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 June 30, 2003 [ ] 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 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--2,342,780 shares as of June 30, 2003
INDEX EVANS BANCORP, INC. AND SUBSIDIARY <TABLE> <CAPTION> PAGE <S> <C> PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets-June 30, 2003 and December 31, 2002 1 Consolidated Statements of Income-Three months ended June 30, 2003 and 2002 2 Consolidated Statements of Income-Six months ended June 30,2003 and 2002 3 Consolidated Statements of Stockholders' Equity-Six months ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows-Six months ended June 30, 2003 and 2002 5-6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risks 20 Item 4. Controls and Procedures 21 PART II. OTHER INFORMATION 21 Item 1. Legal Proceedings Item 2. Changes In Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 22 </TABLE>
PART I - FINANCIAL INFORMATION PAGE 1 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 2003 and December 31, 2002 (Unaudited) <TABLE> <CAPTION> June 30, December 31, 2003 2002 ASSETS ------------ ------------ <S> <C> <C> Cash and due from banks $ 15,820,834 $ 11,308,727 Federal funds sold - 8,450,000 ------------ ------------ Total cash and cash equivalents 15,820,834 19,758,727 Interest bearing accounts in other banks 877,230 877,230 Securities: Available-for-sale, at fair value 124,354,854 103,031,200 Held-to-maturity, at amortized cost 4,050,229 3,640,714 Loans, net of allowance for loan losses of $2,381,507 in 2003 and $2,145,606 in 2002 167,246,246 148,997,646 Properties and equipment, net 5,381,067 5,348,994 Goodwill 2,944,913 2,944,913 Intangible assets 880,551 787,115 Bank-owned life insurance 6,317,000 662,733 Other assets 4,020,235 2,661,588 ------------ ------------ TOTAL ASSETS $331,893,159 $288,710,860 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABIILITIES Deposits: Demand $ 52,037,502 $ 44,664,537 NOW and money market accounts 10,778,544 10,535,456 Regular savings 108,075,771 94,907,508 Time deposits, $100,000 and over 33,784,611 28,440,994 Other time accounts 68,920,444 60,958,340 ------------ ------------ Total deposits 273,596,872 239,506,835 Other borrowed funds 14,908,054 8,110,964 Securities sold under agreements to repurchase 6,452,618 6,543,456 Other liabilities 4,188,634 3,687,604 ------------ ------------ Total liabilities 299,146,178 257,848,859 ------------ ------------ CONTINGENT LIABILITIES AND COMMITMENTS (Note 13) STOCKHOLDERS' EQUITY Common stock, $.50 par value; 10,000,000 shares authorized; 2,342,780 shares issued, and 2,334,162 in 2002 1,171,390 1,167,081 Capital surplus 16,789,986 16,578,868 Retained earnings 12,507,366 11,179,871 Accumulated other comprehensive income 2,278,239 1,942,295 ------------ ------------ 32,746,981 30,868,115 Less: Treasury stock - (6,114) ------------ ------------ Total stockholders' equity 32,746,981 30,862,001 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $331,893,159 $288,710,860 ============ ============ </TABLE> See Notes to Consolidated 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 June 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Three Months Ended June 30, 2003 2002 ---------- ---------- <S> <C> <C> INTEREST INCOME Loans $2,678,213 $2,677,586 Federal funds sold & interest on deposits in other banks 14,538 11,777 Securities: Taxable 604,223 719,622 Non-taxable 580,550 494,334 ---------- ---------- Total Interest Income 3,877,524 3,903,319 INTEREST EXPENSE Interest on deposits 1,027,960 1,137,350 Interest on borrowings 171,678 138,317 ---------- ---------- Total Interest Expense 1,199,638 1,275,667 NET INTEREST INCOME 2,677,886 2,627,652 PROVISION FOR LOAN LOSSES 120,000 105,000 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,557,886 2,522,652 NON-INTEREST INCOME: Service charges 451,944 283,350 Insurance service and fees 858,925 714,606 Commission fees 71,132 59,741 Net (loss) gain on sales of securities (36,967) 101,067 Premium on loans sold 26,389 8,695 Other 450,694 129,489 ---------- ---------- Total non-interest income 1,822,117 1,296,948 NON-INTEREST EXPENSE: Salaries and employee benefits 1,599,531 1,346,788 Occupancy 342,450 318,005 Supplies 84,182 59,187 Repairs and maintenance 96,277 99,607 Advertising and public relations 70,645 46,147 Professional services 188,144 119,908 FDIC assessments 9,545 8,655 Other insurance 61,425 75,614 Other 620,485 501,603 ---------- ---------- Total non-interest expense 3,072,684 2,575,514 ---------- ---------- Income before income taxes 1,307,319 1,244,086 INCOME TAXES 295,163 317,000 ---------- ---------- NET INCOME $1,012,156 $927,086 ========== ========== NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $0.43 $0.40 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,342,787 2,324,642 ========== ========== </TABLE> *Adjusted for 5% stock dividend paid January 29, 2003 See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 3 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Six Months ended June 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 2003 2002 ---------- ---------- <S> <C> <C> INTEREST