SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 2004 [ ] 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) 926-2000 ------------------------------ (Registrant'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 -- 2,472,446 shares as of July 29, 2004
EVANS BANCORP, INC. AND SUBSIDIARY <TABLE> <CAPTION> PAGE <S> <C> PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2004 (Unaudited) and December 31, 2003 1 Consolidated Statements of Income - Three months ended June 30, 2004 and 2003 (Unaudited) 2 Consolidated Statements of Income -Six months ended June 30, 2004 and 2003 (Unaudited) 3 Consolidated Statements of Stockholders' Equity - Six months ended June 30, 2004 and 2003 (Unaudited) 4 Consolidated Statements of Cash Flows - Six months ended June 30, 2004 and 2003 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 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 21 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION 22 Item 1. Legal Proceedings Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity 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 24 </TABLE>
PART I - FINANCIAL INFORMATION Page 1 ITEM I- FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 2004 and December 31, 2003 <TABLE> <CAPTION> June 30, December 31, 2004 2003 ---- ---- (Unaudited) (In thousands except share and per share amounts) <S> <C> <C> ASSETS Cash and due from banks $ 10,521 $ 8,509 Federal funds sold - - -------- -------- Total cash and cash equivalents 10,521 8,509 Interest bearing deposits at other banks 1,083 98 Securities: Available-for-sale, at fair value 152,029 116,807 Held-to-maturity, at amortized cost 4,813 3,749 Loans, net 198,382 185,528 Properties and equipment, net 7,143 5,982 Goodwill 2,945 2,945 Intangible assets 1,827 1,177 Bank-owned life insurance 7,525 7,323 Other assets 4,883 2,559 -------- -------- TOTAL ASSETS $391,151 $334,677 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand $ 53,810 $ 51,885 NOW and money market 12,254 11,464 Regular savings 154,427 105,599 Time deposits 100,865 97,377 -------- -------- Total deposits 321,356 266,325 Other borrowed funds 24,287 25,388 Securities sold under agreements to repurchase 7,823 5,460 Other liabilities 4,708 4,180 -------- -------- Total liabilities 358,174 301,353 STOCKHOLDERS' EQUITY Common stock, $.50 par value; 10,000,000 shares authorized; 2,491,188 and 2,459,246 shares issued, respectively, and 2,472,446 and 2,444,285 shares outstanding, respectively 1,245 1,230 Capital surplus 20,148 19,359 Retained earnings 12,581 11,145 Accumulated other comprehensive (loss) income, net of tax (549) 1,918 Less: Treasury stock, at cost (18,742 and 14,961 shares, respectively) (448) (328) -------- -------- Total stockholders' equity 32,977 33,324 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $391,151 $334,677 ======== ======== </TABLE> See Notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION Page 2 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Three Months (Unaudited) ended June 30, 2004 and 2003 <TABLE> <CAPTION> Three Months Ended June 30, 2004 2003 ---- ---- (In thousands except share and per share amounts) <S> <C> <C> INTEREST INCOME Loans $ 2,885 $ 2,678 Federal funds sold & interest on deposits in other banks 30 15 Securities: Taxable 904 604 Non-taxable 539 581 ---------- ---------- Total interest income 4,358 3,878 INTEREST EXPENSE Interest on deposits 1,012 1,028 Interest on borrowings 183 172 ---------- ---------- Total interest expense 1,195 1,200 NET INTEREST INCOME 3,163 2,678 PROVISION FOR LOAN LOSSES 136 120 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,027 2,558 NON-INTEREST INCOME: Service charges 480 452 Insurance services and fees 1,041 859 Commission fees 53 71 Net loss on sales of securities - (37) Premiums on loans sold 2 26 Other 362 451 ---------- ---------- Total non-interest income 1,938 1,822 NON-INTEREST EXPENSE: Salaries and employee benefits 1,876 1,600 Occupancy 397 342 Supplies 69 84 Repairs and maintenance 109 96 Advertising and public relations 89 71 Professional services 187 188 FDIC assessments 10 10 Other insurance 86 61 Other 722 621 ---------- ---------- Total non-interest expense 3,545 3,073 ---------- ---------- Income before income taxes 1,420 1,307 INCOME TAXES 342 295 ---------- ---------- NET INCOME $ 1,078 $ 1,012 ========== ========== Net income per common share-basic* $ 0.44 $ 0.41 ========== ========== Net income per common share-diluted* $ 0.44 $ 0.41 ========== ========== Weighted average number of common shares* 2,474,379 2,459,926 ========== ========== Weighted average number of diluted shares* 2,476,096 2,459,926 ========== ========== </TABLE> *2003 amounts have been adjusted for 5 percent stock dividend paid December 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 Six Months (Unaudited) ended June 30, 2004 and 2003 <TABLE> <CAPTION> Six Months Ended June 30, 2004 2003 ---- ---- (In thousands except share and per share amounts) <S> <C> <C> INTEREST INCOME Loans $ 5,656 $ 5,318 