Exhibit 13.1
[GRAPHIC]
EVANS BANCORP. INC
2001 Annual Report
COMPANY PROFILE
EVANS BANCORP, INC. IS THE HOLDING COMPANY FOR EVANS NATIONAL BANK, A COMMERCIAL
BANK WITH SEVEN BRANCHES LOCATED IN WESTERN NEW YORK WITH $249.2 MILLION IN
ASSETS AND $204.3 MILLION IN DEPOSITS AT DECEMBER 31, 2001. THE BANK SERVES ITS
MARKET THROUGH OFFICES LOCATED IN ANGOLA, DERBY, EVANS, FORESTVILLE, HAMBURG,
NORTH BOSTON AND WEST SENECA, NEW YORK. THE BANK ANNOUNCED IN FEBRUARY 2002 THE
PLANNED CONSTRUCTION OF A NEW BRANCH OFFICE IN AMHERST, NEW YORK, EXTENDING ITS
MARKET SERVICE AREA TO THE NORTHEAST SUBURBS OF BUFFALO.
THE M&W AGENCY, INC. IS A WHOLLY-OWNED SUBSIDIARY OFFERING RETAIL PROPERTY AND
CASUALTY INSURANCE FROM EIGHT OFFICES IN WESTERN NEW YORK. THE BANK ALSO
PROVIDES NON-DEPOSIT INVESTMENT PRODUCTS SUCH AS MUTUAL FUNDS AND ANNUITIES TO
BANK CUSTOMERS THROUGH ITS WHOLLY-OWNED SUBSIDIARY ENB ASSOCIATES INC. ENB
ASSOCIATES HAS AN AGREEMENT WITH A LICENSED BROKER, THROUGH WHICH IT CAN
PURCHASE AND SELL SECURITIES TO ITS CUSTOMERS.
TABLE OF CONTENTS
2 Letter to Shareholders
6 Business and Market Profile
8 Selected Financial Information
9 Management's Discussion and Analysis
16 Independent Auditor's Report
17 Consolidated Financial Statements
21 Notes to Consolidated Financial Statements
36 Shareholder and Corporate Information
37 Directors and Officers
ABOUT OUR COVER
By any measure, 2001 was a year of solid performance for Evans Bancorp, Inc.,
and reflective of our total team effort. And what better represents the concept
of teamwork and everyone pulling together to achieve a common objective than a
four-person shell -- a relatively common sight along the eastern edge of Lake
Erie in the summer months.
INVESTMENT HIGHLIGHTS
- - History of asset strength, with residential mortgage loans at 15.5 percent
of the total loan portfolio at December 31, 2001 and history of low loan
charge-offs
- - Five-year compounded annual growth rate in assets of 12.08 percent and net
loans of 9.12 percent
- - Management's focus on growth of the commercial loan portfolio, particularly
loans secured by real estate
- - Diverse financial services and insurance businesses, with 22.4 percent of
revenue derived from non-interest income
- - A price to book value ratio of 1.55 based on the closing price for Evans
Bancorp, Inc. common stock of $18.99 on December 31, 2001
- - A dividend yield of approximately 2.58 percent, based on the closing price
for Evans common stock of $18.99 on December 31, 2001
2001 PERFORMANCE HIGHLIGHTS
- - Net income grew to $2.6 million, a 40.0 percent increase over 2000,
excluding a $1.4 million one-time receipt of life insurance proceeds in 2000
- - Non-interest income increased by 24.1 percent for the year. Excluding a $1.4
million one-time receipt of life insurance proceeds in 2000, non-interest
income increased by nearly 100 percent
- - Gross loans increased 10.8 percent in 2001, with commercial loans growing by
18.0 percent
- - The 5 for 4 stock split in June provided the equivalent of a 25.0 percent
increase in cash dividends
- - Total deposits increased by 9.4 percent during 2001
- - Relocated to larger branch in the Town of Boston, expanding the Bank's
market presence and providing exposure to new customers
- - Launching of Eas-E Net Internet Banking -- giving customers access to
account balances, transfers between accounts, and loan and bill payment
options
- - The July 2001 listing on the Nasdaq National Market provides a broader
public market for the Company's common stock, further enhancing visibility
and helping to facilitate future growth
[BAR CHART]
TOTAL ASSETS
------------
(in millions)
97 $158.5
98 $174.1
99 $198.8
00 $224.5
01 $249.2
5-Year CAGR 12.08%
[BAR CHART]
NET EARNINGS PER SHARE*
-----------------------
all per share data reflects the June 2001 5 of 4 split
97 $0.85
98 $0.96
99 $0.95
00 $1.47+
01 $1.17
5-Year CAGR 9.01%
+ 2000 earnings reflected a one-time recipt of approximately $1.4 million in
life insurance proceeds. Excluding the effect of the life insurance proceeds,
2000 net income was $0.84 per share.
