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 September 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--2,440,338 shares as of October 17, 2003
INDEX EVANS BANCORP, INC. AND SUBSIDIARY <TABLE> <CAPTION> PAGE ---- <S> <C> PART 1. FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets-September 30, 2003 and December 31, 2002 1 Consolidated Statements of Income-Three months ended September 30, 2003 and 2002 2 Consolidated Statements of Income-Nine months ended September 30, 2003 and 2002 3 Consolidated Statements of Stockholders' Equity-Nine months ended September 30, 2003 and 2002 4 Consolidated Statements of Cash Flows-Nine months ended September 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 September 30, 2003 and December 31, 2002 (Unaudited) <TABLE> <CAPTION> September 30, December 31, ASSETS 2003 2002 ---------------- ----------------- <S> <C> <C> Cash and due from banks $10,020,937 $11,308,727 Federal funds sold - 8,450,000 ---------------- ----------------- Total cash and cash equivalents 10,020,937 19,758,727 Interest bearing accounts in other banks 682,739 877,230 Securities: Available-for-sale, at fair value 126,120,039 103,031,200 Held-to-maturity, at amortized cost 3,641,812 3,640,714 Loans, net of allowance for loan losses of $2,496,410 in 2003 175,275,062 148,997,646 and $2,145,606 in 2002 Properties and equipment, net 5,403,765 5,348,994 Goodwill 2,944,913 2,944,913 Intangible assets 830,185 787,115 Bank-owned life insurance 7,162,044 662,733 Other assets 3,550,315 2,661,588 ---------------- ----------------- TOTAL ASSETS $335,631,811 $288,710,860 ================ ================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand $49,494,508 $44,664,537 NOW and money market accounts 11,071,519 10,535,456 Regular savings 111,693,220 94,907,508 Time deposits, $100,000 and over 32,149,756 28,440,994 Other time accounts 69,646,569 60,958,340 ---------------- ----------------- Total deposits 274,055,572 239,506,835 Other borrowed funds 17,875,238 8,110,964 Securities sold under agreements to repurchase 6,993,385 6,543,456 Dividend Payable 787,607 - Other liabilities 3,808,186 3,687,604 ---------------- ----------------- Total liabilities 303,519,988 257,848,859 ---------------- ----------------- CONTINGENT LIABILITIES AND COMMITMENTS (Note 13) STOCKHOLDERS' EQUITY Common stock, $.50 par value; 10,000,000 shares authorized; 2,432,309 shares outstanding in 2003, and 2,450,564 shares outstanding in 2002 * 1,229,303 1,167,081 Capital surplus 19,318,671 16,578,868 Retained earnings 10,191,815 11,179,871 Accumulated other comprehensive income 1,947,651 1,942,295 ---------------- ----------------- 32,687,440 30,868,115 Less: Treasury stock (575,617) (6,114) ---------------- ----------------- Total stockholders' equity 32,111,823 30,862,001 ---------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $335,631,811 $288,710,860 ================ ================= </TABLE> *Adjusted for 5 percent stock dividend paid January 29, 2003 and a 5 percent stock dividend declared September 16, 2003 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 September 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Three Months Ended September 30, 2003 2002 ------------------ ------------------ <S> <C> <C> INTEREST INCOME Loans $2,677,837 $2,689,269 Federal funds sold & interest on deposits in other banks 14,672 13,856 Securities: Taxable 380,052 580,543 Non-taxable 572,930 510,743 ------------------ ------------------ Total Interest Income 3,645,491 3,794,411 INTEREST EXPENSE Interest on deposits 960,781 1,037,567 Interest on borrowings 165,586 130,600 ------------------ ------------------ Total Interest Expense 1,126,367 1,168,167 NET INTEREST INCOME 2,519,124 2,626,244 PROVISION FOR LOAN LOSSES 120,000 105,000 ------------------ ------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,399,124 2,521,244 NON-INTEREST INCOME: Service charges 451,270 260,993 Insurance service and fees 897,005 737,126 Commission fees 56,285 88,402 Net gain on sales of securities 58,957 0 Premium on loans sold 56,455 13,019 Other 515,016 274,964 ------------------ ------------------ Total non-interest income 2,034,988 1,374,504 NON-INTEREST EXPENSE: Salaries and employee benefits 1,741,669 1,412,706 Occupancy 348,600 325,057 Supplies 54,484 61,132 Repairs and maintenance 81,024 97,485 Advertising and public relations 56,207 49,523 Professional services 97,822 146,335 FDIC assessments 10,985 8,876 Other insurance 82,470 72,253 Other 658,715 495,471 ------------------ ------------------ Total non-interest expense 3,131,976 2,668,838 ------------------ ------------------ Income before income taxes 1,302,136 1,226,910 INCOME TAXES 292,953 292,189 ------------------ ------------------ NET INCOME $1,009,183 $934,721 ================== ================== NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $0.41 $0.38 ================== ================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,452,318 2,436,691 ================== ================== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES* 2,452,921 2,436,691 ================== ================== </TABLE> *Adjusted for 5 percent stock dividend paid January 29, 2003 and a 5 percent stock dividend declared September 16, 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 Nine Months ended September 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 2003 2002 ------------------ ------------------- <S> <C> <C> INTEREST INCOME Loans $7,996,091 $8,117,019 Federal funds sold & interest on deposits in other banks 77,324 54,037 Securities: Taxable 1,556,731 2,004,507 Non-taxable 1,714,047 1,466,210 ------------------ ------------------- Total Interest Income 11,344,193 11,641,773 INTEREST EXPENSE Interest on deposits 3,002,002 3,352,435 Interest on borrowings 458,763 418,258 ------------------ ------------------- Total Interest Expense 3,460,765 3,770,693 NET INTEREST INCOME 7,883,428 7,871,080 PROVISION FOR LOAN LOSSES 360,000 315,000 ------------------ ------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,523,428 7,556,080 NON-INTEREST INCOME: Service charges 1,352,971 817,726 Insurance service and fees 2,797,240 2,243,535 Commission fees 167,569 183,066 Net gain on sales of securities 270,955 111,302 Premium on loans sold 102,308 34,260 Other 1,303,626 635,530 ------------------ ------------------- Total non-interest income 5,994,669 4,025,419 NON-INTEREST EXPENSE: Salaries and employee benefits 5,027,566 4,104,031 Occupancy 1,095,610 962,797 Supplies 222,469 170,652 Repairs and maintenance 296,031 303,632 Advertising and public relations 203,242 145,475 Professional services 553,084 425,572 FDIC assessments 29,430 26,101 Other insurance 211,750 210,193 Other 1,875,855 1,508,699 ------------------ ------------------- Total non-interest expense 9,515,037 7,857,152 ------------------ ------------------- Income before income taxes 4,003,060 3,724,347 INCOME TAXES 907,900 983,189 ------------------ ------------------- NET INCOME $3,095,160 $2,741,158 ================== =================== NET INCOME PER COMMON SHARE-BASIC AND DILUTED* $1.26 $1.13 ================== =================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES* 2,454,276 2,433,048 ================== =================== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES* 2,452,621 2,433,048 ================== =================== </TABLE> *Adjusted for 5 percent stock dividend paid January 29, 2003 and a 5 percent stock dividend declared September 16, 2003 See notes to Consolidated Financial Statements
PAGE 4 EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME 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 2,741,158 2,741,158 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $506,753 1,700,146 1,700,146 ----------- Total comprehensive income 4,441,304 ----------- Cash dividends ($.54 per common share) (1,304,585) (1,304,585) Purchase of 880 shares for treasury (16,748) (16,748) Issued 9,871 shares under dividend reinvestment plan 4,487 158,481 - - - 162,968 ---------- ----------- ----------- ---------- --------- ------------ Balance, September 30, 2002 $ 1,107,721 $ 13,885,565 $ 12,900,846 $ 2,366,324 $ (16,748) $ 30,243,708 ========== =========== =========== ========== ========= ============\ </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME 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 3,095,160 3,095,160 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $3,415 5,356 5,356 ---------- Total comprehensive income 3,100,516 ---------- Cash dividends ($.63 per common share) (1,534,447) (1,534,447) 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 75,148 75,148 Fractional shares paid in cash on stock dividend - - (12,138) - - (12,138) Purchased 26,295 shares for treasury (575,617) (575,617) 5 percent stock dividend-issued 115,824 shares 57,913 2,479,212 (2,537,125) - - - --------- ----------- ------------ ---------- --------- ----------- Balance, September 30, 2003 $ 1,229,303 $ 19,318,671 $ 10,191,815 $ 1,947,651 $ (575,617) $ 32,111,823 ========= =========== ============ ========== ========= =========== </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 Nine Months Ended September 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 2003 2002 ------------------ ------------------- <S> <C> <C> OPERATING ACTIVITIES Interest received $11,541,985 $11,620,469 Fees and commissions received 5,466,099 3,833,511 Interest paid (3,497,491) (3,946,881) Cash paid to suppliers and employees (9,581,081) (7,537,471) Income taxes paid (910,490) (1,107,877) ------------------ ------------------- Net cash provided by operating activities 3,019,022 2,861,751 INVESTING ACTIVITIES Available for sale securities Purchases (99,676,891) (42,210,419) Proceeds from sales 26,063,631 8,463,344 Proceeds from maturities 50,527,362 29,512,656 Held to