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, 2001 ------------------ [ ] 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--2,199,042 shares as of September 30, 2001
INDEX EVANS BANCORP, INC. AND SUBSIDIARY PAGE PART 1. FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements (Unaudited) Consolidated balance sheets-September 30, 2001 and December 31, 2000 1 Consolidated statements of income--Three months ended September 30, 2001 and 2000 2 Consolidated statements of income--Nine months ended September 30, 2001 and 2000 3 Consolidated statements of stockholders' equity-- Nine months ended September 30, 2001 and 2000 4 Consolidated statements of cash flows--Nine months ended September 30, 2001 and 2000 5 Notes to consolidated financial statements-- September 30, 2001 and 2000 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantative and Qualitative Disclosures About Market Risks 18 PART II. OTHER INFORMATION 19 --------------------------- 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 20
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE 1 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, 2001 (Unaudited) and December 31, 2000 September 30, December 31, ASSETS 2001 2000 ------------ ------------ <S> <C> <C> Cash and due from banks $ 8,251,734 $ 8,108,912 Federal Funds sold 1,350,000 1,250,000 Securities: Classified as available-for-sale, at fair value 77,696,194 69,645,817 Classified as held-to-maturity, at amortized cost 2,799,379 3,475,401 Loans, net 138,378,340 128,779,052 Properties and equipment, net 3,914,006 3,776,869 Other assets 8,125,952 9,513,092 ------------ ------------ TOTAL ASSETS $240,515,605 $224,549,143 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand $ 37,634,312 $ 36,607,680 NOW and money market accounts 8,231,727 9,550,131 Regular savings 66,829,617 58,142,285 Time Deposits, $100,000 and over 31,227,799 30,779,658 Other time accounts 51,592,406 51,621,565 ------------ ------------ 195,515,861 186,701,319 Other Borrowed Funds 9,980,061 4,409,068 Dividend Payable 593,741 0 Securities sold under agreements to repurchase 3,230,033 3,869,172 Other liabilities 4,368,601 4,390,512 ------------ ------------ TOTAL LIABILITIES 213,688,297 199,370,071 ------------ ------------ STOCKHOLDERS' EQUITY Common Stock, $.50 par value; 10,000,000 shares authorized; 2,199,042 and 1,759,601 shares issued respectively 1,099,521 879,801 Capital surplus 13,569,674 13,810,991 Retained earnings 10,915,457 9,953,780 Accumulated other comprehensive income (net of tax) 1,242,656 534,500 ------------ ------------ 26,827,308 25,179,072 Less: Treasury Stock 0 0 ------------ ------------ Total Stockholders' equity 26,827,308 25,179,072 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $240,515,605 $224,549,143 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> 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, 2001 and 2000 (Unaudited) Three Months Ended September 30, 2001 2000 ------------ ------------ <S> <C> <C> INTEREST INCOME Loans $ 2,795,682 $ 2,740,769 Federal funds sold 33,235 45,202 Securities: Taxable 726,969 711,384 Non-taxable 390,828 388,632 ------------ ------------ Total Interest Income 3,946,714 3,885,987 INTEREST EXPENSE Interest on Deposits 1,452,732 1,521,458 Short Term Borrowing 158,398 105,511 ------------ ------------ NET INTEREST INCOME 2,335,584 2,259,018 PROVISION FOR LOAN LOSSES 139,000 60,000 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,196,584 2,199,018 ------------ ------------ NON-INTEREST INCOME: Service charges 273,736 236,347 Premium on loans sold-SLMA 2,352 2,958 Premium/Discount on loans sold-FNMA 5,298 257 Insurance Service and Fees 562,429 132,069 ENB Associates 23,676 26,608 Other 201,795 187,523 Securities Gain(Loss) 77,828 (16,136) ------------ ------------ Total Non-interest Income 1,147,114 569,626 ------------ ------------ NON-INTEREST EXPENSE: Salaries and employee benefits 1,201,564 929,271 Occupancy 282,286 251,545 Supplies 52,933 46,662 Repairs and maintenance 91,817 63,264 Advertising and public relations 40,784 39,475 Professional services 136,394 65,035 FDIC assessments 8,755 8,860 Other Insurance 66,108 99,724 Amortization of Goodwill 79,620 26,539 Evans Bancorp Expense 47,482 13,401 Other 343,019 266,141 ------------ ------------ Total Non-interest Expense 2,350,762 1,809,917 ------------ ------------ Income before income taxes 992,936 958,727 ------------ ------------ INCOME TAXES 267,665 264,000 ------------ ------------ NET INCOME $ 725,271 $ 694,727 ============ ============ NET INCOME PER COMMON SHARE-BASIC $ 0.33 $ 0.32 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,199,042 2,144,178 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> 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, 