CAGR = Compound Annual Growth Rate
This annual report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements include, but
are not limited to, statements concerning future business, revenues and
earnings. There are risks, uncertainties and other factors that could cause the
actual results of the Company to differ materially from the results expressed or
implied by such statements. Information on factors that could affect the
Company's business and results is discussed in the Company's periodic reports
filed with the Securities and Exchange Commission. See Management's Discussion
and Analysis and accompanying Evans Bancorp, Inc. Financial Statements for
further information and analysis.
1
TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES
Evans Bancorp, Inc., the holding company for Evans National Bank, began 2001
with both a strong community bank foundation and the strategic objective of
significantly growing our financial services revenue. We are pleased to report
that your Company's results for 2001 were consistent with our plan. We
profitably grew our traditional banking business and further integrated a major
acquisition - the M&W Agency, Inc., a Western New York property and casualty
insurance agency whose business we acquired in September 2000 - substantially
increasing our non-interest income during the year.
SOUND STRATEGY, SOLID PERFORMANCE
Despite the economic slowdown affecting the Western New York and national
economies which began during 2000, and a continuously challenging interest rate
environment, we were able to grow earnings in 2001 by approximately 40 percent,
excluding the benefit of a one-time income item in 2000. Net income for 2001 was
$2.6 million or $1.17 per share, compared to $3.2 million or $1.47 per share for
2000. However, the 2000 earnings reflected a one-time receipt of approximately
$1.4 million in life insurance proceeds. Excluding the effect of the life
insurance proceeds, 2000 net income was $1.8 million or $0.84 per share. 1999
net income was $2.0 million or $0.95 per share.
[BAR CHART]
CASH DIVIDENDS PAID PER SHARE*
------------------------------
all per share data reflects the June 2001 5 of 4 split
97 $0.24
98 $0.30
99 $0.38
00 $0.41
01 $0.49
5-Year CAGR 19.41%
Our return on equity and return on assets, two key performance measures for
financial institutions, were 1.09 percent and 10.18 percent, respectively, in
2001. Excluding the effect of the life insurance proceeds in 2000, return on
equity and return on assets were 0.87 percent and 8.72 percent, respectively.
We believe these results reflect the value of our strategy to grow net interest
income by further emphasizing commercial loan originations, while also focusing
on opportunities to increase non-interest income and grow our core non-time
deposits.
During the year we utilized a larger share of our asset mix towards
higher-yielding loans, which is reflected in the 18.0 percent growth of our
commercial loan portfolio in 2001. While commercial loans are generally higher
risk than consumer loans, we believe our commercial loan mix and underwriting
guidelines remain conservative, which is reflected in our historical low loan
charge-offs. This strategy helped us to grow total assets by 11.0 percent, to
$249.2 million, and total loans by 10.8 percent to $143.9 million.
Total deposits at year end were $204.3 million, an increase of 9.4 percent from
2000, an indication of the strength of our community banking brand within our
markets and our ability to internally grow our deposit franchise.
Net interest income for 2001 was $9.1 million, an increase of 6.2 percent over
the prior year, reflecting strong loan growth for the year during a period of
declining interest rates. Non-interest income increased by 24.1 percent, to $4.5
million during 2001, reflecting the inclusion of income for a full year from the
M&W Agency. Non-interest expense for 2001 was $9.5 million compared to $7.5
million in 2000, reflecting a number of strategic initiatives including the M&W
acquisition, our investments in enhanced technology and the listing of our
common stock on a national exchange.
Turning to our balance sheet, I believe that our capital strength remains
exceptionally strong. Nonperforming loans at year-end 2001 were 0.8 percent of
loans outstanding, compared to 1.1 percent at year-end 2000. Total charge-offs
for 2001 were $79.6 thousand or 0.06 percent of loans outstanding, compared to
$105 thousand or 0.08 percent of loans outstanding for 2000. In response to
general trends in the economy and the changing mix of our loan portfolio, we
strengthened our reserves in 2001, and our allowance for possible loan losses
now stands at 1.24 percent of total loans and 153.1 percent of nonperforming
loans.
2
Our capital ratios also remain very strong, exceeding all regulatory
requirements for a well-capitalized financial institution. The book value
(shareholders' equity divided by total shares outstanding, adjusted for the
stock split) of your company, a key measure of your ownership interest,
increased from $11.45 per share at year-end 2000 to $12.22 per share at year-end
2001. Over the last five years, we have increased the Company's book value at an
average-compound-annual-growth rate of 10.85 percent.
