e10vq
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For quarterly period ended September 30, 2010 |
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o |
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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)
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New York
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16-1332767 |
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(State of other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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14 -16 North Main Street, Angola, New York
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14006 |
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(Address of principal executive offices)
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(Zip Code) |
(716) 926-2000
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of
the latest practicable date:
Common Stock, $.50 par value: 4,073,553 shares as of November 1, 2010
INDEX
EVANS BANCORP, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
(in thousands, except share and per share amounts)
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September 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Cash and due from banks |
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$ |
14,046 |
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$ |
12,379 |
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Interest-bearing deposits at banks |
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3,957 |
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604 |
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Securities: |
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Available for sale, at fair value (cost: $94,028 at September 30, 2010;
$74,224 at December 31, 2009) |
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97,531 |
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75,854 |
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Held to maturity, at amortized cost (fair value: $1,738 at September 30, 2010;
$3,133 at December 31, 2009) |
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1,716 |
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3,164 |
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Loans and leases, net of allowance for loan and lease losses of $9,099
in 2010 and $6,971 in 2009 |
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495,489 |
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482,597 |
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Properties and equipment, net |
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10,785 |
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9,281 |
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Goodwill |
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8,101 |
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8,101 |
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Intangible assets |
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1,389 |
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2,068 |
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Bank-owned life insurance |
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12,280 |
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11,921 |
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Other assets |
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13,586 |
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13,475 |
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TOTAL ASSETS |
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$ |
658,880 |
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$ |
619,444 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES |
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Deposits: |
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Demand |
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$ |
94,809 |
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$ |
87,855 |
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NOW |
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30,386 |
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15,619 |
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Regular savings |
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242,897 |
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229,609 |
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Muni-vest |
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22,753 |
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23,418 |
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Time |
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144,441 |
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143,007 |
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Total deposits |
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535,286 |
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499,508 |
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Securities sold under agreement to repurchase |
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9,100 |
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5,546 |
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Other short-term borrowings |
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97 |
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19,090 |
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Other liabilities |
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12,138 |
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10,831 |
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Junior subordinated debentures |
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11,330 |
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11,330 |
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Long-term borrowings |
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27,000 |
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27,180 |
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Total liabilities |
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594,951 |
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573,485 |
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CONTINGENT LIABILITIES AND COMMITMENTS |
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STOCKHOLDERS EQUITY: |
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Common stock, $.50 par value, 10,000,000 shares authorized;
4,067,330 and 2,795,198 shares issued, respectively,
and 4,067,044 and 2,771,788 shares outstanding, respectively |
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2,034 |
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1,407 |
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Capital surplus |
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40,434 |
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27,279 |
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Retained earnings |
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20,359 |
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17,381 |
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Accumulated other comprehensive loss, net of tax |
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1,102 |
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(108 |
) |
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Total stockholders equity |
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63,929 |
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45,959 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
658,880 |
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$ |
619,444 |
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See Notes to Unaudited Consolidated Financial Statements
1
PART I FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands, except share and per share amounts)
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Three Months Ended September 30, |
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2010 |
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2009 |
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INTEREST INCOME |
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Loans and leases |
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$ |
7,111 |
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$ |
7,046 |
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Interest bearing deposits at banks |
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1 |
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Securities: |
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Taxable |
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496 |
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479 |
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Non-taxable |
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384 |
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399 |
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Total interest income |
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7,992 |
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7,924 |
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INTEREST EXPENSE |
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Deposits |
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1,444 |
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1,624 |
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Other borrowings |
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229 |
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242 |
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Junior subordinated debentures |
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86 |
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90 |
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Total interest expense |
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1,759 |
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1,956 |
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NET INTEREST INCOME |
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6,233 |
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5,968 |
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PROVISION FOR LOAN AND LEASE LOSSES |
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1,012 |
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634 |
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NET INTEREST INCOME AFTER |
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PROVISION FOR LOAN AND LEASE LOSSES |
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5,221 |
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5,334 |
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NON-INTEREST INCOME |
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Bank charges |
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471 |
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562 |
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Insurance service and fees |
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1,775 |
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1,750 |
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Net gain on sales of securities |
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10 |
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Premium on loans sold |
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48 |
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13 |
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Bank-owned life insurance |
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117 |
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111 |
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Gain on bargain purchase |
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671 |
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Other |
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712 |
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|
712 |
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Total non-interest income |
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3,123 |
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3,829 |
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NON-INTEREST EXPENSE |
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Salaries and employee benefits |
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3,708 |
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3,216 |
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Occupancy |
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707 |
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|
687 |
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Supplies |
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67 |
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68 |
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Repairs and maintenance |
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148 |
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153 |
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Advertising and public relations |
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88 |
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133 |
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Professional services |
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355 |
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379 |
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Technology and communications |
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265 |
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173 |
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Amortization of intangibles |
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221 |
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222 |
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FDIC insurance |
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312 |
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167 |
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Other |
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578 |
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598 |
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Total non-interest expense |
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6,449 |
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5,796 |
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INCOME BEFORE INCOME TAXES |
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1,895 |
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3,367 |
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INCOME TAX PROVISION |
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|
617 |
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|
931 |
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NET INCOME |
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$ |
1,278 |
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$ |
2,436 |
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|
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|
|
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Net income per common share-basic |
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$ |
0.31 |
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$ |
0.87 |
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Net income per common share-diluted |
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$ |
0.31 |
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$ |
0.87 |
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Cash dividends per common share |
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$ |
0.20 |
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$ |
0.20 |
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Weighted average number of common shares outstanding |
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|
4,067,044 |
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2,795,198 |
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Weighted average number of diluted shares outstanding |
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4,068,301 |
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2,805,493 |
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|
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|
See Notes to Unaudited Consolidated Financial Statements
2
PART I FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands, except share and per share amounts)
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Nine Months Ended September 30, |
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2010 |
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2009 |
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INTEREST INCOME |
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Loans and leases |
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$ |
21,101 |
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$ |
20,340 |
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Interest bearing deposits at banks |
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5 |
|
|
|
1 |
|
Securities: |
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|
|
|
|
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Taxable |
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1,279 |
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|
1,202 |
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Non-taxable |
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|
1,189 |
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1,274 |
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|
|
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Total interest income |
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|
23,574 |
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|
|
22,817 |
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INTEREST EXPENSE |
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|
|
|
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Deposits |
|
|
4,213 |
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|
|
5,345 |
|
Other borrowings |
|
|
701 |
|
|
|
630 |
|
Junior subordinated debentures |
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|
250 |
|
|
|
315 |
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|
|
|
|
|
|
|
Total interest expense |
|
|
5,164 |
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|
|
6,290 |
|
NET INTEREST INCOME |
|
|
18,410 |
|
|
|
16,527 |
|
PROVISION FOR LOAN AND LEASE LOSSES |
|
|
2,535 |
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|
9,583 |
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NET INTEREST INCOME AFTER |
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|
|
|
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PROVISION FOR LOAN AND LEASE LOSSES |
|
|
15,875 |
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|
|
6,944 |
|
NON-INTEREST INCOME |
|
|
|
|
|
|
|
|
Bank charges |
|
|
1,462 |
|
|
|
1,685 |
|
Insurance service and fees |
|
|
5,651 |
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|
|
5,698 |
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Net gain on sales of securities |
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|
6 |
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|
16 |
|
Premium on loans sold |
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|
73 |
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|
67 |
|
Bank-owned life insurance |
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|
359 |
|
|
|
466 |