maturity securities Purchases (2,768,262) (2,076,777) Proceeds from maturities 2,640,264 1,532,038 Cash paid for bank owned life insurance (6,200,000) 0 Additions to properties and equipment (350,724) (1,206,352) Increase in loans, net of repayments (39,535,646) (13,875,915) Proceeds from sales of loans 13,039,250 7,750,943 Proceeds from sales of other real estate owned 0 69,420 Acquisition of insurance agencies (180,000) (50,000) ------------------ ------------------- Net cash used in investing activities (56,441,016) (12,091,062) FINANCING ACTIVITIES Increase in deposits 34,608,237 11,725,295 Proceeds (repayments) of borrowings 10,214,203 (1,570,022) Treasury Stock, net (569,503) (16,748) Dividends paid, net (568,733) (454,832) ------------------ ------------------- Net cash provided by financing activities 43,684,204 9,683,693 ------------------ ------------------- Net (decrease) increase in cash and cash equivalents (9,737,790) 454,382 Cash and cash equivalents, beginning of period 19,758,727 10,694,087 ------------------ ------------------- Cash and cash equivalents, end of period 10,020,937 11,148,469 ================== =================== </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 Nine Months Ended September 30, 2003 and 2002 (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 2003 2002 ------------------- ------------------- <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $3,095,160 $2,741,158 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,072,202 736,455 Provision for loan losses 360,000 315,000 Gain on sale of assets (373,263) (56,570) Stock options expensed 75,148 - Increase in accrued interest payable (36,726) (176,188) Increase in accrued interest receivable (471,757) (175,319) Decrease in other liabilities (16,768) (57,802) Decrease in other assets (684,974) (464,983) ------------------- ------------------- Total adjustments (76,138) 120,593 ------------------- ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $3,019,022 $2,861,751 =================== =================== 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
7 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 and 2002 (Unaudited) 1. GENERAL The accounting and reporting policies followed by Evans Bancorp, Inc., (the "Company") a bank holding company, and its wholly-owned subsidiary, Evans National Bank, (the "Bank") and the Bank's wholly-owned subsidiaries, ENB Associates Inc., ("ENB"), M&W Agency, Inc., ("M&W") and Evans National Holding Corp ("ENHC") in the preparation of the accompanying interim financial statements conform with accounting principles generally accepted in the United States of America and with general practice within the banking industry. The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. The results of operations for the nine month period ended September 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.
8 The following table sets forth information regarding the allowance for loan losses for the nine month period ended September 30, 2003 and 2002. ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Nine Months Ended September 30, 2003 2002 ---- ---- <S> <C> <C> Beginning balance, January 1 $2,145,606 $1,786,115 Total charge offs (10,027) (32,180) Total recoveries 831 15,300 --- ------ Net charge offs (9,196) (16,880) Provision for loan losses 360,000 315,000 ------- ------- Ending balance, September 30 $2,496,410 $2,084,235 ========== ========== </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 for the periods ending September 30, 2003 and 2002. The Company's potential dilutive securities included 387 and 410 dilutive shares for the three months and nine months ended September 30, 2003, respectively. 6. CASH DIVIDEND A cash dividend of $0.32 per share, restated for the 5 percent stock dividend declared September 16, 2003, was declared on August 19, 2003 to shareholders of record as of September 10, 2003. A total of $787,607 was paid on 2,432,309 shares on October 1, 2003. 7. STOCK DIVIDEND A five percent stock dividend was paid on January 29, 2003, to 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. Additionally, a five percent stock dividend to be paid on December 1, 2003, was declared on September 16, 2003 for shareholders of record as of October 14, 2003. The stock dividend will result in the issuance of approximately 116,000 shares of common stock before determination of fractional shares, which will be paid in cash. 8. COMMON STOCK During the fourth quarter the Company issued 8,030 shares of common stock. These shares were issued to shareholders on October 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 September 30, 2003 the Company repurchased 25,000 shares of common stock at an average cost of $21.94 per share. Additionally the Company received into treasury stock 1,295 shares released from an escrow account related to the final settlement of the M&W purchase at a cost of $20.93 per share.