PROGRESS ON KEY INITIATIVES
In addition to delivering a solid financial performance and maintaining our
strong financial position, we completed a number of key initiatives to position
Evans Bancorp for continued growth of our business and profitability. In keeping
with our commitment to maintain current technology, we enhanced our online
banking capabilities, launching our Internet banking service, Eas-E Net Online
Banking, in the 2001 second quarter. During 2001 we added three new off-premise
ATM's, and in October we opened a new larger branch facility in the Town of
Boston to better serve that market. We solidified a new partnership that we
announced in January 2002 with M&C Leasing Company to enhance our equipment
leasing capabilities.
A 5 for 4 stock split was distributed on June 12, 2001 to shareholders of record
as of May 25, 2001, the effect of which was to provide existing shareholders
with a 25 percent increase in cash dividends received. The stock split resulted
in an increase of the total outstanding shares of the Company from 1.8 million
to 2.2 million.
[BAR CHART]
BOOK VALUE PER SHARE*
---------------------
all per share data reflects the June 2001 5 of 4 split
97 $8.02
98 $8.78
99 $8.61
00 $11.45
01 $12.22
5-Year CAGR 10.85%
To further enhance the visibility and liquidity of Evans Bancorp as an
investment for our shareholders, we also took the important step of listing our
stock on the Nasdaq National Market. We began trading on the Nasdaq National
Market on July 9, 2001 under the trading symbol EVBN. The listing of Evans
Bancorp common stock in a major public market has made it easier for investors
to buy and sell shares of the Company.
2001 DIRECTOR AND OFFICER APPOINTMENTS
During 2001 we also took steps to further strengthen our management and
operating capabilities. In September, we announced that James Biddle, Jr. was
appointed to the Board of Directors of Evans Bancorp, Inc. and Evans National
Bank. Mr. Biddle is Treasurer of Mader Construction Corporation, Inc., and
related companies. Mader Construction Corporation is a commercial interior and
exterior finish contractor in Elma, NY.
In June, Mark DeBacker joined the Company as Chief Financial Officer. A CPA with
a business and public accounting background, Mr. DeBacker serves as a Senior
Vice President and a member of our Senior Management Team, directing the
Company's financial management and reporting functions.
Also in June, we made two appointments to our branch administration. George
Catalano, Vice President, assumed responsibility for the Bank's Branch Office
Network which has seven locations in Erie and Northern Chautauqua County. Mr.
Catalano continues as Regional Manager of the Southern Region and coordinates
the sales and operations of all branch offices. We also added an experienced
commercial banker when Linda Noecker was appointed Branch Manager of our Hamburg
Office.
Michael C. Schafer also joined the Company in 2001 as Vice President and
Commercial Loan Officer of Evans National Bank. Mr. Schafer joins us with
significant experience and knowledge of commercial lending in our Western New
York market area.
3
2002 - YEAR OF OPPORTUNITY
2001 was a year of solid performance for Evans Bancorp as we set new records for
net interest income and non-interest income while achieving strong loan and
deposit growth. While we are pleased with these results as well as the other
steps taken to position the Bank to better serve our customers, we are even more
excited by the opportunities we see for growth, expansion and operational
improvement in 2002.
During 2002 we will evaluate opportunities to expand our marketplace to
additional communities that we believe will be receptive to our philosophy of
using local customer deposits to support business and consumer loans which, in
turn, improves the quality of life in the community. In February, we announced,
locally, plans for a new branch location in Amherst, New York, where for several
years we have had an expanding commercial lending presence. We see opportunities
for attracting new customers to our existing locations and for expanding our
existing account and product relationships by introducing our customers to our
expanded financial services capabilities. By focusing on these opportunities to
grow our business, we expect to build additional value into our existing banking
franchise and increase shareholder value.
We believe that the best opportunity for building long-term Evans Bancorp
shareholder value is provided by remaining an independent Western New York
community bank. We plan to seek opportunities to expand or fill-in our current
market area through additional branching, promoting our electronic banking
services and acquisition opportunities.
As we did in 2001, we will look for opportunities to expand the convenience of
our off-premise automated teller machine network. During the first quarter of
2002, a new off-site ATM will be added in Gowanda, New York. To better serve our
customers, we recently entered into a cooperative agreement with Lake Shore
Savings that allows the customers of both institutions to use the other
institution's automated teller machines without incurring a surcharge fee.
With our September 2000 acquisition and the commencement of operations of M&W
Agency, Inc., we established a significant presence in the sale of insurance
within our market area. We intend to continue to seek opportunities to grow this
franchise both internally, by promoting cross-selling opportunities with our
existing Bank customers, and externally, through acquisitions. We plan to offer
our insurance products and services through our Evans National Bank branches in
addition to our M&W Agency locations. In January 2002, the M&W Agency acquired
the business and assets of Eden Agency, Inc., which became the eighth office of
M&W and gave us our first market presence in Eden.
