1 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-18539 EVANS BANCORP, INC. (Exact name of registrant as specified in its charter) New York 16-1332767 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 -16 North Main Street, Angola, New York 14006 (Address of principal executive offices) (Zip Code) (716) 549-1000 (Issuer's telephone number) Not applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by check (x) whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, $.50 Par Value--1,698,950 shares as of October 31, 1998
2 INDEX EVANS BANCORP, INC. AND SUBSIDIARY <TABLE> <CAPTION> PAGE <S> <C> <C> PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets--September 30, 1998 and December 31, 1997 1 Consolidated statements of income--Three months ended September 30, 1998 and 1997 2 Consolidated statements of income--Nine months 3 ended September 30, 1998 and 1997 Consolidated statements of cash flows--Nine months 4 ended September 30, 1998 and 1997 Notes to consolidated financial statements-- September 30, 1998 and 1997 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION 8 Item 1. Legal Proceedings Item 2. Changes In Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 9 </TABLE>
3 PART I - FINANCIAL INFORMATION PAGE 1 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, 1998 and December 31, 1997 (Unaudited) <TABLE> <CAPTION> September 30, December 31, ASSETS 1998 1997 ------------- ------------ <S> <C> <C> Cash and due from banks $ 5,211,469 $ 5,821,532 Federal Funds sold 0 4,515,000 Securities: Classified as available-for-sale, at fair value 41,296,213 33,822,334 Classified as held-to-maturity, at amortized cost 5,625,814 6,578,040 Loans, net 108,448,168 101,627,427 Premises and equipment, net 3,914,014 3,827,672 Other assets 2,817,309 2,350,158 ------------- ------------ $ 167,312,987 $158,542,163 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand $ 24,869,755 $ 21,680,839 NOW and money market accounts 7,541,976 7,093,959 Regular savings 48,130,600 44,264,697 Time Deposits, $100,000 and over 22,588,341 22,873,379 Other time accounts 39,747,131 42,478,453 ------------- ------------ 142,877,803 138,391,327 Short Term Borrowing 2,000,000 0 Dividend Payable 339,790 0 Other liabilities 3,972,229 3,111,536 ------------- ------------ 149,189,822 141,502,863 ------------- ------------ STOCKHOLDERS' EQUITY Common Stock, $.50 par value; 10,000,000 shares authorized; 1,698,950 issued and outstanding 849,475 849,475 Surplus 10,990,720 10,990,720 Retained earnings 5,872,108 4,985,249 Treasury Stock (174,645) 0 Unrealized gains on available for sale securities 585,507 213,856 ------------- ------------ 18,123,165 17,039,300 ------------- ------------ $ 167,312,987 $158,542,163 ============= ============ </TABLE> See Notes to Consolidated Financial Statements.
4 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, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> Three Months Ended September 30, 1998 1997 ----------- ---------- <S> <C> <C> INTEREST INCOME Loans $ 2,369,670 $2,216,758 Federal funds sold 24,375 26,428 Securities: Taxable 318,942 343,602 Non-taxable 282,552 249,015 ----------- ---------- 2,995,539 2,835,803 INTEREST EXPENSE Deposits 1,196,915 1,142,744 Short Term Borrowing 36,627 4,309 ----------- ---------- NET INTEREST INCOME 1,761,997 1,688,750 PROVISION FOR CREDIT LOSSES 30,000 15,000 ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,731,997 1,673,750 ----------- ---------- NON-INTEREST INCOME: Service charges 180,681 169,866 Other 99,375 70,577 (Losses)/Gains on Securities Transactions (8,791) 1,990 ----------- ---------- 271,265 242,433 ----------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits 676,878 637,514 Occupancy 191,247 188,002 Supplies 23,628 25,332 Repairs and maintenance 46,166 43,634 Advertising and public relations 26,129 35,452 Professional services 71,939 88,232 FDIC assessments 4,178 4,074 Other 242,070 227,165 ----------- ---------- 1,282,235 1,249,405 ----------- ---------- Income before income taxes 721,027 666,778 ----------- ---------- PROVISION FOR INCOME TAXES 207,400 186,925 ----------- ---------- NET INCOME $ 513,627 $ 479,853 =========== ========== NET INCOME PER COMMON SHARE $ 0.30 $ 0.28 =========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,698,950 1,698,950 =========== ========== </TABLE> See Notes to Consolidated Financial Statements.
