Evans Bancorp - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

14 -16 North Main Street, Angola, New York 14006

(Address of principal executive offices)
(Zip Code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

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

 

 

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION
ITEM I—FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION
ITEM I—FINANCIAL STATEMENTS

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

PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

Three Months Ended
June 30, 2007
(in thousands)

Six Months Ended
June 30, 2007
(in thousands)

Three Months Ended
June 30, 2006
(in thousands)

Six Months Ended
June 30, 2006
(in thousands)

Income tax expense totaled $46 thousand for the six month period ended June 30, 2007 for an effective tax rate of 3.9%. There was an income tax benefit of $(435) thousand for the second quarter. The low effective tax rate for the year-to-date and the income tax benefit for the quarter were due to the loss on sale of securities of $2.3 million incurred in the second quarter. Excluding the loss on sale of securities, the effective tax rate on all other income for the three-month and six-month periods ended June 30, 2007 was 26.3% and 26.7%, respectively, compared to 23.9% and 27.8% in the prior year. Excluding the loss on sale of securities, the Company records an effective tax rate for the period that will be reflective of the projected annual tax rate based on expected supportable tax positions.

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

The Internal Revenue Service (IRS) commenced examinations of the Company’s U.S. Federal income tax returns for 2003, 2004, and 2005 in the first quarter of 2007. It is anticipated that the examination related to these returns will be completed within the next twelve months. To date, there are no proposed adjustments that will have a material impact on the Company’s financial position or results of operations. All penalties or interest on adjustments, if any, will be expensed as income tax expense.

Fair Value Measurements (SFAS 157) – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). This standard defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In addition, SFAS 157 precludes the use of block discounts and supersedes the guidance in EITF 02-3, which prohibited the recognition of day-1 gains on certain derivative trades when determining the fair value of instruments not traded in an active market. With the adoption of this standard, these changes will be reflected as a cumulative effect adjustment to the opening balance of retained earnings. The standard also requires the Company to reflect its own credit standing when measuring the fair value of debt it has issued that is carried at fair value, including derivatives, prospectively from the date of adoption.

SFAS 157 is effective for the Company’s fiscal year beginning January 1, 2008, with earlier adoption permitted for the Company’s fiscal year beginning January 1, 2007. The Company did not early adopt FAS 157. The Company is currently evaluating the potential impact of adopting this standard.

Fair Value Option (SFAS 159) – On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). Under this Standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met.

SFAS 159 is effective for years beginning after November 15, 2007. Early adoption within 120 days of the beginning of a company’s 2007 fiscal year is permissible, provided the company has not yet issued interim financial statements for 2007 and has adopted SFAS 157. The Company did not early adopt FAS 159. The Company is currently evaluating the potential impact of adopting this standard.

Split-Dollar Life Insurance - At its September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or Accounting Principles Board Opinion (“APB”) No. 12, “Omnibus Opinion — 1967.” The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The provisions of Issue 06-06 should be applied through either a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or retrospective application. The Company has endorsement split-dollar life insurance policies covering certain directors and employees.

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.

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

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation, to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.

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

The most significant accounting policies followed by the Company are presented in Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K. These policies, along with the disclosures presented in the other Notes to the Company’s Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are valued in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new information becomes available.

The allowance for loan and lease losses represents management’s estimate of probable losses in the Bank’s loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K describes the methodology used to determine the allowance for loan and lease losses.

The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.

     Total gross loans and leases grew to $302.3 million at June 30, 2007, reflecting a $7.9 million or 2.7% increase from March 31, 2007 and a $13.2 million or 4.6% increase from December 31, 2006. Gross loans and leases are net of $8.5 million, $8.2 million of unearned income and $7.8 million unearned income on direct financing leases as of June 30, 2007, March 31, 2007 and December 31, 2006, respectively. Commercial loans and leases totaled $213.5 million at June 30, 2007, reflecting a $6.5 million or 3.1% increase from March 31, 2007, and an $11.8 million or 5.9% increase from December 31, 2006. Growth in direct financing leases of $2.9 million or 8.6%, commercial installment loans of $1.9 million or 10.6%, and commercial lines of credit of $1.1 million or 8.6%, were largely responsible for the increase from March 31, 2007 to June 30, 2007. Growth in direct financing leases of $5.4 million or 17.0%, commercial installment loans of $3.1 million or 18.2%, and commercial lines of credit of $2.0 million or 16.8% were largely responsible for the increase from December 31, 2006 to June 30, 2007. Consumer loans totaled $88.0 million at June 30, 2007, reflecting a $1.2 million or 1.4% increase from March 31, 2007 and a $1.2 million or 1.4% increase from December 31, 2006. Real estate loans accounted for most of the increase as those loans increased $0.8 million or 1.6% from March 31, 2007 to June 30, 2007 and $1.5 million or 3.0% from December 31, 2006 to June 30, 2007. The Bank continues to sell certain fixed rate residential mortgages originated below a designated interest level to the Federal National Mortgage Association (“FNMA”), while maintaining the servicing rights for those mortgages. During the three month period ended June 30, 2007, the Bank sold mortgages to FNMA totaling $0.8 million, as compared to $0.2 million during the three month period ended June 30, 2006. During the six month period ended June 30, 2007, the Bank sold mortgages to FNMA totaling $1.1 million, as compared to $0.7 million during the six month period ended June 30, 2006. At June 30, 2007, the Bank had a loan servicing portfolio principal balance of $28.4 million upon which it earns servicing fees, as compared to $28.9 million at March 31, 2007, and $28.7 million at December 31, 2006.