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Gain on bargain purchase |
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|
|
|
|
|
671 |
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Other |
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|
2,253 |
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|
2,500 |
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|
|
|
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|
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Total non-interest income |
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|
9,804 |
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|
|
11,103 |
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NON-INTEREST EXPENSE |
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|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
11,042 |
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|
|
9,656 |
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Occupancy |
|
|
2,188 |
|
|
|
2,064 |
|
Supplies |
|
|
204 |
|
|
|
244 |
|
Repairs and maintenance |
|
|
509 |
|
|
|
502 |
|
Advertising and public relations |
|
|
447 |
|
|
|
365 |
|
Professional services |
|
|
1,157 |
|
|
|
1,046 |
|
Technology and communications |
|
|
653 |
|
|
|
572 |
|
Amortization of intangibles |
|
|
679 |
|
|
|
668 |
|
FDIC insurance |
|
|
755 |
|
|
|
550 |
|
Goodwill Impairment |
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|
|
|
|
|
1,984 |
|
Other |
|
|
1,814 |
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|
|
1,916 |
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|
|
|
|
|
|
|
Total non-interest expense |
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|
19,448 |
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|
|
19,567 |
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|
|
|
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INCOME (LOSS) BEFORE INCOME TAXES |
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|
6,231 |
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|
(1,520 |
) |
INCOME TAX PROVISION (BENEFIT) |
|
|
1,874 |
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|
|
(856 |
) |
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|
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NET INCOME (LOSS) |
|
$ |
4,357 |
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|
|
($664 |
) |
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|
|
|
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|
|
|
|
|
|
|
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|
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Net income (loss) per common share-basic |
|
$ |
1.26 |
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|
|
($0.24 |
) |
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|
|
|
|
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|
Net income (loss) per common share-diluted |
|
$ |
1.26 |
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|
|
($0.24 |
) |
|
|
|
|
|
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Cash dividends per common share |
|
$ |
0.40 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
3,451,863 |
|
|
|
2,783,975 |
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding |
|
|
3,454,984 |
|
|
|
2,787,617 |
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
3
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands, except share and per share amounts)
|
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|
|
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|
|
|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Other |
|
|
|
|
|
|
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|
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Common |
|
|
Capital |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
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Surplus |
|
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Earnings |
|
|
(Loss) Income |
|
|
Stock |
|
|
Total |
|
Balance, January 1, 2009 |
|
$ |
1,386 |
|
|
$ |
26,696 |
|
|
$ |
18,374 |
|
|
$ |
(537 |
) |
|
$ |
|
|
|
$ |
45,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale, net of
reclassification of gain of $10 (after tax) securities, net
of tax effect of ($638) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993 |
|
|
|
|
|
|
|
993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost on defined benefit
plans and net loss net of tax effect of ($37) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.61 per common share) |
|
|
|
|
|
|
|
|
|
|
(1,695 |
) |
|
|
|
|
|
|
|
|
|
|
(1,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options expense |
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissued 2,000 shares treasury stock under dividend reinvestment plan |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 13,911 shares under dividend reinvestment plan |
|
|
7 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 9,499 shares under employee stock purchase plan |
|
|
5 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased 2,000 shares for treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
$ |
1,398 |
|
|
$ |
27,043 |
|
|
$ |
16,015 |
|
|
$ |
513 |
|
|
$ |
|
|
|
$ |
44,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2010 |
|
$ |
1,407 |
|
|
$ |
27,279 |
|
|
$ |
17,381 |
|
|
$ |
(108 |
) |
|
$ |
|
|
|
$ |
45,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
4,357 |
|
|
|
|
|
|
|
|
|
|
|
4,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities,
net of reclassification of gain of $4 (after tax),
net of tax effect of ($719) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,154 |
|
|
|
|
|
|
|
1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost on defined benefit
plans and net loss net of tax effect of ($43) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.40 per common share) |
|
|
|
|
|
|
|
|
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options expense |
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 1,222,000 shares in common stock offering |
|
|
611 |
|
|
|
12,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 5,996 shares under dividend reinvestment plan |
|
|
3 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 10,250 shares under employee stock purchase plan |
|
|
5 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 15,810 restricted shares |
|
|
8 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
$ |
2,034 |
|
|
$ |
40,434 |
|
|
$ |
20,359 |
|
|
$ |
1,102 |
|
|
$ |
|
|
|
$ |
63,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
4
PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Interest received |
|
$ |
23,425 |
|
|
$ |
22,160 |
|
Fees received |
|
|
9,621 |
|
|
|
10,271 |
|
Interest paid |
|
|
(5,635 |
) |
|
|
(6,687 |
) |
Cash paid to employees and suppliers |
|
|
(15,710 |
) |
|
|
(15,068 |
) |
Pension plan contributions |
|
|
(150 |
) |
|
|
|
|
Income taxes paid |
|
|
(2,742 |
) |
|
|
(831 |
) |
Proceeds from sale of loans held for resale |
|
|
7,705 |
|
|
|
12,691 |
|
Originations of loans held for resale |
|
|
(8,043 |
) |
|
|
(13,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
8,471 |
|
|
|
9,188 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Available for sales securities: |
|
|
|
|
|
|
|
|
Purchases |
|
|
(86,552 |
) |
|
|
(64,315 |
) |
Proceeds from maturities and calls |
|
|
66,788 |
|
|
|
59,414 |
|
Held to maturity securities: |
|
|
|
|
|
|
|
|
Purchases |
|
|
(130 |
) |
|
|
(1,211 |
) |
Proceeds from maturities and calls |
|
|
1,461 |
|
|
|
404 |
|
Life insurance proceeds |
|
|
|
|
|
|
341 |
|
Additions to properties and equipment |
|
|
(2,394 |
) |
|
|
(451 |
) |
Sale of other real estate |
|
|
96 |
|
|
|
|
|
Increase in loans, net of repayments |
|
|
(15,934 |
) |
|
|
(41,878 |
) |
Cash received in acquisitions |
|
|
|
|
|
|
8,419 |
|
Cash paid on earn-out agreements |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(36,665 |
) |
|
|
(39,317 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
|
3,554 |
|
|
|
9,355 |
|
Repayments of borrowings |
|
|
(19,173 |
) |
|
|
(21,293 |
) |
Increase in deposits |
|
|
35,778 |
|
|
|
47,605 |
|
Dividends paid |
|
|
(566 |
) |
|
|
(1,136 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(27 |
) |
Issuance of common stock |
|
|
13,621 |
|
|
|
263 |
|
Re-issuance of treasury stock |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
33,214 |
|
|
|
34,790 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents |
|
|
5,020 |
|
|
|
4,661 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
12,983 |
|
|
|
9,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
18,003 |
|
|
$ |
13,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued) |
|
5
PART I-FINANCIAL INFORMATION
ITEM I-FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,357 |
|
|
|
($664 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,405 |
|
|
|
1,289 |
|
Goodwill impairment |
|
|
|
|
|
|
1,984 |
|
Deferred tax benefit |
|
|
(665 |
) |
|
|
(1,548 |
) |
Provision for loan and lease losses |
|
|
2,535 |
|
|
|
9,583 |
|
Net gain on sales of assets |
|
|
|
|
|
|
(16 |
) |
Premium on loans sold |
|
|
(73 |
) |
|
|
(67 |
) |
Stock options expense |
|
|
161 |
|
|
|
100 |
|
Proceeds from sale of loans held for resale |
|
|
7,705 |
|
|
|
12,691 |
|
Originations of loans held for resale |
|
|
(8,043 |
) |
|
|
(13,348 |
) |
Changes in assets and liabilities affecting cash flow: |
|
|
|
|
|
|
|
|
Other assets |
|
|
109 |
|
|
|
(1,146 |
) |
Other liabilities |
|
|
980 |
|
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
8,471 |
|
|
$ |
9,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions: |
|
|
|
|
|
|
|
|
Fair value of |
|
|
|
|
|
|
|
|
Assets acquired (noncash) |
|
$ |
|
|
|
$ |
43,516 |
|
Liabilities assumed |
|
$ |
|
|
|
$ |
51,215 |
|
See Notes to Unaudited Consolidated Financial Statements
6
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by Evans Bancorp, Inc. (the Company), a financial
holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National
Association (the Bank), and the Banks subsidiaries, Evans National Leasing, Inc. (ENL), Evans
National Holding Corp. (ENHC) and Suchak Data Systems, Inc. (SDS); and (ii) Evans National
Financial Services, Inc. (ENFS), and ENFSs subsidiary, The Evans Agency, Inc. (TEA) and TEAs
subsidiaries, Frontier Claims Services, Inc. (FCS) and ENB Associates Inc. (ENBA), in the
preparation of the accompanying interim unaudited consolidated financial statements conform with
U.S. generally accepted accounting principles (GAAP) and with general practice within the
industries in which it operates. Except as the context otherwise requires, the Company and its
direct and indirect subsidiaries are collectively referred to in this report as the Company.
The accompanying consolidated financial statements are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of the Companys financial position and results
of operations for the interim periods have been made. Certain reclassifications have been made to
the 2009 unaudited consolidated financial statements to conform to the presentation used in 2010.
The results of operations for the three and nine month periods ended September 30, 2010 are not
necessarily indicative of the results to be expected for the full year. The accompanying unaudited
consolidated financial statements should be read in conjunction with the Audited Consolidated
Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2009. The Company has evaluated subsequent events for potential recognition
and/or disclosure through the date of filing.
2. SECURITIES
The amortized cost of securities and their approximate fair value at September 30, 2010 and
December 31, 2009 were as follows:
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
26,178 |
|
|
$ |
1,260 |
|
|
$ |
|
|
|
$ |
27,438 |
|
States and political subdivisions |
|
|
36,270 |
|
|
|
1,520 |
|
|
|
|
|
|
|
37,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
$ |
62,448 |
|
|
$ |
2,780 |
|
|
$ |
|
|
|
$ |
65,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
$ |
10,935 |
|
|
$ |
294 |
|
|
$ |
|
|
|
$ |
11,229 |
|
FHLMC |
|
|
12,147 |
|
|
|
303 |
|
|
|
|
|
|
|
12,450 |
|
GNMA |
|
|
4,879 |
|
|
|
103 |
|
|
|
|
|
|
|
4,982 |
|
CMOS |
|
|
724 |
|
|
|
23 |
|
|
|
|
|
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
28,685 |
|
|
$ |
723 |
|
|
$ |
|
|
|
$ |
29,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRB Stock |
|
|
920 |
|
|
|
|
|
|
|
|
|
|
|
920 |
|
FHLB Stock |
|
|
1,975 |
|
|
|
|
|
|
|
|
|
|
|
1,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
94,028 |
|
|
$ |
3,503 |
|
|
$ |
|
|
|
$ |
97,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
|
1,716 |
|
|
|
34 |
|
|
|
(12 |
) |
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,716 |
|
|
$ |
34 |
|
|
$ |
(12 |
) |
|
$ |
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
19,675 |
|
|
$ |
123 |
|
|
$ |
(86 |
) |
|
$ |
19,712 |
|
States and political subdivisions |
|
|
36,503 |
|
|
|
1,229 |
|
|
|
(2 |
) |
|
|
37,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
$ |
56,178 |
|
|
$ |
1,352 |
|
|
$ |
(88 |
) |
|
$ |
57,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
$ |
9,385 |
|
|
$ |
225 |
|
|
$ |
(2 |
) |
|
$ |
9,608 |
|
FHLMC |
|
|
3,723 |
|
|
|
147 |
|
|
|
|
|
|
|
3,870 |
|
GNMA |
|
|
362 |
|
|
|
16 |
|
|
|
|
|
|
|
378 |
|
CMOS |
|
|
1,001 |
|
|
|
|
|
|
|
(20 |
) |
|
|
981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
14,471 |
|
|
$ |
388 |
|
|
$ |
(22 |
) |
|
$ |
14,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRB Stock |
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
912 |
|
FHLB Stock |
|
|
2,663 |
|
|
|
|
|
|
|
|
|
|
|
2,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,224 |
|
|
$ |
1,740 |
|
|
$ |
(110 |
) |
|
$ |
75,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
States and political subdivisions |
|
|
3,129 |
|
|
|
19 |
|
|
|
(50 |
) |
|
|
3,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,164 |
|
|
$ |
19 |
|
|
$ |
(50 |
) |
|
$ |
3,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities with a total fair value of $67.9 million and $65.2 million at
September 30, 2010 and December 31, 2009, respectively, were pledged as collateral to secure public
deposits and for other purposes required or permitted by law.
The Company uses the Federal Home Loan Bank of New York (FHLBNY) as its primary source of
overnight funds and also has several long-term advances with FHLBNY. The Company had a total of
$27.0 million and $46.1 million in borrowed funds with FHLBNY at September 30, 2010 and December
31, 2009, respectively. The Company has placed sufficient collateral in the form of residential
and commercial real estate loans at FHLBNY that meet FHLB collateral requirements. As a member of
the Federal Home Loan Bank (FHLB) System, the Bank is required to hold stock in FHLBNY. The Bank
held $2.0 million and $2.7 million in FHLBNY stock as of September 30, 2010 and December 31, 2009,
respectively, at fair value.
The scheduled maturities of debt and mortgage-backed securities at September 30, 2010 are
summarized below. All maturity amounts are contractual maturities. Actual maturities may differ
from contractual maturities because certain issuers have the right to call or prepay obligations
with or without call premiums.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
Available for |
|
|
Held to Maturity |
|
|
|
Sale Securities |
|
|
Securities |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Due in one year or less |
|
$ |
2,658 |
|
|
$ |
2,701 |
|
|
$ |
500 |
|
|
$ |
501 |
|
Due after year one through five years |
|
|
20,100 |
|
|
|
20,715 |
|
|
|
228 |
|
|
|
234 |
|
Due after five years through ten
years |
|
|
28,979 |
|
|
|
30,428 |
|
|
|
345 |
|
|
|
362 |
|
Due after ten years |
|
|
39,396 |
|
|
|
40,792 |
|
|
|
643 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91,133 |
|
|
$ |
94,636 |
|
|
$ |
1,716 |
|
|
$ |
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding unrealized losses within the Companys available for sale securities at
September 30, 2010 and December 31, 2009, is summarized below. The securities are primarily U.S.
government-guaranteed agency securities or municipal securities. All unrealized losses are
considered temporary and related to market interest rate fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
(in thousands) |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
GNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
129 |
|
|
$ |
(1 |
) |
|
$ |
455 |
|
|
$ |
(11 |
) |
|
$ |
584 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities |
|
$ |
129 |
|
|
$ |
(1 |
) |
|
$ |
455 |
|
|
$ |
(11 |
) |
|
$ |
584 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
(in thousands) |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
14,589 |
|
|
$ |
(86 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,589 |
|
|
$ |
(86 |
) |
States and political subdivisions |
|
|
591 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
591 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
$ |
15,180 |
|
|
$ |
(88 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
15,180 |
|
|
$ |
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
$ |
3,079 |
|
|
$ |
(1 |
) |
|
$ |
80 |
|
|
$ |
(1 |
) |
|
$ |
3,159 |
|
|
$ |
(2 |
) |
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOS |
|
|
|
|
|
|
|
|
|
|
981 |
|
|
|
(20 |
) |
|
|
981 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
3,079 |
|
|
$ |
(1 |
) |
|
$ |
1,061 |
|
|
$ |
(21 |
) |
|
$ |
4,140 |
|
|
$ |
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held To Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
695 |
|
|
$ |
(50 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
695 |
|
|
$ |
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities |
|
$ |
18,954 |
|
|
$ |
(139 |
) |
|
$ |
1,061 |
|
|
$ |
(21 |
) |
|
$ |
20,015 |
|
|
$ |
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management has assessed the securities available for sale in an unrealized loss position at
September 30, 2010 and December 31, 2009 and determined the decline in fair value below amortized
cost to be temporary. In making this determination, management considered the period of time the
securities were in a loss position, the percentage decline in comparison to the securities
amortized cost, and the financial condition of the issuer (primarily government or
government-sponsored enterprises). In addition, management does not intend to sell these
securities and it is not more likely than not that the Company will be required to sell these
securities before recovery of their amortized cost. Management believes the decline in fair value
is primarily related to market interest rate fluctuations and not to the credit deterioration of
the individual issuers.
The Company has not recorded any other-than-temporary impairment charges in 2010 or 2009, the gross
unrealized losses amounted to less than 0.1% of the total fair value of the securities portfolio at
September 30, 2010 and December 31, 2009, and the gross unrealized loss position decreased by $148
thousand from December 31, 2009 to September 30, 2010. Nevertheless, it remains possible that
there could be deterioration in the asset quality of the securities portfolio in the future. The
credit worthiness of the Companys portfolio is largely reliant on the ability of U.S. government
sponsored agencies such as FHLB, Federal National Mortgage Association (FNMA), Government
National Mortgage Association (GNMA), and Federal Home Loan Mortgage Corporation (FHLMC), and
municipalities throughout New York State to meet their obligations. In addition, dysfunctional
markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio.