INCOME Loans $5,318,254 $5,427,750 Federal funds sold & interest on deposits in other banks Securities: 62,652 40,182 Taxable 1,176,679 1,423,963 Non-taxable 1,141,117 955,467 ---------- ---------- Total Interest Income 7,698,702 7,847,362 INTEREST EXPENSE Interest on deposits 2,041,221 2,314,868 Interest on borrowings 293,177 287,658 ---------- ---------- Total Interest Expense 2,334,398 2,602,526 NET INTEREST INCOME 5,364,304 5,244,836 PROVISION FOR LOAN LOSSES 240,000 210,000 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,124,304 5,034,836 NON-INTEREST INCOME: Service charges 901,701 556,733 Insurance service and fees 1,900,235 1,506,409 Commission fees 111,284 94,664 Net gain on sales of securities 211,998 111,302 Premium on loans sold 45,853 21,241 Other 788,610 360,566 ---------- ---------- Total non-interest income 3,959,681 2,650,915 NON-INTEREST EXPENSE: Salaries and employee benefits 3,285,897 2,691,325 Occupancy 747,010 637,740 Supplies 167,985 109,520 Repairs and maintenance 215,007 206,147 Advertising and public relations 147,035 95,952 Professional services 455,262 279,237 FDIC assessments 18,445 17,225 Other insurance 129,280 137,940 Other 1,217,140 1,013,228 ---------- ---------- Total non-interest expense 6,383,061 5,188,314 ---------- ---------- Income before income taxes 2,700,924 2,497,437 INCOME TAXES 614,947 691,000 ---------- ---------- NET INCOME $2,085,977 $1,806,437 ========== ========== NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $ 0.89 $ 0.78 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,338,353 2,320,717 ========== ========== </TABLE> *Adjusted for 5 percent stock dividend paid January 29, 2003 See notes to Consolidated Financial Statements
PAGE 4 EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 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 $ - $ 26,960,769 Comprehensive income: 2002 net income 1,806,437 1,806,437 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $506,753 783,352 783,352 ------------- Total comprehensive income 2,589,789 ------------- Cash dividends ($.28 per common share) (617,799) (617,799) Issued 8,974 shares under dividend reinvestment plan 4,487 158,481 - - - 162,968 ---------- ----------- ----------- -------------- -------- ------------- Balance, June 30, 2002 $1,107,721 $13,885,565 $12,652,911 $ 1,449,530 $ - $ 29,095,727 ========== =========== =========== ============== ======== ============= </TABLE> SIX MONTHS ENDED JUNE 30, 2003 (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, 2003 $1,167,081 $16,578,868 $11,179,871 $ 1,942,295 $ (6,114) $ 30,862,001 Comprehensive income: 2003 net income 2,085,977 2,085,977 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $214,331 335,944 335,944 ------------- Total comprehensive income 2,421,921 ------------- Cash dividends ($.32 per common share) (746,838) (746,838) Issued 8,618 shares under dividend reinvestment plan 4,309 185,443 189,752 Reissued 300 shares treasury stock under dividend reinvestment plan 494 6,114 6,608 Stock options expense 25,675 25,675 Fractional shares paid in cash on stock dividend - - (12,138) - - (12,138) ---------- ----------- ----------- -------------- -------- ------------- Balance, June 30, 2003 $1,171,390 $16,789,986 $12,507,366 $ 2,278,239 $ - $ 32,746,981 ========== =========== =========== ============== ======== ============= </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 Six Months Ended June 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 2003 2002 ------------- ------------- <S> <C> <C> OPERATING ACTIVITIES Interest received $ 7,966,079 $ 7,931,801 Fees and commissions received 3,600,942 2,437,606 Interest paid (2,288,454) (2,636,958) Cash paid to suppliers and employees (6,497,299) (4,931,754) Income taxes paid (632,600) (748,800) ------------- ------------- Net cash provided by operating activities 2,148,668 2,051,895 INVESTING ACTIVITIES Available for sale securities Purchases (65,344,294) (27,334,287) Proceeds from sales 14,992,146 8,450,326 Proceeds from maturities 29,419,166 13,412,319 Held to maturity securities Purchases (2,009,024) (1,485,816) Proceeds from maturities 1,479,058 972,820 Cash paid for bank owned life insurance (6,200,000) 0 Additions to properties and equipment (166,604) (639,747) Increase in loans, net of repayments (21,162,906) (9,954,923) Proceeds from sales of loans 2,792,722 4,623,681 Proceeds from sales of other real estate owned 0 71,620 Acquisition of insurance agencies (179,997) (50,000) ------------- ------------- Net cash used in investing activities (46,379,733) (11,934,007) FINANCING ACTIVITIES Increase in deposits 34,149,538 13,695,590 Proceeds (repayments) of borrowings 6,706,250 (1,683,089) Dividends paid, net (562,616) (454,831) ------------- ------------- Net cash provided by financing activities 40,293,172 11,557,670 ------------- ------------- Net (decrease) increase in cash and cash equivalents (3,937,893) 1,675,558 Cash and cash equivalents, beginning of period 19,758,727 10,694,087 ------------- ------------- Cash and cash equivalents, end of period 15,820,834 12,369,645 ============= ============= </TABLE> See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION PAGE 6 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 2003 2002 ------------- ------------- <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 2,085,977 $ 1,806,437 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 773,966 468,746 Provision for loan losses 240,000 210,000 Gain on sale of assets (257,851) (70,752) Stock options expensed 25,675 - Decrease (increase) in accrued interest payable 45,943 (34,432) Increase in accrued interest receivable (296,512) (1,800) Increase (decrease) in other liabilities 210,873 (302,199) Decrease in other assets (679,403) (24,105) ------------- ------------- Total adjustments 62,691 245,458 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,148,668 $ 2,051,895 ============= ============= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENTS AND FINANCIAL ACTIVITIES Acquisition of insurance agencies debt incurred $ 202,000 $ 457,800 </TABLE> See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003 and 2002 1. GENERAL The accounting and reporting policies followed by Evans Bancorp, Inc., (the "Company") a bank holding company, and its wholly-owned subsidiary, Evans National Bank, (the "Bank") and the Bank's wholly-owned subsidiaries, ENB Associates Inc., ("ENB"), M&W Agency, Inc., ("M&W") and Evans National Holding Corp ("ENHC") in the preparation of the accompanying interim financial statements conform with accounting principles generally accepted in the United States of America and with general practice within the banking industry. The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. The results of operations for the six month period ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. 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 is established through a provision for loan losses. Recoveries on loans previously charged off are credited directly to the allowance for loan losses. The allowance is an amount that management believes is adequate to absorb estimated losses on existing loans. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan-loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, and current economic conditions. In addition, various regulatory agencies, as part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Management's allowance for loan losses reflects its current assessment of the New York State and local economy. Both have historically lagged behind the national economy, which is now unsettled. Marginal job growth, in conjunction with a declining population base, has left the Bank's market increasingly susceptible to potential credit problems. This is particularly true of commercial lending, which is a segment of significant past growth as well as a concentration in the Company's commercial 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 Office of the Comptroller of the Currency (OCC), and is reflective of management's assessment of the local environment as well as a continued growth trend in commercial loans.
The following table sets forth information regarding the allowance for loan losses for the six month period ended June 30, 2003 and 2002. ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Six Months Ended June 30, 2003 2002 ---- ---- <S> <C> <C> Beginning balance, January 1 $2,145,606 $1,786,115 Total charge offs (4,930) (20,623) Total recoveries 831 7,568 ---------- ---------- Net charge offs (4,099) (13,055) Provision for loan losses 240,000 210,000 ---------- ---------- Ending balance, June 30 $2,381,507 $1,983,060 ========== ========== </TABLE> 4. REVENUE RECOGNITION The Bank's primary sources of revenue are interest income from loans and investments and service charge income from loans and deposits. 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 accounting principles generally accepted in the United States of America. 5. PER SHARE DATA The common stock per share information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. Basic earnings per share and diluted earnings per share are the same. The Company's potential dilutive securities to issue common stock or convert to common stock are antidilutive at June 30, 2003. 6. DIVIDEND A cash dividend of $0.32 per share was paid on April 1, 2003 to shareholders of record as of March 11, 2003. A total of $746,838 was paid on 2,333,869 shares. 7. STOCK DIVIDEND A five percent stock dividend was paid on January 29, 2003, for shareholders of record as of December 2, 2002. The stock dividend resulted in the issuance of 110,589 shares of common stock. All share and per share amounts have been restated to reflect the issuance of the stock dividend. 8. COMMON STOCK During the quarter ended June 30, 2003, the Company issued 8,618 shares of common stock. These shares were issued to shareholders on April 1, 2003 who elected to receive shares in lieu of cash in the Company's dividend reinvestment plan. 9. TREASURY STOCK During the quarter ended June 30, 2003 the Company reissued 300 shares from Treasury Stock. These shares were reissued to shareholders on April 1, 2003 who elected to receive shares in lieu of cash in the Company's dividend reinvestment plan.