5 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, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 ----------- ------------ <S> <C> <C> INTEREST INCOME Loans $ 7,067,297 $ 6,492,576 Federal funds sold 64,632 97,651 Securities: Taxable 965,569 1,097,298 Non-taxable 808,094 668,801 ----------- ----------- 8,905,592 8,356,326 INTEREST EXPENSE Deposits 3,584,941 3,406,777 Short Term Borrowing 85,124 6,668 ----------- ----------- NET INTEREST INCOME 5,235,527 4,942,881 PROVISION FOR CREDIT LOSSES 90,000 45,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,145,527 4,897,881 ----------- ----------- NON-INTEREST INCOME: Service charges 528,711 498,623 Other 236,724 172,672 Losses on Securities Transactions (5,483) (7,750) ----------- ----------- 759,952 663,545 ----------- ----------- NON-INTEREST EXPENSE: Salaries and employee benefits 2,002,930 1,890,647 Occupancy 571,740 570,024 Supplies 83,141 67,903 Repairs and maintenance 138,801 116,972 Advertising and public relations 87,931 92,389 Professional services 204,325 202,561 FDIC assessments 12,472 11,200 Other 686,569 669,391 ----------- ----------- 3,787,909 3,621,087 ----------- ----------- Income before income taxes 2,117,570 1,940,339 ----------- ----------- PROVISION FOR INCOME TAXES 602,100 591,725 ----------- ----------- NET INCOME $ 1,515,470 $ 1,348,614 =========== =========== NET INCOME PER COMMON SHARE $ 0.89 $ 0.79 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,698,950 1,698,950 =========== =========== </TABLE> See Notes to Consolidated Financial Statements.
6 PAGE 4 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Interest received $ 8,506,687 $ 7,953,798 Fees and commissions received 834,464 725,455 Interest paid (3,520,598) (3,341,151) Cash paid to suppliers and employees (3,575,827) (3,482,480) Income taxes paid (583,365) (608,750) ------------ ------------ Net cash provided by operating activities 1,661,361 1,246,872 ------------ ------------ INVESTING ACTIVITIES Available for sale securities Purchases (27,144,110) (20,390,722) Proceeds from sales 14,084,899 14,641,489 Proceeds from maturities 6,741,195 407,731 Held to maturity securities Purchases (1,879,869) (2,261,519) Proceeds from maturities 2,274,951 1,607,944 Additions to bank premises and equipment (351,121) (509,822) Increase in loans, net of repayments (9,849,161) (7,444,229) Proceeds from sales of loans 2,961,820 1,726,206 ------------ ------------ Net cash used in investing activities (13,161,396) (12,222,922) ------------ ------------ FINANCING ACTIVITIES Increase in deposits 4,486,477 12,571,553 Short term borrowing 2,351,962 0 Treasury Stock (174,645) 0 Cash Dividends Paid (288,822) (169,895) ------------ ------------ Net cash provided by financing activities 6,374,972 12,401,658 ------------ ------------ Net (decrease)/increase in cash and cash equivalents (5,125,063) 1,425,608 Cash and cash equivalents, January 1 10,336,532 7,112,231 ------------ ------------ Cash and cash equivalents, September 30 $ 5,211,469 $ 8,537,839 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
7 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, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 ----------- ----------- <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 1,515,470 $ 1,348,614 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 229,661 259,441 Provision for credit losses 90,000 45,000 Gain on sale of assets (17,917) (15,076) Changes in: Accrued interest payable 123,823 72,294 Accrued interest receivable (280,458) (357,620) Other liabilities 141,966 40,954 Other assets (141,184) (146,735) ----------- ----------- Total adjustments 145,891 (101,742) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,661,361 $ 1,246,872 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net unrealized gain on available for sale securities $ 861,038 $ 179,137 =========== =========== </TABLE> See Notes to Consolidated Financial Statements.