2001 and 2000 (Unaudited) Nine Months Ended September 30, 2001 2000 ------------ ------------ <S> <C> <C> INTEREST INCOME Loans $ 8,438,926 $ 7,922,258 Federal Funds Sold 115,656 125,551 Securities: Taxable 2,249,269 2,029,762 Non-taxable 1,142,332 1,161,352 ------------ ------------ Total Interest Income 11,946,183 11,238,923 INTEREST EXPENSE Interest on Deposits 4,732,991 4,389,064 Short Term Borrowing 370,788 313,327 ------------ ------------ NET INTEREST INCOME 6,842,404 6,536,532 PROVISION FOR LOAN LOSSES 309,000 220,000 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,533,404 6,316,532 ------------ ------------ NON-INTEREST INCOME: Service charges 768,301 625,133 Premium on loan sold-SLMA 4,266 5,350 Premium/Discount on loans sold-FNMA 9,523 1,390 Insurance Service and Fees 1,865,227 132,069 ENB Associates 91,906 43,721 Other 555,615 592,683 Securities (Loss)Gain 165,967 (31,616) ------------ ------------ Total Non-interest Income 3,460,805 1,368,730 ------------ ------------ NON-INTEREST EXPENSE: Salaries and employee benefits 3,615,880 2,670,906 Occupancy 863,058 734,442 Supplies 169,735 141,218 Repairs and maintenance 280,902 174,947 Advertising and public relations 110,153 101,791 Professional services 367,701 193,855 FDIC Assessment 25,911 25,611 Other Insurance 210,099 272,415 Amortization of Goodwill 238,860 26,539 Evans Bancorp Expense 133,021 38,527 Other 1,064,378 758,032 ------------ ------------ Total Non-interest Expense 7,079,698 5,138,283 ------------ ------------ Income before income taxes 2,914,511 2,546,979 ------------ ------------ INCOME TAXES 884,000 673,800 ------------ ------------ NET INCOME $ 2,030,511 $ 1,873,179 ============ ============ NET INCOME PER COMMON SHARE-BASIC $ 0.92 $ 0.87 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,199,042 2,144,178 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> PART 1-FINANCIAL INFORMATION PAGE 4 ITEM 1-FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2000 $ 849,475 $ 10,990,720 $ 7,629,839 $ (1,185,096) $ 0 $ 18,284,938 Comprehensive income: 2000 net income 1,873,179 1,873,179 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $265,508 632,161 632,161 ------------ Total comprehensive income 2,505,340 ------------ Cash dividends ($.52 per common share) (899,045) (899,045) Purchase of 6,028 shares for treasury (283,316) (283,316) Reissuance of treasury stock under stock dividend plan of 3,125 shares 146,875 146,875 Issuance of Shares for M&W acquisition 30,326 2,820,271 2,850,597 ----------- ------------ ------------ ------------ ------------ ------------ Balance, September 30, 2000 $ 879,801 $ 13,810,991 $ 8,603,973 $ (552,935) $ (136,441) $ 22,605,389 =========== ============ ============ ============ ============ ============ <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 $ 879,801 $ 13,810,991 $ 9,953,780 $ 534,500 $ 0 $ 25,179,072 Comprehensive income: 2001 net income 2,030,511 2,030,511 Unrealized gain on available for sale securities, net of reclassification adjustment and tax effect of $297,425 708,156 708,156 ------------ Total comprehensive income 2,738,667 ------------ Cash dividends ($.54 per common share) (1,068,834) (1,068,834) Purchase of 3,086 shares for treasury (145,042) (145,042) Five-for-Four stock split 219,720 219,720 with fractional shares paid in cash (241,317) (241,317) Reissuance of treasury stock under stock dividend plan of 3,086 shares 145,042 145,042 ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 2001 $ 1,099,521 $ 13,569,674 $ 10,915,457 $ 1,242,656 $ 0 $ 26,827,308 ============ ============ ============ ============ ============ ============ </TABLE>
<TABLE> <CAPTION> 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, 2001 and 2000 (Unaudited) Nine Months Ended September 30, 2001 2000 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Interest received $ 11,988,740 $ 10,961,442 Fees and commissions received 3,082,454 1,525,784 Interest paid (5,141,985) (4,629,424) Cash paid to suppliers and employees (4,818,860) (5,681,455) Income taxes paid (1,178,000) (807,235) ------------ ------------ Net cash provided by operating activities 3,932,349 1,369,112 ------------ ------------ INVESTING ACTIVITIES Available for sale securities Purchases (33,745,016) (20,403,274) Proceeds from sales 13,110,548 7,411,556 Proceeds from maturities 14,994,873 4,029,164 Held to maturity securities Purchases (2,387,454) (2,391,654) Proceeds from maturities 2,060,247 2,190,755 Additions to properties and equipment (755,129) (284,933) Investment in Joint Venture 0 (10,500) Increase in loans, net of repayments (16,304,557) (9,841,020) Proceeds from sales of loans 6,087,254 1,029,497 Proceeds from sales of other real estate owned 0 294,452 ------------ ------------ Net cash used in