10. BANK-OWNED LIFE INSURANCE During the first quarter of 2003, the Bank purchased $6.2 million of additional insurance on the lives of certain officers and directors. The policies accumulate asset value to meet future liabilities including the payment of certain employee retirement benefits. Effective April 1, 2003 the Company implemented a non-qualified deferred compensation plan whereby certain directors and officers may defer a portion of their base pre-tax compensation. Effective April 1, 2003 , the Company implemented a non-qualified executive incentive retirement plan, whereby the Company will defer on behalf of certain officers a portion of their base compensation as well as an incentive based upon Company performance, until retirement or termination of service, subject to certain vesting arrangements. Also, effective April 1, 2003, the Company implemented a group term replacement plan for life insurance benefit which includes an endorsement split-dollar benefit to directors and certain officers. Costs pertaining to such plans are recorded in the Statements of Income. The amount of bank owned life insurance is included in other assets on the balance sheet and the increase in the cash surrender value is recorded as other income in the statements of income. 11. OTHER BORROWED FUNDS The Company borrowed an additional $7.0 million from the Federal Home Loan Bank ("FHLB") during the first quarter 2003 to fund a leverage strategy which included the purchase of certain mortgage backed and agency securities. The borrowing is a 10 year repurchase advance at an interest rate of 3.39%. The debt is callable by the FHLB if LIBOR ("London Inter-Bank Offer Rate") is 7.5% or more after February 2005. The debt is collateralized at the Federal Home Loan Bank by the purchased securities. 12. 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 and six month periods ended June 30, 2003 and 2002. Three Months Ended June 30, 2003 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $2,683,911 $ (6,025) $2,677,886 Provision for loan losses 120,000 0 120,000 ---------- --------- ---------- Net interest income (expense) after provision for loan losses 2,563,911 (6,025) 2,577,886 Non-interest income 963,192 0 963,192 Insurance commissions and fees 0 858,925 858,925 Non-interest expense 2,428,217 644,467 3,072,684 ---------- --------- ---------- Income before income taxes 1,098,886 208,433 1,307,319 Income taxes 212,220 82,943 295,163 ---------- --------- ---------- Net income $ 886,666 $ 125,490 $1,012,156 ========== ========= ========== </TABLE>
Six Months Ended June 30, 2003 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $5,376,890 ($ 12,586) $5,364,304 Provision for loan losses 240,000 0 240,000 ---------- ----------- ---------- Net interest income (expense) after provision for loan losses 5,136,890 (12,586) 5,124,304 Non-interest income 2,059,446 0 2,059,446 Insurance commissions and fees 0 1,900,235 1,900,235 Non-interest expense 5,003,607 1,379,454 6,383,061 ---------- ----------- ---------- Income before income taxes 2,192,729 508,195 2,700,924 Income taxes 412,086 202,861 614,947 ---------- ----------- ---------- Net income $1,780,643 $ 305,334 $2,085,977 ========== =========== ========== </TABLE> Three Months Ended June 30, 2002 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $2,632,933 $ (5,281) $2,627,652 Provision for loan losses 105,000 0 105,000 ---------- ---------- ---------- Net interest income (expense) after provision for loan losses 2,527,933 (5,281) 2,522,652 Non-interest income 582,342 0 582,342 Insurance commissions and fees 0 714,606 714,606 Non-interest expense 2,088,220 487,294 2,575,514 ---------- ---------- ---------- Income before income taxes 1,022,055 222,031 1,244,086 Income taxes 229,000 88,000 317,000 ---------- ---------- ---------- Net income $ 793,055 $ 134,031 $ 927,086 ========== ========== ========== </TABLE>
Six Months Ended June 30, 2002 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $5,255,812 $ (10,976) $5,244,836 Provision for loan losses 210,000 0 210,000 ---------- ---------- ---------- Net interest income (expense) after provision for loan losses 5,045,812 (10,976) 5,034,836 Non-interest income 1,144,506 0 1,144,506 Insurance commissions and fees 0 1,506,409 1,506,409 Non-interest expense 4,178,823 1,009,491 5,188,314 ---------- ---------- ---------- Income before income taxes 2,011,495 485,942 2,497,437 Income taxes 497,457 193,543 691,000 ---------- ---------- ---------- Net income $1,514,038 $ 292,399 $1,806,437 ========== ========== ========== </TABLE> 13. CONTINGENT LIABILITIES AND COMMITMENTS The consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the Bank's commitments and contingent liabilities at June 30, 2003 and 2002 is as follows: <TABLE> <CAPTION> 2003 2002 ---- ---- <S> <C> <C> Commitments to extend credit $51,495,000 $34,040,000 Standby letters of credit 2,421,000 1,547,000 ----------- ----------- Total $53,916,000 $ 35,587,00 =========== =========== </TABLE> 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 three 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 balance sheet as these derivatives are not considered material. The Company 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 $146,000 in 2003, $265,000 in 2004, $175,000 in 2005, $173,000 in 2006, $179,000 in 2007, and $1,727,000 thereafter. The Company is subject to possible litigation proceedings in the normal course of business. As of June 30, 2003, the Company had no asserted claims pending against the Company that management considers to be significant.
14 STOCK OPTIONS The first of the Company's stock options were awarded during the quarter ended June 30, 2003 under the Company's Stock Option and Long-Term Incentive Plan (the "Plan"). The Board of Directors were awarded 11,000 options on the date of the annual meeting, April 22, 2003. The options have a six month vesting period and have an exercise price of $22.92, which was the fair market value of the Company's stock on April 22, 2003, as determined by the closing trade price of such stock on the NASDAQ National Market at the date of grant. The Company accounts for the stock options under the fair value recognition provisions of Standard of Financial Accounting Statement ("SFAS") 123, "Accounting for Stock-Based Compensation". For the quarter ended June 30, 2003 the Company recognized approximately $25,000 of stock based compensation. 15. RECLASSIFICATIONS Certain reclassifications have been made to the 2002 financial statements to conform with the presentation used in 2003. 16. REGULATORY LEGISLATION Sarbanes-Oxley Act. On July 30, 2002, the Sarbanes-Oxley Act for 2002 ("SOA") was signed into law. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. The SOA addresses, among other matters: audit committees; certification of financial statements by the Chief Executive Officer and the Chief Financial Officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; a prohibition on insider trading during pension plan black out periods; disclosure of off-balance sheet transactions; a prohibition on certain loans to directors and officers; expedited filing requirements for Forms 4; disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; "real time" filing of periodic reports; the formation of a public accounting oversight board; auditor independence; and various increased criminal penalties for violations of securities laws. The SOA contains provisions that became effective upon enactment, and provisions that will become effective from within 30 days to one year from enactment. The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.