8 PART I - FINANCIAL INFORMATION PAGE 6 ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 AND 1997 (UNAUDITED) 1. GENERAL The accounting and reporting policies followed by Evans Bancorp, Inc., a bank holding company, and its subsidiary, Evans National Bank, in the preparation of the accompanying interim financial statements conform with generally accepted accounting principles and with general practice within the banking industry. The accompanying 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, 1998 are not necessarily indicative of the results to be expected for the full year. 2. SECURITIES Securities which the Bank has the ability and intent to hold to maturity are stated at cost, plus discounts accrued and less premiums amortized. Securities which the Bank has identified as available for sale are stated at fair value. 3. ALLOWANCE FOR CREDIT LOSSES The provision for credit losses is based on management's evaluation of the relative risks inherent in the loan portfolio and, on an annual basis, generally exceeds the amount of net loan losses charged against the allowance. 4. INCOME TAXES Provision for deferred income taxes are made as a result of timing differences between financial and taxable income. These differences relate principally to directors deferred compensation, pension premiums payable, allowance for loan losses and deferred loan origination expenses. 5. PER SHARE DATA The per share of common stock information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends and stock splits. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," during the fourth quarter of 1997. Only basic earnings per share is disclosed because the Company does not have any dilutive securities or other contracts to issue common stock or convert to common stock.
9 PART I - FINANCIAL INFORMATION PAGE 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS MATERIAL CHANGES IN FINANCIAL CONDITION Total deposits increased 3.24% over the first nine months of 1998. This compares to an increase of 10.18% over the first nine months of 1997. An increasingly competitive market for time deposits during 1998 contributed to the decline in deposit growth over the first nine months of 1997. Demand deposits, NOW account deposits and regular savings deposits have increased 14.71%, 6.32% and 8.73% respectively. Time deposits greater than $100 thousand decreased 1.25% and other time accounts decreased 6.43% over the first nine months of 1998, whereas these categories increased 26.04% and 3.30% over the first nine months of 1997 respectively. Due to the decline in new deposit growth in 1998, the Bank has begun to utilize its benefit of being a member of the Federal Home Loan Bank as a funding source by purchasing $2 million in short term borrowing. Total net loans outstanding of $108.4 million have increased 6.71% since December 31, 1997. Loan demand has been strong for the past two years, with net loans increasing 6.18% over the first nine months of 1997. Growth in the first nine months of 1998 has largely been concentrated in the commercial sector of the portfolio, particularly in commercial mortgages. Consumer loan growth remains concentrated in fixed and variable rate home equity products. A total of $1 million of student loans were sold to SLMA in the first nine months of 1998 and $1.9 million in residential mortgages were sold to FNMA in the first nine months of 1998. The investment portfolio increased 16.14% between December 31, 1997 and September 30, 1998 versus an increase of 17.19% over the same time period last year. The Bank continues to concentrate investments in US government and agency securities and tax-advantaged municipal bonds. During this quarter, the Company repurchased 3,881 shares of stock to be made available for sale to the Dividend Reinvestment Plan. The annualized return on average assets ("ROAA") at September 30, 1998 was 1.25%. The ROAA at December 31, 1997 was 1.19%. The Bank's annualized return on average equity at September 30, 1998 was 11.63% versus 11.05% at December 31, 1997. The capital to assets ratio at September 30, 1998 was 10.86% compared to 10.95% at year-end 1997. Total assets have increased $8.8 million or 5.5% since December 31, 1997. MATERIAL CHANGES IN THE RESULTS OF OPERATIONS Net interest income for the nine month period ending September 30, 1998 increased 5.92% over the same nine month period in 1997. Interest income on loans and investments increased 6.57% whereas interest expense on deposits and short-term borrowings increased 7.52%. The Bank's year-to-date net interest margin was 4.65% at September 30, 1998. At September 30, 1997 the year-to-date net interest margin was 4.69%. The year-to-date yield on total earning assets at September 30, 1998 was 8.19%, down .10% from 8.29% a year ago. Yields on US treasury securities and municipal bonds have been computed on a tax-equivalent basis. Comparatively, the year-to-date cost of funds on interest-bearing deposit balances at September 30, 1998 was 4.12% increasing slightly .02% from 4.10% through September 30, 1997. The increase can be attributed to an increase in the volume of the Bank's more expensive products, including the tiered rate Premium savings introduced in May 1997 which now constitutes nearly 6% of total cost funds. The year-to-date provision for credit losses was $90 thousand through September 30, 1998, compared to $45 thousand set aside for potential credit losses through the first nine months of 1997. Management has increased the provision due to the substantial increase in the volume of the loan portfolio, particularly in the commercial sector, over the past two years. Management believes the portfolio continues to be of good quality. Net operating expenses increased 4.61% over the first nine months of 1998 versus an increase of .80% over the first nine months of 1997. Annual salary adjustments and an increase in the number of full-time equivalent employees contributed to a 5.94% increase in salary and benefit expense. Net income through September 30, 1998 of $1,515,470 reflects an increase of 12.37% over the first nine months of 1997. The effective combined tax rate for the first nine months of 1998 was 28.4% compared to 30.5% for the first nine months of 1997. The lower rate for 1998 demonstrates the impact of increasing the Bank's investment in tax-advantaged municipal bonds and the benefit realized from a favorable deferred tax position.