The relatively stable past performance is not a guarantee for similar performance of the Companys securities portfolio going
forward.
3. FAIR VALUE MEASUREMENTS
The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures.
Those provisions relate to financial assets and liabilities carried at fair value and fair value
disclosures related to financial assets and liabilities. ASC Topic 820 defines fair value, expands
related disclosure requirements and specifies a hierarchy of valuation techniques based on the
nature of the inputs used to develop the fair value measures. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
There are three levels of inputs to fair value measurements:
|
|
Level 1, meaning the use of quoted prices for identical instruments in active markets; |
11
|
|
Level 2, meaning the use of quoted prices for similar instruments in active markets or
quoted prices for identical or similar instruments in markets that are not active or are
directly or indirectly observable; and |
|
|
Level 3, meaning the use of unobservable inputs. |
Observable market data should be used when available.
At September 30, 2010 and December 31, 2009, the estimated fair values of the Companys financial
instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
18,003 |
|
|
$ |
18,003 |
|
|
$ |
12,983 |
|
|
$ |
12,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
99,247 |
|
|
$ |
99,269 |
|
|
$ |
79,018 |
|
|
$ |
78,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, net |
|
$ |
495,489 |
|
|
$ |
511,337 |
|
|
$ |
482,597 |
|
|
$ |
491,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
535,286 |
|
|
$ |
536,368 |
|
|
$ |
499,508 |
|
|
$ |
499,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds and securities sold
under agreements to repurchase
|
|
$ |
36,197 |
|
|
$ |
37,557 |
|
|
$ |
51,816 |
|
|
$ |
52,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures |
|
$ |
11,330 |
|
|
$ |
11,330 |
|
|
$ |
11,330 |
|
|
$ |
11,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practical to estimate that value.
Cash and Cash Equivalents. For these short-term instruments, the carrying amount is a reasonable
estimate of fair value. Cash and Cash Equivalents includes interest-bearing deposits at other
banks.
Securities. Fair values for available-for-sale securities are determined using independent
pricing services and market-participating brokers. The pricing service and brokers use a variety
of techniques to arrive at fair value including market maker bids, quotes, and pricing models.
Inputs to their pricing models include recent trades, benchmark interest rates, spreads, and actual
and projected cash flows. Management obtains a single market quote or price estimate for each
security. These quoted prices reflect current information based on orderly transactions. These
are considered Level 2 inputs under ASC 820.
The Company holds certain municipal bonds as held-to-maturity. These bonds are generally small in
dollar amount and are issued only by certain local municipalities within the Companys market area.
The original terms are negotiated directly and on an individual basis. These bonds are not traded
on the open market and management intends to hold the bonds to maturity. The fair value of
held-to-maturity securities is estimated by discounting the future cash flows using the current
rates at which similar agreements would be made with municipalities with similar credit ratings and
for the same remaining maturities.
Loans and Leases, net. The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities, net of the appropriate portion of the
allowance for loan losses. For variable rate loans, the carrying amount is a reasonable estimate
of fair value. This fair value calculation is not necessarily indicative of the exit price, as
defined in ASC 820.
Deposits. The fair value of demand deposits, NOW accounts, muni-vest accounts and regular savings
accounts is the amount payable on demand at the reporting date. The fair value of time deposits is
estimated using the rates currently offered for deposits of similar remaining maturities.
12
Other Borrowed Funds and Securities Sold Under Agreement to Repurchase. The fair value of the
short-term portion of other borrowed funds approximates its carrying value. The fair value of the
long-term portion of other borrowed funds is estimated using a discounted cash flow analysis based
on the Companys current incremental borrowing rates for similar types of borrowing arrangements.
Junior Subordinated Debentures. The carrying amount of Junior Subordinated Debentures is a
reasonable estimate of fair value due to the fact that they bear a floating interest rate that
adjusts on a quarterly basis.
Commitments to extend credit and standby letters of credit. As described in Note 7 Contingent
Liabilities and Commitments to these Unaudited Consolidated Financial Statements, the Company was
a party to financial instruments with off-balance sheet risk at September 30, 2010 and December 31,
2009. Such financial instruments consist of commitments to extend permanent financing and letters
of credit. If the options are exercised by the prospective borrowers, these financial instruments
will become interest-earning assets of the Company. If the options expire, the Company retains any
fees paid by the counterparty in order to obtain the commitment or guarantee. The fair value of
commitments is estimated based upon fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate commitments, the fair value estimation takes into consideration an
interest rate risk factor. The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements. The fair value of these off-balance sheet items at
September 30, 2010 and December 31, 2009 approximates the recorded amounts of the related fees,
which are not considered material.
The following table presents the fair-value hierarchy levels for those financial instruments
disclosed in the previous table which are measured at fair value on both a recurring and
non-recurring basis at September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
|
|
|
$ |
27,438 |
|
|
$ |
|
|
|
$ |
27,438 |
|
States and political subdivisions |
|
|
|
|
|
|
37,790 |
|
|
|
|
|
|
|
37,790 |
|
Mortgage-backed securities |
|
|
|
|
|
|
29,408 |
|
|
|
|
|
|
|
29,408 |
|
FHLB stock |
|
|
|
|
|
|
1,975 |
|
|
|
|
|
|
|
1,975 |
|
FRB stock |
|
|
|
|
|
|
920 |
|
|
|
|
|
|
|
920 |
|
Net impaired loans |
|
|
|
|
|
|
|
|
|
|
7,077 |
|
|
|
7,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
|
|
|
$ |
19,712 |
|
|
$ |
|
|
|
$ |
19,712 |
|
States and political subdivisions |
|
|
|
|
|
|
37,730 |
|
|
|
|
|
|
|
37,730 |
|
Mortgage-backed securities |
|
|
|
|
|
|
14,837 |
|
|
|
|
|
|
|
14,837 |
|
FHLB stock |
|
|
|
|
|
|
2,663 |
|
|
|
|
|
|
|
2,663 |
|
FRB stock |
|
|
|
|
|
|
912 |
|
|
|
|
|
|
|
912 |
|
Net impaired loans |
|
|
|
|
|
|
|
|
|
|
7,611 |
|
|
|
7,611 |
|
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to
fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). For the Company, these include impaired loans and goodwill and intangible assets.
The Company evaluates and values impaired loans at the time the loan is identified as impaired, and
the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Fair
value is estimated based on the value of the collateral securing these loans. Collateral may
consist of real estate and/or business assets including equipment, inventory and/or accounts
receivable and the value of these assets is determined based on appraisals by qualified licensed
appraisers hired by the Company. Appraised and reported values may be discounted based on
managements historical knowledge, changes in market conditions from the time of valuation,
estimated costs to sell, and/or managements expertise and knowledge of the client and the clients
business. Impaired loans had a gross value of $9.5 million, with a valuation allowance of $2.4
million, at September 30, 2010, compared to a gross value for loans and leases of $8.8 million,
with a valuation allowance of
13
$1.2 million, at December 31, 2009. The changes in Level 3 assets measured at estimated fair value
during the nine months ended September 30, 2010 are as follows:
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
Net impaired loans December 31, 2009 |
|
|
7,611 |
|
Included in earnings/change in net assets |
|
|
(3,058 |
) |
Sales, settlements, and payments |
|
|
(1,796 |
) |
Transfers into Level 3, net |
|
|
4,320 |
|
|
|
|
|
Net impaired loans September 30, 2010 |
|
|
7,077 |
|
|
|
|
|
The Company measures the fair value of its reporting units annually, as of December 31st,
using Level 3 inputs, utilizing the market value and income methods to determine if its goodwill
and intangible assets are impaired. When using the cash flow models, management considers
historical information, the Companys operating budget, and the Companys strategic goals in
projecting net income and cash flows for the next five years. Due to the fact that the Companys
stock price was below the book value per share at September 30, 2010, management performed a
goodwill impairment test at September 30, 2010. Management valued TEA, the reporting unit with
goodwill, using cash flow modeling techniques. The fair value of TEA substantially exceeded its
carrying value in the test. As a test for reasonableness, management also ascribed a value to the
total Company by adjusting the market capitalization by accounting for stock market volatility and
a control premium. Management did not use other transactions for comparable valuation multiples to
earnings for the total Company because there was not a meaningful sample of similar transactions to
gain any comfort from using them for valuation purposes. The methodology used in the third quarter
2010 test was identical to those used in the test performed as of December 31, 2009 and described
in more detail in the Application of Critical Accounting Estimates section of Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on
Form 10-K for the year ended December 31, 2009. There were no impairment charges as a result of
the tests performed on September 30, 2010 and December 31, 2009.
4. ALLOWANCE FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses represents the amount charged against the Banks earnings
to maintain an allowance for probable loan and lease losses based on managements evaluation of the
loan and lease portfolio at the balance sheet date. Factors considered by the Banks management in
establishing the allowance include: the collectability of individual loans and leases, current loan
and lease concentrations, charge-off history, delinquent loan and lease percentages, the fair value
of the collateral, input from regulatory agencies, and general economic conditions.
On a quarterly basis, management of the Bank meets to review and determine the adequacy of the
allowance for loan and lease losses. In making this determination, the Banks management analyzes
the ultimate collectability of the loans and leases in its portfolio by incorporating feedback
provided by the Banks internal loan and lease staff, an independent internal loan and lease review
function and information provided by examinations performed by regulatory agencies.
The analysis of the allowance for loan and lease losses is composed of two components: specific
credit allocation and general portfolio allocation. The specific credit allocation includes a
detailed review of each impaired loan and allocation is made based on this analysis. Factors may
include the appraisal value of the collateral, the age of the appraisal, the type of collateral,
the performance of the loan to date, the performance of the borrowers business based on financial
statements, and legal judgments involving the borrower. The general portfolio allocation consists
of an assigned reserve percentage based on the historical loss experience and other qualitative
factors of the loan or lease category.
The general portfolio allocation is segmented into pools of loans with similar characteristics.
Separate pools of loans include similar types of loans as well as pools that contain loans with
similar credit characteristics. These
14
credit characteristics include debtor cash flow and payment history. The qualitative factors
applied to the general portfolio allocation reflect managements evaluation of various conditions.
The conditions evaluated include the following: industry and regional conditions; seasoning of the
loan and lease portfolio and changes in the composition of and growth in the loan and lease
portfolio; the strength and duration of the business cycle; existing general economic and business
conditions in the lending areas; credit quality trends in non-accruing loans and leases; timing of
the identification of downgrades; historical loan and lease charge-off experience; and the results
of bank regulatory examinations.
The following table sets forth information regarding the allowance for loan and lease losses for
the nine month periods ended September 30, 2010 and 2009. It should be noted that on June 30,
2009, the Company placed its direct financing lease portfolio into held-for-sale status, thereby
reducing the allowance for lease losses to zero. The market value was determined to be $7.2
million less than the book value. The portfolio was subsequently placed back into
held-for-investment as of September 30, 2009 after management determined that a greater value for
the portfolio would be realized by keeping it rather than selling it. The portfolio was
re-classified as held-for-investment using the same $7.2 million mark. Since that time, leases
that are determined to have zero value are applied to the remaining mark, rather than charged off
through allowance. As of September 30, 2010, the Company had an allowance for lease losses of $1.1
million and a remaining mark of $2.1 million. Leases written off against the mark were $0.3
million and $2.0 million for the three and nine months ended September 30, 2010, compared with $1.4
million in the three and nine month periods ended September 30, 2009.
