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Exhibit 13.1
2000
[LOGO] EVANS BANCORP, INC.
2000 ANNUAL REPORT
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Contents
Profile ........................................... 1
President's Message ............................... 2
Selected Financial Information .................... 5
Management Discussion and Analysis ................ 6
Independent Auditors' Report ...................... 13
Consolidated Financial Statements ................. 14
Corporate Information ............................. 32
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[ICON] PROFILE
Evans Bancorp, Inc. is a bank holding company headquartered in Angola, New York
and conducts its business through its wholly-owned subsidiary, Evans National
Bank and its wholly-owned subsidiaries, M&W Agency, Inc. and ENB Associates Inc.
The Bank is an FDIC insured full-service commercial bank, and as of December 31,
2000 had total assets of $224,549,143, total deposits of $186,701,319 and total
stockholders' equity of $25,179,072. The Bank's primary market area is located
in Western New York State and specifically in southern Erie County, northern
Chautauqua County and northwestern Cattaraugus County.
The principal business of the Bank is commercial banking and consists of, among
other things, attracting deposits from the general public and using these funds
to extend credit and to invest in securities. The Bank offers a variety of loan
products to its customers including commercial loans, commercial and residential
mortgage loans, and consumer loans. The Bank also offers various checking,
savings, and premium savings accounts, certificates of deposit and electronic
banking services including telephone banking, PC banking, Eas-E check card and
is currently developing Internet Banking.
The M&W Agency, Inc. is a retail property and casualty insurance agency
headquartered in Silver Creek, New York. Through its several branch offices, M&W
sells, for commissions, various premium based insurance policies.
ENB Associates Inc. provides non-deposit investment products, such as mutual
funds and annuities, to bank customers at bank branch locations. ENB has an
agreement with a licensed broker, through which ENB can purchase and sell
securities to its customers.
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[ICON] PRESIDENT'S MESSAGE
As I report on 2000 as an excellent business year for Evans Bancorp, Inc. and
its subsidiary Evans National Bank, it is also with great sadness and regret
that we reflect on the passing of Richard M. Craig, President, Chief Executive
Officer and Chairman of the Board of our Company who passed away in December,
2000.
[PHOTO]
After the sudden loss of Mr. Craig, I, James Tilley, was appointed President of
Evans National Bank with Phillip Brothman appointed Chairman of the Board and
Thomas H. Waring, Jr. appointed Vice Chairman of the Board.
Mr. Craig fought a brief but courageous battle with cancer. His death has meant
the loss of not only a respected leader, but also a beloved friend.
Mr. Craig led us into the new millennium with enthusiasm and energy, skillfully
directing our business plan and growth strategy to once again achieve
record-setting results for the year. On behalf of all employees and Board
members, past and present, we acknowledge him for his remarkable and
unforgettable contributions.
In Richard M. Craig's memory, we dedicate this annual report as a lasting
testament to his leadership, vision and commitment.
Record earnings; record growth in loans and deposits.
Under Mr. Craig's direction, 2000 was once again a year of record growth for our
company. A full discussion of the results can be found in the "Management
Discussion and Analysis" section of this annual report; however we would like to
highlight some accomplishments.
Total assets increased by $25,760,760 to $224,549,143 from $198,788,383, or
13.0%. We achieved strong deposit growth as deposits increased $16,752,420 or
9.9% over the previous year. Loans increased by $12,345,614 in 2000 to
$128,779,052, a 10.6% increase over loans of $116,433,438 at the end of 1999.
While the quality of our loan portfolio continues at a high level, the increase
to the provision for loan losses reflects our current assessment of the New York
State economy, our local economy and recommendations of our regulators. Other
considerations include the past and planned growth of our commercial loan
portfolio and its concentration in commercial real estate. Our provision for
loan losses is now in excess of 1.0% of outstanding loans.
Net charge-offs totaled $105,056 for 2000, which is approximately .08% of
outstanding loans, as compared to $70,543, or .06% for 1999.
Net income in 2000 was $3,222,986 compared to $2,027,270 in 1999. The dramatic
increase was partially due to year-end adjustments including the receipt of life
insurance proceeds of $1,380,000. Other key performance ratios for 2000 include
return on average assets of 1.53% as compared to 1.10% in 1999, and 15.25%
return on average equity as compared to 10.72% in the previous year.
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Positioning for the future.
Our objective continues to be to position Evans Bancorp for sustained long-term
growth while providing sound current returns. We believe that our
accomplishments in 2000, including increases in commercial loan growth and core
deposit growth, are evidence that our strategy is working. But in today's
competitive financial services environment, we know we cannot simply rest on
past accomplishments. In 2000, we believe we set the stage for future growth
with a number of initiatives.
First, our new subsidiary, ENB Associates Inc., is in place to provide customers
with a wide choice of non-deposit investment options. This subsidiary enables us
to deliver the sale of mutual funds and annuities through our branch network,
expanding product lines and providing added convenience to our customers.
We also completed the acquisition of the business and assets of M&W Insurance
Group. Our insurance agency, M&W Agency, Inc. allows us to offer customers a
range of personal and commercial insurance products for individuals and small
businesses. We will seek to grow these two subsidiaries by cross-selling their
services through our branch network which continues to expand, including a new
facility underway in North Boston.
Similarly, our corporate leasing program extends lending options to our
commercial customers. Also, providing customers Internet access improves our
service capabilities in retail banking. These initiatives we believe will
contribute to Evans National Bank's becoming a more comprehensive financial
services provider to our customer base.
Contributing to the community.
In 2000 we continued to strengthen our commitment to the communities in which we
do business. An example of this commitment was the opening of the West Seneca
East High School Student Banking Center. This innovative program gives students
the opportunity to learn the fundamentals of banking, engage in banking
activities, while at the same time exposing them to careers in the financial
industry.
In 2000 we continued to strengthen our commitment to the communities in which we
do business.
Our dedicated officers and employees devote a significant amount of their
personal time to local organizations and charities, helping to build on our
reputation as a civic-minded company. In 2000, Evans National Bank was named
Business of the Year by the West Seneca Chamber of Commerce.
We will continue to encourage employee involvement in leadership roles in the
community. In addition, we will seek to increase our public image through a
redesigned public relations campaign.
Internet Update.
Development and testing of our Internet Banking Service - Eas-E Net - continues,
with the service expected to be up and running during the first quarter of 2001.
Eas-E Net
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completes our family of electronic banking products and will allow both
commercial and retail customers to perform a variety of banking transactions,
including bill payment, all under the protection of enhanced security.
We have also introduced a company Website to give customers and potential
customers access to information about our Company and products, including branch
locations and hours. The Website also allows individuals to communicate with the
Bank via e-mail.
The Outlook.
Despite the loss of Richard Craig, we believe Evans Bancorp, Inc. has made a
successful transition into 2001. Mr. Craig had assembled an exceptionally
qualified team of individuals who are now more committed than ever to carry on
his vision for the Company. The future holds a time of challenge and change in
the banking industry; however, thanks to the direction and foresight of Mr.
Craig, and the dedication of our employees, we believe we are well positioned
for continued growth.
In 2000, Richard C. Stevenson retired from the Board of Directors after 42 years
of service. Mr. Stevenson's contributions to our success have been very
significant and he will continue as Director Emeritus. We wish him a long,
healthy and happy retirement. Robert G. Miller, Jr., President of M&W Agency,
Inc., was appointed as a director by the Board of Directors effective January 1,
2001, to fill the vacancy.
The dedication of our employees makes Evans National Bank successful. During
2000, the following employees were recognized for their years of service: Nadine
G. Houghton (35 years); Katherine M. Allen (25 years), Michelle A. Baumgarden,
Lynn M. Fulton, and Mary Jean Williams (20 years); Carol Ann Czora (10 years)
and Frederick C. Herold, Amy S. Kester, George L. Catalano, Julie M. Heimburg
and Suzanne R. McMillan (5 years).
In closing, we have excellent business momentum and are confident in our ability
to continue to build shareholder value. I would like to thank the Board of
Directors and employees for their enthusiasm, support and hard work. I would
especially like to thank our customers and loyal shareholders for your
confidence. We believe 2001 will be another excellent year for Evans Bancorp,
Inc.
/s/ James Tilley
James Tilley
President
[PHOTO]
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[ICON] SELECTED FINANCIAL INFORMATION
For the year ended December 31, 2000 1999 1998 1997 1996
RESULT OF OPERATIONS
Interest Income $ 15,070,769 $ 12,554,843 $ 11,851,787 $ 11,072,851 $ 9,799,815
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Interest Expense 6,490,680 5,043,316 4,946,730 4,588,056 3,912,761
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Net Interest Income 8,580,089 7,511,527 6,905,057 6,484,795 5,887,054
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Non-Interest Income 3,648,181 1,342,918 1,220,194 950,662 930,986
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Non-Interest Expense 7,535,034 6,050,175 5,196,900 4,849,182 4,555,398
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Net Income 3,222,986 2,027,270 2,043,351 1,802,275 1,614,642
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BALANCE SHEET DATA
Total Assets $ 224,549,143 $ 198,788,383 $ 174,120,230 $ 158,542,163 $ 140,898,057
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Loans - Net 128,779,052 116,433,438 110,526,449 101,627,427 92,087,902
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Allowance for Loan Losses 1,428,467 838,167 729,199 609,539 546,954
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Securities 73,121,218 62,999,678 50,059,972 40,400,374 36,054,324
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Total Deposits 186,701,319 169,948,899 144,083,636 138,391,327 123,461,379
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Stockholders' Equity 25,179,072 18,284,938 18,623,413 17,039,300 15,510,083
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PER SHARE DATA
Net Income $ 1.83 $ 1.19 $ 1.20 $ 1.06 $ 0.95
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Cash Dividend $ 0.52 $ 0.47 $ 0.37 $ 0.30 $ 0.22
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Book Value at Year End $ 14.31 $ 10.76 $ 10.96 $ 10.03 $ 9.13
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Market Value $ 47.00 $ 47.00 $ 45.00 $ 38.00 $ 27.20*
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Weighted Average Shares 1,756,695 1,698,523 1,698,612 1,698,950 1,698,950
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*Retroactively adjusted for stock dividends and stock splits
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[ICON] MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie, Chautauqua
and Cattaraugus Counties of Western New York. The Bank serves its market through
seven banking offices located in Angola, Derby, Evans, Forestville, Hamburg,
North Boston and West Seneca, New York. The Bank's principal source of funding
is through deposits which it reinvests in the community in the form of loans and
investments. Deposits are insured to the applicable limit by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
regulated by the Office of the Comptroller of the Currency.