9 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 consolidated statements of income. The increase in the cash surrender value of such policies is recorded as other non-interest income in the consolidated statements of income. 11. OTHER BORROWED FUNDS The Company borrowed an additional $7.0 million from the Federal Home Loan Bank of New York ("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 nine month periods ended September 30, 2003 and 2002. Three Months Ended September 30, 2003 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $2,524,787 ($5,663) $2,519,124 Provision for loan losses 120,000 0 120,000 ------------------------ ------------------------ ---------------------- Net interest income (expense) after provision for loan losses 2,404,787 (5,663) 2,399,124 Non-interest income 1,137,983 0 1,137,983 Insurance commissions and fees 0 897,005 897,005 Non-interest expense 2,422,505 709,471 3,131,976 ------------------------ ------------------------ ---------------------- Income before income taxes 1,120,265 181,871 1,302,136 Income taxes 220,988 71,965 292,953 ------------------------ ------------------------ ---------------------- Net income $899,277 $109,906 $1,009,183 ======================== ======================== ====================== </TABLE>
10 Nine Months Ended September 30, 2003 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $7,901,677 ($18,249) $7,883,428 Provision for loan losses 360,000 0 360,000 ------------------------ ------------------------ ---------------------- Net interest income (expense) after provision for loan losses 7,541,677 (18,249) 7,523,428 Non-interest income 3,197,429 0 3,197,429 Insurance commissions and fees 0 2,797,240 2,797,240 Non-interest expense 7,426,112 2,088,925 9,515,037 ------------------------ ------------------------ ---------------------- Income before income taxes 3,312,994 690,066 4,003,060 Income taxes 633,074 274,826 907,900 ------------------------ ------------------------ ---------------------- Net income $2,679,920 $415,240 $3,095,160 ======================== ======================== ====================== </TABLE> Three Months Ended September 30, 2002 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $2,631,222 ($4,978) $2,626,244 Provision for loan losses 105,000 0 105,000 ------------------------ ------------------------ ---------------------- Net interest income (expense) after provision for loan losses 2,526,222 (4,978) 2,521,244 Non-interest income 637,378 0 637,378 Insurance commissions and fees 0 737,126 737,126 Non-interest expense 2,160,382 508,456 2,668,838 ------------------------ ------------------------ ---------------------- Income before income taxes 1,003,218 223,692 1,226,910 Income taxes 203,483 88,706 292,189 ------------------------ ------------------------ ---------------------- Net income $799,735 $134,986 $934,721 ======================== ======================== ======================\ </TABLE>
11 Nine Months Ended September 30, 2002 <TABLE> <CAPTION> BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL <S> <C> <C> <C> Net interest income (expense) $7,887,034 ($15,954) $7,871,080 Provision for loan losses 315,000 0 315,000 ------------------------ ------------------------ ---------------------- Net interest income (expense) after provision for loan losses 7,572,034 (15,954) 7,556,080 Non-interest income 1,781,884 0 1,781,884 Insurance commissions and fees 0 2,243,535 2,243,535 Non-interest expense 6,339,205 1,517,947 7,857,152 ------------------------ ------------------------ ---------------------- Income before income taxes 3,014,713 709,634 3,724,347 Income taxes 700,940 282,249 983,189 ------------------------ ------------------------ ---------------------- Net income $2,313,773 $427,385 $2,741,158 ======================== ======================== ====================== </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 September 30, 2003 and 2002 is as follows: <TABLE> <CAPTION> 2003 2002 ---- ---- <S> <C> <C> Commitments to extend credit $51,442,000 $35,928,000 Standby letters of credit 2,373,000 1,791,000 ------------------- ---------------- Total $53,815,000 $37,719,000 =================== ================ </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 two years. Certain lending commitments for conforming residential mortgage loans to be sold into the secondary market are considered derivative instruments under the guidelines of SFAS No. 133. The changes in the fair value of these commitments due to interest rate risk are not recorded on the consolidated balance sheets as these derivatives are not considered material. The Company 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 $80,000 in 2003, $294,000 in 2004, $203,000 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 September 30, 2003, the Company had no asserted claims pending against the Company that management considered to be significant.