Allowance for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Beginning balance, January 1 |
|
$ |
6,971 |
|
|
$ |
6,087 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
Real estate |
|
|
(154 |
) |
|
|
(35 |
) |
Direct financing leases |
|
|
|
|
|
|
(9,483 |
) |
Commercial |
|
|
(223 |
) |
|
|
(280 |
) |
Consumer loans |
|
|
(3 |
) |
|
|
(12 |
) |
Other |
|
|
(45 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
Total charge-offs |
|
|
(425 |
) |
|
|
(9,845 |
) |
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Real estate |
|
|
1 |
|
|
|
|
|
Direct financing leases |
|
|
|
|
|
|
212 |
|
Commercial |
|
|
|
|
|
|
9 |
|
Consumer loans |
|
|
|
|
|
|
1 |
|
Other |
|
|
17 |
|
|
|
16 |
|
|
|
|
|
|
|
|
Total recoveries |
|
|
18 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(407 |
) |
|
|
(9,607 |
) |
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
2,535 |
|
|
|
9,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30 |
|
$ |
9,099 |
|
|
$ |
6,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan and lease
loss to total loans and leases |
|
|
1.80 |
% |
|
|
1.27 |
% |
|
|
|
|
|
|
|
15
5. PER SHARE DATA
The common stock per share information is based upon the weighted average number of shares
outstanding during each period. The Company had 1,257 and 3,121 dilutive shares for the three and
nine month periods ended September 30, 2010. This compares with 10,295 and 3,642 dilutive shares
for the three and nine month periods ended September 30, 2009.
Potential common shares that would have the effect of increasing diluted earnings per share are
considered to be anti-dilutive and not included in calculating diluted earnings per share. For the
three and nine months periods ended September 30, 2010 there were approximately 269,340 and 172,764
shares, respectively, that were not included in calculating diluted earnings per share because
their effect was anti-dilutive. There were 264,989 and 171,578 potentially anti-dilutive shares
for the three and nine month periods ended September 30, 2009.
6. 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 nine month
periods ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Agency |
|
|
|
|
|
|
Banking Activities |
|
|
Activities |
|
|
Total |
|
Net interest income (expense) |
|
$ |
6,286 |
|
|
|
($53 |
) |
|
$ |
6,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
1,012 |
|
|
|
|
|
|
|
1,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) after
provision for loan and lease
losses |
|
|
5,274 |
|
|
|
(53 |
) |
|
|
5,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
1,348 |
|
|
|
|
|
|
|
1,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance service and fees |
|
|
|
|
|
|
1,775 |
|
|
|
1,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
5,095 |
|
|
|
1,354 |
|
|
|
6,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,527 |
|
|
|
368 |
|
|
|
1,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
474 |
|
|
|
143 |
|
|
|
617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,053 |
|
|
$ |
225 |
|
|
$ |
1,278 |
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Agency |
|
|
|
|
|
|
Banking Activities |
|
|
Activities |
|
|
Total |
|
Net interest income (expense) |
|
$ |
5,996 |
|
|
|
($28 |
) |
|
$ |
5,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
634 |
|
|
|
|
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) after
provision for loan and lease
losses |
|
|
5,362 |
|
|
|
(28 |
) |
|
|
5,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
2,079 |
|
|
|
|
|
|
|
2,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance service and fees |
|
|
|
|
|
|
1,750 |
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
4,423 |
|
|
|
1,373 |
|
|
|
5,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
3,018 |
|
|
|
349 |
|
|
|
3,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
796 |
|
|
|
135 |
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,222 |
|
|
$ |
214 |
|
|
$ |
2,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Agency |
|
|
|
|
|
|
Banking Activities |
|
|
Activities |
|
|
Total |
|
Net interest income (expense) |
|
$ |
18,562 |
|
|
|
($152 |
) |
|
$ |
18,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
2,535 |
|
|
|
|
|
|
|
2,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) after
provision for loan and lease
losses |
|
|
16,027 |
|
|
|
(152 |
) |
|
|
15,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
4,153 |
|
|
|
|
|
|
|
4,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance service and fees |
|
|
|
|
|
|
5,651 |
|
|
|
5,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
15,257 |
|
|
|
4,191 |
|
|
|
19,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,923 |
|
|
|
1,308 |
|
|
|
6,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
1,369 |
|
|
|
505 |
|
|
|
1,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,554 |
|
|
$ |
803 |
|
|
$ |
4,357 |
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Agency |
|
|
|
|
|
|
Banking Activities |
|
|
Activities |
|
|
Total |
|
Net interest income (expense) |
|
$ |
16,640 |
|
|
|
($113 |
) |
|
$ |
16,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
9,583 |
|
|
|
|
|
|
|
9,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) after
provision for loan and lease
losses |
|
|
7,057 |
|
|
|
(113 |
) |
|
|
6,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
5,405 |
|
|
|
|
|
|
|
5,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance service and fees |
|
|
|
|
|
|
5,698 |
|
|
|
5,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
15,505 |
|
|
|
4,062 |
|
|
|
19,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(3,043 |
) |
|
|
1,523 |
|
|
|
(1,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision |
|
|
(1,444 |
) |
|
|
588 |
|
|
|
(856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
($1,599 |
) |
|
$ |
935 |
|
|
|
($664 |
) |
|
|
|
|
|
|
|
|
|
|
7. CONTINGENT LIABILITIES AND COMMITMENTS
The unaudited 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 consist
of commitments to extend credit and standby letters of credit. A summary of the Banks commitments
and contingent liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
(in thousands) |
|
Commitments to extend credit |
|
$ |
105,544 |
|
|
$ |
90,994 |
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
3,750 |
|
|
|
3,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,294 |
|
|
$ |
94,310 |
|
|
|
|
|
|
|
|
Commitments to extend credit and standby letters of credit include some exposure to credit loss in
the event of nonperformance of the customer. The Banks credit policies and procedures for credit
commitments and financial guarantees are the same as those for extensions of credit that are
recorded on the Companys unaudited 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 of the Bank. The Bank has not incurred any losses on its commitments
during the past two years.
Certain lending commitments for construction residential mortgage loans are considered derivative
instruments under the guidelines of GAAP. The changes in the fair value of these commitments, due
to interest rate risk, are not recorded on the consolidated balance sheets as the fair value of
these derivatives is not considered material.
The Company is subject to possible litigation proceedings in the normal course of business. As of
September 30, 2010 and December 31, 2009, there were no claims pending against the Company that
management considered material.
18
8. NET PERIODIC BENEFIT COSTS
On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered
substantially all Company employees. The plan provides benefits that are based on the employees
compensation and years of service. Under the freeze, eligible employees will receive at retirement
the benefits already earned through January 31, 2008, but do not accrue any additional benefits.
As a result, service cost is no longer incurred.
The Bank used an actuarial method of amortizing prior service cost and unrecognized net gains or
losses which result from actual expense and assumptions being different than those that are
projected. The amortization method the Bank used recognized the prior service cost and net gains or
losses over the average remaining service period of active employees. The Bank contributed
$150,000 to its defined benefit pension plan in July 2010.
The Bank also maintains a nonqualified supplemental executive retirement plan covering certain
members of the Companys 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 uses recognizes the net gains or
losses over the average remaining service period of active employees.
The following table presents the net periodic cost for the Banks defined benefit pension plan and
supplemental executive retirement plan for the nine month periods ended September 30, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Executive |
|
|
|
Pension Benefits |
|
|
Retirement Plan |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
123 |
|
|
$ |
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
161 |
|
|
|
161 |
|
|
|
141 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(146 |
) |
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the net loss |
|
|
26 |
|
|
|
42 |
|
|
|
8 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost |
|
$ |
41 |
|
|
$ |
76 |
|
|
$ |
337 |
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The main objective of the ASU is to provide
financial statement users with greater transparency about an entitys allowance for credit losses
and the credit quality of its financing receivables. The ASU is intended to provide additional
information to assist financial statement users in assessing an entitys credit risk exposures and
evaluating the adequacy of its allowance for credit losses. To achieve that objective, an entity
should provide disclosures on a disaggregated basis, including portfolio segment and class of
financing receivable. The ASU lists a number of additional disclosures that will be required to be
provided by entities once the ASU is adopted. The new guidance is effective for interim periods
ending after December 15, 2010. The Company will adopt ASU 2010-20 for the year ended December 31,
2010. The ASU will have a significant impact on the amount of information disclosed by the
Company about the credit quality of its loans and leases and the allowance for loan and lease
losses.
19
ITEM 2 MANAGEMENTS 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 Companys business plans, prospects, growth and
operating strategies, statements regarding the asset quality of the Companys loan and investment
portfolios, and estimates of the Companys risks and future costs and benefits.
These forward-looking statements are based largely on the expectations of the Companys management
and are subject to a number of risks and uncertainties, including but not limited to general
economic conditions, either nationally or in the Companys 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 Companys margins or reduce the fair value
of financial instruments; changes in laws or government regulations affecting financial
institutions (such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, discussed in
greater detail below), including changes in regulatory fees and capital requirements; the Companys
ability to enter new markets successfully and capitalize on growth opportunities; the Companys
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 Companys organization, compensation and benefit plans;
and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the
Companys periodic reports filed with the SEC, in particular the Risk Factors discussed in Item
1A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Many
of these factors are beyond the Companys control and are difficult to predict.
Because of these and other uncertainties, the Companys 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 Companys 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 Companys 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 Companys 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
20
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, 2009. These policies, along
with the disclosures presented in the other Notes to the Companys 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 Companys 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.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents managements estimate of probable losses in the
Companys 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 Companys Unaudited Consolidated Balance Sheets. Note 1
to the Audited Consolidated Financial Statements included in Item 8 in the Companys Annual Report
on Form 10-K for the year ended December 31, 2009, describes the methodology used to determine the
allowance for loan and lease losses.
Goodwill
The amount of goodwill reflected in the Companys 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 on December 31st. Since the stock price of the
Company was below the book value per share at September 30, 2010, another goodwill impairment test
was performed. No impairment charges were incurred as a result of the test and the fair value of
the tested reporting unit substantially exceeded its fair value.
RECENT LEGISLATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) was signed into law on
July 21, 2010. The Act contains numerous and wide-ranging reforms to the structure and operation
of the U.S. financial system. Among the Acts significant regulatory changes are (i) the
imposition of more stringent capital requirements on bank holding companies by, among other things,
imposing leverage ratios and prohibiting new trust preferred issuances from counting as Tier 1
capital; (ii) making permanent the temporary increase in FDIC deposit insurance coverage from
$100,000 to $250,000 and providing for unlimited deposit insurance on noninterest-bearing
transaction accounts, together with an increase in the minimum Deposit Insurance Fund reserve
requirement and a change in the assessment base from deposits to net assets; (iii) the creation of
the Bureau of Consumer Financial Protection, a new financial consumer protection agency, which is
empowered to promulgate new consumer protection regulations and revise existing regulations in many
areas of consumer compliance; (iv) provisions permitting states to adopt stricter consumer
protection laws and permitting state attorneys general to enforce rules issued by the Bureau of
Consumer Financial Protection; (v) increased regulation of derivatives and hedging transactions and
restrictions on the Companys ability to engage in certain proprietary trading and investing
activities; (vi) limitations on debit card interchange fees; (vii) the imposition of new disclosure
and other requirements related to corporate governance and executive compensation; and (viii) the
creation of the Financial Stability Oversight Council, with responsibility for identifying and
monitoring systemic risks posed by financial firms, activities and practices.
The Company is currently evaluating the potential impact of the Act on its business, financial
condition and results of operations. Management expects that some provisions of the Act may have
adverse effects on the Company, such
21
as the cost of complying with the numerous new regulations and disclosure and reporting
requirements mandated by the Act. Portions of the Act become effective at different times, and
many of the Acts provisions consist of general statements directing various regulators to issue
more detailed rules. Consequently, the full scope of the Acts impact on the financial system in
general and the Company in particular cannot be predicted at this time.
ANALYSIS OF FINANCIAL CONDITION
Loan and Lease Activity
Total loans and leases grew to $504.6 million at September 30, 2010, reflecting a $1.6 million or
0.3% increase from June 30, 2010 and a 3.1% increase from December 31, 2009. Loans secured by real
estate were $410.6 million at September 30, 2010, an increase of $0.5 million or 0.1% from June 30,
2010 and a $21.1 million or 5.4% increase from December 31, 2009. The two portfolios that grew the
most in the second quarter were construction loans and commercial and industrial (C&I) loans.