On February 15, 2000 the Bank entered into an agreement with O'Keefe Shaw & Co.,
Inc. establishing ENB Associates Inc. ("ENB"), a wholly-owned subsidiary of the
Bank. As part of the Bank's banking activities, on March 11, 2000 ENB Associates
Inc. began the activity of providing non-deposit investment products, such as
annuities and mutual funds, to bank customers.
Effective September 1, 2000 the Company completed the acquisition of the assets,
business and certain liabilities of M&W Group, Inc., a retail property and
casualty insurance agency headquartered in Silver Creek, New York, with offices
located in Angola, North Collins, South Dayton, Cattaraugus, Randolph, and West
Seneca, New York. The insurance agency acquired is operated through M&W Agency,
Inc. a wholly-owned subsidiary of the Bank. M&W Agency, Inc. sells various
premium-based insurance policies on a commission basis.
[BAR GRAPH]
Net Income
($ Millions)
1.6 1.8 2.0 2.0 3.2
1996 1997 1998 1999 2000
Commencing in 2000, the Company operates in two reportable segments - banking
and insurance. For the years ended December 31, 1999 and 1998, the Company
determined that its business was comprised of banking activity only.
The following discussion of financial condition and results of operations of the
Company and the Bank and its wholly-owned subsidiaries should be read in
conjunction with the consolidated financial statements and accompanying notes.
Statements included in this Management Discussion and Analysis may contain
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1993, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that
involve substantial risks and uncertainties. When used in this report, the words
"anticipate", "believe", "estimate", "expect", "intend", "may", and similar
expressions identify such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the Company
or the Company's management and are subject to a number of risks and
uncertainties, including but not limited to economic, competitive, regulatory,
and other factors affecting the Company's operations, markets, products and
services, as well as expansion strategies and other factors discussed elsewhere
in this report and other filings by the Company with the Securities and Exchange
Commision. Many of these factors are beyond the Company's control.
RESULTS OF OPERATIONS
Net interest income, the difference between interest income and fee income on
earning assets, such as loans and securities, and interest expense on deposits
and borrowings, provides the basis for the Bank's results of operations. These
results are also impacted by non-interest income, the provision for credit
losses, non-interest expense and income taxes. Net income of $3,222,986 consists
of $3,178,293 related to the Company's banking activities and $44,693 related to
the Company's insurance activities. The total net income of $3,222,986 or $1.83
per share in 2000 increased considerably over net income of $2,027,270 or $1.19
per share for 1999. This increase is partially attributable to proceeds from a
life insurance policy recorded at the end of December 2000, naming the Bank as
beneficiary. This policy was purchased to indirectly fund a future obligation of
the Bank as part of the
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Supplemental Employee Retirement Plan ("SERP"). Without the life insurance
proceeds the per share data is comparable to 1999.
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 14.2%
from 1999 to 2000, compared to an increase of 8.8% from 1998 to 1999. Average
earning assets increased $25.4 million in 2000 versus an increase of $19.3
million in average interest-bearing liabilities. The tax-equivalent yield on
earning assets increased 36 basis points from 7.71% in 1999 to 8.07% in 2000.
The cost of funds increased 45 basis points, from 3.75% in 1999 to 4.20% in
2000. The Bank's net interest margin remained the same, 4.43% at December 31,
2000 and at December 31, 1999. In 1999, the increase in net interest income of
8.8% was due to an increase of $18.5 million in earning assets over 1998. The
tax-equivalent yield earned on those assets dropped 40 basis points from the
prior year, to 7.71% from 8.11%. The average cost of funds on interest-bearing
liabilities decreased 34 basis points over that time period, from 4.09% in 1998
to 3.75% in 1999. The volume of interest-bearing liabilities increased 11.3% in
1999 over 1998 or $13.6 million. The Bank's net interest margin narrowed from
4.52% in 1998 to 4.43% in 1999.
Management believes there are two main factors contributing to the net interest
margin remaining the same for 2000 and 1999. One factor is the impact of the
interest rate policy of the Federal Reserve. In its efforts to slow down the
economy, the Federal Reserve Board increased short-term interest rates three
times for a total of 75 basis points in 1999, increasing rates 25 basis points
on three occasions beginning in June. In 2000, Federal Reserve raised rates an
additional 100 basis points, 25 basis points in February, 25 basis points in
March and 50 basis points in May. These moves led to increases in the prime
rate. Interest rates on new securities issues have increased as well.
Investments were made throughout the year to take advantage of the high yields
available.
The second factor is competition. Banks are not only competing with each other
for available business, but with other providers of loan and investment
products, such as credit unions and insurance companies. A wealth of information
is easily obtained by consumers via the Internet, from television and through
print media. Competitors exist beyond the geographic trade area and to continue
to be successful, banks have increased business volumes by offering higher
deposit rates and lower loan rates, looking to other potential sources of
income, such as fees and service charges, to increase earnings.
The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. The Bank's Asset/Liability Management
Committee ("ALCO") meets monthly for the purpose of evaluating the Bank's
short-range and long-range liquidity position and the potential impact on
capital and earnings as a result of sudden changes in interest rates. The Bank
has adopted an asset/liability policy that specifies minimum limits for
liquidity and capital ratios. Maximum limits have been set for the negative
impact acceptable on net interest income and the market value of investments as
a result of a shift in interest rates. The asset/liability policy also includes
guidelines for investment activities and funds management. At its monthly
meeting, the ALCO reviews the Bank's status and formulates its strategy based on
current economic conditions, interest rate forecasts, loan demand, deposit
volatility and the Bank's earnings objectives.
[BAR GRAPH]
Net Interest Income
($ Millions)
5.9 6.5 6.9 7.5 8.6
1996 1997 1998 1999 2000
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the amount charged against the Bank's
earnings to establish a reserve of allowance sufficient to absorb expected loan
losses based on management's evaluation of the loan portfolio. Factors
considered include loan concentrations, charge-off history, delinquent loan
percentages, input from regulatory agencies and general economic conditions. In
2000, the Bank increased the amount charged against earnings for loan losses to
$689,000 from $170,000 in 1999. In 1998, $150,000 was charged against earnings
for this purpose.
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The following table summarizes the Bank's actual loan losses, total of
non-performing loans and total allowance for loan losses for 2000, 1999 and
1998, both in dollars and as a percentage of total loans outstanding:
2000 1999 1998
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Actual Loan Losses $ 105,056 0.08% $ 70,543 0.06% $ 71,458 0.06%
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Non-Performing Loans $1,460,000 1.13% $1,771,625 1.52% $1,452,000 1.32%
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Allowance for Loan Losses $1,428,467 1.11% $ 838,167 0.72% $ 729,199 0.66%
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Although an increase in loan losses was experienced in the past year, the
increase in the reserve is reflective of a continued growth trend in commercial
loans as well as management's assessment of the local economic environment. The
local economy has lagged behind both New York State and national prosperity,
while continuing to be hampered by marginal job growth and a declining
population base. Although not reflected in the Bank's historical performance,
the portfolio may be susceptible in the event of an economic downturn.
Management's increase to the reserve during the fourth quarter of 2000 was a
result of their analysis of the above factors and the regulations promulgated by
the Office of the Comptroller of the Currency.
NON-INTEREST INCOME
Total non-interest income increased approximately $2,305,000 or 171.7% in 2000
over 1999. This compares to an increase of approximately $123,000 from 1998 to
1999. Non-interest income for 2000 included approximately $1,380,000, which the
Bank recorded as the beneficiary of a life insurance policy on the former
Chairman, President and CEO. Approximately $158,000 was recorded for an increase
in the cash surrender value of life insurance policies held on certain bank
officers. Approximately $114,000 was recorded for an increase in the cash
surrender value of life insurance policies held on certain directors.
[BAR GRAPH]
Net Loans
($ Millions)
92.1 101.6 110.5 116.4 128.8
1996 1997 1998 1999 2000
In 2000, the Bank received a six-month benefit from the service charge increase
instituted in July 2000. Loan-related income also increased in 2000. This
included prepayment penalties collected on loans and dividends received as a
result of the Bank's participation in the New York State Bankers Group Insurance
Trust.
Losses realized on the sale of assets totaled approximately $88,000 in 2000
versus approximately $16,000 in gains realized in 1999. In 2000, planned sales
of securities resulted in net losses of $53,000. These losses will be offset by
additional interest income earned on the reinvestment of proceeds in
higher-yielding bonds.
Premiums received on the sale of student loans to the Student Loan Marketing
Association ("SLMA") were approximately $5,600. In 1999, gains on sales to SLMA
were approximately $6,400. About $2,200 in premiums were received on mortgages
sold to the Federal National Mortgage Association ("FNMA") in 2000. This
compares to $7,800 received in 1999. The Bank has been affiliated with both SLMA
and FNMA since 1995. The Bank also sold in 2000, two properties, which it owned
as a result of foreclosure. Total losses of $35,000 were experienced on these
sales.
Other non-interest income reflected an increase of approximately $646,000 due to
sales of insurance by the M&W Agency, Inc., since it commenced operations in
September 2000.
NON-INTEREST EXPENSE
Total non-interest expense increased approximately $1.5 million or 24.5% in 2000
over 1999. In 2000, the ratio of non-interest expense to average assets was
3.55% compared to 3.24% in 1999 and 3.14% in 1998. Non-interest expense
categories include those most impacted by branch expansion, the acquisition of
the M&W Agency, Inc. and the
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addition of ENB Associates Inc.-salaries, occupancy, advertising, and supplies,
among others. Salary and benefit expense increased 23.0% in 2000. Of the
$739,000 increase, approximately $374,000 is attributable to the operation of
the M&W Agency, Inc. The remainder of the increase included merit/promotional
increases, other additional staffing and expenses related to the Bank's
retirement plans. Occupancy expenses increased about $115,000 or 12.7%. The cost
of the occupancy expense for M&W Agency, Inc. contributed $42,000 to occupancy
expense. Approximately $24,000 in increased expense for supplies included
materials purchased as a result of the Bank's Year 2000 initiative in January.