14 STOCK OPTIONS Stock options were awarded during the quarter ended September 30, 2003 under the Company's Stock Option and Long-Term Incentive Plan (the "Plan"). Certain employees of the Bank and its subsidiaries were awarded 15,500 options on August 19, 2003. The options have vesting schedules from two years through nine years and have an exercise price of $22.28. Additionally, the Company implemented the Evans Bancorp, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan") on July1, 2003. The Stock Purchase Plan allows participants to purchases shares of Common Stock at an option price equal to the lesser of 85% of the fair market value of the Common Stock on the date of grant or 85% of the fair market value on the date of exercise. The Company granted options on July 1, 2003 based on participant's selected deferral compensation percentages. 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 September 30, 2003 the Company recognized approximately $75,000 of stock based compensation expense. 15. RECLASSIFICATIONS Certain reclassifications have been made to the 2002 financial statements to conform with the presentation used in 2003. 16. SUBSEQUENT EVENTS Subsequent to September 30, 2003, M&W Agency, Inc. completed its acquisition of the assets, business and certain liabilities of Tarbox Inc. a retail property and insurance agency located in Gowanda, New York. The pro forma impact of this acquisition is not material to the net sales, net income, or basic earnings per share assuming the acquisition had taken place on January 1, 2003.
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. Yields are presented on a tax-equivalent basis. <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE ASSETS (000'S) (000'S) (000'S) (000'S) <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans, net $171,938 $2,678 6.23% $147,771 $2,689 7.28% Taxable investments 70,644 380 2.15% 45,184 580 5.14% Tax-exempt investments 53,131 573 6.56%* 45,107 511 6.89%* Time Deposits-Other Bank 872 6 2.60% 0 0 0.00% Federal funds sold 3,648 9 0.99% 3,323 14 1.66% --------------- --------- --------- ------------- --------- ------------- Total interest-earning assets 300,233 $3,646 5.25% 241,385 $3,794 6.72% ========= ========= Noninterest-earning assets Cash and due from banks 8,953 8,676 Premises and equipment, net 5,387 4,483 Other assets 14,791 8,441 --------------- ------------- Total Assets $329,364 $262,985 =============== ============= LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $11,259 $6 0.21% $9,642 $12 0.50% Savings deposits 107,059 220 0.82% 74,937 195 1.04% Time deposits 102,980 735 2.85% 88,208 831 3.77% Fed funds purchased 650 2 1.23% 0 0 0.00% Securities sold u/a to repurchase and other 6,033 13 0.86% 3,344 13 1.55% FHLB advances 13,573 145 4.27% 8,729 112 5.12% Notes payable 852 6 2.82% 455 5 4.44% --------------- --------- --------- ------------- --------- ------------- Total interest-bearing liabilities 242,406 $1,127 1.86% 185,315 $1,168 2.72% --------- --------- Non interest-bearing liabilities: Demand deposits 50,825 42,589 Other 4,302 5,596 --------------- ------------- Total liabilities 297,533 $233,500 Stockholders' equity 31,831 29,485 --------------- ------------- Total Liabilities and Stockholders' Equity $329,364 $262,985 =============== ============= Net interest earnings $2,519 $2,626 ========= ========= Net yield on interest earning assets 3.37% 4.00% </TABLE> * Internal investment decisions utilize tax-equivalent yields, which are presented for consistency. GAAP basis yields for tax-exempt investments were 4.31% and 4.53% for the three months ended September 30, 2003 and 2002, respectively. Total gross loans have grown to $177.8 million at September 30, 2003, reflecting a 4.8% or $8.1 million increase from June 30, 2003. Total net loans (loans after allowance for loan losses) have grown to $175.3 million at September 30, 2003, reflecting a 4.8% or $8.0 million increase from June 30, 2003. During the quarter, the Bank has continued to shift its loan portfolio composition toward higher-yielding commercial loans, especially those secured by real estate. Commercial loans total $126.1 million at September 30, 2003, reflecting a 4.8% or $5.8 million increase from June 30, 2003. Consumer loans total $51.2 million at September 30, 2003, reflecting a 4.7% or $2.3 million increase from June 30, 2003. 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 third quarter 2003, the Bank sold loans to FNMA totaling $6.7 million as compared to $2.9 million during the third quarter 2002.
