Evans Bank(EVBN) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Evans Bancorp, Inc. as of September 30, 2022, and for the three and nine-month periods then ended, including detailed notes on accounting policies and financial details Unaudited Consolidated Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity, primarily driven by reduced interest-bearing deposits and significant unrealized losses on available-for-sale securities Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $2,129,705 | $2,210,640 | ($80,935) | | Interest-bearing deposits at banks | $6,813 | $234,929 | ($228,116) | | Securities: Available for sale | $369,141 | $305,959 | $63,182 | | Loans, net | $1,607,827 | $1,553,467 | $54,360 | | Total Liabilities | $1,979,854 | $2,026,748 | ($46,894) | | Total deposits | $1,873,746 | $1,937,037 | ($63,291) | | Total Stockholders' Equity | $149,851 | $183,892 | ($34,041) | | Accumulated other comprehensive (loss) | ($49,824) | ($5,671) | ($44,153) | Unaudited Consolidated Statements of Income Net income decreased for both the third quarter and nine-month period ended September 30, 2022, primarily due to a provision for loan losses compared to a credit in the prior year Three Months Ended September 30 (in thousands, except per share data) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $19,188 | $18,163 | | Provision (Credit) for Loan Losses | $1,328 | ($1,459) | | Net Income | $5,864 | $6,979 | | Diluted EPS | $1.06 | $1.27 | Nine Months Ended September 30 (in thousands, except per share data) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $53,741 | $53,110 | | Provision (Credit) for Loan Losses | $1,816 | ($1,906) | | Net Income | $16,346 | $18,144 | | Diluted EPS | $2.95 | $3.30 | Unaudited Consolidated Statements of Comprehensive (Loss) Income The company reported a comprehensive loss for both the third quarter and nine-month period ended September 30, 2022, primarily driven by substantial unrealized losses on available-for-sale securities Comprehensive (Loss) Income Summary (in thousands) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | | | | Net Income | $5,864 | $6,979 | | Other Comprehensive Loss | ($15,525) | ($1,455) | | Comprehensive (Loss) Income | ($9,661) | $5,524 | | Nine Months Ended Sep 30 | | | | Net Income | $16,346 | $18,144 | | Other Comprehensive Loss | ($44,153) | ($3,471) | | Comprehensive (Loss) Income | ($27,807) | $14,673 | Unaudited Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased significantly, primarily due to other comprehensive losses from unrealized securities losses, partially offset by net income - Key drivers for the change in stockholders' equity during the first nine months of 2022 include net income of $16.3 million, other comprehensive loss of $44.2 million, and cash dividends paid of $6.9 million[13] Unaudited Consolidated Statements of Cash Flows Net cash decreased significantly for the nine months ended September 30, 2022, primarily due to substantial cash used in investing activities and a net decrease in deposits Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $17,121 | $12,749 | | Net Cash from Investing Activities | ($189,582) | ($13,307) | | Net Cash from Financing Activities | ($51,117) | $94,677 | | Net (Decrease) Increase in Cash | ($223,578) | $94,119 | | Cash at Beginning of Period | $244,785 | $97,604 | | Cash at End of Period | $21,207 | $191,723 | Notes to Unaudited Consolidated Financial Statements The notes detail significant accounting policies, securities and loan portfolio composition, credit quality, and the upcoming adoption of the CECL accounting standard, highlighting substantial unrealized losses on securities - The company's securities portfolio had gross unrealized losses of $64.1 million on available-for-sale securities as of September 30, 2022, which management determined to be temporary and primarily related to market interest rate fluctuations[22][28] - The loan portfolio is primarily composed of real estate loans ($1.39 billion) and commercial and industrial loans ($238 million), with the allowance for loan losses at $18.6 million, or 1.14% of total gross loans, as of September 30, 2022[35][56] - The company will adopt the new CECL (Current Expected Credit Loss) accounting standard effective January 1, 2023, which is expected to have a material impact on the financial statements[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, highlighting loan growth, credit quality improvements, the impact of rising interest rates on net interest income and securities, and capital and liquidity management Analysis of Financial Condition The analysis of financial condition highlights growth in gross loans (excluding PPP), a decrease in the criticized loan portfolio, and a significant net unrealized loss in the investment securities portfolio due to rising interest rates - Excluding the decline in Paycheck Protection Program (PPP) loans, gross loans increased by $79 million during the first nine months of 2022[125] - The criticized loan portfolio (rated "special mention" and "substandard") decreased by $22 million to $89 million at September 30, 2022, from $111 million at December 31, 2021[129] - The available-for-sale investment portfolio had a total net unrealized loss of $64.1 million at September 30, 2022, a significant shift from a net unrealized gain of $4.3 million at December 31, 2021, primarily due to rising market interest rates[133] Analysis of Results of Operations Net income decreased for both the third quarter and nine-month period ended September 30, 2022, primarily due to a provision for loan losses, despite growth in net interest income and margin expansion Quarterly Performance Highlights (Q3 2022 vs Q3 2021) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net Income | $5.9M | $7.0M | | Diluted EPS | $1.06 | $1.27 | | Net Interest Income | $19.2M | $18.2M | | Net Interest Margin | 3.72% | 3.48% | | Provision (Credit) for Loan Losses | $1.3M | ($1.5M) | - The Q3 2022 provision for loan losses was primarily driven by a $1.5 million charge-off of a single government agency guaranteed commercial loan after a claim for reimbursement was denied[147] - For the first nine months of 2022, net interest income increased by $0.6 million year-over-year, as higher income from investment securities was largely offset by a $5.5 million reduction in PPP loan fees[150] Capital and Liquidity The company maintains strong capital ratios, despite a decline in book value per share due to unrealized losses on investment securities, and manages liquidity through various sources - The company maintains regulatory capital ratios significantly above the "well capitalized" standard, with a Tier 1 leverage ratio of 9.00% at September 30, 2022[157] - Book value per share declined to $27.20 at September 30, 2022, from $32.73 at September 30, 2021, primarily due to an $8.38 per share reduction from unrealized losses on investment securities caused by interest rate hikes[158] - The company has multiple sources of liquidity, including up to $350 million in borrowing capacity from the FHLB Overnight Line of Credit as of September 30, 2022[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with an asset-liability model projecting the sensitivity of net interest income to various interest rate changes Sensitivity of Net Interest Income to Interest Rate Changes (in thousands) | Rate Change | Projected Impact (Sep 30, 2022) | Projected Impact (Dec 31, 2021) | | :--- | :--- | :--- | | +200 bps | ($298) | $1,375 | | +100 bps | $3,004 | $3,569 | | -100 bps | ($4,548) | ($2,183) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting identified - The company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of September 30, 2022[173] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[174] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course litigation, with management believing no pending proceedings will materially adversely affect financial condition or results of operations - In the opinion of management, there are no pending legal proceedings that would have a material effect on the Company's financial condition or results of operations[176] Item 1A. Risk Factors No material changes to risk factors were reported since the last Annual Report on Form 10-K - No material changes to risk factors were reported since the last Annual Report on Form 10-K[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares during Q3 2022, with 270,731 shares remaining available under its 2021 Repurchase Program - As of September 30, 2022, the company had authorization to repurchase an additional 270,731 shares of its common stock under its 2021 Repurchase Program[179] Item 6. Exhibits This section lists exhibits filed with the report, including CEO and CFO certifications and financial data in XBRL format - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[182]