This included forms and envelopes used to provide each customer with a bank
statement as of December 31, 1999, in addition to their regularly scheduled
statement. This also included the purchase of stationery with the Bank's new
logo. Repairs and maintenance increased approximately $33,000 or 14.1%. This was
largely due to M&W Agency, Inc. Advertising costs went down $13,000 or 8.1% from
the total in 1999. In 1999 advertising costs had increased over the prior year
by $42,000 or 36.0%. About 75% of the increase was attributed to the promotion
of the newly-opened West Seneca branch over that time period. The remaining 25%
of that amount was spent on promoting the Bank's PC and telephone banking
services. Professional services increased about $41,000 or 16.7% due to
increased fees. The FDIC assessment increased 102.3% in 2000. New assessment
rates went into effect on January 1, 2000. Other insurance increased
approximately $85,000 or 30.9% due to premiums paid for life insurance policies
held on certain bank officers and directors.
Miscellaneous other expenses increased 53.9% or approximately $444,000 in 2000.
Expenses associated with originating loans, telephone costs, postal costs,
maintenance on foreclosed properties and correspondent bank service charges also
fall under miscellaneous expenses. All of these categories increased in 2000.
Miscellaneous other expenses were impacted by the M&W Agency, Inc. acquisition,
of approximately $70,000. Expense also related to the M&W Agency, Inc.
acquisition is four months of goodwill expense of approximately $106,000.
TAXES
The provision for income taxes in 2000 of $781,000 reflects an effective tax
rate of 19%. This compares to $607,000 or 23% in 1999 and $735,000 or 27% in
1998. The favorable tax position maintained by the bank is attributable to the
substantial investments in tax advantaged municipal bonds and the life insurance
proceeds recorded as tax exempt income in 2000. The effective tax rate without
the life insurance proceeds would have been 31%.
FINANCIAL CONDITION
The Bank had total assets of $224.5 million at December 31, 2000, an increase of
$25.8 million or 13.0% over $198.8 million at December 31, 1999. Net loans of
$128.8 million increased 10.6% or $12.3 million over the previous year.
Securities increased $10.1 million or 16.1% . Cash and cash equivalents
decreased $2.6 million or 21.9%. Deposits grew by $16.8 million or 9.9%.
Shareholders' equity increased $6.9 million or 37.7%, approximately $2.9 million
of which is attributable to the M&W Agency, Inc. acquisition. Unrealized gains/
losses on investment securities held by the Bank increased $1.7 million over
1999.
[BAR GRAPH]
Total Deposits
($ Millions)
123.5 138.4 144.1 169.9 186.7
1996 1997 1998 1999 2000
LOANS
Loans comprised 61.8% of the Bank's total average earning assets in 2000. Actual
year-end balances increased 10.6% versus an increase of 5.3% in 1999 and 8.8% in
1998. The Bank continues to focus its lending on commercial and residential
mortgages, commercial loans and home equity loans. Commercial mortgages make up
the largest segment of the portfolio at 47.9% of total loans. Residential
mortgages comprise 18.9% of the portfolio and commercial loans account for 14.1%
of outstanding loans. 15.5% are home equity loans and direct financing lease
loans account for 1.0% of outstanding loans.
At December 31, 2000, the Bank had a loan/deposit ratio of 69.7%. This compares
to a loan/deposit ratio of 69.0% at December 31, 1999.
The Bank currently retains the servicing rights to $8.9 million in long-term
mortgages sold to the Federal National Mortgage Association ("FNMA") since
becoming a member in 1995. This arrangement
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allows the Bank to offer long-term mortgages without exposure to the associated
interest rate risks, while retaining customer account relationships.
The Bank continues its contractual arrangement with the Student Loan Marketing
Association ("SLMA") whereby SLMA services the Bank's loans to borrowers who are
still in school and subsequently purchases those loans. Approximately $800,000
in student loans were sold to SLMA in 2000. Student loans presently make up
0.26% of total loans.
SECURITIES AND FEDERAL FUNDS SOLD
Securities and federal funds sold made up the remaining 38.2% of the Bank's
total average earning assets at December 31, 2000. These categories provide the
Bank with additional sources of liquidity and income. The Bank's securities
portfolio increased 16.1% over the prior year. It continues to be strongly
concentrated in tax-advantage municipal bonds, which make up 43.0% of the
portfolio, US government-guaranteed mortgage-backed securities which make up
21.6% of bonds, and US government-sponsored agency bonds of various types which
comprise 32.4% of the total. As a member of both the Federal Reserve System and
the Federal Home Loan Bank, the Bank is required to hold stock in those
entities. These investments made up 1.7% of the portfolio at December 31, 2000.
The credit quality of the portfolio is strong, with 89% of the portfolio
carrying the equivalent of a Moody rating of AAA.
Federal funds sold balances are largely maintained for liquidity purposes. The
average balance maintained in fed funds sold declined in 2000 to 1.3% of total
average earning assets from 2.1% the previous year. In 1999, the Bank maintained
higher balances in these overnight investments as part of its liquidity
contingency plan for the Year 2000.
The tax-equivalent yield earned on securities and federal funds sold increased
57 basis points in 2000 moving from 6.33% in 1999 to 7.00% in 2000. This
compares to 6.58% in 1998. High yields were available on bonds throughout the
year, and new investments were concentrated in longer term bonds with call
protection. Also, low-yielding bonds were sold and replaced with higher-yielding
bonds. Although the Bank experienced $53,000 in net losses on these sales, the
losses will be made up in additional interest income. As stated earlier, the
volume of federal funds sold decreased in 2000, however, the yield on this
category increased from 4.94% in 1999 to 6.04% in 2000.
Statement of Financial Accounting Standard ("SFAS") No. 115 outlines accounting
and reporting requirements for investment securities. All securities are
designated at the time of purchase as either "held to maturity" or "available
for sale". Securities designated as held to maturity are stated on the balance
sheet at amortized cost. Those designated as available for sale are reported at
fair market value. At December 31, 2000, $3,475,401 in securities were
designated as held to maturity. These bonds are primarily investments that the
Bank has made in its local trade area.
The available for sale portfolio totaled $69,645,817 or approximately 95.2% of
the Bank's securities portfolio at December 31, 2000. Net unrealized gains and
losses on available for sale securities resulted in a net unrealized gain of
$786,030 at December 31, 2000 as compared to a net unrealized loss of $1.7
million at December 31, 1999. Rates increased at the end of 1999, driving market
prices down on fixed income bonds held in the portfolio. Although rates did not
decrease until January of 2001, the anticipation of decreasing rates drove
market prices up at the end of 2000. Unrealized gains and losses on available
for sale securities are reported, net of taxes, as a separate component of
shareholders' equity. At December 31, 2000, the impact to equity was a net
unrealized gain of $534,500.
DEPOSITS
Total deposits increased $16.8 million or 9.9% in 2000 over 1999. Although all
of the Bank's branches have experienced deposit growth, the most significant
increases have come from the West Seneca and Hamburg offices opened in 1999 and
1995, respectively. Core deposit growth has been an area the Bank has focused on
and success is evident in the 23.3% increase in Demand Deposits and 18.7%
increase in NOW accounts. Although the year-end balance in regular savings
declined 1.2% from the previous year, the decrease has been concentrated in the
traditional passbook and statement savings products. The tiered rate Premium
Savings product remains a strong product with balances averaging $18.9 million
in 2000. In 2000, the Bank added a new Business Savings account for commercial
customers, which has averaged about $3.4 million in balances per month. Time
deposits of less than $100,000 increased 15.9% in 2000 as customers took
advantage of the favorable rate environment and put money in certificates of
deposit of various terms.
Certificates of deposit in excess of $100,000 increased 6.7%. These funds are
generally not considered core deposits. Most of these deposits are obtained from
municipalities through the competitive bidding process. Others are obtained from
commercial and retail customers looking for the safety of a FDIC-insured
deposit. These deposits
10
13
have increased significantly over the past several years due to the Bank's
expansion of its trade area.
Evans National Bank remains committed to providing quality products and making
banking convenient for its customers. The Eas-E Line services, which include
telephone and personal computer banking, will soon be supplemented by Eas-E Net
Internet Banking. This new service will enable customers to access account
information and pay bills via the Internet. The Bank's recently developed
website, evansnationalbank.com, is another resource for obtaining information
regarding the Bank's products and services. In March 2000 the Bank formed ENB,
an investment subsidiary, which provides customers with the opportunity to
purchase mutual funds and annuities at their local branch of the Bank. In
September, the Bank acquired an insurance subsidiary, M & W Agency, Inc., which
specializes in property and casualty insurance. M & W has seven offices
throughout the Bank's trade area, including one conveniently located in the
Bank's West Seneca branch.
In 2000, the Bank opened an in-school branch banking facility in West Seneca
East High School. This facility is staffed by students, and provides not only
access to bank services, but also an educational opportunity for students who
may be interested in banking as a career.
LIQUIDITY
The Bank utilizes cash flows from the investment portfolio and federal funds
sold balances to manage the liquidity requirements it experiences due to loan
demand and deposit fluctuations. The Bank also has many borrowing options. As a
member of the Federal Home Loan Bank ("FHLB"), the Bank is able to borrow funds
at competitive rates. Advances of up to $10.8 million can be drawn on the FHLB
via the Overnight Line of Credit Agreement. An amount equal to 25% of the Bank's
total assets could be borrowed through the advance programs under certain
qualifying circumstances. The Bank also has the ability to purchase $4,000,000
in federal funds from one of its correspondent banks. By placing sufficient
collateral in safekeeping at the Federal Reserve Bank, the Bank could also
borrow at the discount window.
The cash flows from the investment portfolio are laddered to provide funds
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 to ensure that a sufficient amount of securities is
available that could be sold without incurring significant losses. At December
31, 2000 approximately 5.7% of the Bank's securities had maturities of one year
or less and approximately 18.6% had maturity dates of five years or less. At
December 31, 2000 the Bank had net short-term liquidity of $18.0 million as
compared to $7.9 million at December 31, 1999. Available assets of $76.3 million
less public and purchased funds of $45.7 million resulted in a long-term
liquidity ratio of 167% versus 149% at December 31, 1999.