investing activities (16,939,234) (17,975,957) ------------ ------------ FINANCING ACTIVITIES Increase in deposits 8,814,543 13,144,149 Purchase (Repayment) of short term borrowing 4,931,853 (1,994,534) Purchase of treasury stock 0 (136,441) Dividends paid (496,689) (424,737) ------------ ------------ Net cash provided by financing activities 13,249,707 10,588,437 ------------ ------------ Net increase (decrease) in cash and cash equivalents 242,822 (6,018,408) Cash and cash equivalents, January 1 9,358,912 11,978,778 ------------ ------------ Cash and cash equivalents, September 30 $ 9,601,734 $ 5,960,370 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE 6 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2001 and 2000 (Unaudited) Nine Months Ended September 30, 2001 2000 ------------ ------------ <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 2,030,511 $ 1,873,179 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 996,237 454,521 Provision for loan losses 309,000 220,000 (Gain)Loss on sale of assets (179,756) 25,007 (Decrease)Increase in accrued interest payable (38,207) 72,967 Increase in accrued interest receivable (46,948) (252,075) Decrease in other liabilities (853,413) (692,790) Decrease(Increase) in other assets 1,714,925 (331,697) ------------ ------------ Total adjustments 1,901,838 (504,067) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,932,349 $ 1,369,112 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net unrealized gain(loss) on available for sale securities $ 2,142,508 ($ 813,139) ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
Page 7 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 AND 2000 (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") and M&W Agency, Inc., ("M&W") 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 consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. The results of operations for the nine month period ended September 30, 2001 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 LOAN LOSSES ------------------------- The provision for loan 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. REVENUE RECOGNITION ------------------- The Bank's primary sources of revenue are interest income from loans and investments and service charge income. The revenue is recognized in the period in which it is earned. M&W's revenue is derived mainly from insurance commissions. The revenue is recognized on the accrual basis of accounting in accordance with generally accepted accounting principles. 5. 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 and deferred loan origination expenses. 6. 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. 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. 7. STOCK SPLIT ----------- A 5 for 4 stock split was distributed on June 12, 2001 to shareholders of record as of May 25, 2001. Fractional shares were redeemed for cash. The stock split resulted in the issuance of 439,441 shares of common stock as well as fractional shares paid in cash totaling $21,597. All share and per share data reflect the split.
Page 8 8. SEGMENT INFORMATION ------------------- Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information was adopted by the Company during 2000. This Statement establishes standards for the way that the Company reports information about its operating segments. The Company is comprised of two primary business segments, banking and insurance. The following table sets forth information regarding these segments for the three month and nine month periods ended September 30, 2001 and 2000. <TABLE> <CAPTION> Three Months Ended September 30, 2001 BANKING INSURANCE ACTIVITIES ACTIVITIES TOTAL <S> <C> <C> <C> Net Interest Income(loss) $2,340,604 ($ 5,020) $2,335,584 Provision for credit losses 139,000 0 139,000 ---------- ---------- ---------- Net interest income(loss) after provision for credit losses 2,201,604 (5,020) 2,196,584 Non-interest income 506,857 0 506,857 Insurance Commissions & Fees 0 562,429 562,429 Net securities gains 77,828 0 77,828 Non-interest expense 1,927,586 423,176 2,350,762 ---------- ---------- ---------- Income before income taxes 858,703 134,233 992,936 Income tax expense 220,665 47,000 267,665 ---------- ---------- ---------- Net income $ 638,038 $ 87,233 $ 725,271 ========== ========== ========== <CAPTION> Nine Months Ended September 30, 2001 BANKING INSURANCE ACTIVITIES ACTIVITIES TOTAL <S> <C> <C> <C> Net Interest Income(loss) $6,861,831 ($ 19,427) $6,842,404 Provision for credit losses 309,000 0 309,000 ---------- ---------- ---------- Net interest income(loss) after provision for credit losses 6,552,831 (19,427) 6,533,404 Non-interest income 1,429,611 0 1,429,611 Insurance Commissions & Fees 0 1,865,227 1,865,227 Net securities gains 165,967 0 165,967 Non-interest expense 5,701,965 1,377,733 7,079,698 ---------- ---------- ---------- Income before income taxes 2,446,444 468,067 2,914,511 Income tax expense 693,000 191,000 884,000 ---------- ---------- ---------- Net income $1,753,444 $ 277,067 $2,030,511 ========== ========== ========== </TABLE>