In 2008 and 2009, some of the Banks larger banking competitors and the conduit markets curtailed
their lending activities somewhat and consequently created opportunities in the local commercial
real estate market for smaller banks, such as the Bank. The increased opportunities resulted in the
Banks strong commercial real estate growth rates. Given the Banks experienced and local lending
team, its history of low commercial real estate losses, and knowledge of its customers, management
feels comfortable that its growth in commercial real estate over the past couple years has put
quality assets on the balance sheet. However, the Companys strategy has shifted to a more diverse
loan portfolio not as heavily reliant on commercial real estate for growth. This is evidenced in
the lack of growth in commercial and multi-family real estate loans in the third quarter while C&I
loans increased $4.4 million, or 7.1% from June 30, 2010. C&I loans traditionally provide banks
with a better opportunity to gain new commercial deposits and establish deeper relationships.
The national direct financing lease portfolio declined $3.9 million during the third quarter and
has declined $12.7 million year-to-date to $18.7 million at September 30, 2010 as the Company
ceased lease originations in the second quarter of 2009 and is winding down the portfolio and
exiting this business line. In the third quarter of 2009, the Company announced that it had ceased
its marketing efforts to sell the portfolio and intends to service the portfolio until maturity.
The national direct financing lease portfolio currently comprises 3.7% of the Companys total loan
and lease portfolio, down from 4.5% at June 30, 2010 and 6.4% at December 31, 2009.
Residential 1-4 family real estate loans decreased $1.3 million from June 30, 2010 and $2.2 million
from December 31, 2009. Recent efforts by the federal government to stimulate housing demand in
the face of the economic recession have lowered residential home mortgage rates and resulted in
stronger consumer real estate demand. 2009 was the high point of the Banks residential mortgage
demand, with demand slowing somewhat in 2010 as the low rate environment has been in place for so
long that many of the consumers who would be candidates to re-finance have already done so.
Although demand has abated in 2010 somewhat, it is still higher than the typical volume previously
experienced in the Companys history. Given the low fixed rates and long terms of the loans being
originated, the Company has sold many of its originated residential mortgage loans. This, along
with prepayments from existing customers re-financing their homes, has resulted in decreased
consumer real estate balances at September 30, 2010 when compared with June 30, 2010 and December
31, 2009.
The Bank sells these fixed rate residential mortgages to FNMA, while maintaining the servicing
rights for those mortgages. During the three month period ended September 30, 2010, the Bank sold
mortgages to FNMA totaling $2.8 million, as compared with $4.0 million sold during the three month
period ended September 30, 2009. During the nine month period ended September 30, 2010, the Bank
sold mortgages to FNMA totaling $7.6 million, as compared with $12.6 million during the nine month
period ended September 30, 2009. Sales to FNMA decreased due to a decline in originations. At
September 30, 2010, the Bank had a loan servicing portfolio principal balance of $41.3 million upon
which it earns servicing fees, as compared with $40.3 million at June 30, 2010 and $37.4 million at
December 31, 2009. The value of the mortgage servicing rights for that portfolio was $0.3 million
at September 30, 2010, compared with $0.4 million at June 30, 2010 and $0.3 million at December 31,
2009. The value of the mortgage servicing rights has not increased in perfect correlation to the
increase in the size of the servicing portfolio because the historic low interest rate environment
portends more prepayments and refinancing of loans in the servicing portfolio with higher coupon
rates, reducing the amount of time the Company has to earn servicing fees from FNMA. Residential
mortgage loans held-for-sale were $0.7 million at September 30, 2010, compared with
22
$0.3 million at June 30, 2010 and $0.3 million at December 31, 2009. The Company has never been
contacted by FNMA to repurchase any loans due to improper documentation or fraud.
Loan and Lease Portfolio Composition
The following table presents selected information on the composition of the Companys loan and
lease portfolio in dollar amounts and in percentages as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
(in thousands) |
|
Mortgage loans on real estate: |
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
$ |
78,591 |
|
|
$ |
80,775 |
|
Commercial and multi-family |
|
|
255,621 |
|
|
|
244,242 |
|
Construction |
|
|
30,764 |
|
|
|
21,010 |
|
Second mortgages |
|
|
6,439 |
|
|
|
7,813 |
|
Home equity lines of credit |
|
|
39,179 |
|
|
|
35,633 |
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
410,594 |
|
|
|
389,473 |
|
|
|
|
|
|
|
|
|
|
Direct financing leases |
|
|
18,745 |
|
|
|
31,486 |
|
Commercial and industrial loans |
|
|
66,576 |
|
|
|
60,345 |
|
Consumer loans |
|
|
2,905 |
|
|
|
2,957 |
|
Other |
|
|
5,453 |
|
|
|
4,782 |
|
Net deferred loan origination costs |
|
|
315 |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
504,588 |
|
|
|
489,568 |
|
Allowance for loan losses |
|
|
(9,099 |
) |
|
|
(6,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
495,489 |
|
|
$ |
482,597 |
|
|
|
|
|
|
|
|
Other loans include $0.9 million and $0.2 million at September 30, 2010 and December 31, 2009,
respectively, of overdrawn deposit accounts classified as loans.
Leasing Portfolio
Net loan and lease charge-offs were $0.2 million and $0.4 million for the three and nine month
periods ended September 30, 2010 as compared with $0.1 million and $9.6 million in the three and
nine month periods ended September 30, 2009. Nearly all of the net charge-offs for 2009 was in the
Companys leasing portfolio. What follows is an explanation of the sequence of events for ENL over
the past 18 months, followed by a table illustrating the history of the leasing portfolios
accounting over the past 15 months.
The rapid deterioration of the portfolio, the lack of strategic fit in the Companys community
banking business model, and the sensitivity of direct financing leases to the economic environment
led management to make the strategic decision in April 2009 to exit the national direct financing
lease business and market the portfolio for sale. This decision resulted in the classification of
the leasing portfolio as held-for-sale and the portfolio being marked to its market value at June
30, 2009. The mark-to-market adjustment was $7.2 million. At September 30, 2009, management
determined to keep the lease portfolio, terminated its plans to actively market the portfolio for
sale, and the portfolio was placed back into held-for-investment at the revised carrying amount as
of June 30, 2009. The difference between the principal value and the carrying value, initially
created by the mark-to-market adjustment at June 30, 2009, reduces over time as individual leases
deteriorate, become uncollectible, and are written off. The allowance for lease losses was zero at
June 30, 2009 when the portfolio was classified as held-for-sale and reported at its fair market
value. With the portfolio classified as held-for-investment at September 30, 2010, the portfolio
has been evaluated in accordance with the Companys normal credit review policies in determining
the appropriate allowance for lease losses. During the third quarter of 2010, $0.3 million in
leases were deemed uncollectible and the difference between the principal value and carrying value
of the leases declined from $2.4 million to $2.1 million. This is a decline in the quarterly
write-offs from $0.6 million in the second quarter of 2010 and $1.1 million in the first quarter of
2010. Non-performing leases of $2.4 million at September 30, 2010 have declined from $2.9 million
at December 31, 2009, but remained flat compared with $2.4 million at June 30, 2010. Leases still
accruing but delinquent 31 days or more were $0.4 million at September 30, 2010, an increase from
$0.2 million at June 30, 2010 and $0.3 million at December 31, 2009. With charge-offs continuing
to reduce the remaining mark
23
on the leasing portfolio and non-accruing and delinquent leases not correspondingly declining,
management determined that an additional $0.3 million in reserve for lease losses was appropriate
at September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
2010 |
|
|
2009 |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
Leasing Principal Balance |
|
$ |
20,869 |
|
|
$ |
25,142 |
|
|
$ |
29,788 |
|
|
$ |
35,645 |
|
|
$ |
41,950 |
|
Mark |
|
|
(2,124 |
) |
|
|
(2,469 |
) |
|
|
(3,084 |
) |
|
|
(4,159 |
) |
|
|
(5,732 |
) |
|
|
|
|
|
Leasing Carrying Value |
|
$ |
18,745 |
|
|
$ |
22,673 |
|
|
$ |
26,704 |
|
|
$ |
31,486 |
|
|
$ |
36,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-Market Adjustment |
|
$ |
2,469 |
|
|
$ |
3,084 |
|
|
$ |
4,159 |
|
|
$ |
5,732 |
|
|
$ |
7,164 |
|
Net Write-Offs |
|
|
(345 |
) |
|
|
(615 |
) |
|
|
(1,075 |
) |
|
|
(1,573 |
) |
|
|
(1,432 |
) |
|
|
|
|
|
Remaining Mark |
|
$ |
2,124 |
|
|
$ |
2,469 |
|
|
$ |
3,084 |
|
|
$ |
4,159 |
|
|
$ |
5,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the three months ended |
|
|
|
2010 |
|
|
2009 |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
Allowance for lease losses |
|
$ |
772 |
|
|
$ |
772 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Provision for leases |
|
|
305 |
|
|
|
|
|
|
|
772 |
|
|
|
|
|
|
|
|
|
Leasing net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for lease losses |
|
$ |
1,077 |
|
|
$ |
772 |
|
|
$ |
772 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mark plus allowance |
|
$ |
3,201 |
|
|
$ |
3,241 |
|
|
$ |
3,856 |
|
|
$ |
4,159 |
|
|
$ |
5,732 |
|
Mark + allowance/leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principal balance |
|
|
15.34 |
% |
|
|
12.89 |
% |
|
|
12.94 |
% |
|
|
11.67 |
% |
|
|
13.66 |
% |
Non-Performing Loans and Leases
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 $9.9 million, or 1.96% of total loans and leases
outstanding, at September 30, 2010, compared with $11.1 million, or 2.20% of total loans and leases
outstanding at June 30, 2010 and $12.9 million, or 2.64% at December 31, 2009. In the third
quarter, two loans totaling $1.4 million were removed from the 90 days past due and still accruing
category. One of the loans, for $0.8 million, was extended under normal terms after administrative
delays caused the loan to go past its original maturity date, and is no longer categorized as a
non-performing loan. The other loan, for $0.6 million, was a construction loan and was put on
nonaccrual status and is still considered a non-performing loan. Most of the rest of the decline
in nonperforming loans in the quarter ($0.2 million) is attributable to charge-offs of previously
non-performing loans.
Non-accruing mortgage loans on real estate were $5.1 million as of September 30, 2010, up from $4.5
million at June 30, 2010 and $4.3 million at December 31, 2009. The increase is primarily
attributable to the aforementioned downgrade of a $0.6 million construction loan from the former
Waterford portfolio.
Non-accruing direct financing leases were $2.4 million at September 30, 2010, flat compared with
the $2.4 million balance at June 30, 2010, but lower than the $2.9 million balance at December 31,
2009. Most of the Companys direct financing lease write-offs are coming from those in
non-accruing status. Thus far in 2010, leasing write-offs have outpaced the rate of formerly
performing leases being placed into non-accrual status, resulting in the decrease in non-accruing
leases.
Non-accruing commercial and industrial loans were $1.7 million at September 30, 2010, compared with
$1.9 million at June 30, 2010 and $1.4 million at December 31, 2009. The decrease in the quarter
was related to the charge-off of a commercial and industrial loan for $0.2 million. The increase
since December was primarily caused by the downgrading of two commercial loan relationships in the
second quarter.
24
Loans 90 days past due and still accruing were $0.5 million at September 30, 2010, a decrease from
$2.0 million at
June 30, 2010 and $4.1 million at December 31, 2009. The two loans remaining in this category are
more than 90 days past the initial maturity. The Bank intends to either extend the loans under
normal underwriting criteria and market terms or receive payment in full. The delay in refinancing
or repayment is generally due to administrative, legal, or other processing matters, and not due to
the ability to pay or creditworthiness of the borrower. Of the matured loans that made up this
balance at December 31, 2009, March 31, 2010, and June 30, 2010, all except the construction loan
for $0.6 million at June 30, 2010 that went into nonaccrual were renewed under normal underwriting
criteria and market terms or paid in full.