Liquidity needs can also be met by aggressively pursuing municipal deposits,
which are normally awarded on the basis of competitive bidding. The Bank
maintains a sufficient level of US government and government agency securities
and New York State municipal bonds that can be pledged as collateral for these
deposits.
Total cash and cash equivalents decreased approximately $2.6 million or 21.9%
from 1999 to 2000. Excess cash was kept for the Y2K contingency for year-end
1999. Since then the excess cash has been reinvested in the securities portfolio
resulting in the decrease in total cash and cash equivalents for year-end 2000.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. ALCO
analyzes the gap position on a monthly basis to determine the Bank's exposure to
interest rate risk. The gap position is the difference between the total of the
Bank's rate-sensitive assets and rate-sensitive liabilities maturing or
repricing during a given time frame. A "positive" gap results when more assets
than liabilities reprice and a "negative" gap results when more liabilities than
assets reprice within a given time period. Because assets historically reprice
faster than liabilities, a slightly negative gap position is considered
preferable. At December 31, 2000 the Bank was in a negative gap position with
$13.0 million more in rate-sensitive liabilities repricing over the next year
than in rate-sensitive assets. The Bank's asset/liability limit, as defined in
its asset/liability policy, is a difference of +/- 15% of the Bank's total
assets, which amounted to +/- $33.7 million at December 31, 2000. The gap ratio
(rate-sensitive assets/rate-sensitive liabilities) at that date was 84%.
Off-balance sheet financial instruments at December 31, 2000 included $8,546,000
in undisbursed lines of credit at an average interest rate of 11.0%, $2,444,000
in fixed rate loan origination commitments at 10.9%, $16,445,000 in adjustable
rate loan origination commitments at 11.1% and $1,203,000 in adjustable rate
letters of credit at an average rate of 11.5%.
11
14
Expected maturity date -
year ended December 31, 2001 2002 2003 2004 2005 There-after Total Fair Value
INTEREST-EARNING
ASSETS ($000S)
Loans Receivable, Fixed Rate 11,581 6,161 5,876 4,336 4,448 18,265 50,667 51,052
Average Interest Rate 8.91% 8.88% 8.76% 8.54% 8.31% 8.03%
- --------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Adj. Rate 18,836 4,709 3,898 2,311 6,264 42,282 78,300 78,300
Average Interest Rate 9.83% 9.19% 8.93% 9.35% 8.96% 8.70%
- --------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 1,250
Average Interest Rate 6.00%
- --------------------------------------------------------------------------------------------------------------------------
Investments 13,166 6,483 10,496 7,721 8,030 27,225 73,121 73,121
Average Interest Rate 6.87% 7.32% 7.62% 7.12% 7.21% 7.51%
- --------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES ($000S)
Deposits 71,095 37,260 14,699 14,332 12,151 557 150,094 150,626
Average Interest Rate 5.22% 5.00% 2.50% 2.41% 2.33% 1.07%
- --------------------------------------------------------------------------------------------------------------------------
Borrowed Funds 54 1,033 2,000 1,124 84 114 4,409 4,409
Average Interest Rate 10.60% 5.19% 4.90% 5.51% 8.00% 9.00%
- --------------------------------------------------------------------------------------------------------------------------
MARKET RISK
When rates rise or fall, the market value of the Bank's assets and liabilities
will increase or decrease. As a part of the Bank's asset/liability policy, the
Bank has set limitations on the negative impact to the market value of its
balance sheet that would be acceptable. The Bank's securities portfolio is
priced monthly and adjustments are made on the balance sheet to reflect the
market value of the available for sale portfolio per SFAS No. 115. A limitation
of a negative 25% of total capital before SFAS No. 115 (after tax) has been
established as the maximum impact to equity as a result of marking available for
sale securities to market that would be acceptable. At year-end, the impact to
equity as a result of marking available for sale securities to market was an
unrealized gain of $534,500. On a quarterly basis, the available for sale
portfolio is shocked for immediate rate increases of 100 and 200 basis points.
At December 31, 2000 the Bank determined it would take an immediate increase in
rates in excess of 200 basis points to eliminate the current capital cushion.
The Bank's capital ratios are also reviewed on a quarterly basis. Unrealized
gains and losses on available for sale securities are not included in the
calculation of these ratios.
CAPITAL EXPENDITURES
The construction and furnishing of a new office in North Boston is anticipated
to cost the Bank approximately $715,000 in 2001. The Bank has leased the
existing North Boston office, since that branch was acquired in 1989. The vacant
lot was purchased in 1991 and preliminary work has been done on the site.
Current plans call for the new facility to be ready to be occupied by mid-year
2001. The present tenant in the Erie Road building adjacent to the Derby Office
is expected to vacate the building in 2001. At that time the Bank will renovate
the building for its own use. These renovations are expected to total $150,000.
Other planned expenditures include replacing a number of personal computers,
replacing/adding automated teller machines (ATMs) and miscellaneous other
equipment and software upgrades. The Bank believes it has a sufficient capital
base to support these capital expenditures with current assets and retained
earnings.
IMPACT OF INFLATION AND CHANGING PRICES
There will always be economic events, such as the changes in the economic
policies of the Federal Reserve Board that will have an impact on the
profitability of the Company. Inflation may result in impaired asset growth,
reduced earnings and substandard capital ratios. The net interest margin can be
adversely impacted by the volatility of interest rates throughout the year.
Since these factors are unknown, management attempts to structure the balance
sheet and repricing frequency of assets and liabilities to avoid a significant
concentration that could result in a negative impact on earnings.
New Accounting Standards
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. Management has determined that this standard will not have a
significant impact on the Company's financial condition and results of
operation.
12
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Evans Bancorp, Inc. We have audited the accompanying consolidated balance sheets
of Evans Bancorp, Inc. and subsidiary (the "Company") as of December 31, 2000
and 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Buffalo, New York
February 1, 2001
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
13
16
December 31, 2000 and 1999 2000 1999
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 8,108,912 $ 8,528,778
Federal funds sold 1,250,000 3,450,000
------------ -------------
Total cash and cash equivalents 9,358,912 11,978,778
Securities:
Available for sale, at fair value 69,645,817 59,550,786
Held to maturity 3,475,401 3,448,892
Loans, net of allowance for loan losses of $1,428,467 in 2000
and $838,167 in 1999 128,779,052 116,433,438
Properties and equipment, net 3,776,869 3,834,496
Other assets 9,513,092 3,541,993
------------ -------------
TOTAL ASSETS $224,549,143 $ 198,788,383
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 36,607,680 $ 29,683,357
NOW and money market 9,550,131 8,048,455
Regular savings 58,142,285 58,819,156
Time 82,401,223 73,397,931
------------ -------------
Total deposits 186,701,319 169,948,899
Other borrowed funds 4,409,068 5,000,000
Securities sold under agreements to repurchase 3,869,172 3,699,829
Other liabilities 4,390,512 1,854,717
------------ -------------
Total liabilities 199,370,071 180,503,445
------------ -------------
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized;
1,759,601 and 1,698,950 shares issued and outstanding, respectively 879,801 849,475
Capital surplus 13,810,991 10,990,720
Retained earnings 9,953,780 7,629,839
Accumulated other comprehensive income (loss), net of tax 534,500 (1,185,096)
------------ -------------
Total stockholders' equity 25,179,072 18,284,938
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $224,549,143 $ 198,788,383
============ =============
See notes to consolidated financial statements.
14
17
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998
INTEREST INCOME:
Loans $ 10,616,225 $ 9,294,995 $ 9,336,407
Federal funds sold 158,635 180,292 84,316
Securities:
Taxable 2,746,273 1,761,594 1,333,268
Non-taxable 1,549,636 1,317,962 1,097,796
------------ ----------- -----------
Total interest income 15,070,769 12,554,843 11,851,787
INTEREST EXPENSE ON DEPOSITS AND
BORROWINGS 6,490,680 5,043,316 4,946,730
NET INTEREST INCOME 8,580,089 7,511,527 6,905,057
PROVISION FOR LOAN LOSSES 689,000 170,000 150,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,891,089 7,341,527 6,755,057
NON-INTEREST INCOME:
Service charges 862,207 741,232 708,482
Net (loss) gains on sales of assets (88,114) 16,103 66,208
Premium on loans sold 7,818 14,155 56,145
Life insurance proceeds 1,380,318 0 0
Other 1,485,952 571,428 389,359
------------ ----------- -----------
Total non-interest income 3,648,181 1,342,918 1,220,194
------------ ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,951,446 3,212,869 2,807,223
Occupancy 1,024,465 909,304 762,380
Supplies 197,614 173,698 115,588
Repairs and maintenance 265,296 232,428 186,772
Advertising and public relations 147,460 160,480 118,021
Professional services 286,607 245,575 290,858
FDIC assessments 34,481 17,041 16,395
Other Insurance 359,206 274,456 173,176
Other 1,268,459 824,324 726,487
------------ ----------- -----------
Total non-interest expense 7,535,034 6,050,175 5,196,900
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 4,004,236 2,634,270 2,778,351
INCOME TAXES 781,250 607,000 735,000
------------ ----------- -----------
NET INCOME $ 3,222,986 $ 2,027,270 $ 2,043,351
============ =========== ===========
Net income per common share - basic $ 1.83 $ 1.19 $ 1.20
============ =========== ===========
Weighted average number of common shares 1,756,695 1,698,523 1,698,612
============ =========== ===========
See notes to consolidated financial statements.