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. 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 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 judgements 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 inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgement 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. 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 judgement and the use of estimates related to the growth assumptions and market multiples used in the valuation model.
ANALYSIS OF FINANCIAL CONDITION Average Balance Sheet The following table presents the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. Investments are included at amortized cost. Interest and yields are presented on a tax-equivalent basis. <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 2003 JUNE 30, 2002 AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Loans, net $162,642 $2,678 6.59% $144,414 $2,677 7.41% Taxable investments 82,014 604 2.96% 50,440 720 5.71% Tax-exempt investments 52,893 883 6.67% 43,104 751 6.96% Time Deposits-Other Bank 877 6 2.63% 0 0 0.00% Federal funds sold 2,117 9 4.60% 3,538 12 1.36% -------- ------ ---- -------- ------ ---- Total interest-earning assets 300,543 $4,180 5.56% 241,496 $4,160 6.89% ====== ====== Noninterest-earning assets Cash and due from banks 8,390 8,306 Premises and equipment, net 5,404 4,361 Other assets 14,370 8,435 -------- -------- Total Assets $328,707 $262,598 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 10,600 $ 6 0.24% $ 9,973 $ 14 0.56% Savings deposits 113,053 293 1.03% 70,228 201 1.14% Time deposits 101,105 730 2.88% 94,415 923 3.91% Fed funds purchased 1,035 4 1.93% 23 0 0.00% Securities sold u/a to repurchase and other 5,240 13 1.01% 3,460 16 1.84% FHLB advances 13,866 148 4.27% 9,008 117 5.19% Notes payable 912 6 2.65% 486 5 4.11% -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities 245,811 $1,200 1.95% 187,593 $1,276 2.72% ------ ------ Noninterest-bearing liabilities: Demand deposits 47,254 42,159 Other 4,014 4,631 -------- -------- Total liabilities 297,079 $234,383 Stockholders' equity 31,628 28,215 -------- -------- Total Liabilities and Stockholders' Equity $328,707 $262,598 ======== ======== Net interest earnings $2,980 $2,884 ====== ====== Net yield on interest earning assets 3.61% 4.17% </TABLE> Total gross loans have grown to $169.6 million at June 30, 2003, reflecting a 5.9% or $9.5 million increase for the quarter. Total net loans (loans after allowance for loan losses) have grown to $167.2 million at June 30, 2003, reflecting a 5.9% or $9.3 million increase for the quarter. 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 $120.3 million at June 30, 2003, reflecting a 6.2% or $7.0 million increase for the quarter. Consumer loans total $48.9 million at June 30, 2003, reflecting a 5.1% or $2.4 million increase for the quarter. Given the current low interest rate environment, the Bank continues to sell certain fixed rate residential loans originated under a certain interest rate level, while maintaining the servicing rights to such loans. During the second quarter 2003, the Bank sold loans to FNMA totaling $3.5 million as compared to $1.7 million during the second quarter 2002. At June 30, 2003, the Bank had a loan servicing portfolio principal balance of $26.0 million upon which it earns a servicing fee. This loan servicing portfolio balance compares to $24.0 million at December 31, 2002.