The following table sets forth information regarding non-performing loans and leases as of the
dates specified.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
(in thousands) |
|
Non-accruing loans and leases: |
|
|
|
|
|
|
|
|
Mortgage loans on real estate |
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
$ |
816 |
|
|
$ |
1,076 |
|
Commercial and multi-family |
|
|
2,102 |
|
|
|
2,713 |
|
Construction |
|
|
1,966 |
|
|
|
417 |
|
Second mortgages |
|
|
74 |
|
|
|
|
|
Home equity lines of credit |
|
|
189 |
|
|
|
128 |
|
|
|
|
|
|
|
|
Total mortgage loans on real estate |
|
|
5,147 |
|
|
|
4,334 |
|
|
|
|
|
|
|
|
|
|
Direct financing leases |
|
|
2,372 |
|
|
|
2,905 |
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans |
|
|
1,661 |
|
|
|
1,400 |
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
200 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accruing loans and leases |
|
$ |
9,380 |
|
|
$ |
8,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases 90+ days past due |
|
|
523 |
|
|
|
4,112 |
|
|
|
|
|
|
|
|
Total non-performing loans and leases |
|
$ |
9,903 |
|
|
$ |
12,948 |
|
|
|
|
|
|
|
|
Total non-performing loans and leases as a
percentage of total assets |
|
|
1.50 |
% |
|
|
2.09 |
% |
Total non-performing loans and leases as a
percentage of total loans and leases |
|
|
1.96 |
% |
|
|
2.64 |
% |
For the three and nine month periods ended September 30, 2010, gross interest income that would
have been reported on non-accruing loans and leases had they been current was $186 thousand and
$506 thousand, respectively. For the three and nine month periods ended September 30, 2009, gross
interest income that would have been reported on non-accruing loans and leases had they been
current was $70 thousand and $287 thousand, respectively. The amount has increased year-over-year
to the higher level of non-accruing loans and leases. There was $13 thousand and $53 thousand of
interest income on non-accruing loans and leases included in net income for the three and nine
month periods ended September 30, 2010. There was $71 thousand and $200 thousand of interest income
on non-accruing loans and leases included in net income for the three and nine month periods ended
September 30, 2009. This amount has decreased as more loans and leases were added to non-accruing
status in the prior year than in the current year, resulting in more loans and leases in 2009 that
earned income prior to be putting in non-accruing status
The Company had $1.6 million in loans and leases that were restructured in a troubled debt
restructuring at September 30, 2010, compared with $1.9 million at June 30, 2010 and $2.2 million
at December 31, 2009. $0.5 million, $0.6 million, and $0.9 million of the troubled debt
restructurings at September 30, 2010, June 30, 2010, and December 31, 2009, respectively, were in
non-accrual. All of the restructurings were undertaken in an effort to
25
maximize the Companys
ability to collect on loans and leases where borrowers were experiencing financial issues.
The general practice of the Company is to work with borrowers so that they are able to pay back
their loan or lease in full. If a borrower continues to be delinquent or cannot meet the terms of
a troubled debt restructuring, the loan or lease will be placed in nonaccrual or charged off.
The allowance for loan and lease losses totaled $9.1 million or 1.80% of total loans and leases
outstanding at September 30, 2010, as compared with $8.3 million or 1.65% of total loans and leases
outstanding at June 30, 2010, and $7.0 million or 1.42% of total loans and leases outstanding as of
December 31, 2009. The allowance increase this year has resulted from a $2.5 million provision for
loan and lease losses while maintaining fairly low charge-off levels at 0.11% of average loans and
leases, or $0.4 million. The provision has resulted from an upward trend in loans categorized as
special mention or substandard in the Companys internal credit ratings, loan growth, and
additional reserve needed for the leasing portfolio as non-performing leases have not declined in
tandem with the roll-off of the portfolio. However, despite the relatively high level of provision
for loan and lease losses, the Companys charge-off level had remained better than industry
averages at $0.4 million, or 0.11% of average loans and leases for the year to date.
At September 30, 2010, the Company had $35.1 million in loans remaining from its FDIC-assisted
acquisition of Waterford Village Bank (Waterford) in July 2009. $2.2 million, or 6.4%, of the
loans in the former Waterford portfolio are non-accruing and considered non-performing. The
indemnification asset, which represents the expected proceeds from FDIC loss share claims related
to former Waterford loans which are charged off, was $0.9 million at September 30, 2010, compared
with $1.0 million at June 30, 2010 and $1.4 million at December 31, 2009. The asset declines as
losses are reimbursed by the FDIC or losses are not incurred as initially recorded.
The adequacy of the Companys allowance for loan and lease losses is reviewed quarterly by the
Companys management with consideration given to loan and lease concentrations, charge-off history,
delinquent loan and lease percentages, regulatory considerations, and general economic conditions.
Management believes the allowance for loan and lease losses is adequate for losses from existing
loans and leases.
Investing Activities
Total securities were $99.3 million at September 30, 2010, reflecting a $2.1 million, or 2.16%,
increase from $97.2 million at June 30, 2010 and a $20.3 million, or 25.7%, increase from $79.0
million at December 31, 2009. In the second quarter of 2010, the Company raised net proceeds of
$13.4 million through a registered offering of shares of its common stock and experienced deposit
growth that outpaced loan growth. With cash and interest-bearing deposits at correspondent banks
paying close to zero in this historically low interest rate environment, management purchased
investment securities of various types and maturities to better utilize the excess capital.
Compared with December 31, 2009, as of September 30, 2010, the Company added $7.7 million in U.S.
government-sponsored agency bonds, $0.1 million in tax-advantaged municipal bonds, and $14.6
million in U.S. government-sponsored mortgage-backed securities. Securities and interest-bearing
deposits at correspondent banks made up 16.9% of the Banks total average interest earning assets
in the third quarter of 2010, compared with 15.1% in the second quarter of 2010 and 15.6% in the
third quarter of 2009.
Due to the mix of the investment security purchases made in 2010, the Companys concentration in
tax-advantaged municipal bonds decreased from 51.7% at December 31, 2009 to 39.8% at September 30,
2010 and the concentration in government-sponsored mortgage-backed securities increased from 18.8%
at December 31, 2009 to 29.6% at September 30, 2010. U.S. government-sponsored agency bonds of
various types comprised 27.6% of the portfolio at September 30, 2010 versus 25.0% at December 31,
2009. As a member of both the Federal Reserve System and FHLBNY, the Bank is required to hold
stock in those entities. These investments made up 2.9% of the portfolio at September 30, 2010
versus 4.5% at December 31, 2009. The credit quality of the securities portfolio as a whole is
believed to be strong as the portfolio is in an overall unrealized net gain position, with no
individual securities in a significant unrealized loss position. With interest rates at historical
lows, the unrealized gain position of the investment portfolio increased from $1.6 million and $2.7
million at December 31, 2009 and June 30, 2010, respectively, to $3.5 million at September 30,
2010.
The Company monitors extension and prepayment risk in the securities portfolio to limit potential
exposures. The average expected life of the securities portfolio was 3.4 years as of September 30,
2010 compared with 3.6 years at June 30, 2010 and 3.2 years as of December 31, 2009.
Available-for-sale securities with a total fair value of $67.9
26
million, $69.9 million, and $65.2
million at September 30, 2010, June 30, 2010 and December 31, 2009,
respectively, 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 September 30, 2010 were $535.3 million, reflecting a $0.3 million, or 0.1%,
decrease from June 30, 2010, but a $35.8 million, or 7.2%, increase from December 31, 2009. Demand
deposits at September 30, 2010 were $94.8 million, reflecting a $1.1 million or 1.1% decrease from
June 30, 2010, but a $7.0 million or 7.9% increase from December 31, 2009. Demand deposit balances
fluctuate day-to-day based on the high volume of transactions normally associated with the demand
product, and therefore average demand deposit growth is a better measure of sustained growth.
Average demand deposits during the three month period ended September 30, 2010 were 7.9% higher
than the second quarter of 2010 and 10.8% higher than the prior years third quarter. Most of the
Companys growth in demand deposits has come from commercial customers.
In 2010, the Companys deposit growth vehicle has shifted from the premium money market savings
product to its complementary Better Checking and Better Savings products, which are included in the
NOW and regular savings deposit categories on the financial statements, respectively. The Better
Checking product, introduced in the fourth quarter of 2009, is unique in the Banks Western New
York footprint as it pays a premium interest rate as a reward to customers who demonstrate a deep
relationship with the Company as evidenced by regular use of their debit card, use of direct
deposit, and electronic statements. Overall, NOW deposits increased $4.7 million, or 18.4%, in the
third quarter, and $14.8 million, or 94.6% for the first nine months of the year. Regular savings
deposits increased $3.6 million, or 1.5%, in the third quarter of 2010 after the Better Savings
product was introduced during the second quarter. Regular savings deposits of $242.9 million at
September 30, 2010 are up $13.3 million from the end of last year.
The Company experienced a decline in its muni-vest savings product in the third quarter. The
Companys muni-vest savings portfolio includes a small number of municipal customers. The balance
of the portfolio can experience a large amount of volatility based on property tax inflow
seasonality and the specific circumstances of a small number of rate-sensitive municipal customers.
Muni-vest deposits were $22.8 million at September 30, 2010, $27.7 million at June 30, 2010, and
$23.4 million at December 31, 2009. Time deposits were $144.4 million at September 30, 2010,
compared with $147.0 million at June 30, 2010 and $143.0 million at December 31, 2009. After a
successful promotion of 5 year certificates of deposit in the second quarter, market interest rates
fell further in the third quarter. The lower rates on the long end of the yield curve have once
again reduced the consumer demand for longer-term deposits.
Short-term borrowings, which typically include the Banks overnight line of credit and other
advances with the FHLBNY and other short-term notes, remained at $0.1 million at September 30,
2010, unchanged from $0.1 million at June 30, 2010. However, this does represent a significant
decrease from $19.1 million at December 31, 2009. Because the Companys deposit growth has
outpaced its loan growth this year and with the injection of cash from the common stock offering in
the second quarter of 2010, the Banks outstanding overnight line of credit with FHLBNY, which was
$19.1 million at December 31, 2009, was reduced to zero at June 30, 2010 and September 30, 2010.
Long-term borrowings at September 30, 2010 remained unchanged from the June 30, 2010 balance of
$27.0 million, and down slightly from $27.2 million at December 31, 2009.