Federal funds sold & interest on deposits in other banks 51 63 Securities: Taxable 1,581 1,177 Non-taxable 1,093 1,141 ---------- ---------- Total interest income 8,381 7,699 INTEREST EXPENSE Interest on deposits 1,858 2,041 Interest on borrowings 363 293 ---------- ---------- Total interest expense 2,221 2,334 NET INTEREST INCOME 6,160 5,365 PROVISION FOR LOAN LOSSES 272 240 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,888 5,125 NON-INTEREST INCOME: Service charges 910 902 Insurance services and fees 2,395 1,900 Commission fees 88 111 Net gain on sales of securities 144 212 Premiums on loans sold 7 46 Other 725 789 ---------- ---------- Total non-interest income 4,269 3,960 NON-INTEREST EXPENSE: Salaries and employee benefits 3,855 3,286 Occupancy 806 747 Supplies 156 168 Repairs and maintenance 211 215 Advertising and public relations 173 147 Professional services 363 455 FDIC assessments 21 19 Other insurance 173 129 Other 1,422 1,218 ---------- ---------- Total non-interest expense 7,180 6,384 ---------- ---------- Income before income taxes 2,977 2,701 INCOME TAXES 730 615 ---------- ---------- NET INCOME $ 2,247 $ 2,086 ========== ========== Net income per common share-basic* $ 0.91 $ 0.85 ========== ========== Net income per common share-diluted* $ 0.91 $ 0.85 ========== ========== Weighted average number of common shares* 2,474,973 2,455,271 ========== ========== Weighted average number of diluted shares* 2,476,881 2,455,271 ========== ========== </TABLE> *2003 amounts have been adjusted for 5 percent stock dividend paid December 2003 See notes to Consolidated Financial Statements
Page 4 EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) <TABLE> <CAPTION> ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL ----- ------- -------- ------ ----- ----- (In thousands except share and per share amounts) <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2003 $1,167 $16,579 $11,180 $1,942 $(6) $30,862 Comprehensive income: Net income 2,086 2,086 Unrealized gain on available for sale securities, net of reclassification and tax effect $129 336 336 ------- Total comprehensive income 2,422 ------- Cash dividends ($.30 per common share) (747) (747) Issued 8,618 shares under dividend reinvesment plan 4 185 189 Reissued 300 shares treasury stock under dividend reinvestment plan 1 6 7 Stock options expense 26 26 Fractional shares paid in cash on stock dividend (12) (12) ------ ------- ------- ------ --- ------- Balance, June 30, 2003 $1,171 $16,790 $12,508 $2,278 $ 0 32,747 ====== ======= ======= ====== === ======= </TABLE> SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) <TABLE> <CAPTION> ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME(LOSS) STOCK TOTAL ----- ------- -------- ------------ ----- ----- (In thousands except share and per share amounts) <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2004 $1,230 $19,359 $11,145 $1,918 $(328) $33,324 Comprehensive income: Net income 2,247 2,247 Unrealized loss on available for sale securities, net of reclassification and tax effect $86 (2,467) (2,467) ------- Total comprehensive loss (220) ------- Cash dividends ($.33 per common share) (818) (818) Stock options expense 81 81 Reissued 7,472 shares treasury stock under dividend reinvestment plan 16 164 180 Reissued 4,247 shares treasury stock under employee stock purchase plan (9) 93 84 Issued 31,942 shares for purchase of 15 708 723 insurance agencies Purchased 15,500 shares for treasury (377) (377) ------ ------- ------- ------ ----- ------- Balance, June 30, 2004 $1,245 $20,148 $12,581 $ (549) $(448) $32,977 ====== ======= ======= ====== ===== ======= </TABLE> See Notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION Page 5 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2004 and 2003 (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 2004 2003 ---- ---- (In thousands) <S> <C> <C> OPERATING ACTIVITIES Interest received $ 8,443 $ 7,966 Fees and commissions received 4,016 3,601 Interest paid (2,211) (2,288) Cash paid to suppliers and employees (6,604) (6,497) Income taxes paid (871) (633) -------- -------- Net cash provided by operating activities 2,773 2,149 INVESTING ACTIVITIES Available for sale securities Purchases (66,938) (65,344) Proceeds from sales 12,266 14,992 Proceeds from maturities 15,258 29,419 Held to maturity securities Purchases (3,237) (2,009) Proceeds from maturities 1,194 1,479 Cash paid for bank owned life insurance - (6,200) Additions to properties and equipment (1,511) (167) Increase in loans, net of repayments (14,305) (21,163) Proceeds from sales of loans 1,254 2,793 Proceeds from sales of other real estate owned (6) - Acquisition of insurance agencies (98) (180) -------- -------- Net cash used in investing activities (56,123) (46,380) FINANCING ACTIVITIES Increase in deposits 55,031 34,150 Proceeds from borrowings, net 1,262 6,706 Purchase of treasury stock, net (129) 6 Dividends paid, net (802) (569) -------- -------- Net cash provided by financing activities 55,362 40,293 -------- -------- Net increase (decrease) in cash and cash equivalents 2,012 (3,938) Cash and cash equivalents, beginning of period 8,509 19,758 -------- -------- Cash and cash equivalents, end of period $ 10,521 $ 15,820 ======== ======== </TABLE> See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION Page 6 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2004 and 2003 (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 2004 2003 ---- ---- (In thousands) <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $2,247 $2,086 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 778 774 Provision for loan losses 272 240 Gain on sale of assets (138) (212) Premiums on loans sold (7) (46) Stock options expensed 81 26 Increase in accrued interest payable 10 46 Increase in accrued interest receivable (181) (297) Increase in other liabilities 297 211 Decrease in other assets (586) (679) ------ ------ Total adjustments 526 63 ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES $2,773 $2,149 ====== ====== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of insurance agencies $ 724 $ 202 </TABLE> See notes to Consolidated Financial Statements
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003 (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 six month period ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in our Report on Form 10-K for the year ended December 31, 2003. 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 represents the amount charged against the Bank's earnings to establish a reserve or allowance sufficient to absorb probable loan losses based on management's evaluation of the loan portfolio. Factors considered include current loan concentrations, charge-off history, delinquent loan percentages, input from regulatory agencies and general economic conditions. On a quarterly basis, management of the Bank meets to review the adequacy of the allowance for loan losses. In making this determination, the Bank analyzes the ultimate collectibility of the loans in its portfolio by incorporating feedback provided by internal loan staff, an independent loan review function and information provided by examinations performed by regulatory agencies. The analysis of the allowance for loan losses is composed of three components: specific credit allocation, general portfolio allocation and subjectively by determined allocation. The specific credit allocation includes a detailed review of the credit in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 114 and No. 118, and allocation is made based on this analysis. The general portfolio allocation consists of an assigned reserve percentage based on the credit rating of the loan. The subjective portion of the allowance reflects management's evaluation of various conditions, and involves a higher degree of uncertainty because this component of the allowance is not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with this element include the following: industry and regional conditions; seasoning of the loan portfolio and changes in the composition of and growth in the loan portfolio; the strength and duration of the business cycle; existing general economic and business conditions in the lending areas; credit quality trends in nonaccruing loans; historical loan charge-off experience; and the results of bank regulatory examinations.
The following table sets forth information regarding the allowance for loan losses for the six month periods ended June 30, 2004 and 2003. ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Six months ended June 30, 2004 2003 ---- ---- (In thousands) <S> <C> <C> Beginning balance, January 1 $2,539 $2,146 Total charge offs (9) (5) Total recoveries 62 1 ------ ------ Net recoveries (charge offs) 53 (4) Provision for loan losses 272 240 ------ ------ Ending balance, June 30 $2,864 $2,382 ====== ====== </TABLE> 4. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the Company's acquisition of the M&W Group, Inc. The goodwill is not amortized but the Company periodically assesses whether events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. 5. REVENUE RECOGNITION The Bank's primary sources of revenue are interest income from loans and investments and service charge income from loans and deposits. M&W's revenue is derived mainly from insurance commissions. Revenue is recognized in the period in which it is earned. The revenue is recognized on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. 6. 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. The Company's potential dilutive securities included 1,621 and 1,870 dilutive shares for the three and six months ended June 30, 2004, respectively. There were no dilutive shares for the three and six months ended June 30, 2003. All 2003 share and per share amounts have been adjusted to reflect a 5 percent stock dividend paid in December 2003. 7. TREASURY STOCK During the quarter ended June 30, 2004 the Company repurchased 10,100 shares of common stock at an average cost of $24.00 per share.