<TABLE> <CAPTION> Page 9 Three Months Ended September 30, 2000 BANKING INSURANCE ACTIVITIES ACTIVITIES TOTAL <S> <C> <C> <C> Net Interest Income (loss) $2,262,626 $ (3,608) $2,259,018 Provision for credit losses 60,000 0 60,000 ---------- ---------- ---------- Net interest income (loss) after provision for credit losses 2,202,626 (3,608) 2,199,018 Non-interest Income 453,693 0 453,693 Insurance Commissions & Fees 0 132,069 132,069 Net securities losses (16,136) 0 (16,136) Non-interest expense 1,683,970 125,947 1,809,917 ---------- ---------- ---------- Income before taxes 956,213 2,514 958,727 Income tax expense 262,900 1,100 264,000 ---------- ---------- ---------- Net Income $ 693,313 $ 1,414 $ 694,727 ========== ========== ========== <CAPTION> Nine Months Ended September 30, 2000 BANKING INSURANCE ACTIVITIES ACTIVITIES TOTAL <S> <C> <C> <C> Net Interest Income (loss) $6,540,140 $ (3,608) $6,536,532 Provision for credit losses 220,000 0 220,000 ---------- ---------- ---------- Net interest income (loss) after provision for credit losses 6,320,140 (3,608) 6,316,532 Non-interest Income 1,268,277 0 1,268,277 Insurance Commissions & Fees 0 132,069 132,069 Net securities losses (31,616) 0 (31,616) Non-interest expense 5,012,336 125,947 5,138,283 ---------- ---------- ---------- Income before taxes 2,544,465 2,514 2,546,979 Income tax expense 672,700 1,100 673,800 ---------- ---------- ---------- Net Income $1,871,765 $ 1,414 $1,873,179 ========== ========== ========== </TABLE>
Page 10 9. NEW ACCOUNTING STANDARDS PRONOUNCEMENTS --------------------------------------- SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. The Company adopted the provisions of SFAS No. 133 effective October 1, 1998. The adoption of SFAS No. 133 (as amended by SFAS No. 138) did not impact the Company's earnings or financial position. As allowed by SFAS No. 133 the Company transferred approximately $2,900,000 of certain securities from held to maturity to the available for sale classification during 1998. The realized and unrealized gains on the securities transferred were not material to the Company. SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Accounting, was issued in September 2000. This statement replaces SFAS No. 125, and requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities of the Company occurring after March 31, 2001 and did not have a material impact on the Company's financial statements. SFAS No. 141, Business Combinations issued on June 29, 2001 requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. Specifically identifiable intangible assets acquired, other than goodwill, will be amortized over their estimated useful economic life. This pronouncement had no effect on the Company's financial statements. SFAS No. 142, Goodwill and Other Intangible Assets, issued on June 29, 2001, addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This statement will result in the end to systematic goodwill and other intangible amortization and require impairment testing on those balances at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. At September 30, 2001, the Company had approximately $2.9 million of goodwill and recorded approximately $85,000 of goodwill amortization expense during the quarter ended September 30, 2001.
Page 11 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "expect", "intend", "may", and similar expressions identify such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based largely on the expectations of the Company or the Company's management and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, and other factors affecting the Company's operations, markets, products and services, as well as expansion strategies and other factors discussed elsewhere in this report and other reports filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control. 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 credit losses, investment activities, loan origination, sale and servicing activities, service charges and fees collected on deposit accounts, and insurance services and fees. Noninterest expense primarily consists of salaries and employee benefits, occupancy and equipment expense, technology and communication expenses, and goodwill amortization. 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. Interest income on loans does not include interest on loans for which the Bank has ceased to accrue interest. Interest and yields are not presented on a tax-equivalent basis.