15
18
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2000, 1999 and 1998
Common Capital Retained Accumulated Treasury
Stock Surplus Earnings Other Stock Total
Comprehensive
Income
(Loss)
Balance, January 1, 1999 $ 849,475 $ 10,990,720 $4,985,249 $ 213,856 $ 0 $17,039,300
Comprehensive income:
1998 net income 2,043,351 2,043,351
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $107,977 229,452 229,452
Total comprehensive income 2,272,803
Cash dividends ($.37 per common share) (627,836) (627,836)
Purchase of 3,881 shares for treasury (174,645) (174,645)
Reissuance of treasury stock under
stock dividend plan of 2,529 shares 113,791 113,791
----------- ------------ ---------- ----------- -------- -----------
Balance, December 31, 1998 849,475 10,990,720 6,400,764 443,308 (60,854) 18,623,413
Comprehensive income:
1999 net income 2,027,270 2,027,270
Unrealized loss on available
for sale securities, net of reclassification
adjustment and tax effect of $766,297 (1,628,404) (1,628,404)
-----------
Total comprehensive income 398,866
-----------
Cash dividends ($.47 per common share) (798,195) (798,195)
Purchase of 4,434 shares for treasury (205,368) (205,368)
Reissuance of treasury stock under
stock dividend plan of 5,786 shares 266,222 266,222
----------- ------------ ---------- ----------- -------- -----------
Balance, December 31, 1999 849,475 10,990,720 7,629,839 (1,185,096) -- 18,284,938
Comprehensive income:
2000 net income 3,222,986 3,222,986
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $550,271 1,719,596 1,719,596
-----------
Total comprehensive income 4,942,582
-----------
Cash dividends ($.52 per common share) (899,045) (899,045)
Purchase of 5,825 shares for treasury (273,775) (273,775)
Reissuance of treasury stock under
stock dividend plan of 5,825 shares 273,775 273,775
Issuance of shares for M&W acquisition 30,326 2,820,271 2,850,597
----------- ------------ ---------- ----------- -------- -----------
Balance, December 31, 2000 $ 879,801 $ 13,810,991 $9,953,780 $ 534,500 $ 0 $25,179,072
=========== ============ ========== =========== ======== ===========
See notes to consolidated financial statements.
16
19
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998
OPERATING ACTIVITIES:
Interest received $ 14,908,370 $ 12,559,167 $ 11,805,241
Fees received 2,202,389 1,283,956 1,136,626
Interest paid (6,314,332) (5,052,915) (4,952,879)
Cash paid to employees and suppliers (7,665,183) (5,750,114) (4,944,895)
Income taxes paid (992,235) (842,482) (863,365)
------------ ------------ ------------
Net cash provided by operating activities 2,139,009 2,197,612 2,180,728
------------ ------------ ------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (27,931,442) (30,158,490) (35,657,818)
Proceeds from sales 15,544,257 3,121,468 19,652,675
Proceeds from maturities 4,786,927 8,423,564 7,686,003
Held to maturity securities:
Purchases (2,962,044) (3,952,558) (3,722,629)
Proceeds from maturities 2,935,536 7,099,039 2,790,562
Additions to properties and equipment (359,547) (643,470) (414,541)
Investment in joint venture (10,500) 0 0
Increase in loans, net of repayments (14,415,746) (11,666,342)
(13,857,709)
Proceeds from sales of loans 1,513,153 5,241,973 4,863,285
Proceeds from sale of other real estate owned 411,971 299,515 49,070
Proceeds from life insurance policies surrendered 0 0 224,009
------------ ------------ ------------
Net cash used in investing activities (20,487,435) (22,235,301) (18,387,093)
------------ ------------ ------------
FINANCING ACTIVITIES:
(Repayments) proceeds from borrowing (503,340) (412,234) 8,165,920
Increase in deposits 17,130,945 25,865,263 5,693,383
Dividends paid (899,045) (798,196) (627,836)
Purchase of treasury stock (273,775) (205,368) (174,645)
Sale of treasury stock 273,775 266,222 113,791
------------ ------------ ------------
Net cash provided by financing activities 15,728,560 24,715,687 13,170,613
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,619,866) 4,677,998 (3,035,752)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,978,778 7,300,780 10,336,532
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,358,912 $ 11,978,778 $ 7,300,780
============ ============ ============
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,222,986 $ 2,027,270 $ 2,043,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 663,346 611,579 381,115
Provision for loan losses 689,000 170,000 150,000
Loss (gains) on sales of assets 80,296 (16,103) (66,208)
Gain on life insurance policies surrendered 0 0 (97,580)
Proceeds from life insurance (1,380,318) 0 0
Changes in assets and liabilities affecting cash flow:
Other assets (981,869) (832,205) (225,835)
Other liabilities (154,432) 237,071 (4,115)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,139,009 $ 2,197,612 $ 2,180,728
============ ============ ============
See notes to consolidated financial statements.
17
20
EVANS BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General - Evans Bancorp, Inc. (the "Company") was organized in
October 1988, under the Business Corporation Law of the State of New York as a
bank holding company. The accompanying consolidated financial statements include
the accounts of Evans Bancorp, Inc. and its wholly owned subsidiary, Evans
National Bank (the "Bank"), and its wholly owned subsidiaries, M&W Agency, Inc.
("M&W"), and ENB Associates Inc. ("ENB").
The Bank is in the commercial banking business, attracting deposits from and
making loans to the general public in its immediate geographical area. The
Bank's main office is located in Angola, New York and it has branches in Derby,
Evans, Forestville, Hamburg, North Boston, and West Seneca.
M&W is a retail property and casualty insurance agency headquartered at Silver
Creek, New York. Through its several branch offices, M&W sells, for commissions,
various premium based insurance policies. M&W commenced operations during the
third quarter of 2000.
ENB was established during the first quarter of 2000 and provides non-deposit
investment products, such as mutual funds and annuities, to bank customers at
bank branch locations. ENB has an agreement with a licensed broker, where by ENB
can purchase and sell securities for bank customers.
Commencing in 2000, the Company operates in two reportable segments - banking
and insurance.
Regulatory Requirements - The Bank is subject to the rules, regulations, and
reporting requirements of various regulatory bodies, including the Federal
Reserve Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), and
the Office of the Comptroller of the Currency ("OCC").
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the Bank and subsidiaries. All material intercompany
accounts and transactions are eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities - Securities for which the Bank has the positive intent and ability
to hold to maturity are stated at cost, adjusted for discounts and premiums that
are recognized in interest income over the period to the earlier of call date or
maturity using a method that approximates level yield. Securities held to
maturity have been designated as unavailable to be sold as part of the Bank's
asset-liability management activities.
Securities classified as available for sale are stated at fair value, with
unrealized gains and losses excluded from earnings and reported, net of deferred
income taxes, in stockholders' equity. Gains and losses on sales of securities
are computed using the specific identification method.
Securities which have experienced an other than temporary decline in fair value
are written down to a new cost basis with the amount of the writedown included
in earnings as a realized loss. The new cost basis is not changed for subsequent
recoveries in fair value. Factors which management considers in determining
whether an impairment in value of an investment is other than temporary include
the issuer's financial performance and near term prospects, the financial
condition and prospects for the issuer's geographic region and industry, and
recoveries in fair value subsequent to the balance sheet date.
The Bank does not engage in securities trading activities.
Loans - The Bank grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout Erie and Chautauqua counties. The ability of the Bank's debtors to
honor their contracts is dependent upon the real estate and general economic
conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted to charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method.
The bank considers a loan to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect principal or
interest due according to the contractual terms of the loan. Loan impairment is
measured based on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical
18
21
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the recorded investment
in the loan. For loans other than those that the Bank expects repayment through
liquidation of the collateral, when the remaining recorded investment in the
impaired loan is less than or equal to the present value of the expected cash
flows, income is recorded on a cash basis.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance for Loan Losses - The allowance for loan losses is established through
a provision for loan losses. Recoveries on loans previously charged off are
credited directly to the allowance for loan losses. The allowance is an amount
that management believes adequate to absorb losses on existing loans that may
become uncollectible. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan-loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral, and current
economic conditions.
In addition, various regulatory agencies, as part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Management's increase to the provision for loan losses during 2000 reflects its
current assessment of the New York State and local economy. Both have lagged
behind national prosperity, which is now unsettled. Marginal job growth, in
conjunction with a declining population base, has left the Bank's market more
susceptible to potential credit problems in the event of an economic downturn.
This is particularly true of commercial borrowers, which is a segment of
significant past growth as well as concentration in commercial real estate.
Commercial real estate values may be susceptible in an adverse economy.
Management believes that the increase to the reserve is also in accordance with
regulations promulgated by the Office of the Comptroller of the Currency, and is
reflective of its assessment of the local environment as well as a continued
growth trend in commercial loans.
Foreclosed Real Estate - Foreclosed real estate is initially recorded at the
lower of book or fair value (net of costs of disposal) at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
potential additional losses is established by a charge to operations if the
carrying value of a property exceeds fair value. Foreclosed real estate is
classified as other assets on the consolidated balance sheets.
Goodwill - Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in connection with the Company's acquisition of
the M&W Group, Inc. Goodwill is being amortized on a straight-line basis over
ten years. The Company periodically assesses whether events or changes in
circumstances indicate that the carrying amount of goodwill may be impaired.
Properties and Equipment - Properties and equipment are stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets which range from 3 to 31
years.
The Bank regularly assesses all of its long-lived assets for impairment and
recognizes a loss when the carrying value of an asset exceeds its fair value.
The Bank determined that no impairment loss needs to be recognized for
applicable assets in 2000 or 1999.
Interest Income on Loans - Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed and any cash received is
credited to the outstanding principal balance. Such loans are returned to
accrual status when they are made current and, in the opinion of management, the
borrower has the ability to continue making timely payments. Loan origination
and commitment fees and certain direct loan origination costs are deferred and
recognized over the lives of the related assets as an adjustment of the loans'
yields using the level yield method.
Income Taxes - Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the tax rate expected to be in effect when the taxes are
actually paid or recovered.
19
22
Net Income per Common Share - Net income per common share is based on the
weighted average number of shares outstanding during each year, retroactively
adjusted for stock dividends. Only basic earnings per share is disclosed because
the Company does not have any dilutive securities or other contracts to issue
common stock or convert to common stock.
Dividend Reinvestment Plan - The Company has a Dividend Reinvestment Plan (the
"Plan") which provides each holder of record of the Bank's common stock the
opportunity to reinvest automatically the cash dividends they receive on shares
of the Bank's common stock. Stockholders who do not wish to participate in the
Plan will continue to receive cash dividends, as declared, in the usual manner.
Fifth Third Bank Corporate Services (the "Agent") is the administrator of the
Plan. Shares purchased under the Plan are held in safekeeping by the Agent until
the stockholder terminates his/her participation in the Plan. The Agent also
acts as transfer agent and registrar for the Bank's common stock.