8. SEGMENT INFORMATION The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three and six month periods ended June 30, 2004 and 2003. Three Months Ended June 30, 2004 (in thousands) <TABLE> <CAPTION> INSURANCE BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL ------------------ ----------------- ----- <S> <C> <C> <C> Net interest income (expense) $ 3,168 ($5) $ 3,163 Provision for loan losses 136 - 136 -------- ----- ------- Net interest income (expense) after provision for loan losses 3,032 (5) 3,027 Non-interest income 897 - 897 Insurance commissions and fees - 1,041 1,041 Non-interest expense 2,692 853 3,545 -------- ----- ------- Income before income taxes 1,237 183 1,420 Income taxes 269 73 342 -------- ----- ------- Net income $ 968 $ 110 $ 1,078 ======== ===== ======= </TABLE> Six Months Ended June 30, 2004 (in thousands) <TABLE> <CAPTION> INSURANCE BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL ------------------ ----------------- ----- <S> <C> <C> <C> Net interest income (expense) $ 6,170 ($10) $ 6,160 Provision for loan losses 272 - 272 -------- ----- ------- Net interest income (expense) after provision for loan losses 5,898 (10) 5,888 Non-interest income 1,874 - 1,874 Insurance commissions and fees - 2,395 2,395 Non-interest expense 5,387 1,793 7,180 -------- ----- ------- Income before income taxes 2,385 592 2,977 Income taxes 493 237 730 -------- ----- ------- Net income $ 1,892 $ 355 $ 2,247 ======== ===== ======= </TABLE>
Three Months Ended June 30, 2003 (in thousands) <TABLE> <CAPTION> INSURANCE BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL ------------------ ----------------- ----- <S> <C> <C> <C> Net interest income (expense) $ 2,684 ($6) $ 2,678 Provision for loan losses 120 - 120 -------- ----- ------- Net interest income (expense) after provision for loan losses 2,564 (6) 2,558 -------- ----- ------- Non-interest income 963 - 963 Insurance commissions and fees - 859 859 Non-interest expense 2,428 645 3,073 -------- ----- ------- Income before income taxes 1,099 208 1,307 Income taxes 212 83 295 -------- ----- ------- Net income $ 887 $ 125 $ 1,012 ======== ===== ======= </TABLE> Six Months Ended June 30, 2003 (in thousands) <TABLE> <CAPTION> INSURANCE BANKING ACTIVITIES AGENCY ACTIVITIES TOTAL ------------------ ----------------- ----- <S> <C> <C> <C> Net interest income (expense) $ 5,378 ($13) $ 5,365 Provision for loan losses 240 - 240 -------- ----- ------- Net interest income (expense) after provision for loan losses 5,138 (13) 5,125 Non-interest income 2,060 - 2,060 Insurance commissions and fees - 1,900 1,900 Non-interest expense 5,005 1,379 6,384 -------- ----- ------- Income before income taxes 2,193 508 2,701 Income taxes 412 203 615 -------- ----- ------- Net income $ 1,781 $ 305 $ 2,086 ======== ===== ======= </TABLE>
9. CONTINGENT LIABILITIES AND COMMITMENTS The consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the Bank's commitments and contingent liabilities at June 30, 2004 and 2003 is as follows: <TABLE> <CAPTION> 2004 2003 ---- ---- (In thousands) <S> <C> <C> Commitments to extend credit $ 44,777 $ 51,495 Standby letters of credit 1,640 2,421 ---------- ----------- Total $ 46,417 $ 53,916 ========== =========== </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 Bank 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 $305,000 in 2004, $268,000 in 2005, $227,000 in 2006, $224,000 in 2007, $203,000 in 2008 and $2,676,000 thereafter. The Company is subject to possible litigation proceedings in the normal course of business. As of June 30, 2004, the Company had no asserted claims pending against the Company that management considered to be significant. 10. RECLASSIFICATIONS Certain reclassifications have been made to the 2003 financial statements to conform with the presentation used in 2004. 11. NET PERIODIC BENEFIT COSTS The Bank has a defined benefit pension plan covering substantially all employees. The plan provides benefits that are based on the employees' compensation and years of service. The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortization method the Bank is using recognizes the prior service cost and net gains or losses over the average remaining service period of active employees. The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank is using recognizes the net gains or losses over the average remaining service period of active employees.
The following table represents net periodic benefit costs recognized: THREE MONTHS ENDED MARCH 31 (in thousands) <TABLE> <CAPTION> PENSION BENEFITS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 2004 2003 2004 2003 --------------------- ------------------------------ <S> <C> <C> <C> <C> Service cost $ 54 $ 39 $ 22 $ 18 Interest cost 38 40 35 33 Expected return on plan assets (42) (34) - - Amortization of prior service cost (4) (4) 24 24 Amortization of the net loss 1 4 3 2 ---- ---- ---- ---- Net periodic benefit cost $ 47 $ 45 $ 84 $ 77 ==== ==== ==== ==== </TABLE> SIX MONTHS ENDED JUNE 30 (in thousands) <TABLE> <CAPTION> PENSION BENEFITS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 2004 2003 2004 2003 --------------------- --------------------------------------- <S> <C> <C> <C> <C> Service cost $108 $ 78 $ 44 $ 36 Interest cost 76 80 70 66 Expected return on plan assets (84) (68) - - Amortization of prior service cost (8) (8) 48 48 Amortization of the net loss 2 8 6 4 ---- ---- ---- ---- Net periodic benefit cost $ 94 $ 90 $168 $154 ==== ==== ==== ==== </TABLE> 12. RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures for equity investments accounted for under the cost method. Disclosures about unrealized losses that have not been recognized as other-than-temporary impairments that were required under an earlier EITF 03-1 consensus remain in effect. The EITF 03-1 guidance for determining other-than-temporary impairment is effective for the Company's quarter ending September 30, 2004 and the disclosures for the cost method investments are effective for the Company's fiscal year ending December 31, 2004. The determination of whether a decline in market value is other-than-temporary is necessarily a matter of subjective judgment. The timing and amount of any realized losses reported in the Company's financial statements could vary if conclusions other than those made by management were to determine whether an other-than-temporary impairment exists. This EITF is not expected to have a material impact on the Company's consolidated financial statements. In March 2004, the FASB issued a Proposed Statement of Financial Accounting Standards ("the Proposed Statement"), "Share-Based Payment." The Proposed Statement addresses the accounting for transactions in which an enterprise exchanges its equity instruments for employee services or incurs liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The Proposed Statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would require instead that such transactions be accounted for using a fair value-based method. Effective January 1, 2003, the Company began recognizing expense for stock-based compensation using the fair value method of accounting described in SFAS No. 123, "Accounting for Stock-Based Compensation," as amended. As a result, the Proposed Statement, if ultimately adopted by the FASB as proposed, is not expected to have a material impact on the Company's consolidated financial statements.