We are also taking a number of steps that we believe will improve our customer
service and internal efficiency. These steps include upgrading our item and data
processing technology and operations, relocating and expanding our loan division
at a new centralized location in Derby and upgrading our cash management
services for business and corporate customers with a new Internet banking
product. Additionally, a Real Estate Investment Trust will be established as a
subsidiary of the Bank to manage the business activity of our mortgage loan
portfolio.
We are also moving to expand the scope of our credit administration area. We are
taking steps to strengthen our participation financing alliance with other
community banks, thus enhancing our ability to meet the growing borrowing needs
of our commercial customers.
As we have throughout our history, we will remain actively engaged with the
local communities that we serve. We have established a Regional Advisory Board
which is actively involved in community development and serves as a conduit for
potential new business opportunities. We will also be opening our second
"Student Banking Center" at West Seneca West High School. Designed to introduce
teenagers to the concept of personal money management, these centers also serve
to raise awareness of Evans National Bank within our market area. We continue to
encourage our employees to take an active role by volunteering their time in the
local community.
4
[EVBN NASDAQ LISTED LOGO]
The listing of our common stock on the Nasdaq National Market has created the
need for increased shareholder communication and the opportunity to reach a
broader segment of potential investors. We will be taking steps in 2002 intended
to increase awareness of Evans Bancorp as a potential investment for both
individual and institutional investors. During 2002 we will begin to initiate
quarterly earnings conference calls and investor presentations, as well as work
to develop supplemental investor materials. We also intend to expand the use of
our website as a cost-effective option for distributing information to current
and potential investors. We will also consider options to elevate and expand our
general public relations effort and build on the significant level of community
goodwill we have established within our market.
As we begin 2002 there is much to be excited about. We believe that considerable
opportunity exists to further grow our business by expanding the products and
services we offer customers, particularly in the commercial banking market. M&W
Agency enhances our ability to provide more services to our customers, and we
are beginning to see some success from these cross-selling efforts. Our
significant presence in southern Erie County and northern Chautauqua County, a
stable and conservative market, uniquely positions us to capitalize on our
status as the leading community bank serving these markets. Also, our recently
announced plans to establish a branch location in Amherst will provide access to
the northeastern suburbs of Buffalo. We greatly appreciate the continuing
support and confidence of our customers and shareholders, which in many cases
are one-in-the-same. You can be confident that the entire Evans Bancorp team
will be working hard in 2002 to continue to grow our Bank and to increase
shareholder value.
[PHOTO]
/s/ JAMES TILLEY
James Tilley
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5
BUSINESS SUMMARY
LENDING
Our loan portfolio consists of 66.2 percent commercial and 33.8 percent consumer
loans. Loans on real estate, 81.9 percent of total loans, comprise the largest
product segment. Some of the products experiencing the largest percentage growth
in 2001 over 2000 include commercial lines of credit, 29.1 percent, commercial
mortgages, 19.9 percent, and home equity loans, 8.6 percent. Our commitment to
commercial and consumer relationship-based community banking has resulted in
beneficial, consistent long-term growth and, we believe, a high level of credit
worthiness of our customers. In 2001 we focused on increasing our commercial
loan portfolio. Of the $14.6 million increase in total commercial loans, $12.2
million represented commercial real estate.
Our lending activities include secured and unsecured commercial loans, consumer
loans, educational loans, commercial and consumer mortgages, home equity loans
and business loans.
[PIE CHART]
GROSS LOAN COMPOSITION (December 31, 2001)
Commercial Real Estate 51.3%
Residential Real Estate 15.5%
Home Equity 15.1%
Commercial 14.9%
Consumer 3.2%
GROSS LOANS = $143.9 MILLION
FINANCIAL SERVICES
Evans Bancorp has quietly transformed itself into a diversified financial
services organization. Non-interest income now accounts for approximately 22.4
percent of revenue, allowing for a reduced reliance on net interest margin for
financial performance.
The Company's wholly-owned insurance subsidiary, M&W Agency, whose business was
acquired September 1, 2000 offers full lines of personal and commercial
insurance products through eight locations throughout Western New York. The
agency is also a partner in CFS (Combined Financial Services) Companies,
expanding product offerings further. The addition of M&W Agency significantly
changed the distribution of Evans Bancorp revenues, generating approximately
$2.4 million in commission income or 12.0 percent of 2001 consolidated revenues.