10 Year 2000 PAGE 8 The Company is aware of the issues associated with the arrival of the Millennium (year 2000) and the significant challenge it presents. The "Year 2000" problem centers around the world's computer systems and a common programming practice that condenses a century date to just two digits, i.e."98" to represent 1998, to conserve computer storage space. As a result, these systems may interpret "00" as 1900 rather 2000, causing potential data corruption or system failure. The Company is addressing the Year 2000 issue by completing a five-phase approach recommended by the Federal Financial Institutions Examination Council and following guidelines provided us by our regulatory authorities, who monitor our progress periodically. The five phases are: Awareness-define the year 2000 problems, obtain executive level support, establish a project team and develop an overall strategy; Assessment-assess the size and complexity by identifying affected areas of our business, identify required resources and develop a comprehensive plan; Renovation-initiate code enhancements and required hardware and software upgrades, monitor progress of third party vendors; Validation-test incremental changes to hardware and software components as well as connections with other systems; Implementation-certification of systems as year 2000 complaint and development of contingency plans. To date, the first four recommended phases are essentially complete, with only the implementation phase remaining and all mission-critical systems having been renovated or replaced. Testing is planned for completion by December 31, 1998. Quality reviews will be conducted throughout 1999 and the year 2000 to ensure proper functioning of our system. Contingency plans are being designed to provide, if necessary, for business continuation, and our validation effort will be well underway by year end. Completion is planned during the first quarter of 1999. The Company believes, however, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is an ongoing one which will require further modifications as the Company obtains additional information, specifically regarding third party Year 2000 readiness. Expenses associated with Year 2000 compliance are not expected to have a material impact on the financial condition of the Company. Expenses are projected to be approximately $45 thousand, the majority of which will be charged in 1999. The Company cannot provide assurance that failure of third parties to address the Year 2000 issue will not have an adverse impact on the Company. To combat their uncertainties, the Company is assessing critical suppliers and customers to ascertain their readiness. The Company believes that, with the implementation of the Year 2000 initiatives as scheduled, the possibility of significant interruptions of normal operations should be reduced. The preceding "Year 2000" discussion contains various statements which represent the Company's beliefs or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause the differences include, but are not limited to, the actions of governmental agencies or other third parties with respect to Year 2000 problems. 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: On September 22, 1998, the Board of Directors declared a cash dividend of $.20 per share payable on October 6,1998 to shareholders of record on September 22, 1998. ITEM 6. Exhibits and Reports on Form 8-K - None to Report. The following Exhibits are filed as part of this Report: <TABLE> <CAPTION> Exhibit No. Description Page <S> <C> <C> 27 Financial Data Schedule 10 </TABLE>
11 PAGE 9 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 November 13, 1998 /s/Richard M. Craig --------------------------------------- Richard M. Craig President and Chief Executive Officer DATE November 13, 1998 /s/James Tilley --------------------------------------- James Tilley Senior Vice President