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 services 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 statement, 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. The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements in the Company's Annual Report. 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 judgments 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 in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment 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. Note 1, in the Company's Annual Report, to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses. 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 judgment 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. Yields are presented on a non tax-equivalent basis. <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 2004 JUNE 30, 2003 ------------------------------- ----------------------------- AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ OUTSTANDING EARNED/ BALANCE PAID YIELD/ BALANCE PAID YIELD/ (000) (000) RATE (000) (000) RATE ----------- -------- ------- ----------- -------- ------ <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Loans, net $192,691 $2,885 5.99% $162,642 $2,678 6.59% Taxable investments 106,238 904 3.40% 82,014 604 2.96% Tax-exempt investments 49,821 539 4.33% 52,893 581 4.39% Time deposits-other bank 1,083 4 1.63% 877 6 2.63% Federal funds sold 9,268 26 1.11% 2,117 9 4.60% -------- ------ ---- -------- ------ ---- Total interest-earning assets 359,101 4,358 4.85% 300,543 3,878 5.16% ====== ====== Noninterest-earning assets Cash and due from banks 10,642 8,390 Premises and equipment, net 6,516 5,404 Other assets 16,506 14,370 -------- -------- Total Assets $392,765 $328,707 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $12,195 6 0.20% $10,600 $6 0.24% Savings deposits 163,785 388 0.95% 113,053 292 1.03% Time deposits 98,925 618 2.50% 101,105 730 2.88% Fed funds purchased 551 1 0.89% 1,035 4 1.93% Securities sold u/a to repurchase 6,269 13 0.82% 5,240 13 1.01% FHLB advances 18,526 164 3.54% 13,866 149 4.27% Notes payable 724 5 2.63% 912 6 2.65% -------- -------- ------ ---- Total interest-bearing liabilities 300,975 $1,195 1.59% 245,811 $1,200 1.95% ====== ====== Noninterest-bearing liabilities: Demand deposits 53,936 47,254 Other 4,443 4,014 -------- -------- Total liabilities $359,354 $297,079 Stockholders' equity 33,411 31,628 -------- -------- Total Liabilities and Stockholders' Equity $392,765 $328,707 ======== ======== Net interest earnings $3,163 $2,678 ====== ====== Net yield on interest earning assets 3.52% 3.56% </TABLE>
Loan Activity Total gross loans have grown to $201.2 million at June 30, 2004, reflecting a 4.7% or $9.1 million increase from March 31, 2004. Total net loans (loans after allowance for loan losses) have grown to $198.4 million at June 30, 2004, reflecting a 4.7% or $8.9 million increase from March 31, 2004. Commercial loans total $140.3 million at June 30, 2004, reflecting a 2.6% or $3.6 million increase from March 31, 2004. Consumer loans total $60.4 million at June 30, 2004, reflecting a 9.8% or $5.4 million increase from March 31, 2004. During the quarter, the Bank began to portfolio fixed rate residential real estate loans with shorter desired maturities, as a result of the interest rate environment improving during the quarter. Prior to second quarter 2004 the Bank sold the majority of residential mortgages to FNMA to minimize interest rate risk in the low interest rate environment. During the second quarter 2004, the Bank sold loans to FNMA totaling $0.4 million as compared to $3.5 million during the second quarter 2003. At June 30, 2004, the Bank had a loan servicing portfolio principal balance of $29.7 million upon which it earns a servicing fee. This loan servicing portfolio balance compares to $30.9 million both at March 31, 2004 and December 31, 2003. Loan Portfolio Composition The following table presents selected information on the composition of the Company's loan portfolio in dollar amounts and in percentages as of the dates indicated. <TABLE> <CAPTION> JUNE 30, 2004 DECEMBER 31, 2003 ($000) PERCENTAGE ($000) PERCENTAGE ------------- ---------- ----------------- ---------- <S> <C> <C> <C> <C> COMMERCIAL LOANS Real Estate $114,345 57.0% $108,325 57.8% Installment 12,533 6.2% 14,033 7.5% Lines of credit 13,333 6.6% 10,645 5.7% Cash Reserve 84 0.0% 81 0.0% -------- ----- -------- ----- Total Commercial Loans 140,295 69.8% 133,084 71.0% CONSUMER LOANS Real Estate 28,241 14.1% 24,270 12.9% Home Equity 29,091 14.5% 26,857 14.3% Installment 2,477 1.2% 2,046 1.1% Overdrafts 321 0.2% 811 0.4% Credit Card 296 0.2% 292 0.2% Other (42) 0.0% 170 0.1% -------- ----- -------- ----- Total Consumer Loans 60,384 30.2% 54,446 29.0% -------- ----- -------- ----- Total Loans 200,679 100.0% 187,530 100.0% -------- ----- -------- ----- Net Deferred Costs & Unearned Discounts 567 537 Allowance for Loan Losses (2,864) (2,539) -------- -------- Loans, net $198,382 $185,528 ======== ======== </TABLE>