At September 30, 2003, the Bank had a loan servicing portfolio principal balance of $29.5 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> SEPTEMBER 30, 2003 PERCENTAGE DECEMBER 31, 2002 PERCENTAGE ($000) ($000) <S> <C> <C> <C> <C> Commercial Loans Real Estate $ 103,079 58.1% $ 84,581 56.1% Installment 13,396 7.6% 12,512 8.3% Lines of Credit 9,559 5.4% 8,333 5.5% Cash Reserve 66 0.0% 47 0.0% --------------------- ---------------- ------------------------- ----------------- Total Commercial Loans 126,100 71.1% 105,473 69.9% Consumer Loans Real Estate 21,858 12.3% 19,789 13.1% Home Equity 26,078 14.7% 23,132 15.3% Installment 2,173 1.2% 1,886 1.3% Overdrafts 684 0.4% 104 0.1% Credit Card 268 0.2% 298 0.2% Other 133 0.1% 126 0.1% --------------------- ---------------- ------------------------- ----------------- Total Consumer Loans 51,194 28.9% 45,335 30.1% --------------------- ---------------- ------------------------- ----------------- Total Loans 177,294 100.0% 150,808 100.0% ===================== ================ ========================= ================= Net Deferred Costs 477 336 Allowance for Loan Losses (2,496) (2,146) --------------------- ------------------------- Loans, Net $ 175,275 $ 148,998 ===================== ========================= </TABLE> Loan quality has remained stable with $9 thousand in net charge offs incurred during the nine months ended September 30, 2003. Non-performing loans, defined as accruing loans greater than 90 days past due and non-accrual loans, totaled 0.15% of total loans outstanding at September 30, 2003 as compared to 0.79% at December 31, 2002. The decrease in non-accrual loans was due to the assumption by a new borrower of one large commercial loan with a principal balance at December 31, 2002 of $853,253. At September 30, 2003, the same loan, with an outstanding principal balance of $676,358, 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 $2.5 million or 1.41% of gross loans outstanding at September 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> SEPTEMBER 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 208 1,104 Consumer 0 0 Commercial business 20 93 ----------------------- ----------------------- Total 228 1,197 ----------------------- ----------------------- Accruing loans 90+ days past due 39 0 ----------------------- ----------------------- Total non-performing loans $267 $1,197 ======================= ======================= Total non-performing loans as a percentage of total assets 0.08% 0.41% ======================= ======================= Total non-performing loans as a percentage of total loans 0.15% 0.79% ======================= ======================= </TABLE> The following table sets forth information regarding the allowance for loan losses for the nine month period ended September 30, 2003 and 2002. <TABLE> <CAPTION> Nine Months Ended September 30, 2003 2002 ---- ---- <S> <C> <C> Beginning balance, January 1 $2,145,606 $1,786,115 Total charge offs (10,027) (32,180) Total recoveries 831 15,300 --- ------ Net charge offs (9,196) (16,880) Provision for loan losses 360,000 315,000 ------- ------- Ending balance, September 30 $2,496,410 $2,084,235 ========== ========== </TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Balance at Balance at 09/30/03 12/31/02 Attributable to: Attributable to: ($000) ($000) <S> <C> <C> Real Estate Loans $1,406 $844 Commercial Loans and Leases 382 259 Installment Loans (Includes Credit Cards) 139 72 Unallocated 569 971 --- --- Total allowance for loan losses $2,496 $2,146 ===== ===== </TABLE> Investing Activities The Company's securities portfolio increased by 1.1% to approximately $129.8 million at September 30, 2003 as compared to approximately $128.4 million at June 30, 2003. The growth in the securities portfolio of 21.6% for the nine months ended September 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. The Company monitors extension and prepayment risk in the portfolio to limit potential exposures. Management believes the average expected life of the portfolio is 4.54 years as of September 30, 2003, as compared to 6.54 years at September 30, 2002. Available-for-sale securities with a total fair value of $75.9 million at September 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 increased 0.2% to $274.1 million at September 30, 2003 from $273.6 million at June 30, 2003. Year to date total deposits have increased 14.4% from $239.5 million at December 31, 2002. Regular savings deposits increased to $111.7 million at September 30, 2003, reflecting a 3.4% or $3.6 million increase for the quarter, primarily due to the Bank's success in retaining these municipal deposits with Muni-Vest, the year to date savings deposits have increased $16.8 million from $94.9 million at December 31, 2002. Additionally, the increase for the