Employee Benefits and Deferred Compensation Plan - Costs are charged to salaries
and employee benefits expense in the periods in which the services are rendered.
Pension costs are funded on a current basis in compliance with the Employee
Retirement Income Security Act and are accounted for in compliance with SFAS No.
132, "Employers' Accounting for Pensions".
Off Balance Sheet Financial Instruments - In the ordinary course of business the
Bank has entered into off balance sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when the transactions are
executed.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, interest bearing deposits in other
banks and federal funds sold. Generally, federal funds sold are purchased for
one-day periods.
Cash and due from banks includes reserve balances that the Bank is required to
maintain with Federal Reserve Banks. The required reserves are based upon
deposits outstanding and were approximately $1,045,000 and $885,000 at December
31, 2000 and 1999, respectively.
Accounting Standards Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, which became effective for the Company in
1998. SFAS No. 130 established standards for reporting and disclosure of
comprehensive income and its components in financial statement format.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. Items considered comprehensive income including foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. The Company has
elected to display comprehensive income in the statements of stockholders'
equity, net of reclassification adjustments. Reclassification adjustments are
made to avoid double counting in comprehensive income items that are displayed
as part of net income for a period that also had been displayed as part of other
comprehensive income in that period or earlier periods. The reclassification
adjustments, net of tax, for the years ended December 31, 2000, 1999, and 1998
amounted to $1,062, $242 and $3,026, respectively.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. The Company adopted the provisions of SFAS No. 133
effective October 1, 1998. The adoption of SFAS No. 133 (as amended by SFAS No.
138) did not impact the Company's earnings or financial position. As allowed by
SFAS No. 133 the Company transferred approximately $2,900,000 of certain
securities from held to maturity to the available for sale classification during
1998. The realized and unrealized gains on the securities transferred were not
material to the Company.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Accounting, was issued in September 2000.
Management has determined that this standard will not have a significant impact
on the Company's financial condition.
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23
2. SECURITIES
The amortized cost of securities and their approximate fair value at December 31
were as follows:
2000
Unrealized
Amortized Gains Losses Fair
Cost Value
Available for Sale:
U.S. Government and Agency Securities $23,665,879 $ 343,037 $ (120,487) $23,888,429
Mortgage Backed Securities 15,817,452 30,138 (249,043) 15,598,547
State and Municipal Securities 28,111,205 792,368 (9,982) 28,893,591
Other Securities 1,265,250 0 0 1,265,250
----------- ---------- ----------- -----------
Total $68,859,786 $1,165,543 $ (379,512) $69,645,817
=========== ========== =========== ===========
Held to Maturity:
U.S. Government and Agency Securities $ 42,181 $ 0 $ 0 $ 42,181
State and Municipal Securities 3,433,220 0 0 3,433,220
----------- ---------- ----------- -----------
Total $ 3,475,401 $ 0 $ 0 $ 3,475,401
=========== ========== =========== ===========
1999
Unrealized
Amortized Gains Losses Fair
Cost Value
Available for Sale:
U.S. Government and Agency Securities $15,506,351 $ 312 $ (563,399) $14,943,264
Mortgage Backed Securities 15,136,101 0 (780,540) 14,355,561
State and Municipal Securities 29,476,371 43,679 (442,839) 29,077,211
Other Securities 1,174,750 0 0 1,174,750
----------- ---------- ----------- -----------
Total $61,293,573 $ 43,991 $(1,786,778) $59,550,786
=========== ========== =========== ===========
Held to Maturity:
U.S. Government and Agency Securities $ 43,795 $ 0 $ 0 $ 43,795
State and Municipal Securities 3,405,097 0 0 3,405,097
----------- ---------- ----------- -----------
Total $ 3,448,892 $ 0 $ 0 $3,448,892
=========== ========== =========== ===========
Available for sale securities with a total fair value of $31,860,087 at December
31, 2000 were pledged as collateral to secure public deposits and for other
purposes required or permitted by law.
The scheduled maturities of debt securities at December 31, 2000 are summarized
below. Actual maturities may differ from contractual maturities because certain
issuers have the right to call or prepay obligations with or without call
premiums.
Available for Held to Maturity
Sale Securities Securities
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 1,697,008 $ 1,697,515 $2,454,711 $2,454,711
Due after year one through five years 8,722,891 8,788,230 655,663 655,663
Due after five years through ten years 23,610,870 24,035,323 181,540 181,540
Due after ten years 34,829,017 35,124,749 183,487 183,487
----------- ----------- ---------- ----------
Total $68,859,786 $69,645,817 $3,475,401 $3,475,401
=========== =========== ========== ==========
Realized gains and losses from sales of securities for the years ended December
31, 2000, 1999 and 1998 are summarized as follows:
2000 1999 1998
Gross gains $ 41,628 $ 3,084 $ 55,727
Gross losses (94,454) (3,841) (45,664)
-- -- ---1
Net gain (loss) $(52,826) $ (757) $ 10,063
======== ======= ========
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24
3. LOANS, NET
Major categories of loans at December 31, 2000 and 1999 are summarized as
follows:
2000 1999
Real estate - mortgages $ 107,218,299 $ 95,330,046
Real estate - construction 1,965,555 3,538,079
Commercial 14,783,192 14,173,095
Installment 3,140,291 2,356,914
Student loans 337,536 371,453
Other 1,350,205 1,101,391
Direct financing lease 1,040,722 0
Net deferred loan origination costs 371,719 400,627
------------- -------------
130,207,519 117,271,605
Allowance for loan losses (1,428,467) (838,167)
------------- -------------
Loans, net $ 128,779,052 $ 116,433,438
============= =============
Changes in the allowance for loan losses for the years ended December 31, 2000,
1999 and 1998 were as follows:
2000 1999 1998
Balance, beginning of year $ 838,167 $ 729,199 $ 609,539
Provision for loan losses 689,000 170,000 150,000
Recoveries 6,356 9,511 41,118
Loans charged off (105,056) (70,543) (71,458)
----------- --------- ---------
Balance, end of year $ 1,428,467 $ 838,167 $ 729,199
=========== ========= =========
Loans evaluated for
impairment, for which an allowance for loan impairment was not required under
SFAS No. 114 due to the adequacy of related collateral values totaled
approximately $1,195,000 and $1,725,000 at December 31, 2000 and 1999,
respectively. The average recorded investment in these loans during 2000, 1999,
and 1998 was approximately $1,166,500, $889,500, and $690,500, respectively. If
such loans had been in an accruing status, the Bank would have recorded
additional interest income of approximately $78,000, $76,000 and $71,000 in
2000, 1999 and 1998, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 2000.
As of December 31, 2000 and 1999, the Bank had no other loans which were
impaired as defined by SFAS No. 114.
The Bank participates as a lessor in a leasing agreement that is classified as a
direct financing lease. Future minimum lease payments totaled $1,040,722 at
December 31, 2000. Unearned income totaled $216,402 at December 31, 2000. All
future minimum lease payments are expected to be collected.
At December 31, 2000 the scheduled future minimum lease payments are as follows:
2001 $ 142,844
2002 211,265
2003 224,469
2004 264,082
2005 198,062
----------
Total $1,040,722
==========
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4. OTHER ASSETS
Other assets at December 31, were as follows:
2000 1999
Bank owned life insurance $ 689,915 $ 664,566
Goodwill 3,182,143 0
Deferred tax asset 1,279,585 739,440
Accrued interest receivable 1,599,780 1,380,863
Life insurance proceeds receivable 1,650,000 0
Other 1,111,669 757,123
----------- -----------
Total $ 9,513,092 $ 3,541,992
=========== ===========
5. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
2000 1999
Land $ 268,485 $ 268,485
Buildings and improvements 3,737,942 3,648,930
Construction in Progress 21,100 0
Equipment 3,520,974 3,110,305
----------- -----------
7,548,501 7,027,720
Less accumulated depreciation (3,771,632) (3,193,224)
----------- -----------
Properties and equipment, net $ 3,776,869 $ 3,834,496
=========== ===========
Depreciation expense totaled $578,407 in 2000, $506,381 in 1999, and $428,020 in
1998. Construction in progress represents the initial expenditures for a
commitment to build a new North Boston branch with total budgeted cost of
approximately $715,000.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities - For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Receivable - 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.
Deposits - The fair value of demand deposits, NOW and money market 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.
Federal Funds Purchased - The carrying amount of federal funds purchased
approximate their fair values due to their short-term nature.
Other Borrowed Funds - 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 Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Commitments to extend credit and standby letters of credit - As described in
Note 12, the Company was a party to financial instruments with off-balance sheet
risk at December 31, 2000 and 1999. Such financial instruments consist of
commitments to extend permanent financing and letters of credit. If the options
are exercised by the prospective
23
26
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 December 31, 2000 and 1999 approximates the recorded amounts of the related
fees, which are not considered material.
At December 31, 2000 and 1999, the estimated fair values of the Company's
financial instruments were as follows:
2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and cash equivalents $ 8,108,912 $ 8,108,912 $ 8,528,778 $ 8,528,778
============= ============= ============ ============
Securities $ 73,121,218 $ 73,121,218 $ 62,999,678 $ 62,999,678
============= ============= ============ ============
Loans $ 130,207,519 $117,271,605
Less: allowance for loan losses (1,428,467) (838,167)
------------- ------------
Loans, net $ 128,779,052 $ 129,163,941 $116,433,438 $110,857,593
============= ============= ============ ============
Financial Liabilities:
Deposits $ 186,701,319 $ 187,233,211 $169,948,899 $170,018,032
============= ============= ============ ============
Other borrowed funds $ 4,409,068 $ 4,409,068 $ 5,000,000 $ 5,000,000
============= ============= ============ ============
7. DEPOSITS
Time deposits, with minimum denominations of $100,000 each, totaled
$30,779,658 and $28,856,320 at December 31, 2000 and 1999, respectively.