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> JUNE 30, 2003 PERCENTAGE DECEMBER 31, 2002 PERCENTAGE ($000) ($000) <S> <C> <C> <C> <C> Commercial Loans Real Estate $ 96,924 57.3% $ 84,581 56.1% Installment 13,545 8.0% 12,512 8.3% Lines of Credit 9,755 5.8% 8,333 5.5% Cash Reserve 50 0.0% 47 0.0% -------- ----- -------- ----- Total Commercial Loans 120,274 71.1% 105,473 69.9% Consumer Loans Real Estate 21,281 12.5% 19,789 13.1% Home Equity 24,991 14.8% 23,132 15.3% Installment 1,929 1.1% 1,886 1.3% Overdrafts 269 0.2% 104 0.1% Credit Card 306 0.2% 298 0.2% Other 123 0.1% 126 0.1% -------- ----- -------- ----- Total Consumer Loans 48,899 28.9% 45,335 30.1% -------- ----- -------- ----- Total Loans 169,173 100.0% 150,808 100.0% ======== ===== ======== ===== Net Deferred Costs & Allowance for Loan Losses (2,382) (2,146) -------- -------- Loans, Net $167,246 $148,998 ======== ======== </TABLE> Loan quality has remained stable with $4 thousand in net charge offs incurred during the second quarter ended June 30, 2003. Non-performing loans, defined as accruing loans greater than 90 days past due and non-accrual loans, totaled 0.07% of total loans outstanding at June 30, 2003 as compared to 0.79% at December 31, 2002. The decrease in non-accrual loans was due to the refinancing with a new borrower of one large commercial loan with a principal balance at December 31, 2002 of $853,253. At June 30, 2003, the same loan, with an outstanding principal balance of $682,044, was considered impaired and has a reserve of $326,000. No loans were considered impaired at December 31, 2002. The allowance for loan losses totaled $2.4 million or 1.40% of gross loans outstanding at June 30, 2003 as compared to $2.1 million or 1.42% of gross loans outstanding at December 31, 2002. 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. <TABLE> <CAPTION> JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- ($000) ($000) <S> <C> <C> Non-accruing loans: One-to-four family $ 0 $ 0 Home equity 0 0 Commercial real estate and multi-family 70 1,104 Consumer 0 0 Commercial business 32 93 ------ ------ Total 102 1,197 ------ ------ Accruing loans 90+ days past due 25 0 ------ ------ Total non-performing loans $ 127 $1,197 ====== ====== Total non-performing loans as a percentage of total assets 0.04% 0.41% ====== ====== Total non-performing loans as a percentage of total loans 0.07% 0.79% ====== ====== </TABLE> The following table sets forth information regarding the allowance for loan losses for the six month period ended June 30, 2003 and 2002. <TABLE> <CAPTION> Six Months Ended June 30, 2003 2002 ---- ---- <S> <C> <C> Beginning balance, January 1 $ 2,145,606 $ 1,786,115 Total charge offs (4,930) (20,623) Total recoveries 831 7,568 ----------- ----------- Net charge offs (4,099) (13,055) Provision for loan losses 240,000 210,000 ----------- ----------- Ending balance, June 30 $ 2,381,507 $ 1,983,060 =========== =========== </TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Balance at Balance at 06/30/03 12/31/02 Attributable to: Attributable to: ---------------- ---------------- ($000) ($000) <S> <C> <C> Real Estate Loans $1,376 $ 844 Commercial Loans and Leases 358 259 Installment Loans (Includes Credit Cards) 129 72 Unallocated 519 971 ------ ------ Total allowance for loan losses $2,382 $2,146 ====== ====== </TABLE> Investing Activities The Company's securities portfolio decreased by 8.1% to approximately $128.4 million at June 30, 2003 as compared to approximately $139.7 million at March 31, 2003. The Company used investment maturities and pay-downs of principal in the second quarter as funding for the approximate growth of $9.5 million in loans. The growth in the securities portfolio of 20.4% for the six months ended June 30, 2003 was due in part to the Company's utilization of an advance from 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 and 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. Available-for-sale securities with a total fair value of $70.4 million at June 30, 2003 were pledged as collateral to secure public deposits and for other purposes required or permitted by law. Funding Activities Total deposits during the quarter decreased 0.9% to $273.6 million at June 30, 2003 from $276.0 million at March 31, 2003. Year to date total deposits have increased 14.2% from $239.5 million at December 31, 2002. Regular savings deposits decreased to $108.1 million at June 30, 2003, reflecting a 9.7% or $11.6 million decrease for the quarter, due to payment of expenses by tax deposits from municipals. Primarily due to the Bank's success in retaining these municipal deposits with a revamped money market product called Muni-Vest, the year to date savings deposits have increased $13.2 million from $94.9 million at December 31, 2002. Additionally, the decrease for the quarter in savings deposits was partially offset by an increase in demand deposits of 11.0% to $52.0 million at June 30,2003. Core deposits (all deposits excluding time deposits greater than $100,000) decreased to $239.8 million, reflecting a 1.5% or $3.6 million decrease for the quarter. Demand deposits increased 16.5%, Now accounts increased 2.3%, and securities sold under agreement to repurchase decreased 1.4% from December 31, 2002 all of which vary day to day within a range based on customer transaction volume and represent normal deposit activity. Other Balance Sheet Changes $6.2 million of bank owned life insurance was purchased during the first quarter 2003. The life insurance contracts (naming the Bank as primary beneficiary) were established to indirectly fund various employee benefit plans which were established in the second quarter of 2003. Other borrowed funds increased $6.8 million at June 30, 2003 from $8.1 million at December 31, 2002. The increase is attributed to a $7 million borrowing from FHLB as described above under Investing Activities. The borrowing is a 10 year callable product with an interest rate of 3.39%.