27
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 |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
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 |
|
$ |
496,037 |
|
|
$ |
7,111 |
|
|
|
5.73 |
% |
|
$ |
455,509 |
|
|
$ |
7,046 |
|
|
|
6.19 |
% |
Taxable securities |
|
|
59,091 |
|
|
|
496 |
|
|
|
3.36 |
% |
|
|
43,471 |
|
|
|
479 |
|
|
|
4.41 |
% |
Tax-exempt securities |
|
|
39,515 |
|
|
|
384 |
|
|
|
3.89 |
% |
|
|
38,842 |
|
|
|
399 |
|
|
|
4.11 |
% |
Interest bearing deposits at banks |
|
|
2,189 |
|
|
|
1 |
|
|
|
0.18 |
% |
|
|
1,623 |
|
|
|
|
|
|
|
0.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
596,832 |
|
|
$ |
7,992 |
|
|
|
5.36 |
% |
|
|
539,445 |
|
|
$ |
7,924 |
|
|
|
5.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
13,818 |
|
|
|
|
|
|
|
|
|
|
|
13,125 |
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
10,772 |
|
|
|
|
|
|
|
|
|
|
|
9,456 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
34,813 |
|
|
|
|
|
|
|
|
|
|
|
32,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
656,235 |
|
|
|
|
|
|
|
|
|
|
$ |
594,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW |
|
$ |
26,684 |
|
|
$ |
70 |
|
|
|
1.05 |
% |
|
$ |
9,588 |
|
|
$ |
5 |
|
|
|
0.21 |
% |
Regular savings |
|
|
240,424 |
|
|
|
421 |
|
|
|
0.70 |
% |
|
|
209,406 |
|
|
|
520 |
|
|
|
0.99 |
% |
Muni-Vest savings |
|
|
25,162 |
|
|
|
29 |
|
|
|
0.46 |
% |
|
|
31,908 |
|
|
|
35 |
|
|
|
0.44 |
% |
Time deposits |
|
|
145,202 |
|
|
|
924 |
|
|
|
2.55 |
% |
|
|
149,354 |
|
|
|
1,064 |
|
|
|
2.85 |
% |
Other borrowed funds |
|
|
27,490 |
|
|
|
224 |
|
|
|
3.26 |
% |
|
|
36,004 |
|
|
|
236 |
|
|
|
2.62 |
% |
Junior subordinated debentures |
|
|
11,330 |
|
|
|
86 |
|
|
|
3.04 |
% |
|
|
11,330 |
|
|
|
90 |
|
|
|
3.18 |
% |
Securities sold U/A to repurchase |
|
|
7,748 |
|
|
|
5 |
|
|
|
0.26 |
% |
|
|
5,201 |
|
|
|
5 |
|
|
|
0.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
484,040 |
|
|
$ |
1,759 |
|
|
|
1.45 |
% |
|
|
452,791 |
|
|
$ |
1,955 |
|
|
|
1.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
96,669 |
|
|
|
|
|
|
|
|
|
|
|
87,275 |
|
|
|
|
|
|
|
|
|
Other |
|
|
11,099 |
|
|
|
|
|
|
|
|
|
|
|
11,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
591,808 |
|
|
|
|
|
|
|
|
|
|
$ |
551,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
64,427 |
|
|
|
|
|
|
|
|
|
|
|
43,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
656,235 |
|
|
|
|
|
|
|
|
|
|
$ |
594,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings |
|
|
|
|
|
$ |
6,233 |
|
|
|
|
|
|
|
|
|
|
$ |
5,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
4.18 |
% |
|
|
|
|
|
|
|
|
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.91 |
% |
|
|
|
|
|
|
|
|
|
|
4.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
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 |
|
$ |
490,881 |
|
|
$ |
21,101 |
|
|
|
5.73 |
% |
|
$ |
427,263 |
|
|
$ |
20,340 |
|
|
|
6.35 |
% |
Taxable securities |
|
|
47,498 |
|
|
|
1,279 |
|
|
|
3.59 |
% |
|
|
40,135 |
|
|
|
1,202 |
|
|
|
3.99 |
% |
Tax-exempt securities |
|
|
39,586 |
|
|
|
1,189 |
|
|
|
4.00 |
% |
|
|
40,484 |
|
|
|
1,274 |
|
|
|
4.20 |
% |
Interest bearing deposits at banks |
|
|
3,744 |
|
|
|
5 |
|
|
|
0.18 |
% |
|
|
1,118 |
|
|
|
1 |
|
|
|
0.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
581,709 |
|
|
$ |
23,574 |
|
|
|
5.40 |
% |
|
|
509,000 |
|
|
$ |
22,817 |
|
|
|
5.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
12,714 |
|
|
|
|
|
|
|
|
|
|
|
12,182 |
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
9,824 |
|
|
|
|
|
|
|
|
|
|
|
9,621 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
35,042 |
|
|
|
|
|
|
|
|
|
|
|
32,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
639,289 |
|
|
|
|
|
|
|
|
|
|
$ |
563,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW |
|
$ |
22,922 |
|
|
$ |
163 |
|
|
|
0.95 |
% |
|
$ |
10,923 |
|
|
$ |
24 |
|
|
|
0.29 |
% |
Regular savings |
|
|
235,393 |
|
|
|
1,227 |
|
|
|
0.70 |
% |
|
|
188,004 |
|
|
|
1,767 |
|
|
|
1.25 |
% |
Muni-Vest savings |
|
|
30,381 |
|
|
|
110 |
|
|
|
0.48 |
% |
|
|
33,671 |
|
|
|
169 |
|
|
|
0.67 |
% |
Time deposits |
|
|
142,213 |
|
|
|
2,713 |
|
|
|
2.54 |
% |
|
|
140,831 |
|
|
|
3,385 |
|
|
|
3.20 |
% |
Other borrowed funds |
|
|
33,164 |
|
|
|
685 |
|
|
|
2.75 |
% |
|
|
32,707 |
|
|
|
614 |
|
|
|
2.50 |
% |
Junior subordinated debentures |
|
|
11,330 |
|
|
|
250 |
|
|
|
2.94 |
% |
|
|
11,330 |
|
|
|
316 |
|
|
|
3.72 |
% |
Securities sold U/A to repurchase |
|
|
7,277 |
|
|
|
16 |
|
|
|
0.29 |
% |
|
|
4,997 |
|
|
|
15 |
|
|
|
0.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
482,680 |
|
|
$ |
5,164 |
|
|
|
1.43 |
% |
|
|
422,463 |
|
|
$ |
6,290 |
|
|
|
1.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
90,112 |
|
|
|
|
|
|
|
|
|
|
|
83,975 |
|
|
|
|
|
|
|
|
|
Other |
|
|
10,813 |
|
|
|
|
|
|
|
|
|
|
|
12,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
583,605 |
|
|
|
|
|
|
|
|
|
|
$ |
518,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
55,684 |
|
|
|
|
|
|
|
|
|
|
|
44,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
639,289 |
|
|
|
|
|
|
|
|
|
|
$ |
563,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings |
|
|
|
|
|
$ |
18,410 |
|
|
|
|
|
|
|
|
|
|
$ |
16,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
4.22 |
% |
|
|
|
|
|
|
|
|
|
|
4.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.97 |
% |
|
|
|
|
|
|
|
|
|
|
3.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
Net income for the third quarter of 2010 was $1.3 million, or $0.31 per diluted share, compared
with a net income of $2.4 million, or $0.87 per diluted share, in the third quarter of 2009. The
decrease in net income was largely due to a higher provision for loan and lease losses, the gain on
bargain purchase related to the Waterford acquisition recognized in last years third quarter, and
higher non-interest expenses. The provision for loan and lease losses increased from $0.6 million
to $1.0 million year-over-year. Included in the 2010 third quarter was a $0.3 million provision
for the Companys discontinued leasing portfolio. There was no provision for leasing in last
years third quarter. The reasons for the increased provision are discussed above under Analysis
of Financial Condition Leasing Portfolio. For the year-to-date period, net income in 2010 was
$4.4 million, or $1.26 per diluted share, compared with a net loss of ($0.7) million, or ($0.24)
per diluted share in 2009. The significant increase in net income was largely due to a lower
provision for loan and lease losses in the first nine months of 2010. For the nine
29
month period
ended September 30, 2009 and September 30, 2010, the provision for loan and lease loss decreased
from $9.6 million to $2.5 million, respectively. The Company incurred significantly higher
provision for lease losses in the first two quarters of 2009 when compared with the first two
quarters of 2010, which more than offset the increased provision in the third quarter of 2010.
Also, for the year-to-date comparative, there was a $2.0 million goodwill impairment charge related
to the Companys leasing reporting unit in the first quarter of 2009. The return on average equity
was 7.93% and 10.43% for the three and nine month periods ended September 30, 2010, compared with
22.45% and (1.98%) in the same periods in 2009. Return on average equity decreased for the three
month comparison due to lower net income in the 2010 third quarter and higher average equity for
the 2010 third quarter from the secondary common stock offering in May 2010. The increase in
return on average equity for the nine month period is due to higher net income in 2010.
Net operating income (as defined in the following Supplemental Non-GAAP Disclosure) is net income
adjusted for what management considers non-operating items. Net operating income for the three
and nine month periods ended September 30, 2010 was $1.4 million, or $0.34 per diluted share, and
$4.8 million, or $1.38 per diluted share, respectively, compared with a net operating income of
$2.2 million, or $0.77 per diluted share, and $0.5 million, or $0.19 per diluted share in the same
periods for 2009. The decrease in the three month comparison is due to the increase in leasing
provision and non-interest expenses related to investments in people and infrastructure. The
increase in the nine month comparison is due to the decrease in the provision for loan and lease
losses as well as the increase in net interest income.
Supplemental Reporting of Non-GAAP Results of Operations
To provide investors with greater understanding of the Companys operating results, in addition to
the results measured in accordance with U.S. generally accepted accounting principles (GAAP), the
Company provides supplemental reporting on net operating income and diluted net operating
earnings per share which excludes items that management believes to be non-operating in nature.
Specifically, net operating income and diluted net operating earnings per share exclude gains and
losses on the sale and call of securities and the non-cash impairment and amortization of
acquisition-related goodwill and intangible assets. This non-GAAP information is being disclosed
because management believes that providing these non-GAAP financial measures provides investors
with information useful in understanding the Companys financial performance, its performance
trends, and financial position. While the Companys management uses these non-GAAP measures in its
analysis of the Companys performance, this information should not be viewed as a substitute for
financial results determined in accordance with GAAP or considered to be more important than
financial results determined in accordance with GAAP, nor is it necessarily comparable with
non-GAAP measures which may be presented by other companies. The reconciliation of net operating
income and diluted net operating earnings per share to GAAP net income (loss) and GAAP diluted
earnings (loss) per share is presented in the following table.
30
Reconciliation of GAAP Net Income (Loss) to Net Operating Income (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in thousands, except per share) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
GAAP Net Income (Loss) |
|
$ |
1,278 |
|
|
$ |
2,436 |
|
|
$ |
4,357 |
|
|
|
($664 |
) |
Gain on sale and call of securities 1 |
|
|
|
|
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(10 |
) |
Goodwill impairment charge 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,210 |
|
Amortization of intangibles 1 |
|
|
135 |
|
|
|
135 |
|
|
|
414 |
|
|
|
408 |
|
Gain on bargain purchase 1 |
|
|
|
|
|
|
(409 |
) |
|
|
|
|
|
|
(409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income 2 |
|
$ |
1,413 |
|
|
$ |
2,156 |
|
|
$ |
4,767 |
|
|
$ |
535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP diluted earnings (loss) per share |
|
$ |
0.31 |
|
|
$ |
0.87 |
|
|
$ |
1.26 |
|
|
|
($0.24 |
) |
Gain on sale and call of securities 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.43 |
|
Amortization of intangibles 1 |
|
|
0.03 |
|
|
|
0.05 |
|
|
|
0.12 |
|
|
|
0.15 |
|
Gain on bargain purchase 1 |
|
|
|
|
|
|
(0.15 |
) |
|
|
|
|
|
|
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net operating earnings per share 2 |
|
$ |
0.34 |
|
|
$ |
0.77 |
|
|
$ |
1.38 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
After any tax-related effect |
|
2 |
|
Non-GAAP measure |
Other Results of Operations
Net interest income was $6.2 million during the third quarter of 2010, up $0.1 million, or 2.2%
from the trailing second quarter of 2010, and $0.2 million, or 4.4%, higher than $6.0 million in
the third quarter of 2009. For the year-to-date, net interest income of $18.4 million in 2010 was
11.4% higher than the $16.5 million in net interest income earned in the same period in 2009.
While the net interest margin continues to contract, interest-earning asset growth has allowed the
Company to sustain its net interest income growth. Core loans, which are defined as total loans
and leases less direct financing leases, were $485.8 million at September 30, 2010, an increase of
1.2% (4.8% annualized) from $480.3 million at June 30, 2010 and 6.1% from $458.1 million at
December 31, 2009. The Company experienced growth in its commercial and industrial portfolio,
offset by a decrease in its residential mortgage balances due to refinancing activity and the sale
of most originations to FNMA. Investment securities were $99.2 million at September 30, 2010, up
2.1% from $97.2 million at the end of the second quarter of 2010 and 25.6% from $79.0 million at
the end of 2009. The Company raised $13.4 million in capital in May 2010 which it intends to use
to support future loan growth. In the interim, the Company has used the capital to purchase
investment securities. Partially offsetting the increase in core loans and investment securities
was the continuing decline in direct financing lease balances after the Company discontinued this
business line in the second quarter of 2009. Direct financing leases were $18.7 million at
September 30, 2010, compared with $22.7 million at June 30, 2010 and $31.5 million at December 31,
2009.
The Companys net interest margin was 4.18% in the third quarter of 2010, but the margin continues
to contract, as it was 4.21% in the 2010 second quarter and 4.43% in the 2009 third quarter. The
Companys net interest margin for the third quarter of 2010 was impacted by two former Waterford
loans that were impaired at the time of acquisition that paid off in full in the quarter. The
recovery of those loans was recognized into interest income, boosting net interest margin by 5
basis points. Adjusting for those two Waterford loans, net interest margin for the quarter would
have been 4.13%, continuing a trend of net interest margin compression of 6-9 basis points per
quarter. For the year-to-date period, net interest margin decreased from 4.33% in 2009 to 4.22% in
2010. While loan rates remain stable, investment security yields continue to decline as the yield
curve flattens among long-term low inflation rate expectations in the marketplace. Investment
securities also make up a larger portion of the Companys interest earning assets during the third
quarter of 2010 than in past quarters as a result of the Companys
31
May 2010 capital raise. On the funding side, while the Company has been successful in
attracting new customers, most of that success has come in the premium rate Better Checking, Better
Savings, and business money market accounts. While these products have put some pressure on the
net interest margin, the Company expects to benefit in the longer term from the deep customer
relationships that these products provide. With rates at a low level for such an extended period,
there is limited benefit available going forward in more beneficial deposit pricing while asset
yields continue to decline.
