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EVBN > SEC Filings for EVBN > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for EVANS BANCORP INC

Form 10-Q for EVANS BANCORP INC


2-May-2014

Quarterly Report


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 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "seek," and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company's business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company's loan and investment portfolios, and estimates of the Company's risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company's management and are subject to a number of risks and uncertainties, including but not limited to: general economic conditions, either nationally or in the Company's market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company's margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company's ability to enter new markets successfully and capitalize on growth opportunities; the Company's ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company's organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company's periodic reports filed with the SEC, in particular the "Risk Factors" discussed in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Many of these factors are beyond the Company's control and are difficult to predict.

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The Company's Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company's Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. Refer to Note 3 - "Fair Value Measurements" to the Company's Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.

Significant accounting policies followed by the Company are presented in Note 1
- "Organization and Summary of Significant Accounting Policies" to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2013. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company's Unaudited Consolidated Financial Statements and how those values are determined.

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


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Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents management's estimate of probable losses in the Company's loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Company's Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, describes the methodology used to determine the allowance for loan and lease losses.

Goodwill

The amount of goodwill reflected in the Company's Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is typically performed annually as of December 31st. No impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its fair value. There were no triggering events in the three month period ended March 31, 2014 that resulted in an interim impairment test.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

Total loans and leases grew to $660.7 million at March 31, 2014, a $13.7 million, or 2.1%, increase from total loans and leases of $647.0 million at December 31, 2013. Total loans and leases grew $72.6 million, or 12.3%, from $588.1 million at March 31, 2013.

Loans secured by real estate were $547.5 million at March 31, 2014, reflecting a $9.6 million, or 1.8%, increase from $537.9 million at December 31, 2013. The Company's commercial real estate portfolio has historically been the fastest growing part of the real estate portfolio, however, the largest growth in the real estate portfolio during the first quarter of 2014 was experienced in the Company's residential mortgages, with the largest percentage increase of 3.0%, or $2.8 million. In the first quarter of 2014, residential mortgages increased $2.4 million, or 2.6%, and residential construction loans increased $0.4 million, or 28.1%, since December 31, 2013. Commercial construction and commercial and multi-family loans increased $6.6 million, or 1.7%, since December 31, 2013.

The Company retained most residential mortgages originated during the first quarter of 2014. During the first quarter of 2013, the Company sold approximately 8.7% of the residential mortgages originated during that quarter to FNMA. Residential mortgages increased to $96.4 million at March 31, 2014. However, residential mortgage originations decreased to $5.7 million in the three month period ended March 31, 2014, compared with $8.6 million in the three month period ended March 31, 2013.

The Bank sells certain fixed rate residential mortgages to FNMA, while maintaining the servicing rights for those mortgages. In the three month period ended March 31, 2014, the Bank did not sell any mortgages to FNMA, as compared with $0.8 million sold during the three month period ended March 31, 2013. At March 31, 2014, the Bank had a loan servicing portfolio principal balance of $62.3 million upon which it earns servicing fees, as compared with $63.5 million at December 31, 2013. The value of the mortgage servicing rights for that portfolio was $0.5 million at March 31, 2014 and December 31, 2013. At March 31, 2014, there were $0.1 million in residential mortgage loans held-for-sale, compared with no residential mortgages held for sale at December 31, 2013. The Company had no commercial loans held-for-sale at March 31, 2014 or December 31, 2013. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.

The Company continues to focus on diversified growth with commercial and industrial ("C&I") lending as a way to achieve such diversification in its loan portfolio, which has historically experienced strong growth rates in real estate loans. In the first quarter of 2014, C&I balances increased $4.0 million, or 3.7%, from $107.0 million at December 31, 2013 to $111.0 million at March 31, 2014. C&I loans increased $5.0 million, or 4.7%, from $106.0 million at March 31, 2013.