ANALYSIS OF RESULTS OF OPERATIONS Net Income Net income was $1.0 million or $0.43 per share for the quarter ended June 30, 2003 as compared to $0.9 million or $0.40 per share for the quarter ended June 30, 2002. Year-to-date in 2003, the Company has recorded net income of $2.1 million or $0.89 per share as compared to $1.8 million or $0.78 per share for the same period in 2002. All per share amounts reflect the special 5 percent stock dividend paid on January 29, 2003. Net income represented a return on average assets of 1.23% for the quarter ended June 30, 2003 compared to 1.41% for the same period in 2002. The return on average equity for the second quarter of 2003 was 13.63% compared to 13.66% for the second quarter of 2002. Other Operating Results Net interest income increased $50.0 thousand, or 1.9%, for the quarter ended June 30, 2003 compared to the same time period in 2002. Total interest income in the second quarter 2003 decreased 0.7% and interest paid on deposits and borrowings decreased 6.0% from the second quarter of 2002. Interest income decreased in spite of the $59.0 million, or 24.5% increase in average interest-earning assets to $300.5 million for the second quarter of 2003 from $241.5 million for the second quarter of 2002, due mainly to deposit growth in the Muni-Vest product and good growth in demand deposit accounts. The tax equivalent yield on total interest earning assets decreased to 5.56% for the quarter ended June 30, 2003 from 6.89% for the quarter ended June 30, 2002. The interest expense decrease reflects the $58.2 million, or 31.0% increase in average interest-bearing liabilities to $245.8 million for the second quarter of 2003 from $187.6 million for the second quarter of 2002 as well as the offsetting effect of interest rate reductions made by the Company since March 31, 2002. The cost of interest-bearing liabilities decreased to 1.95% for the quarter ended June 30, 2003 from 2.72% for the quarter ended June 30, 2002. The Company's net interest margin on earning assets, for the three month period ended June 30, 2003 was 3.97% as compared to 4.78% for the same time period in 2002. The decrease reflects investment and loan prepayments of the assets in the portfolio with the continued historical low interest rate environment. These prepayments are being invested in the lower environment. Additionally, a large volume increase has been realized in this environment. The Company anticipates that net interest margin will remain challenged in the near term future as a result of the current low interest rate environment. The yield on average loans decreased to 6.59% for the second quarter of 2003 from 7.41% for the same time period in 2002. The tax equivalent yield on federal funds and investments decreased from 6.11% in the second quarter of 2002 to 4.36% in the second quarter of 2003. The cost of funds on interest bearing balances decreased to 1.95% for the second quarter of 2003 from 2.72% for the same time period in 2002. The provision for loan losses has increased to $120 thousand for the second quarter of 2003 from $105 thousand for the same time period in 2002. The higher second quarter provision in 2003 was a result of continued commercial loan growth. The Company believes that 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 substantiates the current loan loss provision. Commercial real estate loans tend to have a higher credit risk than consumer loans. The decrease in net interest margin is due primarily to two factors: increased competition from both a loan and deposit pricing perspective and a decrease in the potential to adjust deposit rates significantly lower as a result of the historically low interest rate environment. Non-interest income increased to $1.8 million for the second quarter 2003 as compared to $1.3 million for the second quarter 2002. Service charges increased to $452 thousand in the second quarter 2003, a 59.5% or $169 thousand increase over the second quarter 2002, due to a concentrated effort on increasing fee income in late 2002 and early 2003 and the roll out of the Bank's Safeguard Overdraft Service in early 2003. M&W Agency insurance commissions increased to $859 thousand in the second quarter, a 20.1% or $144 thousand increase over the second quarter 2002, partially due to the M&W acquisition of the Gutekunst Agency on January 1, 2003 and Frontier Claims Services on December 31, 2003. Due to higher loan activity, the Bank realized additional income, of approximately $87 thousand during the second quarter of 2003 on loan prepayment charges, loan servicing charges and letter of credit fees. The Bank also realized additional income on the increase in cash-surrender value of approximately $78 thousand on bank-owned life insurance on key employees, purchased in the first quarter of 2003. The Bank also realized $37 thousand in losses on sales of securities during the second quarter 2003 as compared to $101 thousand in gains in the second quarter 2002. Other increases include fees on the Bank's merchant credit card program and ATM fees. Non interest expense increased by $0.5 million to $3.1 million for the second quarter 2003 as compared to $2.6 million for the second quarter 2002. The primary increase is salaries of $0.3 million which is a result of the Bank and M&W Agency's growth over the past year, as well as normal merit increases. Professional services have increased $0.1 million primarily as a result of fees connected with a consulting engagement to increase fee income. Other expenses have increased $0.1 million due to a number of items including costs associated with the Bank's conversion to a new item processing data center environment, which have resulted in increased capacity, capability and opportunity for future efficiencies, as well as costs pertaining to the recent issuance of stock options to the Company's Board of Directors. The Company has elected to expense stock options under the provisions of SFAS No. 123. Income tax expense totaled $295,163 and $317,000 for the three month periods ended June 30, 2003 and 2002, respectively. The effective combined tax rate for the second quarter of 2003 was 22.6% compared to 25.5% for the second quarter of 2002. The
decrease in the effective tax rate is primarily attributable to state tax advantages related to the recent establishment of Evans National Holding Corp, the Bank's subsidiary real estate investment trust, and the tax benefit of the Bank-owned life insurance increase in cash surrender value. CAPITAL The Bank has consistently maintained regulatory capital ratios at, or above, "well capitalized" standards. Total stockholders' equity was $32.7 million at June 30, 2003, up from $31.0 million at March 31, 2003. Equity as a percentage of assets was 9.87% at June 30, 2003, compared to 9.35% at March 31, 2003. Book value per common share rose to $13.97 at June 30, 2003, up from $13.29 at March 31, 2003. CAPITAL EXPENDITURES The Bank has approved the construction and furnishing of a new branch office in Lancaster, New York for 2003. The cost to the Bank is expected to be approximately $0.8 million. Other planned expenditures include replacing a number of personal computers, replacing/adding automated teller machines (ATMs) and miscellaneous other equipment. The Bank believes it has a sufficient capital base to support these capital expenditures with current assets and retained earnings.
