap position compares to a "negative" gap position at December 31, 2001 of $0.4 million. This decrease is due to a number of factors, including a number of long-term mortgage pre-payments and shortened effective maturities on callable securities as a result of the current interest rate environment. Also, there was a shift during the quarter in less than one year certificates of deposit to longer terms, especially in the greater than $100,000 category. The Bank's asset/liability target, under its asset/liability policy, is a difference of +/- 15% of the Bank's total assets, which amounted to +/- $38.8 million at March 31, 2002. The gap ratio (rate-sensitive assets/rate-sensitive liabilities) at that date was 98%. MARKET RISK When rates rise or fall, the market value of the Bank's assets and liabilities will increase or decrease. As a part of the Bank's asset/liability policy, the Bank has set limitations on the negative impact to the market value of its balance sheet that would be acceptable. The Bank's securities portfolio is priced monthly and adjustments are made on the balance sheet to reflect the market value of the available for sale portfolio per SFAS No. 115. A limitation of a negative 25% of total capital before SFAS No. 115 (after tax) has been established as the maximum impact to equity as a result of marking available for sale securities to market that would be acceptable. At quarter-end, the impact to equity as a result of marking available for sale securities to market was an unrealized gain of approximately $0.5 million. On a quarterly basis, the available for sale portfolio is shocked for immediate rate increases of 100 and 200 basis points. At March 31, 2002, the Bank determined it would take an immediate increase in rates in excess of 200 basis points to eliminate the current capital cushion. The Bank's capital ratios are also reviewed on a quarterly basis. Unrealized gains and losses on available for sale securities are not included in the calculation of these ratios.
PAGE 18 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - None to report ITEM 2. Changes in Securities - None to report ITEM 3. Defaults upon Senior Securities - None to report ITEM 4. Submission of Matters To a Vote of Security Holder - None to report ITEM 5. Other Information On February 19, 2002, the Board of Directors declared a cash dividend of $.28 per share payable on April 2, 2002 to shareholders of record as of March 12, 2002. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits <TABLE> <CAPTION> Exhibit No. Name Page No. ----------- ---- -------- <S> <C> <C> 99.1 Press Release-Announcing Earnings for Quarter ended 21 March 31, 2002 </TABLE> (b) Report on Form 8-K: The registrant filed a Form 8-K on January 25, 2002 to report under Item 5 - Other Events the acquisition of the business and assets of the Eden Agency by M&W Agency, Inc., a wholly-owned subsidiary of Evans National Bank effective January 1, 2002. A press release was filed as an exhibit to the Form 8-K. The registrant filed a Form 8-K on January 29, 2002 to report under Item 5 - Other Events the Company's 2001 and fourth quarter earnings. A press release was filed as an exhibit to the Form 8-K. The registrant filed a Form 8-K on February 13, 2002 to report under Item 5 - Other Events the Company's plans for a new eighth branch location. A press release was filed as an exhibit to the Form 8-K. The registrant filed a Form 8-K on March 7, 2002 to report under Item 5 - Other Events the Company's declaration of a semi-annual dividend to be paid on outstanding EVBN common stock. A press release was filed as an exhibit to the Form 8-K.
PAGE 19 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 24, 2002 /s/James Tilley ----------------------------------- James Tilley President and CEO DATE April 24, 2002 /s/Mark DeBacker ----------------------------------- Mark DeBacker Senior Vice President & Chief Financial Officer