ENB Associates Inc., ("ENB") established in the first quarter of 2000, provides
non-deposit investment products, such as mutual funds, annuities, 401K and IRA
plans and estate planning. ENB has an agreement with a licensed broker, through
which ENB can purchase and sell securities to Bank customers. We are currently
in the process of increasing the ENB presence in our existing branches, creating
more cross-selling opportunities with existing customers. ENB enjoyed strong
revenue growth of approximately 132.2 percent in 2001.
[PIE CHART]
REVENUE COMPONENTS (2001)
Interest Income - Loans 54.7%
Interest Income - Securities 22.1%
Insurance Activities 12.0%
Other 6.0%
Bank Deposit Account Service Charges 5.2%
TOTAL REVENUE = $20.2 MILLION
6
DEPOSITS
Evans National Bank's deposit account services include checking, savings, NOW
and money market accounts and time deposits. Total deposits were $204.3 million
at December 31, 2001, an increase of 9.4 percent from year end 2000. Our
deposits have grown at a compound annual growth rate of 10.59 percent over the
last five years. Core deposits -- deposits excluding CD accounts over $100,000 -
represent 83.5 percent of this growth.
[PIE CHART]
DEPOSIT COMPOSITION (December 31, 2001)
Time 44.4%
Savings 31.5%
Demand 19.4%
NOW 4.7%
TOTAL DEPOSITS = $204.3 MILLION
TECHNOLOGY
During 2001, Evans introduced Eas-E Net, our Internet banking service. Eas-E Net
completes our family of electronic banking products and allows both commercial
and retail customers to perform a variety of banking transactions, including
bill and loan payment, all under the protection of enhanced security. We also
added three off-premise ATM's during 2001, and plan to further expand our
off-premise ATM network during 2002. Other electronic banking services include
full-service telephone banking, PC banking, and the Eas-E check card. We have
also enhanced our Company website to give customers and potential customers
access to information about our Company and products. The Bank is also in the
process of updating item and data processing technology and operations to
improve efficiency, reduce cost and better serve our customers.
Evans National Bank conducts its community banking business from seven branch
locations in southern Erie and northern Chautauqua counties. The Bank has
initiated work on a new branch location in Amherst, New York that is expected to
open in the fall of 2002.
M&W Agency offers full lines of personal and commercial insurance products
through eight offices located in Erie, Cattaraugus and Chautauqua Counties.
M&W's newest office was formerly the Eden Agency, Inc., whose business was
acquired in January 2002.
[GRAPHIC]
MARKET AREA
- Erie
- Chautauqua
- Cattaraugus
Corporate Headquarters / Evans National Bank Branch
- ---------------------------------------------------
Evans National Bank Branch
- ---------------------------------------------------
M&W Agency
- ---------------------------------------------------
Proposed Branch - Amherst, New York
- ---------------------------------------------------
7
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 2001 2000 1999 1998 1997
RESULTS OF OPERATIONS (in thousands)
Interest Income $ 15,647 $ 15,071 $ 12,555 $ 11,852 $ 11,073
Interest Expense 6,537 6,491 5,043 4,947 4,588
Net Interest Income 9,110 8,580 7,512 6,905 6,485
Non-Interest Income 4,528 3,648(A) 1,343 1,220 951
Non-Interest Expense 9,531 7,535 6,050 5,197 4,849
Net Income 2,579 3,223(A) 2,027 2,043 1,802
=======================================================================================================
BALANCE SHEET DATA (in thousands)
Total Assets $ 249,153 $ 224,549 $ 198,788 $ 174,120 $ 158,542
Loans - Net 142,469 128,779 116,433 110,526 101,627
Allowance for Loan Losses 1,786 1,428 838 729 609
Securities 84,065 73,121 63,000 50,060 40,400
Total Deposits 204,260 186,701 169,949 144,084 138,391
Stockholders' Equity 26,961 25,179 18,285 18,623 17,039
=======================================================================================================
PER SHARE DATA*
Net Income $ 1.17 $ 1.47 $ 0.95 $ 0.96 $ 0.85
Cash Dividend $ 0.49 $ 0.41 $ 0.38 $ 0.30 $ 0.24
Book Value at Year End $ 12.22 $ 11.45 $ 8.61 $ 8.78 $ 8.02
Market Value $ 18.99 $ 37.60 $ 37.60 $ 36.00 $ 30.40
Weighted Average Shares 2,200,130 2,195,869 2,123,154 2,123,265 2,123,688
=======================================================================================================
(A) Includes one-time insurance proceeds of approximately $1.4 million
* Retroactively adjusted for stock splits
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evans Bancorp, Inc. (The "Company") is the holding company for Evans National
Bank (the "Bank"), its wholly-owned subsidiary which is a nationally chartered
bank founded in 1920 and headquartered in Angola, New York. The Bank's principal
business is to provide a full range of banking services and other financial
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. In
early 2002, the Bank signed a long term land lease commitment in Amherst, New
York, where it plans to construct its eighth branch. 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 of the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is regulated by the Office of the Comptroller of the Currency.