<TABLE> <CAPTION> Page 12 THREE MONTHS ENDED SEPTEMBER 30, 2001 THREE MONTHS ENDED SEPTEMBER 30, 2000 AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE (000) (000) (000) (000) <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Loans, Net $137,287 $ 2,796 8.15% $122,226 $ 2,741 8.97% Taxable Investments 47,575 727 6.11% 38,610 711 7.37% Tax-exempt Investments 32,861 391 4.76% 33,250 389 4.68% Federal funds sold 3,111 33 4.27% 2,546 45 7.10% -------- -------- -------- -------- -------- -------- Total interest-earning assets 220,834 $ 3,947 7.15% 196,632 $ 3,886 7.91% ======== ======== Noninterest-earning assets Cash and due from banks 7,475 6,619 Premises and equipment, net 3,645 3,732 Other assets 8,002 4,803 -------- -------- Total Assets $239,956 $211,786 ======== ======== LIABILITIES & SHAREHOLDER'S EQUITY Interest-bearing liabilities: NOW accounts $ 8,123 $ 20 0.99% $ 9,117 $ 23 0.99% Savings deposits 63,071 344 2.18% 60,263 432 2.87% Time deposits 84,521 1,089 5.15% 74,092 1,067 5.76% Fed Funds Purchased & Securities Sold U/A to Repurchase and 4,310 30 2.86% 3,316 43 5.26% other FHLB Advances 9,804 128 5.21% 5,000 62 4.95% -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities 169,829 $ 1,611 3.79% 151,788 $ 1,627 4.29% -------- -------- Noninterest-bearing liabilities: Demand deposits 37,289 35,422 Other 6,203 4,206 Total liabilities $213,321 $191,416 -------- -------- Shareholders' equity 26,635 20,370 -------- -------- Total Liabilities and Equity $239,956 $211,786 ======== ======== Net interest earnings $ 2,336 $ 2,259 ======== ======== Net yield on interest earning assets 4.23% 4.60% </TABLE>
Page 13 Total net loans outstanding increased 1.6% to $138.4 million at September 30, 2001 from $136.2 million at June 30, 2001. Year-to-date, total net loans have increased 7.5% from $128.8 million at December 31, 2000. During the quarter, the Company continued to shift its loan mix towards higher-yielding commercial loans. As a result, loan growth for the quarter ended September 30, 2001 was concentrated primarily in commercial mortgages (approximately $2.7 million). Total commercial loans increased 2.2% to approximately $91.0 million at September 30, 2001 from approximately $89.0 million at June 30, 2001. Year-to-date, commercial loans have increased 12.6% from $80.8 million at December 31, 2000. Total consumer loans increased 1.0% to approximately $48.8 million at September 30, 2001 from approximately $48.3 million at June 30, 2001. Year-to-date, consumer loans have decreased 0.6% from $49.0 million at December 31, 2000. These results reflect the Company's strategy to deal with the declining interest rate environment by continuing to emphasize commercial loan originations while selling fixed rate residential real estate loans originated under a certain interest rate level. For the nine months ended September 30, 2001, the Company sold residential mortgages to the Federal National Mortgage Association ("FNMA") totaling approximately $5,436,000 as compared to approximately $519,000 during the same period in 2000. The Company maintains servicing rights on the loans that it sells to FNMA and earns a fee thereon.
Page 14 Loan Portfolio Composition -------------------------- The following table presents selected information on the composition of the Company's loan portfolio in dollar amounts and in percentages as of the dates indicated. <TABLE> <CAPTION> SEPTEMBER 30, 2001 PERCENTAGE DECEMBER 31, 2000 PERCENTAGE ($000) ($000) <S> <C> <C> <C> <C> COMMERCIAL LOANS Real Estate $ 70,401 50.4% $ 61,628 47.5% Installment 11,645 8.3% 10,327 8.0% Lines of Credit 7,929 5.7% 7,748 6.0% Lease Financing 951 0.7% 1,041 0.8% Cash Reserve 40 0.0% 51 0.0% ---------- ---------- ---------- ---------- Total Commercial Loans 90,966 65.1% 80,795 62.3% Consumer Loans Real Estate 23,590 16.9% 24,333 18.7% Home Equity 20,759 14.9% 19,971 15.4% Installment 3,105 2.2% 2,989 2.3% Overdrafts 598 0.4% 1,012 0.8% Credit Card 295 0.2% 297 0.2% Student Loans 217 0.2% 338 0.3% Other 197 0.1% 100 0.0% ---------- ---------- ---------- ---------- Total Consumer Loans 48,761 34.9% 49,040 37.7% ---------- ---------- ---------- ---------- Total Loans 139,727 100.0% 129,835 100.0% ========== ========== ========== ========== Net Deferred Costs & 372 372 Unearned Discounts Allowance for Credit Losses (1,721) (1,428) ---------- ---------- Total Loans, Net $ 138,378 $ 128,779 ========== ========== </TABLE> The Company's total non-accruing loans, expressed as a percentage of total loans, was 0.49% at September 30, 2001 as compared to 0.92% at December 31, 2000. Actual charge-offs for the three months ended September 30, 2001 were $20,278 compared to $37 for the same period in 2000. The decrease in non-accruing loans is substantially a result of foreclosure on one parcel of commercial real estate during 2001. This property is currently held for sale by the Bank. The Company's allowance for credit losses increased to approximately $1.7 million at September 30, 2001 from approximately $1.4 million at December 31, 2000. The allowance for credit loss as a percentage of total loans was 1.23% at September 30, 2001 compared to 1.10% at December 31, 2000. This increase is a result of the increased amount of commercial loans. This increase in the loan portfolio, especially the increase in commercial loans, which tend to have higher credit risk than consumer loans, is reflected in the additional credit loss reserve levels reflected at September 30, 2001 and December 31, 2000.