quarter in savings deposits was partially offset by an decrease in demand deposits of 4.9% to $49.5 million at September 30,2003. Core deposits (all deposits excluding time deposits greater than $100,000) increased to $241.9 million, reflecting a 0.9% or $2.1 million increase for the quarter. Demand deposits increased 10.8%, regular savings increased 17.7%, time deposits $100 thousand and over increased 13.0%, other time accounts increased 14.3%, and securities sold under agreement to repurchase increased 6.9% 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 by $9.8 million at September 30, 2003 from $8.1 million at December 31, 2002. The increase is primarily 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%. Additionally, the Company had federal funds purchased of approximately $3.6 million at September 30, 2003, compared to no federal funds purchased at December 31, 2002.
ANALYSIS OF RESULTS OF OPERATIONS Net Income Net income was $1.0 million or $0.41 per share for the quarter ended September 30, 2003 as compared to $0.9 million or $0.38 per share for the quarter ended September 30, 2002. Year-to-date in 2003, the Company has recorded net income of $3.1 million or $1.26 per share as compared to $2.7 million or $1.13 per share for the same period in 2002. All per share amounts reflect the special 5 percent stock dividend paid on January 29, 2003 and special 5 percent stock dividend declared on September 16, 2003. Net income represented a return on average assets of 1.23% for the quarter ended September 30, 2003 compared to 1.42% for the same period in 2002. The return on average equity for the third quarter of 2003 was 13.12% compared to 13.43% for the third quarter of 2002. Other Operating Results Net interest income decreased $107.1 thousand, or 4.1%, for the quarter ended September 30, 2003 compared to the same time period in 2002. Total interest income in the third quarter 2003 decreased 3.9% and interest paid on deposits and borrowings decreased 3.6% from the third quarter of 2002. Interest income decreased in spite of the $58.8 million, or 24.4% increase in average interest-earning assets to $300.2 million for the third quarter of 2003 from $241.4 million for the third quarter of 2002, due mainly to deposit growth in the Muni-Vest product as well as growth in demand deposit accounts. The tax equivalent yield on total interest earning assets decreased to 5.25% for the quarter ended September 30, 2003 from 6.72% for the quarter ended September 30, 2002. The interest expense decrease reflects the effect of interest rate reductions made by the Company since September 30, 2002 as well as the offsetting $57.1 million, or 30.8% increase in average interest-bearing liabilities to $242.4 million for the third quarter of 2003 from $185.3 million for the third quarter of 2002. The cost of interest-bearing liabilities decreased to 1.86% for the quarter ended September 30, 2003 from 2.72% for the quarter ended September 30, 2002. The Company's net interest margin on earning assets, for the three month period ended September 30, 2003 was 3.75% as compared to 4.79% for the same time period in 2002. The decrease reflects the result of accelerated amortization of investment security premiums 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. Year-to-date net interest income increased $12.3 thousand, or 0.2% for the nine months ended September 30, 2003 compared to the same period in 2002. The small increase is due to the same offsetting relationship evidenced in the third quarter of 2003 between growth in average assets, 295.6 million as of September 30, 2003 versus $240.3 million at September 30, 2002, and the reduction of net interest margin , 4.00% and 4.82% for the nine months ended September 30, 2003 and 2002, respectively. The provision for loan losses has increased to $120 thousand for the third quarter of 2003 from $105 thousand for the same time period in 2002. The provision for loan losses has increased to $360 thousand for the nine months ended September 30,2003 from $315 thousand for the same time period in 2002. The higher third quarter and year-to-date 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 three factors: increased competition from both a loan and deposit pricing perspective, a decrease in the potential to adjust deposit rates significantly lower as a result of the historically low interest rate environment, and a large amount of activity in mortgage refinancing which led to an acceleration of amortization on investment securities purchased at a premium that were backed by mortgages. Non-interest income increased to $2.0 million, or 48.1%, for the third quarter 2003 as compared to $1.4 million for the third quarter 2002. Service charges increased to $451 thousand in the third quarter 2003, a 72.9% or $190 thousand