Asset quality continues to remain strong with net charge offs of $3 thousand in the second quarter of 2004, and total net recoveries of $53 thousand for the year to date. Non-performing loans, defined as accruing loans greater than 90 days past due and non-accruing loans, totaled 0.31% of total loans outstanding at June 30, 2004 as compared to 0.49% at December 31, 2003. The decrease in non-performing loans was due to one large commercial loan with a principal balance of $493 thousand at December 31, 2003 being paid off in January 2004. No loans were considered impaired at June 30, 2004. The allowance for loan losses totaled $2.9 million or 1.42% of gross loans outstanding at June 30, 2004 as compared to $2.5 million or 1.35% of gross loans outstanding at December 31, 2003. The adequacy of the Company's allowance for loan losses is reviewed quarterly with consideration given to loan concentrations, charge-off history, delinquent loan percentages, and general economic conditions. Management believes the allowance for loan losses is adequate to absorb credit losses from existing loans. The following table sets forth information regarding non-performing loans. <TABLE> <CAPTION> June 30, 2004 December 31, 2003 ------------- ----------------- ($000) ($000) <S> <C> <C> Non-accruing loans: One-to-four family $ - $ - Home Equity - - Commercial real estate and multifamily 289 256 Consumer - - Commercial Business - 40 ----- ----- Total $ 289 $ 296 ----- ----- Accruing loans 90+ days past due 340 627 ----- ----- Total non-performing loans $ 629 $ 923 ===== ===== Total non-performing loans as a percentage of total assets 0.16% 0.27% ===== ===== Total non-performing loans as a percentage of total loans 0.31% 0.49% ===== ===== </TABLE>
The following tables set forth information regarding the allowance for loan losses for the six month periods ended June 30, 2004 and 2003. <TABLE> <CAPTION> Six Months Ended June 30, 2004 2003 ------- ------- ($000) ($000) <S> <C> <C> Beginning balance, January 1 $ 2,539 $ 2,146 Total charge offs (9) (5) Total recoveries 62 1 ------- ------- Net recoveries(charge offs) 53 (4) Provision for loan losses 272 240 ------- ------- Ending balance, June 30 $ 2,864 $ 2,382 ======= ======= </TABLE> ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Balance at Balance at 6/30/2004 12/31/2003 Attributable to: Attributable to: ---------------- ---------------- ($000) ($000) <S> <C> <C> Real Estate Loans $ 1,634 $ 1,619 Commercial Loans and Leases 461 384 Consumer Loans 172 147 All other loans 9 - Unallocated 588 389 ------------ ------------ Total $ 2,864 $ 2,539 ============ ============ </TABLE> Investing Activities The Company's securities portfolio increased by 1.6% to approximately $156.8 million at June 30, 2004, as compared to approximately $154.4 million at March 31, 2004. The growth in the securities portfolio of 1.6% for the three months ended June 30, 2004 was due in part to the Company's utilization of an advance from the 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 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 U.S. 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 assets within the portfolio is 4.2 years as of June 30, 2004, as compared to 3.8 years at March 31, 2004. Available-for-sale securities with a total fair value of $118.8 million at June 30, 2004 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.
Funding Activities Total deposits during the quarter decreased 3.3% to $321.4 million at June 30, 2004 from $332.3 million at March 31, 2004. Regular savings deposits decreased to $154.4 million at June 30, 2004 , reflecting a 8.1% or $13.7 million decrease for the quarter. Typically, in the first quarter of each year, the Company experiences an influx of tax deposits from municipalities which can be expected to decrease as they pay expenses as the year progresses. The growth in the first part of the year from Muni-Vest was due to this normal influx of tax deposits, supplemented additionally by new municipal depositors. The Company expects as these deposits are drawn down throughout the year that they will be supplemented and offset with growth of other core deposits. Core deposits (all deposits excluding time deposits greater than $100,000) decreased to $282.8 million, reflecting a 3.6% or $10.6 million decrease for the quarter. For the quarter ended June 30, 2004, demand deposits increased 5.3%, time deposits of $100 thousand and over decreased 1.0%, other time accounts decreased 0.8%, and securities sold under agreement to repurchase increased 12.6%, compared to March 31, 2004, all of which vary day to day within a range based on customer transaction volume and represent normal deposit activity.