Page 15 The adequacy of the Company's allowance for credit 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 credit losses is adequate to absorb credit losses from existing loans. The following table sets forth information regarding non-accrual loans. <TABLE> <CAPTION> September 30, 2001 December 31, 2000 ------------------- ----------------- ($000) ($000) <S> <C> <C> Non-accruing loans: One-to-four family $ 0 $ 0 Home equity 0 0 Commercial real estate and multi-family 494 1,113 Consumer 0 0 Commercial business 184 82 ------------ ------------ Total 678 1,195 ------------ ------------ Loans 90+ days past due 1,076 265 ------------ ------------ Total non-performing loans $ 1,754 $ 1,460 ============ ============ Total non-performing loans as a percentage 0.73% 0.65% of total assets ============ ============ Total non-performing loans as a percentage 1.27% 1.12% of total loans ============ ============ </TABLE>
Page 16 Investing Activities -------------------- The Company's securities portfolio increased by 2.5% to approximately $80.5 million at September 30, 2001 as compared to approximately $78.5 million at June 30, 2001. Year-to-date, the securities portfolio has grown 10.1% from $73.1 million at December 31, 2000. Growth for the quarter is attributable to growth in deposits. Available funds continue to be invested in US government and agency securities and tax-advantaged bonds issued by New York State municipalities and school districts. Funding Activities ------------------ Total deposits during the quarter increased by 1.9% to $195.5 million at September 30, 2001 from $191.8 million at June 30, 2001. Year-to-date, total deposits increased 4.7% from $186.7 million at December 31, 2000. Tax collections in local municipalities traditionally contribute to increases in total deposits, usually certificates of deposit over $100,000, during the first and third quarters and then decrease in the second and fourth quarters as cash is needed by the municipalities for operations. Core deposits (all deposits excluding time deposits greater than $100,000), increased 1.8% to $164.3 million at September 30, 2001 from $161.4 million at June 30, 2001. Year-to-date, core deposits increased 5.3% from $156.0 million at December 31, 2000. Demand deposits increased 4.0% to $37.6 million at September 30, 2001 from $36.2 million at June 30, 2001. Premium savings, Statement savings, and Business savings also increased 5.1%, 4.0%, and 12.2%, respectively, for the quarter. NOW accounts decreased by 5.8% for the quarter, mainly due to a decrease in municipal NOW accounts as a result of lower rates offered in this account. Other borrowed funds increased from approximately $4.4 million at December 31, 2000 to $10.0 million at September 30, 2001 primarily as a result of a new $6.0 million borrowing undertaken in late May 2001 from the Federal Home Loan Bank. This borrowing was made to allow the Company to leverage low interest rates at the Federal Home Loan Bank to primarily fund an increase in commercial loan demand. Other Balance Sheet Changes --------------------------- Properties and equipment, net has increased as a result of construction of a replacement of the Company's branch location in North Boston, New York. This new branch will open in mid-October 2001 and will replace a branch located across the street which the Company has leased up until now. Other assets have decreased from December 31, 2000 as a result of receipt in the first quarter of 2001 of approximately $1.7 million in insurance proceeds on the life insurance policy of Richard Craig, Chairman of the Board and CEO, who passed in late December 2000. Also, net goodwill has decreased based on approximately $255,000 of amortization year-to-date. MATERIAL CHANGES IN THE RESULTS OF OPERATIONS --------------------------------------------- Net Income ---------- The Company recorded net income of approximately $725,000 for the quarter ended September 30, 2001, an increase of 4.3% over net income of $695,000 for the same quarter in 2000. Earnings per share were $0.33 for the quarter ended September 30, 2001, and $0.32 for the same quarter in 2000. Year-to-date earnings through September 30, 2001 were $0.92 per share as compared to $0.87 per share for the same time period in 2000. All share and per share information is stated after giving effect to the stock split distributed on June 12, 2001 to shareholders of record on May 25, 2001. Net income represented a return on average assets of 1.21% for the quarter ended September 30, 2001 compared to 1.31% for the same period in 2000. The return on average equity for the third quarter of 2001 was 10.89% compared to 13.64% for the third quarter of 2000. Cash Operating Results ---------------------- The Company has recorded its recent business acquisition under the purchase method of accounting. As a result, the Company had recorded net intangible assets consisting predominately of goodwill totaling approximately $2.9 million at September 30, 2001 and $3.2 million at December 31, 2000. Amortization expense of goodwill was approximately $85,000 and $30,000 in the third quarter of 2001 and 2000, respectively. Since