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Credit Quality of Loan Portfolio

Total non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled $5.2 million, or 0.79% of total loans and leases outstanding, as of March 31, 2014, compared with $13.7 million, or 2.12% of total loans and leases outstanding at December 31, 2013. The $8.5 million, or 62.0%, decrease in non-performing loans and leases is mostly due to a single commercial real estate loan returned to accrual status in the first quarter of 2014. The loan was successfully restructured with a new borrower in the third quarter of 2013 and has since demonstrated repayment performance.

In the first quarter of 2014, commercial credits graded as "special mention" and "substandard" increased $1.4 million from $30.3 million at December 31, 2013 to $31.7 million at March 31, 2014, primarily due to an increase in commercial and multi-family mortgages classified as "special mention" during the first quarter. As noted in Note 4 to these Unaudited Financial Statements, internal risk ratings are the credit quality indicators used by the Company's management to determine the appropriate allowance for loan and lease losses for commercial credits. "Special mention" and "substandard" loans are weaker credits with a higher risk of loss than "pass" or "watch" credits. As of March 31, 2014, $7.3 million, or 81.3%, of the $9.0 million "substandard" credits were identified as impaired, and thus, individually evaluated for specific reserves.

The allowance for loan and lease losses totaled $11.7 million, or 1.78% of total loans and leases outstanding as of March 31, 2014, consistent with the allowance for loan and lease loss to total loans and leases ratio of 1.78% at December 31, 2013. The $0.2 million increase in the allowance from $11.5 million at December 31, 2013 was driven by the $1.5 million increase in commercial loans classified as criticized assets and general loan growth during the quarter, partially offset by loan and lease recoveries and decreases in specific reserves held on impaired loans. The net charge-off (recovery) ratio in the first quarter of 2014 equated to (0.05)% of average net loans and leases, compared with a ratio of
(0.15)% and 0.02% in the fourth quarter of 2013 and first quarter of 2013, respectively.

The first quarter coverage ratio of the allowance for loan and lease losses to non-performing loans and leases increased to 225% compared with the fourth quarter of 2013 of 84%, due to the commercial mortgage credit relationship that was returned to accrual status in the first quarter of 2014, as discussed above.

Investing Activities

Total securities were $97.0 million at March 31, 2014, compared with $102.0 million at December 31, 2013. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, increased to $30.1 million at March 31, 2014 from $27.3 million at December 31, 2013. Interest-bearing cash increased in the first quarter due to large seasonal influx from municipal deposits from tax receipts. Securities and interest-bearing deposits at correspondent banks made up 16.8% of the Bank's total average interest earning assets in the first quarter of 2014, compared with 18.7% and 23.5% in the fourth quarter of 2013 and first quarter of 2013, respectively.

The Company's highest concentration in its securities portfolio was in available for sale tax-advantaged debt securities issued by state and political subdivisions with 32.9% at March 31, 2014, compared with 31.2% at December 31, 2013. The concentration in U.S. government-sponsored agency bonds was 28.9% of the total securities portfolio at March 31, 2014, compared with 31.3% at December 31, 2013. U.S. government-sponsored mortgage-backed securities comprised 35.7% of the securities portfolio at March 31, 2014, compared with 35.1% at December 31, 2013.

Management believes that the credit quality of the securities portfolio as a whole is strong as the portfolio has no individual securities in a significant unrealized loss position. While interest rates have been near historic lows and long-term rates decreased in the first quarter of 2014 compared to the fourth quarter of 2013, long-term rates increased from the first quarter of 2013. As a result, the net unrealized gain position of the available-for-sale investment portfolio increased from $0.3 million at December 31, 2013, and decreased from $3.6 million at March 31, 2013.

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Available-for-sale securities with a total fair value of $93.6 million at March 31, 2014, as compared with $71.1 million at December 31, 2013, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.

Funding Activities

Total deposits at March 31, 2014 were $721.9 million, compared with $706.6 million at December 31, 2013, reflecting an increase of $15.3 million, or 2.2%, from the fourth quarter 2013. The increase in deposit balances during the first quarter of 2014 was driven by growth in municipal NOW products due to seasonality of tax collections received. Total NOW deposits increased $13.6 million, or 20.6%, over December 31, 2013.