Interest expense associated with these balances totaled $1,747,316 and
$1,202,506 at December 31, 2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of time deposits are as follows:
2001 $57,295,059
2002 23,459,663
2003 898,837
2004 532,020
2005 208,644
Thereafter 7,000
-----------
$82,401,223
===========
8. OTHER BORROWED FUNDS
Other borrowed funds include $4,409,068 of long-term borrowing. The long-term
borrowing totaling $4,000,000, consisted of various advances from the Federal
Home Loan Bank with interest rates ranging from 4.83% to 5.07%. These advances
are collateralized by certain qualifying assets. The maturities of other
borrowed funds are as follows:
2001 $ 409,068
2002 1,000,000
2003 2,000,000
2004 1,000,000
----------
Total $4,409,068
==========
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into agreements with depositors to sell to the depositors
securities owned by the Bank and repurchase the identical security, generally
within one day. No physical movement of the securities is involved. The
depositor is informed the securities are held in safekeeping by the Bank on
behalf of the depositor.
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27
10. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLAN
The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees'
compensation and years of service. The Bank uses an actuarial method of
amortizing prior service cost and unrecognized net gains or losses which result
from actual experience and assumptions being different than those that are
projected. The amortization method the Bank is using recognizes the prior
service cost and net gains or losses over the average remaining service period
of active employees which exceeds the required amortization.
The following are reconciliations of the benefit obligation and the fair value
of plan assets, the funded status of the plan, the amounts not recognized in the
statements of financial position, and the amounts recognized in the statement of
financial position.
2000 1999
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,851,106 $ 1,696,760
Service cost 110,067 89,062
Interest cost 145,860 132,676
Employer contributions 93,807 0
Actuarial gain (444) (19,488)
Benefits paid (287,445) (47,904)
----------- -----------
Benefit obligations at end of year 1,912,951 1,851,106
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 1,932,394 1,828,978
Actual return on plan assets 158,673 151,320
Employer contributions 93,807 0
Benefits paid (287,445) (47,904)
----------- -----------
Fair value of plan assets at end of year 1,897,429 1,932,394
----------- -----------
Funded status (15,522) 81,288
Unrecognized net actuarial loss (gain) 59,635 (25,602)
Unrecognized prior service cost (212,403) (227,110)
----------- -----------
Accrued benefit cost $ (168,290) $ (171,424)
=========== ===========
The Plan's assets are primarily invested in a money market fund, stocks, and
bonds. Valuations of the pension plan as shown above were conducted as of
October 1, 2000 and 1999. Assumptions used by the Bank in both years in the
determination of pension plan information consisted of the following:
Weighted-average discount rate 7.50%
Rate of increase in compensation levels 4.75%
Expected long-term rate of return on plan assets 7.50%
The components of net periodic benefit cost consisted of the following:
2000 1999 1998
Service cost $ 110,067 $ 89,062 $ 62,689
Interest cost 145,860 132,676 117,378
Expected return on plan assets (149,085) (135,913) (128,242)
Net amortization and deferral (16,169) (16,169) (16,169)
--------- --------- ---------
Net periodic benefit cost $ 90,673 $ 69,656 $ 35,656
========= ========= =========
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28
The Bank also maintains a nonqualified supplemental executive retirement plan
covering certain members of senior management. The plan provides a fixed benefit
which is specific to the participant. The obligations related to the plan are
indirectly funded by life insurance contracts (naming the Bank as beneficiary)
with aggregate cash surrender values of approximately $119,000 and $219,000 at
December 31, 2000 and 1999, respectively. The face values of these policies was
approximately $1,750,000 and $3,400,000 at December 31, 2000 and 1999,
respectively. The Bank uses an actuarial method of amortizing unrecognized net
gains or losses which result from actual experience and assumptions being
different than those that are projected. The amortization method the Bank is
using recognizes the net gains or losses over the average remaining service
period of active employees which exceeds the required amortization.
At December 31, 2000, the Company has recorded a receivable of $1,650,000 from
an insurance contract on the former Chairman, President and CEO who passed away
on December 29, 2000. Of the total amount recorded, $1,380,318 has been included
as life insurance proceeds on the consolidated statement of income. The
difference of $269,682 represents the cash surrender value of the policy. A
portion of the proceeds will ultimately be used to fund the supplemental
executive retirement plan liability associated with the former Chairman,
President and CEO.
The following are reconciliations of the benefit obligation and the fair value
of plan assets, the funded status of the plan, the amounts not recognized in the
statement of financial position, and the amounts recognized in the statement of
financial position.
2000 1999
Change in benefit obligation:
Benefit obligation at beginning of year $ 885,252 $ 568,183
Service cost 194,792 83,898
Interest cost 73,633 63,592
Actuarial (gain) loss 63,012 169,579
----------- ---------
Benefit obligation at end of year 1,216,689 885,252
----------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year 0 0
Actual return on plan assets 0 0
Contributions to the plan 0 0
Benefits paid 0 0
----------- ---------
Fair value of plan assets at end of year 0 0
----------- ---------
Funded status (1,216,689) (885,252)
Unrecognized net actuarial loss 285,479 274,069
----------- ---------
Accrued benefit cost $ (931,210) $(611,183)
=========== =========
Valuations of the nonqualified supplemental executive retirement plans as shown
above were conducted as of October 1, 2000 and 1999. The liability calculation
pertaining to the former Chairman, President and CEO was updated through
December 31, 2000. Assumptions used by the Bank in both years in the
determination of pension plan information consisted of the following:
Weighted-average discount rate 7.50%
Expected long-term rate of return on plan assets 7.50%
The components of net periodic benefit cost consisted of the following:
2000 1999 1998
Service cost $194,792 $ 83,898 $ 56,415
Interest cost 73,633 63,592 40,297
Net amortization and deferral 51,602 51,602 22,215
-------- -------- --------
Net periodic benefit cost $320,027 $199,092 $118,927
======== ======== ========
26
29
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $212,000, $73,000
and $70,000 in 2000, 1999 and 1998, respectively. The estimated present value of
the benefit obligation, included in other liabilities, was $959,000 and $772,000
at December 31, 2000 and 1999, respectively. This obligation is indirectly
funded by life insurance contracts (naming the Bank as beneficiary) with
aggregate cash surrender values of approximately $285,000 and $171,000 at
December 31, 2000 and 1999, respectively. The face values of these policies at
both dates was approximately $3,200,000. The increase in cash surrender value is
included in the "Other" financial statement line on the statement of income.
Premiums on the aforementioned life insurance contracts were paid by the Bank in
lieu of payment of directors' fees.
The Bank also has a deferred contribution Retirement and Thrift 401(k) Plan for
its employees who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute between 1%
and 15% of their annual salary, with a matching contribution by the Bank equal
to 25% of the employees contribution up to 4% of their annual salary. The Bank
can also make discretionary contributions to the Plan. The Bank's expense under
this Plan was approximately $43,000, $39,000 and $36,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
11. STOCK OPTION PLAN
On April 21, 1999 the stockholders approved the Company's Stock Option Plan (the
"Plan"). Under the provisions of the Plan, awards, up to an aggregated 85,000
shares of common stock, may be granted for employees and consultants under the
Plan, awards may consist of stock options, stock appreciation rights (SARs), and
Restricted Stock awards. With respect to stock options, the Committee of the
Company's Board of Directors determines the option price (not to be less than
fair market value) at the date of grant. The Committee will determine the
applicable vesting periods for all awards as well as expiration dates, which
will generally not be more than ten years. The Committee is authorized to
determine all terms, restrictions, and conditions for all types of awards under
the Plan. As of December 31, 2000 no awards have been granted.
12. INCOME TAXES
The components of the provision for income taxes were as follows:
2000 1999 1998
Income taxes currently payable $ 1,250,000 $ 769,000 $ 839,000
Deferred benefit (468,750) (162,000) (104,000)
----------- --------- ---------
Net provision $ 781,250 $ 607,000 $ 735,000
=========== ========= =========
At December 31, 2000 and 1999 the components of the net deferred tax asset were
as follows:
2000 1999
Deferred Tax Assets:
Allowance for loan losses $ 519,000 $ 265,000
Pension premiums 554,000 313,000
Deferred compensation 383,000 308,000
Unrestricted gains/losses on securities 0 696,000
Other 85,000 38,000
---------- ----------
Gross deferred tax assets 1,541,000 1,620,000
---------- ----------
Deferred Tax Liabilities:
Depreciation 24,000 24,000
SERP premiums 114,000 0
Prepaid expenses 149,000 160,000
Unrestricted gains/losses on securities 314,000 0
---------- ----------
Gross deferred tax liabilities 601,000 184,000
---------- ----------
Net deferred tax assets $ 940,000 $1,436,000
========== ==========
27
30
The net deferred tax asset at December 31, 2000 and 1999 is included in other
assets in the accompanying consolidated balance sheets.
In assessing the realizability of the deferred tax assets and the need for a
valuation allowance, the Company believes it is more likely than not that the
net deferred assets will be recognized.
The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
December 31
2000 1999 1998
Amount Percent Amount Percent Amount Percent
Tax provision at statutory rate $ 1,361,000 34% $ 896,000 34% $ 945,000 34%
Increase (decrease) in taxes
resulting from:
Tax-exempt income (527,000) (13) (448,000) (17) (373,000) (13)
Tax exempt insurance proceeds (469,000) (12) 0 0 0 0
State taxes, net of federal benefit 210,000 5 159,000 6 162,000 6
Other items, net 206,250 5 0 0 1,000 0
----------- --- --------- --- --------- ---
Provision for income taxes $ 781,250 19% $ 607,000 23% $ 735,000 27%
=========== === ========= === ========= ===
13. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with certain directors, significant
shareholders and their affiliates (related parties). The aggregate amount of
loans to such related parties at December 31, 2000 and 1999 was $4,689,588 and
$4,486,346, respectively. During 2000 and 1999, new loans to such related
parties amounted to $9,384,541 and $11,290,531, respectively, and repayments
amounted to $9,181,300 and $11,030,923.
14. CONTINGENT LIABILITIES AND COMMITMENTS
The consolidated financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of the Bank's commitments and contingent
liabilities at December 31, 2000 and 1999 is as follows:
2000 1999
Commitments to extend credit $27,435,000 $22,597,000
Standby letters of credit 1,203,000 1,283,000
----------- -----------
Total $28,638,000 $23,880,000
=========== ===========
Commitments to extend credit and standby letters of credit all include exposure
to some credit loss in the event of nonperformance of the customer. The Bank's
credit policies and procedures for credit commitments and financial guarantees
are the same as those for extensions of credit that are recorded on the
consolidated balance sheets. Because these instruments have fixed maturity
dates, and because they may expire without being drawn upon, they do not
necessarily represent cash requirements to the Bank. The Bank has not incurred
any losses on its commitments during the past three years.