the amortization of goodwill does not result in a cash expense, the Company believes that supplemental reporting of its operating results on a "cash" or "tangible" basis (which excludes the after-tax effect of amortization of goodwill and the related asset balances) represents a relevant measure of financial performance. The supplemental cash basis data presented herein includes the effect of other non-cash operating expenses such as depreciation, provision for credit losses, or deferred income taxes associated with the results of operations. Cash net income grew 11.9% to $811,000 in the third quarter of 2001 from $725,000 in the same period in 2000. Cash earnings per share were $0.37 for the three months ended September 30, 2001 as compared to $0.34 for the same time period in 2000. The operations of M&W Agency have contributed an additional $0.04 cash earnings per share for the three months ended September 30, 2001 as compared to the same time period in 2000.
Page 17 Other Operating Results ----------------------- Net interest income increased $77,000, or 3.4%, for the quarter ended September 30, 2001 compared to the same time period in 2000. Total interest income increased 1.6% and interest paid on deposits decreased 4.5% from the third quarter of 2000. The increase in interest income reflects the $24.2 million, or 12.3%, increase in average interest-earning assets to $220.8 million for the third quarter of 2001 from $196.6 million for the third quarter of 2000 as well as the effect of interest rate reductions driven by the Federal Reserve as discussed below. The increase in average interest-earnings assets resulted primarily from continued emphasis on loan originations. The interest expense decrease reflects the $18.0 million, or 11.9% increase in average interest-bearing liabilities to $169.8 million for the third quarter of 2001 from $151.8 million for the third quarter of 2000 as well as the offsetting effect of interest rate reductions made by the Bank thus far in 2001. The Bank's net interest margin, for the three month period ended September 30, 2001 was 3.86% as compared to 4.23% for the same time period in 2000. The decrease is partly attributable to the impact on the Bank's rate-sensitive assets by the Federal Reserve decreasing short-term interest rates 75 basis points during the third quarter of 2001,and 350 basis points through September 30, 2001. On October 2, 2001, the Federal Reserve decreased short-term interest rates by another 50 basis points. In order to help maintain its net interest margin, the Bank correspondingly reduced certain deposit rates in October 2001. The yield on loans decreased to 8.15% for the third quarter of 2001 from 8.97% for the same time period in 2000. The tax equivalent yield on federal funds and investments decreased from 7.24% in the third quarter of 2000 to 6.48% in the third quarter of 2001. The cost of funds on interest bearing balances decreased to 3.79% for the third quarter of 2001 from 4.29% for the same time period in 2000. These decreases are, again, attributable to the Federal Reserve monetary rate adjustments noted above. The provision for loan losses has increased to $139,000 for the third quarter of 2001 from $60,000 for the same time period in 2000. This increase is a result of the increase in the size of the overall loan portfolio as well as an increase in the commercial loan composition as a percentage of the overall portfolio. Commercial loans tend to have a higher credit risk than consumer loans. Non-interest income increased to $1.1 million for the quarter ended September 30, 2001 from $570,000 for the same period in 2000. This increase of $530,000 is primarily attributable to an increase of $430,000 in sales of insurance products through M&W Agency, Inc. which commenced operations in September 2000. Additionally, gains on planned sales of investments provided an increase of $94,000 in non-interest income for the third quarter of 2001 compared to the same time period in 2000. Non-interest expense totaled $2.4 million for the third quarter of 2001 reflecting an approximate $541,000 increase over the third quarter of 2000 total of $1.8 million. Approximately $400,000 of this increase, primarily salaries and benefits, occupancy and equipment costs and goodwill amortization, is directly attributable to the operations of M&W Agency, Inc. The majority of the remainder of such increase pertains to professional fees including accounting and legal fees related to a number of projects at the Company during the quarter ended September 30, 2001 including Internal Audit outsourcing assistance and costs related to listing of the Company's common stock on the Nasdaq National Market which occurred on July 9, 2001. Income tax expense totaled $268,000 and $264,000 for the three month periods ended September 30, 2001 and 2000, respectively. The effective combined tax rate for the third quarter of 2001 is 27.0% compared to 27.5% for the third quarter of 2000. The effective tax rate maintained by the Bank is attributable to investments in tax advantaged municipal bonds and the benefit realized from a favorable deferred tax position.