ANALYSIS OF RESULTS OF OPERATIONS Net Income Net income was $1.1 million or $0.44 per share for the quarter ended June 30, 2004 as compared to $1.0 million or $0.41 per share for the quarter ended June 30, 2003. Year-to-date in 2004, the Company has recorded net income of $2.2 million or $0.91 per share as compared to $2.1 million or $0.85 per share for the same period in 2003. 2003 per share amounts have been adjusted for the special 5 percent stock dividend paid in December 2003. Net income represented a return on average assets of 1.10% for the quarter ended June 30, 2004, compared to 1.23% for the same period in 2003. The return on average equity for the second quarter of 2004 was 12.91%, compared to 12.80% for the second quarter of 2003. Other Operating Results Net interest income increased $0.5 million, or 18.1%, for the quarter ended June 30, 2004, compared to the same time period in 2003. Total interest income in the second quarter 2004 increased 12.4%, and interest paid on deposits and borrowings decreased 0.4%, from the second quarter of 2003. Interest income increased due to the $58.6 million, or 19.5%, increase in average interest-earning assets to $359.1 million for the second quarter of 2004 from $300.5 million for the second quarter of 2003. The interest expense decrease of $5 thousand for the quarter, reflects the effect of interest rate reductions made by the Company since June 30, 2003 in spite of the offsetting $55.2 million, or 22.5% increase in average interest-bearing liabilities to $301.0 million for the second quarter of 2004 from $245.8 million for the second quarter of 2003. The cost of interest-bearing liabilities decreased to 1.59% for the quarter ended June 30, 2004 from 1.95% for the quarter ended June 30, 2003. The Company's net interest margin on earning assets, for the three month period ended June 30, 2004 was 3.52%, as compared to 3.56% for the same time period in 2003. The Company anticipates that on its net interest margin which will remain challenged in the near term future as a result of the current low interest rate environment. The provision for loan losses increased to $136 thousand for the second quarter of 2004 from $120 thousand for the same time period in 2003. The higher second quarter provision in 2004 was primarily a result of continued commercial loan growth. Commercial real estate loans tend to have a higher credit risk than consumer loans. Non-interest income increased 6.4% to $1.9 million for the second quarter 2004 as compared to $1.8 million for the second quarter 2003. M&W Agency insurance commissions represented the largest increase in the second quarter, a 21.2% or $0.2 million increase over the second quarter 2003, principally due to the M&W acquisition of Tarbox Inc. located in Gowanda, New York, in the third quarter of 2003, and the purchases of the Easy PA Agency, Inc. and Ellwood Agency, Inc. insurance agencies, both located in Hamburg, New York, on January 2, 2004. Non-interest expense was $3.5 million for the second quarter 2004, an increase of $0.5 million, or 15.4%, over the second quarter 2003. The primary component of the increase was increased salary and employee benefit expense of $276 thousand related to Company growth. Other miscellaneous expense increased by $102 thousand compared with the second quarter 2003, due to a number of items including increased operating costs for the M&W Agency insurance operations reflecting the two agency acquisitions completed in January 2004, as well as other transaction-based expenses related to the increased size and volume in the Bank's business. Income tax expense totaled $342 thousand and $295 thousand for the three month periods ended June 30, 2004 and 2003, respectively. The effective combined tax rate for the second quarter of 2004 was 24.1% compared to 22.6% for the second quarter of 2003. This increase is primarily a result of the decreased composition of municipal securities as a percentage of the overall investment portfolio and non-deductible nature of intangibles acquired in the Ellwood Insurance Agency Acquisition in January 2004. CAPITAL The Bank has consistently maintained regulatory capital ratios at, or above, standards developed by regulatory agencies to be considered "well capitalized". Total stockholders' equity was $33.0 million at June 30, 2004, down from $34.3 million at March 31, 2004. The decrease is primarily attributable to the decrease in accumulated other comprehensive income (loss), which is due to the decrease in unrealized gains in the investment portfolio as bond rates in the market moved higher. Equity as a percentage of assets was 8.4% at June 30, 2004, compared to 8.6% at March 31, 2004. Book value per common share fell to $13.34 at June 30, 2004, down from $13.87 at March 31, 2004. CAPITAL EXPENDITURES The Bank has approved the construction and furnishing of a new branch office in 2004. The cost to the Bank is expected to be approximately $0.6 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.