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

     Net loan and lease charge-offs were $365 thousand in the three month period ended June 30, 2007 as compared to net recoveries of $12 thousand in the same period of 2006. Net charge-offs were $533 thousand for the six month period ended June 30, 2007 as compared to $117 thousand in the same period of 2006. Non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled 0.26% of total loans and leases outstanding at June 30, 2007 as compared to 0.22% at March 31, 2007 and 0.23% at December 31, 2006. The allowance for loan and lease losses totaled $3.9 million or 1.28% of total loans and leases outstanding at June 30, 2007 as compared to $3.9 million or 1.32% of total loans and leases at March 31, 2007 and $3.7 million or 1.29% of total loans and leases outstanding at December 31, 2006.

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

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

     For the three and six month periods ended June 30, 2007, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $28 thousand and $46 thousand, respectively. For the three and six month periods ended June 30, 2006, gross interest income that would have been reported on non-accruing loans and leases had they been current, was $20 thousand and $54 thousand, respectively. There was $12 thousand and $18 thousand of interest income included in net income for the three and six month periods ended June 30, 2007, and no interest income for the same periods in 2006 on non-accruing loans and leases.

     Total securities declined to $117.8 million at June 30, 2007, reflecting a $36.3 million or 23.6% decrease from March 31, 2007, and a $19.9 million or 14.5% decrease from December 31, 2006. The decline in the securities portfolio is a result of the Company’s sale of $45 million in securities in June 2007 as it initiates its strategy to de-lever a portion of its balance sheet. The decline was less than the amount sold because the Company needed to purchase short-term discount notes to pledge as collateral against its remaining municipal deposits. As some of those municipal deposits continue to roll off, the Company will allow some of its short-term discount notes to mature without being replaced. The Company monitors extension and prepayment risk in the portfolio to limit potential exposures. Management believes the average expected life of the portfolio is 2.4 years as of June 30, 2007, as compared to 2.7 years as of March 31, 2007. Available-for-sale securities with a total fair value of $112.2 million at June 30, 2007 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

     Total deposits at June 30, 2007 were $373.1 million, reflecting a $6.8 million or 1.8% decrease from March 31, 2007. Time deposits $100,000 and over decreased $12.0 million, or 14.3%, to $72.0 million mainly due to municipal deposits and run off of time deposits accumulated in promotions in prior periods. Additionally, muni-vest balances decreased $1.6 million or 3.4% from March 31, 2007. The Company has allowed these sources of funds to roll off as part of its de-leverage strategy. As the investment securities balance has declined, these funds were no longer needed. These decreases were partially offset by an increase of $3.6 million, or 5.1%, in demand deposits. Core deposits (all deposits excluding time deposits greater than $100,000) increased $5.2 million, or 1.8%, to $301.2 million from March 31, 2007.

     Total deposits increased $17.4 million or 4.9% increase from December 31, 2006. The increase in deposits from December 31, 2006 was primarily attributable to an increase in muni-vest deposits of $13.9 million or 44.6%, which was the mainly due to a large deposit made by a single municipal customer in the first quarter. Additionally, demand deposits increased $2.3 million or 3.2% from December 31, 2006, while NOW accounts decreased $1.1 million or 9.6% from December 31, 2006.

     As the securities portfolio has declined, the Company has had less need to rely on wholesale sources of funds. Short-term borrowings from other correspondent banks and the Federal Home Loan Bank of New York was $5.8 million at June 30, 2007 as compared to $26.4 million at March 31, 2007 and $24.8 million at December 31, 2006.

     The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan and lease balances include both performing and non-performing loans and leases. Investments are included at amortized cost. Yields are presented on a non-tax-equivalent basis.