Page 18 ITEM 3 - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ------------------------------------------------------------------ INTEREST RATE RISK Interest rate risk occurs when interest-earning assets and interest-bearing liabilities mature or reprice at different times or on a different basis. The Asset, Liability Committee, ("ALCO") of the Bank analyzes the gap position on a monthly basis to determine the Bank's exposure to interest rate risk. The gap position is the difference between the total of the Bank's rate- sensitive assets and rate-sensitive liabilities maturing or repricing during a given time frame. A "positive" gap results when more assets than liabilities reprice and a "negative" gap results when more liabilities than assets reprice within a given time period. Because assets historically reprice faster than liabilities, a slightly negative gap position is considered preferable. At September 30, 2001 the Bank was in a negative gap position with $2.9 million more in rate-sensitive liabilities repricing over the next year than in rate-sensitive assets. This "negative" gap position compares to a "negative" gap position at June 30, 2001 of $10.8 million. This decrease is due to a number of factors, including a number of long-term mortgage pre-payments and shortened effective maturities on callable securities as a result of the current interest rate environment. Also, there was a shift during the quarter in less than one year certificates of deposit to longer terms, especially in the greater than $100,000 category. The Bank's asset/liability target, under its asset/liability policy, is a difference of +/- 15% of the Bank's total assets, which amounted to +/- $36.1 million at September 30, 2001. The gap ratio (rate-sensitive assets/rate-sensitive liabilities) at that date was 97%. MARKET RISK When rates rise or fall, the market value of the Bank's assets and liabilities will increase or decrease. As a part of the Bank's asset/liability policy, the Bank has set limitations on the negative impact to the market value of its balance sheet that would be acceptable. The Bank's securities portfolio is priced monthly and adjustments are made on the balance sheet to reflect the market value of the available for sale portfolio per SFAS No. 115. A limitation of a negative 25% of total capital before SFAS No. 115 (after tax) has been established as the maximum impact to equity as a result of marking available for sale securities to market that would be acceptable. At quarter-end, the impact to equity as a result of marking available for sale securities to market was an unrealized gain of approximately $1.2 million. On a quarterly basis, the available for sale portfolio is shocked for immediate rate increases of 100 and 200 basis points. At September 30, 2001 the Bank determined it would take an immediate increase in rates in excess of 200 basis points to eliminate the current capital cushion. The Bank's capital ratios are also reviewed on a quarterly basis. Unrealized gains and losses on available for sale securities are not included in the calculation of these ratios.
Page 19 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 Holder - None to report ITEM 5. Other Information On September 27, 2001, the Board of Directors declared a cash dividend of $.27 per share payable on November 5, 2001 to shareholders of record as of October 9, 2001. In conjunction with his appointment to the Board of Directors effective August 1, 2001, James Biddle, Jr. has been appointed to the Audit Committee of the Board of Directors . The members now consist of David Taylor, Chairman, David Koch, Thomas Waring, and James Biddle, Jr. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- Exhibit No. Name Page No. 99.1 Press Release-Announcing Earnings for Quarter ended September 30, 2001 20 (b) Report on Form 8-K ------------------ The registrant filed a Form 8-K on September 27, 2001 to report under ITEM 5 - OTHER EVENTS the Company's declaration of a cash dividend of $0.27per common share payable on November 5, 2001 to shareholders of record on October 9, 2001. The Company also announced that the Board of Directors has authorized the Company to repurchase up to 50,000 shares of its common stock over the next two years.
Page 20 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. Evans Bancorp, Inc. DATE October 23, 2001 /s/James Tilley ------------------------------------- James Tilley President DATE October 23, 2001 /s/Mark DeBacker ------------------------------------- Mark DeBacker Chief Financial Officer