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 $7.9 million can be drawn on the FHLB via the Overnight Line of Credit Agreement. An amount equal to 25% of the Bank's total assets could be borrowed through the advance programs under certain qualifying circumstances. The Bank also has the ability to purchase up to $7 million in federal funds from one of its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could also borrow at the discount window. Additionally, the Bank has access to capital markets as a funding source. The cash flows from the investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices, so that securities are available for sale from time-to-time without the need to incur significant losses. At June 30, 2004, approximately 1.9% of the Bank's securities had contractual maturity dates of one year or less and approximately 24.7% had maturity dates of five years or less. Available assets of $154.9 million, less public and purchased funds of $152.2 million, resulted in a long-term liquidity ratio of 102% at June 30, 2004, versus 123% at December 31, 2003. The decrease is due to the large increase in municipal deposits over the six month period ended June 30, 2004. Liquidity needs can also be met by more aggressively pursuing municipal deposits, which are normally awarded on the basis of competitive bidding. The Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for these deposits.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Additional information called for by this item is contained in the Liquidity section of Management's Discussion and Analysis of Financial Condition and Results of Operation. Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank's financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in the future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management's philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans and investment securities and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank's financial instruments and changes to such market values given changes in the interest rates. The Bank's Asset Liability Committee, which includes members of senior management, monitors the Bank's interest rate sensitivity with the aid of a computer model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on - or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and other financial instruments used for interest rate risk management purposes. The following table demonstrates the possible impact of changes in interest rates on the Bank's net interest income over a 12 month period of time: SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES <TABLE> <CAPTION> Calculated increase (decrease) in projected annual net interest income ($000) ($000) June 30, 2004 December 31, 2003 ------------- ----------------- <S> <C> <C> Changes in interest rates +200 basis points (344) 515 - -200 basis points (374) (1,390) </TABLE> Many assumptions were utilized by the Bank to calculate the impact that changes in interest rates may have on net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the event that 200 basis point rate changes cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions, such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank's projected net interest income.
ITEM 4 - CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Treasurer have concluded that the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) 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 CONTROL OVER FINANCIAL REPORTING There were no changes in the Company's internal control over financial reporting that occurred in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - None to report ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table includes all issuer repurchases, including those made pursuant to publicly announced plans or programs. <TABLE> <CAPTION> TOTAL NUMBER OF MAXIMUM NUMBER (OR SHARES PURCHASED AS APPROPRIATE DOLLAR VALUE) OF TOTAL NUMBER AVERAGE PRICE PART OF PUBLICLY SHARES THAT MAY YET BE OF SHARES PAID ANNOUNCED PLANS OR PURCHASED UNDER THE PLANS PERIOD PURCHASED PER SHARE PROGRAMS OR PROGRAMS - -------------------------- ---------------- ------------- ------------------- ---------------------------- <S> <C> <C> <C> <C> April, 2004 (April 1, 2004 through April 30, 2004 800 $24.85 800 43,800 May, 2004 (May 1, 2004 through May 31, 2004) 600 $24.57 600 43,200 June, 2004 (June 1, 2004 through June 30, 2004) 8,700 $23.88 8,700 34,500 ------ ------ ------ ------ Total 10,100 $24.00 10,100 34,500 ====== ====== ====== ====== </TABLE> All of the foregoing shares were purchased in open market transactions. On October 22, 2003, the Company announced that its Board of Directors had authorized the purchase of up to 50,000 shares of the Company's common stock over a two year period. There were no other publicly announced plans outstanding as of June 30, 2004. ITEM 3. Defaults upon Senior Securities - None to report
ITEM 4. Submission of Matters To a Vote of Security Holders The 2004 Annual Shareholders meeting of the registrant was held on April 20, 2004. At the meeting, Phillip Brothman, David M. Taylor and Thomas H. Waring, Jr., were reelected as directors for a term of three years, and Mary Catherine Militello as a new director for a term of three years. The following votes were cast for the nominees: For: Phillip Brothman 1,667,769 David M Taylor 1,672,263 Thomas H Waring, Jr 1,640,608 Mary Catherine Militello 1,616,900 The following directors also continue their terms as officers: Robert W Allen William F Barrett James E Biddle, Jr LaVerne G Hall Robert G Miller, Jr John R O'Brien James Tilley Nancy W Ware 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 the Principal Executive Officer pursuant to 26 section 302 of The Sarbanes-Oxley Act of 2002. 31.2 Certification of the Principal Financial Officer pursuant to 28 section 302 of The Sarbanes-Oxley Act of 2002. 32.1 Certification of the Principal Executive Officer pursuant to 18 30 USC Section 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 the Principal Financial Officer pursuant to 18 32 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of The Sarbanes -Oxley Act of 2002 </TABLE> (b) Reports on Form 8-K : The registrant furnished a form 8-K on April 20, 2004 to report under Item 7 and Item 12. The report included a press release setting forth results of operations and financial conditions for the first quarter 2004.
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 August 4, 2004 By: /s/James Tilley ------------------------------ James Tilley President and CEO DATE August 4, 2004 By: /s/Mark DeBacker ----------------------------- Mark DeBacker Treasurer