On March 11, 2000, ENB Associates Inc., a wholly-owned subsidiary of the Bank,
began the activity of providing non-deposit investment products, such as
annuities and mutual funds, to bank customers. Effective September 1, 2000, the
Bank 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 by 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. Also, as of January 1, 2002, M&W Agency, Inc.,
acquired the assets, business and certain liabilities of the Eden Agency in
Eden, New York.
Commencing in 2000, the Company operates in two reportable segments-banking and
insurance. For the year ended December 31, 1999, 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's 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 reports filed by the Company with the Securities and
Exchange Commission. 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 $2.6 million in
2001 consists of $2.3 million related to the Company's banking activities and
$0.3 million related to the Bank's insurance activities. The total net income of
$2.6 million or $1.17 per share in 2001 compares to $3.2 million or $1.47 per
share for 2000. However, 2000 net income included one-time insurance proceeds of
approximately $1.4 million on a life insurance policy on the former Chairman,
President and CEO. This policy was purchased to indirectly fund a future
obligation of the Bank under a Supplemental Employee Retirement Plan ("SERP").
Excluding the 2000 one-time insurance proceeds, 2001 net income increased by
$0.7 million or 40.0%. Net income in 1999 was $2.0 million or $.95 per share.
All share and per share information presented is stated after giving effect to a
5 for 4 stock split distributed on June 12, 2001, to shareholders of record on
May 25, 2001.
[BAR CHART]
NET INCOME
(in millions)
97 $1.8
98 $2.0
99 $2.0
00 $3.2+
01 $2.6
+ 2000 earning relected a one-time receipt of approximately $1.4 million in life
insurance proceeds. Excluding the effect of thelife insurance proceeds, 2000 net
income was approximatley $1.8 million.
9
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 6.2% from
2000 to 2001, compared to an increase of 14.2% from 1999 to 2000. This increase
in 2001 is primarily attributable to the increase in average earning assets of
$19.1 million versus an increase of $15.9 million in average interest-bearing
liabilities over 2000. The tax-equivalent yield on earning assets decreased 49
basis points from 8.07% in 2000 to 7.58% in 2001. The cost of funds decreased
only 35 basis points, from 4.20% in 2000 to 3.85% in 2001. The Bank's net
interest margin decreased from 4.43% at December 31, 2000 to 4.20% at December
31, 2001.
Management believes there are two main factors contributing to the net interest
margin decline from 2000 to 2001. In an effort to stimulate the U.S. economy,
the Federal Reserve decreased short-term interest rates 11 times for a
cumulative impact of 475 basis points during 2001. These moves led to decreases
in the prime rate which reduced the Bank's interest income. The Bank made
subsequent adjustments to deposit rate offerings to offset such decreases which
lagged behind the changes in the prime rate. The dollar volume and rate volume
changes both contributed to the decrease in net interest margin. In addition to
the fact that the cost of funds decreased 35 basis points, while the
tax-equivalent yield on interest-earning assets decreased 49 basis points, the
volume of average interest-earning assets increased by 9.7% or $19.1 million
while average interest-bearing liabilities increased 10.4% or $15.9 million in
2001 as compared to 2000.
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. As the Bank continues
to expand into new markets, competition is likely to increase further, including
direct competition with other community banks. A wealth of information regarding
competitors is easily obtained by consumers via the Internet, from television
and through print media. Competitors exist beyond the geographic trade area and
banks generally 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, therefore, has priced its
products to be competitive with these competitors which has affected its net
interest margin.
The Bank regularly 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount charged against the Bank's
earnings to establish a reserve or allowance sufficient to absorb expected loan
losses based on management's evaluation of the loan portfolio. Factors
considered include future loan concentrations, charge-off history, delinquent
loan percentages, input from regulatory agencies and general economic
conditions. In 2001, the Bank charged $0.4 million against earnings for loan
losses as compared to $0.7 million in 2000. In 1999, $0.2 million was charged
against earnings for this purpose.
The amount charged to loan losses over the past three years has been greater
than the Bank's actual loan losses. The following table summarizes the Bank's
actual loan losses, total of non-performing loans and total allowance for loan
losses for 2001, 2000 and 1999, both in dollars and as a percentage of total
loans outstanding:
2001 2000 1999
Actual Loan Losses $ 79,602 0.06% $ 105,056 0.08% $ 70,543 0.08%
Non-Performing Loans $1,167,000 0.81% $1,460,000 1.13% $1,771,625 1.52%
Allowance for Loan Losses $1,786,115 1.24% $1,428,467 1.11% $ 838,167 0.72%
Management's provision for loan losses 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 during an economic downturn. This is particularly true of commercial
borrowers. Commercial loans represent a segment of significant past growth as
well as concentration in the Company's real estate portfolio. Commercial real
estate values may be susceptible to decline in an adverse economy.