increase over the third 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 $897 thousand in the third quarter, a 21.7% or $160 thousand increase over the third quarter 2002, partially due to the M&W acquisition of the Gutekunst Agency on January 1, 2003 and Frontier Claims Services on December 31, 2002. Due to higher loan activity, the Bank realized additional income, of approximately $123 thousand during the third quarter of 2003 on loan prepayment charges, loan servicing charges, Bankers Title Credit, 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 $59 thousand in gains on sales of securities during the third quarter 2003 as compared to no gains in the third quarter 2002. Other increases include fees on the Bank's merchant credit card program and ATM fees. Non-interest income increased $2.0 million, or 48.9% for the nine month ended September 30, 2003, compared to the same period in 2002. Non interest expense increased by $0.5 million, or 17.4%, to $3.1 million for the third quarter 2003 as compared to $2.7 million for the third 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. Other expenses have increased $0.2 million due to a number of items including costs associated with the Bank's conversion to a next generation 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. Non-interest expense increased $1.7 million, or 21.1% for the nine month ended September 30, 2003, compared to the same period in 2002.
Income tax expense totaled $292,953 and $292,189 for the three month periods ended September 30, 2003 and 2002, respectively. Income tax expense totaled $907,900 and $983,189 for the nine month periods ended September 30, 2003 and 2002, respectively. The effective combined tax rate for the third quarter of 2003 was 22.5% compared to 23.8% for the third quarter of 2002. The effective combined tax rate for the first nine months of 2003 was 22.7% compared to 26.4% for the first nine months 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 $32.1 million at September 30, 2003, down from $32.7 million at June 30, 2003. This reduction is primarily attributable to stock repurchases during 2003 of $575,617. Equity as a percentage of assets was 9.57% at September 30, 2003, compared to 9.87% at June 30, 2003. Book value per common share fell to $13.20 at September 30, 2003, down from $13.31 at June 30, 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 September 30, 2003, based on current models being utilized by management, the effect of an immediate 200 basis point increase in interest rate would increase the Company's annual net interest income by approximately 0.5%, or $0.1million. A 200 basis point decrease in interest rate would decrease annual net interest income by 3.1% or approximately $0.4 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 September 30, 2003, approximately 2.8 % of the Bank's securities had maturity dates of one year or less and approximately 19.8% had maturity dates of five years or less. The average contractural maturity at September 30, 2003 was 9.75 years compared to 14.83 years at September 30, 2002. At September 30, 2003, the Bank had net short-term liquidity of $30.3 million as compared to $36.9 million at December 31, 2002. Available assets of $135.2 million, less public and purchased funds of $102.0 million, resulted in a long-term liquidity ratio of 132% at September 30, 2003, versus 158% at December 31, 2002. The decrease is due to the large increase in deposits over the nine 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 position in excess of regulatory requirements. 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 Treasurer 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 - None to report 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) 23 and 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) 25 and 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 27 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of The Sarbanes -Oxley Act of 2002 32.2 Certification of Mark DeBacker pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of The Sarbanes -Oxley Act of 2002 29 </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 9 a press release setting forth results of operations and financial conditions for the second quarter 2003. The registrant filed a Form 8-K on August 20, 2003 to report under Item 5 and Item 7 a press release announcing the semi-annual dividend of $.34 per share. The registrant filed a Form 8-K on September 18, 2003 under Item 5 and Item 7 a press release announcing a special five percent stock dividend. 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 October 29, 2003 /s/ James Tilley -------------------------------- James Tilley President and CEO DATE October 29, 2003 /s/ Mark DeBacker -------------------------------- Mark DeBacker Treasurer