The provision for loan and lease losses increased from $0.6 million in the third quarter of 2009
and $0.3 million in the second quarter of 2010 to $1.0 million in the third quarter of 2010,
primarily due to the $0.3 million provision for leases. The provision for the Companys core loan
portfolio was $0.7 million in the third quarter of 2010, compared with $0.3 million in the second
quarter of 2010 and $0.6 million in the third quarter of 2009. The increase in the provision for
loan losses in the third quarter of 2010 versus the second quarter of 2010 was due to an increased
amount of loan downgrades in the Companys internal credit risk ratings during the quarter. The
provision for the Companys leasing portfolio was $0.3 million in the third quarter 2010, compared
with $0 in the second quarter of 2010 and the third quarter of 2009. Despite not originating any
new leases since the second quarter of 2009 and another $0.3 million in net write-offs in the third
quarter of 2010, leasing nonaccruals were flat at September 30, 2010 compared with June 30, 2010
and 31 or more days delinquent leases increased from $0.2 million to $0.4 million. With
charge-offs continuing to reduce the remaining mark on the leasing portfolio and non-accruing and
delinquent leases not correspondingly declining, management determined that an additional $0.3
million in reserve for lease losses was appropriate at September 30, 2010.
For the nine-month period ended September 30, 2010, the provision for loan and lease losses was
$2.5 million, compared with $9.6 million for the same period in 2009. The decline is largely due
to the leasing portfolio, which was impaired with a mark-to-market adjustment in the second quarter
of 2009 when the Company announced its intention to market the portfolio for sale. Management has
since decided to hold the portfolio through maturity. The provision for lease losses was $1.1
million for the nine month period ended September 30, 2010, compared with $6.8 million in the prior
year period. The provision for the core loan portfolio has also declined in 2010. The provision
for loan losses was $1.4 million for the nine month period ended September 30, 2010, compared with
$2.8 million in the prior year period. The provision was higher in 2009 because of higher loan
growth, a larger increase in criticized loans according to the Companys internal credit ratings,
and a larger increase in qualitative loss factors due to the economic recession.
Non-interest income, which represented 33.4% of total revenue, compared with 39.1% in the prior
year third quarter, declined 18.4%, or $0.7 million to $3.1 million when compared with the third
quarter of 2009. The decrease is primarily attributable to a gain on bargain purchase of $0.7
million recognized in the third quarter of 2009 related to the Waterford acquisition in an
FDIC-assisted transaction in July 2009.
The largest portion of the Companys non-interest income is insurance service and fee revenue from
The Evans Agency (TEA). Insurance agency revenue of $1.8 million was flat for this years third
quarter when compared with the 2009 third quarter. The revenue is higher than the $1.6 million in
the second quarter of 2010 due to the seasonality of the revenue. The soft insurance market and
macro-economic conditions continue to put downward pressure on TEAs revenue in personal and
commercial property and casualty insurance commissions.
For the nine-month period ended September 30, 2010, non-interest income declined to $9.8 million,
from $11.1 million in 2009. $0.7 million of the year-over-year decline is attributable to the
bargain purchase gain related to the Waterford acquisition in July 2009. Deposit service charges
declined $0.2 million from $1.7 million to $1.5 million, reflecting an industry-wide trend related
to consumer behavior and new regulation. Other income declined from $2.5 million in the first nine
months of 2009 to $2.3 million in 2010. This decline is a result of reduced non-compliance and
late fees charged to ENL customers as the portfolio rolls off. TEA revenue remained flat for the
nine month period ended September 30, 2010 when compared to the prior year period at $5.7 million.
Total non-interest expenses were $6.4 million for the third quarter of 2010, an increase of $0.7
million, or 11.3%, from $5.8 million in the third quarter of 2009. The increase is primarily due
to higher salary and employee benefits. The largest component of the increase was in salaries and
employee benefits, which increased 15.3%, or $0.5 million, to $3.7 million for the third quarter
of 2010 compared with the prior year third quarter. Salaries and benefits were higher because of
annual merit raises and the addition of new employees including commercial loan officers and branch
employees retained in the acquisition of Waterford. Another portion of the increase is a result of
annual
32
bonus accruals in the third quarter of 2010. After the losses recorded in the first two quarters
of 2009, the Company determined that it would not pay out bonuses to any employees for 2009 and
thus suspended its normal bonus accrual for the remainder of 2009.
For the year-to-date period, non-interest expenses decreased $0.2 million to $19.4 million in 2010
due primarily to the goodwill impairment charge related to the Companys leasing reporting unit in
the first quarter of 2009. Excluding the $2.0 million goodwill impairment charge, non-interest
expenses increased $1.9 million, or 10.6%, from 2009 to 2010, primarily due to the reasons
discussed in the quarterly comparison above.
As a result of the increase in non-interest expenses and the decrease in non-interest income, the
efficiency ratio, excluding goodwill impairment and intangible amortization, increased to 66.57%
for the third quarter of 2010, from 56.95% in the third quarter of 2009. The Companys efficiency
ratio for the second quarter of 2010 was 69.72%. For the year-to-date, the efficiency
ratio was 66.54% in 2010, compared with 61.26% in 2009.
Income tax expense was $0.6 million and $1.9 million for the three and nine month periods ended
September 30, 2010, respectively. These figures represent an effective tax rate of 32.6% and 30.1%
for the three and nine month periods ended September 30, 2010, respectively, compared with 27.7%
and 56.3% in the three and nine month periods ended September 30, 2009. The Companys effective
tax rate is higher in the third quarter of 2010 compared with an effective tax rate of 26.6% in the
second quarter of 2010. The Company typically files its tax returns in the third quarter,
resulting in the effective tax rate varying based on how the tax return differs from the previously
estimated tax provision. The Company also recorded adjustments related to the completion of its
normal IRS and New York State tax audits. The effective tax rates in 2009 were
significantly impacted by the losses incurred in the Companys leasing reporting unit.
CAPITAL
The Company consistently maintains regulatory capital ratios measurably above the federal well
capitalized standard, including a Tier 1 leverage ratio of 9.99% at September 30, 2010. This is a
significant increase from the 7.80% at December 31, 2009 due to the Companys successful registered
common stock offering in May 2010 generating net proceeds to the Company of $13.4 million. Book
value per share of the Companys common stock was $15.72 at September 30, 2010, compared with
$15.44 at June 30, 2010, and $16.34 at December 31, 2009. While earnings increased the book value
of the Company, the 1.2 million additional shares issued in the May 2010 common stock offering at
$12.00 per share diluted the book value per share. Tangible book value per share at September 30,
2010 was $13.39, compared with $13.05 at June 30, 2010 and $12.72 at December 31, 2009 as earnings
growth offset the stock offerings dilution.
On August 17, 2010, the Board of Directors of the Company declared a semi-annual cash dividend of
$0.20 per share on the Companys outstanding common stock. The dividend was paid on October 6,
2010 to shareholders of record as of September 13, 2010. The $0.20 dividend was equal to the
previous dividend paid on April 27, 2010.
LIQUIDITY
The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to
manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also
has many borrowing options. As a member of the FHLB the Bank is able to borrow funds at competitive
rates. Advances of up to $84.5 million can be drawn on the FHLB via an Overnight Line of Credit
Agreement between the Bank and the FHLB. An amount equal to 25% of the Banks total assets could
be borrowed through the advance programs under certain qualifying circumstances. The Bank also has
the ability to purchase up to $14.0 million in federal funds from its correspondent banks. By
placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at
the discount window. The Banks liquidity needs also can be met by more aggressively pursuing time
deposits, or accessing the brokered time deposit market, including the Certificate of Deposit
Account Registry Service (CDARS) network. The Companys primary source of liquidity is dividends
from the Bank. Additionally, the Company has access to capital markets as a funding source, as
evidenced by its recent registered public offering of common stock, described above under
Capital.
Cash flows from the Banks 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. At September 30, 2010,
33
approximately 3.3% of the Banks securities had contractual maturity dates of one year or less and
approximately 21.7% had maturity dates of five years or less.
Management, on an ongoing basis, closely monitors the Companys liquidity position for compliance
with internal policies, and believes that available sources of liquidity are adequate to meet
funding needs in the normal course of business. As part of that monitoring process, management
calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in
the calculation are liquid assets and potential liabilities. Management stresses the potential
liabilities calculation to ensure a strong liquidity position. Included in the calculation are
assumptions of some significant deposit run-off as well as funds needed for loan closing and
investment purchases. At September 30, 2010, in the Companys internal stress test, the Company had
net short-term liquidity of $60.6 million as compared with $43.2 million at December 31, 2009.
Management does not anticipate engaging in any activities, either currently or in the long term,
for which adequate funding would not be available and which would therefore result in significant
pressure on liquidity. However, continued economic recession could negatively impact the Companys
liquidity.
The Company believes that 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
municipal deposits.
34
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Additional information responsive to this Item is contained in the Liquidity section of
Managements Discussion and Analysis of Financial Condition and Results of Operations, which
information is incorporated herein by reference.
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the
Banks 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 future periods under various interest rate scenarios using
projected balances for interest-earning assets and interest-bearing liabilities. Managements
philosophy toward interest rate risk management is to limit the variability of net interest income
to changes in net interest rates. The balances of financial instruments used in the projections are
based on expected growth from forecasted business opportunities, anticipated prepayments of loans,
and expected maturities of investment securities, loans and deposits. Management supplements the
modeling technique described above with analysis of market values of the Banks financial
instruments and changes to such market values given changes in the interest rates.
The Banks Asset-Liability Committee, which includes members of senior management, monitors the
Banks interest rate sensitivity with the aid of a 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 Banks net
interest income over a 12-month period of time:
SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES
Calculated (decrease) increase
in projected annual net interest income
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
Changes in interest rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+200 basis points |
|
$ |
29 |
|
|
|
($807 |
) |
+100 basis points |
|
|
825 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
-100 basis points |
|
|
470 |
|
|
|
577 |
|
-200 basis points |
|
|
N/A |
|
|
|
N/A |
|
Many assumptions were utilized by management to calculate the impact that changes in interest rates
may have on the Banks 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 the 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
35
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 Banks projected net interest income.
ITEM 4 CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Companys management, with the participation of the Companys principal executive officer and
principal financial officer, evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of September 30, 2010 (the end of the period covered by this Report). Based on
that evaluation, the Companys principal executive and principal financial officers concluded that
as of September 30, 2010 the Companys disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Companys internal control over financial reporting were identified in connection
with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act
that occurred during the fiscal quarter ended September 30, 2010 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS
The information called for by this item is incorporated herein by reference to the Exhibit Index
included immediately following the signature page to this Quarterly Report on Form 10-Q.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Evans Bancorp, Inc.
|
|
|
|
|
DATE
|
|
|
November 3, 2010 |
/s/ David J. Nasca
|
|
|
David J. Nasca |
|
|
President and CEO
(Principal Executive Officer) |
|
|
DATE |
|
|
November 3, 2010 |
/s/ Gary A. Kajtoch
|
|
|
Gary A. Kajtoch |
|
|
Treasurer
(Principal Financial Officer) |
|
37
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit No. |
|
Name |
|
Page No. |
31.1
|
|
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
39 |
|
|
|
|
|
|
|
|
31.2
|
|
Certification of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
40 |
|
|
|
|
|
|
|
|
32.1
|
|
Certification of Principal Executive Officer pursuant to 18
USC Section 1350 Chapter 63 of Title 18, United States Code,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
41 |
|
|
|
|
|
|
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to 18
USC Section 1350 Chapter 63 of Title 18, United States Code,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
42 |
|
38