10
[BAR CHART]
NET INTEREST INCOME
(In millions)
97 $6.5
98 $6.9
99 $7.5
00 $8.6
01 $9.1
5-Year CAGR 9.13%
Management believes that the reserve is also in accordance with regulations
promulgated by the OCC, and is reflective of its assessment of the local
environment as well as a continued growth trend in commercial loans.
NON-INTEREST INCOME
Total non-interest income increased approximately $0.9 million or 24.1% in 2001
over 2000. This compares to an increase of approximately $2.3 million from 1999
to 2000. Non-interest income for 2000 included approximately $1.4 million of
life insurance proceeds, which the Bank recorded as the beneficiary of a life
insurance policy on its former Chairman, President and CEO. Excluding this
one-time item, non-interest income increased $2.3 million or 99.7% from 2000 to
2001. Income from the M&W Agency, Inc. accounted for a substantial portion of
this increase in non-interest income, approximately $1.8 million. Income on a
property foreclosed on in 2001 accounted for approximately $0.1 million in
additional income in 2001.
In 2001, the Bank received a six-month benefit from the increase in service
charges on deposit accounts instituted in July 2001. Loan-related income also
increased in 2001. 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.
Gains realized on the sale of assets, primarily planned sales of securities,
totaled approximately $0.2 million in 2001 versus an approximate $0.1 million
loss realized in 2000.
NON-INTEREST EXPENSE
Total non-interest expense increased approximately $2.0 million or 26.5% in 2001
over 2000. In 2001, the ratio of non-interest expense to average assets was
4.01% compared to 3.55% in 2000 and 3.24% in 1999. Non-interest expense
categories include those most impacted by branch expansion and the operations of
the M&W Agency, Inc. and ENB Associates Inc.: salaries, occupancy, advertising,
and supplies, among others. Salary and benefit expense increased 27.1% in 2001.
Of the $1.1 million increase in salary and benefit expenses in 2001,
approximately $0.9 million is attributable to the addition 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 $0.1 million or 12.9%. The cost of the
occupancy expense for M&W Agency, Inc. contributed $0.1 million to occupancy
expense. Repairs and maintenance increased approximately $0.1 million or 38.2%.
This was largely due to M&W Agency, Inc. Professional services increased about
$0.2 million or 65.7% due to increased fees related to the listing of the
Company's common stock on the Nasdaq National Market. Accounting and legal fees
comprised a majority of these expenses. M&W Agency, Inc. professional costs
increased as a result of additional audit fees required to perform their annual
external audit. The FDIC Assessment expense remained stable in 2001 as compared
to 2000, however, it increased 102.3% in 2000 over 1999. New assessment rates
went into effect on January 1, 2000. Other insurance decreased approximately
$0.1 million or 22.9% in 2001 due to one-time premiums paid in 2000 for life
insurance policies held on certain bank officers and directors.
Miscellaneous other expenses increased 41.7% or approximately $0.5 million in
2001. Expenses associated with Internet banking, ATM expense, telephone costs,
postal costs, maintenance on foreclosed properties, director fees and
correspondent bank service charges fall under miscellaneous expenses. All of
these categories increased in 2001 as compared to 2000. Amortization of goodwill
related to the M&W Agency, Inc. acquisition accounted for approximately $0.2
million of the increase. Due to the January 1, 2002
[BAR CHART]
Non-Interest Income
(In millions)
97 $ 1.0
98 $ 1.2
99 $ 1.3
00 $ 3.6+
01 $ 4.5
5-Year CAGR 37.21%
+ 2000 Non-interest income relected a one-time receipt of apporximately $1.4
million in life insurance preceeds. Excluding the effect of the life insurance
proceeds, 2000 non-interest income was approximately $2.3 million.
11
Statement of Financial Accounting Standards (SFAS) No. 142 adoption by the
Company, systematic goodwill amortization is likely to cease and the net
goodwill recorded by the Company will be evaluated for impairment at least on an
annual basis. Evans Bancorp, Inc. parent company expense increased approximately
$0.1 million due to costs incurred for initial listing and annual fees for
listing of the Company's common stock on the Nasdaq National Market. M&W Agency,
Inc. miscellaneous costs increased approximately $0.1 million due to a full year
of operation as a part of the Company in 2001 versus four months during 2000.