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The Company's retail deposit growth vehicle for the last three years has been its complementary Better Checking and Better Savings products, which are included in the NOW and regular savings deposit categories, respectively, on the Company's balance sheet. However, the growth in NOW and savings deposits slowed in 2013 as the Better Checking and Better Savings products begin to mature and the Company continued to lower rates on selected deposit products given the Company's current excess liquidity and declining net interest margin in this extended low rate environment. Demand deposits, totaling $140.0 million and $123.1 at March 31, 2014 and 2013, respectively, drove much of the 3.4% year-over-year increase in total deposits mostly due to commercial demand deposit growth.

In the first quarter of 2014, time deposits decreased slightly to $108.7 million from $110.1 million at December 31, 2013. Time deposit rates remain low, resulting in recent balance declines, as customers have preferred liquid savings deposits.

Other borrowings, which typically include the Bank's overnight line of credit and other advances with the FHLBNY, were $9.0 million at March 31, 2014 and December 31, 2013. The Company remains in an overall liquid position, and therefore has not needed to add to its wholesale borrowings.


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ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

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

                                 Three Months Ended                      Three Months Ended
                                   March 31, 2014                          March 31, 2013
                           Average       Interest                  Average        Interest
                         Outstanding      Earned/     Yield/     Outstanding      Earned/     Yield/
                           Balance         Paid        Rate        Balance          Paid       Rate
                               (dollars in thousands)                  (dollars in thousands)
ASSETS
Interest-earning
assets:
Loans and leases, net    $   641,265      $  7,510    4.68  %    $   575,953       $ 7,252    5.04  %
Taxable securities            69,992           449    2.57  %         63,974           417    2.61  %
Tax-exempt securities         33,499           245    2.93  %         34,146           269    3.15  %
Interest bearing
deposits at banks             26,238            15    0.23  %         78,426            18    0.09  %

Total
interest-earning
assets                       770,994      $  8,219    4.26  %        752,499       $ 7,956    4.23  %

Non interest-earning
assets:

Cash and due from
banks                         14,920                                  14,376
Premises and
equipment, net                11,210                                  11,219
Other assets                  39,789                                  35,719

Total Assets             $   836,913                             $   813,813

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW                      $    71,190      $     76    0.43  %    $    67,836       $   113    0.67  %
Regular savings              388,890           265    0.27  %        380,783           327    0.34  %
Time deposits                109,549           415    1.52  %        110,209           450    1.63  %
Other borrowed funds           9,000            79    3.51  %         17,989           153    3.40  %
Junior subordinated
debentures                    11,330            79    2.79  %         11,330            79    2.79  %
Securities sold U/A
to repurchase                 14,883             7    0.19  %         14,374             8    0.22  %

Total
interest-bearing
liabilities                  604,842      $    921    0.61  %        602,521       $ 1,130    0.75  %

Noninterest-bearing
liabilities:
Demand deposits              139,503                                 122,359
Other                         12,090                                  12,856
Total liabilities        $   756,435                             $   737,736

Stockholders' equity          80,478                                  76,077

Total Liabilities and
Equity                   $   836,913                             $   813,813

Net interest earnings                   $    7,298                               $   6,826

Net interest margin                                   3.79  %                                 3.63  %

Interest rate spread                                  3.65  %                                 3.48  %


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Net Income

Net income was $2.0 million in the first quarter of 2014, up from $1.8 million in the first quarter of 2013, primarily due to a $0.5 million increase in net interest income driven by growth in loans and non-interest bearing demand deposits. As a result, return on average equity was 10.01% for the first quarter of 2014 compared with 9.55% in the first quarter of 2013.

Other Results of Operations - Quarterly Comparison

Net interest income was $7.3 million for the first quarter, an increase of 6.9% from the prior-year period, and down 0.6% from the trailing fourth quarter of 2013. Growth in loans and non-interest bearing demand deposits drove the increase over the prior-year period.