15. CONCENTRATIONS OF CREDIT
The majority of the Bank's loans, commitments and standby letters of credit have
been granted to customers in the Bank's market area. Investments in state and
municipal securities also involve governmental entities within the Bank's market
area. The concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers. The Bank, as a matter of policy, does not extend credit to
any single borrower or group in excess of 15% of capital.
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16. SEGMENT INFORMATION
The Company is comprised of two primary business segments: banking and insurance
activities.
The reportable segments are separately managed and their performance is
evaluated based on net income. All sources of segment specific revenues and
expenses are attributed to management's definition of net income. Revenues from
transactions between the two segments are not significant. The accounting
policies of the segements are the same as those described in Note 1. The
following table sets forth information regarding these segments for the year
ended December 31, 2000.
Banking Insurance
Activities Activities Total
Net interest income (loss) $ 8,596,869 $ (16,780) $ 8,580,089
Provision for credit losses 689,000 0 689,000
------------ --------- ------------
Net interest income (loss) after provision for credit losses 7,907,869 (16,780) 7,891,089
Non-interest income 3,054,523 0 3,054,523
Insurance commissions and fees 0 646,484 646,484
Net securities losses 52,826 0 52,826
Non-interest expense 6,979,923 555,111 7,535,034
Income before income taxes 3,929,643 74,593 4,004,236
Income tax expense 751,350 29,900 781,250
------------ --------- ------------
Net income $ 3,178,293 $ 44,693 $ 3,222,986
============ ========= ============
December 31,
Identifiable Assets, Net 2000
Banking activities $220,798,870
Insurance activities 3,750,273
------------
Consolidated Total Assets $224,549,143
============
For the years ended December 31, 1999 and 1998, the Company determined that its
business was comprised of banking activities only.
17. ACQUISITION OF M&W GROUP, INC.
Effective September 1, 2000, the Company completed its acquisition of the
assets, business and certain liabilities of M&W Group, Inc., a retail property
and casualty insurance agency headquartered at Silver Creek, New York, with
offices located in Angola, North Collins, South Dayton, Cattaraugus, Randolph,
and West Seneca, New York. The Company issued 60,651 shares of its common stock
as the purchase price for the assets acquired.
The purchase price (including liabilities assumed) exceeded the fair value of
the assets acquired by approximately $3,200,000. Such amount has been recorded
by the Company as goodwill and is being amortized on a straight-line basis over
10 years. The insurance agency acquired is being operated through M&W Agency,
Inc., a newly formed operating subsidiary of the Bank.
Unaudited, pro forma consolidated net sales, net income and basic earnings per
share assuming the acquisition had taken place at the beginning of 1999 was
$13,100,000, $3,300,000 and $1.90 per share for fiscal 2000, and $10,500,000,
$2,000,000 and $1.14 per share for fiscal 1999. Such pro forma results are not
necessarily indicative of what the actual consolidated results of operations
might have been if the acquisition had been effective at the beginning of fiscal
1999.
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18. REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the Comptroller of
the Currency. Under such restrictions, the Bank may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained earnings (as
defined) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000 and 1999, that
the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from its regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category. The
Bank's actual capital amounts and ratios were as follows:
2000
Actual Minimum for Capital Minimum To Be Well
Adequacy Purposes Capitalized Under Prompt
Corrective Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets) $22,880,000 16.6% $11,006,000 8.0% $13,757,000 10.0%
=========== ==== =========== === =========== ====
Tier I Capital (to Risk Weighted Assets) $21,463,000 15.6% $ 5,503,000 4.0% $ 8,254,000 6.0%
=========== ==== =========== === =========== ====
Tier I Capital (to Average Assets) $21,463,000 9.9% $ 8,677,000 4.0% $10,846,000 5.0%
=========== ==== =========== === =========== ====
1999
Actual Minimum for Capital Minimum To Be Well
Adequacy Purposes Capitalized Under Prompt
Corrective Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets) $20,304,000 16.6% $ 9,770,000 8.0% $12,213,000 10.0%
=========== ==== =========== === =========== ====
Tier I Capital (to Risk Weighted Assets) $19,466,000 15.9% $ 4,885,000 4.0% $ 7,328,000 6.0%
=========== ==== =========== === =========== ====
Tier I Capital (to Average Assets) $19,466,000 10.1% $ 7,366,000 4.0% $ 9,207,000 5.0%
=========== ==== =========== === =========== ====
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19. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information
is as follows:
CONDENSED BALANCE SHEETS
December 31, 2000 and 1999:
2000 1999
ASSETS
Cash $ 41,205 $ 39,018
Investment in subsidiary 25,137,867 18,245,920
------------ ------------
Total assets $ 25,179,072 $ 18,284,938
============ ============
Stockholders' Equity
Stockholders' Equity:
Common stock $ 879,801 $ 849,475
Capital surplus 13,810,991 10,990,720
Accumulated other comprehensive income 534,500 (1,185,096)
Retained earnings 9,953,780 7,629,839
------------ ------------
Total stockholders' equity $ 25,179,072 $ 18,284,938
============ ============
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999, and 1998 2000 1999 1998
Dividends from subsidiary $ 899,046 $ 798,195 $ 627,836
Other revenue 50,000 50,000 75,000
Expenses (47,813) (49,681) (42,949)
Income before equity in undistributed
earnings of subsidiary 901,233 798,514 659,887
Equity in undistributed earnings of subsidiary 2,321,753 1,228,756 1,383,464
------------ ------------ -----------
Net income $ 3,222,986 $ 2,027,270 $ 2,043,351
============ ============ ===========
CONDENSED STATEMENTS OF CASH FLOW
Years Ended December 31, 2000, 1999, and 1998 2000 1999 1998
Operating Activities:
Net income $ 3,222,986 $ 2,027,270 $ 2,043,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary (2,321,753) (1,228,756) (1,383,464)
------------ ------------ -----------
Net cash provided by operating activities 901,233 798,514 659,887
Financing Activities - Cash dividends paid (899,046) (798,195) (627,836)
------------ ------------ -----------
Net (increase) decrease in cash 2,187 319 32,051
Cash, beginning 39,018 38,699 6,648
------------ ------------ -----------
Cash, ending $ 41,205 $ 39,018 $ 38,699
============ ============ ===========
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[ICON] BOARD OF DIRECTORS
Evans Bancorp, Inc. and Evans National Bank
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Robert W. Allen William F. Barrett Phillip Brothman Laverne G. Hall
Secretary Property Developer and Chairman of the Board Retired
Retired Real Estate Manager Partner - Hurst,
Brothman & Yusick
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
David C. Koch Robert G. Miller, Jr. David M. Taylor Thomas H. Waring, Jr.
Chairman and CEO President President Vice Chairman of the
New Era Cap Co., Inc. M&W Agency, Inc. Concord Nurseries, Inc. Board
Principal
Waring Financial Group
DIRECTORS EMERITUS
Floyd H. Hurst
Richard C. Stevenson
Carl F. Ulmer
[PHOTO]
OFFICERS
Evans Bancorp, Inc.
James Tilley
President
Robert W. Allen
Secretary
William R. Glass
Treasurer
MANAGEMENT TEAM
Seated: Standing:
Phillip Brothman William R. Glass
Chairman of the Board Senior Vice President - Loan Division
James Tilley Thomas H. Waring, Jr.
President Vice Chairman of the Board
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[ICON] EVANS NATIONAL BANK OFFICERS
CHAIRMAN OF THE BOARD VICE PRESIDENT ASSISTANT VICE BANK OFFICERS
Phillip Brothman Katherine M. Allen PRESIDENT Michelle A. Bress
George L. Catalano Rita A. Boyland Julie Gornikiewicz
Mary E. Doeing Rose Marie Hinckley Nadine G. Houghton
President Susan J. Herold Cathy E. Rohrich Lori L. Kuczka
James Tilley Timothy F. Jachlewski Mary Jo Schults Mary K. Nytz
Howard M. Martin, Jr. Mary D. Philbin
Senior Vice President Michael R. Noville
William R. Glass Jeffrey M. Werdein
Jeffrey L. White
- -------------------------------------------- --------------------------------------------------
M&W AGENCY, INC. ENB
PRESIDENT VICE PRESIDENT ASSOCIATES INC.
Robert G. Miller, Jr. Louis Atti PRESIDENT VICE PRESIDENT
Frederick Gould James Tilley Emily S. Hazlett
Ronald E. Miller
- -------------------------------------------- --------------------------------------------------
CORPORATE INFORMATION
There has never been an organized public trading market for the Company's
outstanding common stock. The following table represents the highest and lowest
per share prices known to management at which the Company's stock has actually
been transferred in private transactions during the periods indicated. In each
period for which prices are shown, management has price information for the
transaction. The prices do not include any retail markup, markdown or
commission.
2000 1999
Quarter High Low High Low
First $47.00 $47.00 $45.00 $45.00
Second $47.00 $47.00 $46.00 $45.00
Third $47.00 $47.00 $47.00 $46.00
Fourth $47.00 $47.00 $47.00 $47.00
Total shares outstanding were 1,759,601 as of December 31, 2000. There were
1,237 shareholders of record on December 31, 2000.
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE COMPANY'S REPORT ON FORM
10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2000, THE FINANCIAL STATEMENTS AND
THE SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, MAY BE
OBTAINED, WITHOUT CHARGE, FROM MICHELLE A. BAUMGARDEN, EVANS BANCORP, INC.,
14-16 N. MAIN STREET, ANGOLA, N.Y. 14006
THE ANNUAL MEETING
The Annual Meeting of the Shareholders of the Company will be held on Tuesday,
April 24, 2001 at 9:00 a.m. at Romanello's South Restaurant, 5793 South Park
Avenue, Hamburg, N.Y.
INQUIRIES
For information or assistance regarding individual stock records, transactions,
dividend reinvestment accounts, dividend checks, or stock certificates, contact:
Corporate Trust Services, Fifth Third Bank, 38 Fountain Square Plaza, Mail Drop
10AT66, Cincinnati, OH 45263.
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