ITEM 3 - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS AND LIQUIDITY INTEREST RATE RISK The Company's asset/liability management strategy is to maximize earnings and return on capital while limiting exposure to risks associated with a volatile interest rate environment. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the type and terms of interest earning assets and interest bearing liabilities that generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. Management uses income simulation models to quantify the potential impact on earnings and capital with changes in interest rates. The model uses cash flows and repricing information from loans and certificates of deposit, plus repricing assumptions on products without specific repricing dates (e.g. savings and interest bearing demand accounts), to calculate durations of each of the Bank's assets and liabilities. In addition, the model uses management assumptions on growth with duration to project income. The model also projects the effect on income due to changes in interest rates as well as the value of the Company's equity in each of the theoretical rate environments. The Company maintains specific interest rate risk management policy limits. Based on simulation modeling, these guidelines include a +/- 5.25% of net interest income and a 6% of capital threshold on the value of the Company's economic value of equity. At June 30, 2003, the effect of an immediate 200 basis point increase in interest rate would increase the Company's annual net interest income by 1.4%, or $ 0.2 million. A 200 basis point decrease in interest rate would decrease annual net interest income by 3.7% or approximately $ 0.5 million. 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 June 30, 2003, approximately 4.9% of the Bank's securities had maturity dates of one year or less and approximately 19.6% had maturity dates of five years or less. At June 30, 2003, the Bank had net short-term liquidity of $20.5 million as compared to $36.9 million at December 31, 2002. Available assets of $121.8 million, less public and purchased funds of $97.8 million, resulted in a long-term liquidity ratio of 125% at June 30, 2003, versus 158% at December 31, 2002. The decrease is due to the large increase in deposits over the six month period, which are considered volatile funds. Liquidity needs can also be met by 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. MARKET RISK When rates rise or fall, the market value of the Bank's rate-sensitive assets and liabilities increases or decreases. 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. On a monthly basis, the balance sheet is shocked for immediate rate increases of 100 and 200 basis points. At June 30, 2003, 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.
ITEM 4 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls (As defined in Exchange Act Rule 13a-14(c)) 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 have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. 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 Holders The 2003 Annual Shareholders meeting of the Registrant was held on April 22, 2003. At the meeting, LaVerne G. Hall, Robert G. Miller, Jr, James Tilley, and John R. O'Brien were elected as directors for a term of three years, and Nancy W Ware was elected as a director for a term of two years. The following votes were cast for the nominees: <TABLE> <CAPTION> FOR <S> <C> Nancy W Ware 1,527,085 LaVerne G Hall 1,530,661 Robert G Miller, Jr 1,530,661 John R. O'Brien 1,528,880 James Tilley 1,529,663 </TABLE> The following directors also continue their terms of office: Robert W Allen William F Barrett James E Biddle Jr Phillip Brothman David M Taylor Thomas H Waring, Jr The proposed amendment to Evans Bancorp, Inc. 1999 Stock Option and Long Term Incentive Plan was approved with 1,118,416 votes for, 124,160 votes cast against, 8,842 votes abstained, and 311,765 broker non-votes. The proposed Employee Stock Purchase Plan was approved with 1,165,105 votes for, 47,854 votes cast against, 38,459 votes abstained, and 311,765 broker non-votes. ITEM 5. Other Information - None to report
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits <TABLE> <CAPTION> Exhibit No. Name Page No. <S> <C> <C> 31.1 Certification of James Tilley pursuant to Rule 13a-14(a) and 23 15d-14(a), as adopted pursuant to section 302 of The Sarbanes-Oxley Act of 2002. 31.2 Certification of Mark DeBacker pursuant to Rule 13a-14(a) and 25 15d-14(a), as adopted pursuant to section 302 of The Sarbanes-Oxley Act of 2002. 32.1 Certification of James Tilley pursuant to 18 USC Section 1350 27 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 Mark DeBacker pursuant to 18 USC Section 1350 29 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 </TABLE> (b) Reports on Form 8-K : The registrant filed a Form 8-K on July 29, 2003 to report under Item 7 and Item 12 a press release announcing second quarter earnings. 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 July 31, 2003 /s/ James Tilley ----------------------------- James Tilley President and CEO DATE July 31, 2003 /s/ Mark DeBacker ----------------------------- Mark DeBacker Treasurer