Net interest margin decreased 6 basis points to 3.79% from 3.85% in the trailing fourth quarter, primarily driven by a decrease in the yield on interest-earning assets. Net interest margin improved over the 2013 first quarter rate of 3.63%. The increase in net interest margin from the prior-year period was due to a 14 basis point decrease in pricing on Evans' interest bearing liabilities, combined with a 3 basis point increase in the yield on interest-earning assets.

The provision for loan and lease losses was $0.2 million in the 2014 first quarter, down from $0.5 million in the prior-year period. The decrease is due mostly to a lower level of criticized assets in the current quarter in comparison to prior year first quarter. When compared with the trailing fourth quarter of 2013, the provision decreased by $0.1 million.

Non-interest income was $3.4 million, or 31.7% of total revenue, in the quarter, up $0.1 million, or 2.6%, from the prior-year period. Insurance agency revenue of $2.1 million was up $0.1 million, or 6.6%, from the 2013 first quarter, due mostly to increases in property and casualty and wealth management revenue. Compared with the trailing fourth quarter of 2013, total non-interest income increased by 12.5%, mostly due to an increase of $0.6 million, or 35.0%, in insurance agency revenue as a result of seasonal profit sharing.

Total non-interest expense was $7.6 million, an increase of 7.7% from the prior-year period. Personnel expenses, the largest expense item for the Company, were up $0.4 million, or 9.5%, from the prior-year period, and reflecting annual merit increases and personnel hires to support the Company's growth strategy.

Income tax expense for the quarter was $1.0 million, representing an effective tax rate of 31.1% compared with an effective tax rate of 30.4% in the first quarter of 2013.

CAPITAL

The Company consistently maintains regulatory capital ratios significantly above the federal "well capitalized" standard, including a Tier 1 leverage ratio of 10.20% and 10.36% at March 31, 2014 and December 31, 2013, respectively. Book value per share of the Company's common stock was $19.41 at March 31, 2014, compared with $19.18 at December 31, 2013. Tangible book value per share (a non-GAAP measure) at March 31, 2014 was $17.44, compared with $17.26 at December 31, 2013. The increase in both book value and tangible book value per share is a result of the Company's repurchase of shares in the first quarter.

Tangible book value per share is a non-GAAP financial measure. The Company calculates tangible book value per share by dividing tangible book value by the number of common shares outstanding, as compared to GAAP book value per share, which the Company calculates by dividing GAAP book value by the number of common shares outstanding. Management believes that this information is consistent with treatment by bank regulatory agencies, which exclude intangible assets from the calculation of risk-based capital ratios. Accordingly, management believes that this non-GAAP financial measure provides information that is important to investors and that is useful in understanding the Company's capital position and ratios. Further, management believes that presentation of this measure, together with the accompanying reconciliation, provides a complete understanding of factors and trends affecting the Company's business and allows investors to view the Company's performance in a manner similar to management, the financial services industry, bank stock analysts and regulatory agencies. However, this non-GAAP financial measure is supplemental and is not a substitute for an analysis based on GAAP financial measures. Note that other companies may use different calculations for this measure, and therefore the Company's presentation of tangible book value per share may not be comparable to similarly titled measures reported by other companies. Investors should review the Company's consolidated financial statements in their entirety and should not rely on any single financial measure.


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A reconciliation of this non-GAAP financial measure, tangible book value per share, to the most directly comparable GAAP financial measure, book value, is set forth in the following table:

($ in thousands, except per share data)           March 31, 2014      December 31, 2013

Stockholders' equity ("book value")               $       80,517      $          80,712

Goodwill (related to insurance agency
reporting unit)                                           (8,101)                (8,101)
Intangible assets (related to insurance
agency reporting unit)                                       (67)                  (108)

Tangible book value                               $       72,349      $          72,503

Number of common shares outstanding                    4,147,666              4,201,362

Tangible book value per share                     $        17.44      $           17.26

On February 18, 2014, the Company declared a cash dividend of $0.31 per share on the Company's outstanding common stock. The dividend was paid on April 8, 2014 . . .

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