TAXES
The provision for income taxes in 2001 of $1.1 million reflects an effective tax
rate of 30%. This compares to $0.8 million or 19% in 2000 and $0.6 million or
23% in 1999. A significant reason for the increase in the effective tax rate in
2001 was a full year of non-tax deductible goodwill amortization expense related
to the M&W Agency acquisition. Additionally, the life insurance proceeds
recorded in 2000 were tax-exempt income also contributing to the favorable tax
position in that year. The Bank maintains a substantial investment in
tax-advantaged municipal bonds, which contributes to its favorable tax position.
FINANCIAL CONDITION
The Bank had total assets of $249.2 million at December 31, 2001, an increase of
$24.6 million or 11.0% over $224.5 million at December 31, 2000. Net loans of
$142.5 million increased 10.6% or $13.7 million over the previous year.
Securities increased $10.9 million or 15.0% and cash and cash equivalents
increased $1.3 million or 13.6%. Deposits grew by $17.6 million or 9.4%.
Shareholders' equity increased $1.8 million or 7.1%. Net unrealized gains/losses
on investment securities held by the Bank, after tax effect, increased $0.1
million over 2000.
LOANS
Loans comprised 62.5% of the Bank's total average earning assets in 2001. Actual
year-end total loan balances increased 10.8% versus an increase of 10.6% in 2000
and 5.3% in 1999. The Bank continues to focus its lending on commercial and
residential mortgages, commercial loans and home equity loans. Commercial
mortgages made up the largest segment of the portfolio at 51.3% of total loans.
Residential mortgages comprise 15.5% of the portfolio and 15.1% are home equity
loans. Other commercial loans account for 14.9% of outstanding loans.
At December 31, 2001, the Bank had a loan/deposit ratio of 70.6%. This compares
to a loan/deposit ratio of 69.7% at December 31, 2000.
The Bank currently retains the servicing rights to $16.0 million in long-term
mortgages sold to the Federal National Mortgage Association ("FNMA") since
becoming a member in 1995. This arrangement allows the Bank to offer long-term
mortgages without exposure to the associated interest rate risks, while
retaining customer account relationships. In 2001 and 2000 the Bank sold loans
to FNMA totaling approximately $8.5 million and $0.7 million respectively.
The Bank continued its contractual arrangement with the Student Loan Marketing
Association ("SLMA") during 2001 whereby SLMA services the Bank's loans to
borrowers who are still in school and subsequently purchases those loans.
Approximately $0.7 million in student loans were sold to SLMA in 2001. Student
loans presently make up 0.2% of total loans.
SECURITIES AND FEDERAL FUNDS SOLD
Securities and federal funds sold made up the remaining 37.5% of the Bank's
total average earning assets at December 31, 2001. These categories provide the
Bank with additional sources of liquidity and income. The Bank's securities
portfolio increased 15.0% over the prior year. It continues to be strongly
concentrated in tax-advantaged municipal bonds, which make up 47.7% of the
portfolio, US government-guaranteed mortgage-backed securities which make up
20.4% of bonds, and US government-sponsored agency bonds of various types which
comprise 30.4% 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 1.5% of the portfolio at December 31, 2001.
The credit rating of the portfolio is strong, with 93.9% of the portfolio
carrying the equivalent of a Moody's rating of AAA.
Federal funds sold balances are largely maintained for liquidity purposes. The
average balance maintained in federal funds sold increased slightly in 2001 to
1.5% of total average earning assets from 1.3% the previous year.
[BAR CHART]
NET LOANS
(In millions)
97 $101.6
98 $110.5
99 $116.4
00 $128.8
01 $142.5
12
The tax-equivalent yield earned on securities and federal funds sold decreased
30 basis points in 2001 moving from 7.00% in 2000 to 6.70% in 2001. This
compares to 6.33% in 1999. Decreasing yields were available on bonds purchased
throughout the year, and new investments were concentrated in longer term bonds
with call provisions. Also, certain planned sales of securities with accumulated
gains were made and replaced with similar-yielding bonds where possible. The
Bank experienced $0.2 million in net gains on these sales. As stated earlier,
the volume of federal funds sold increased in 2001, however, the yield on this
category decreased from 6.04% in 2000 to 4.12% in 2001.
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, 2001, $2.3
million 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 $81.7 million or approximately 97.2% of
the Bank's securities portfolio at December 31, 2001. Net unrealized gains and
losses on available for sale securities resulted in a net unrealized gain of
$1.1 million at December 31, 2001 as compared to $0.8 million at December 31,
2000. Rates decreased throughout 2001 as discussed above, driving market prices
up on fixed income bonds held in the portfolio. Unrealized gains and losses on
available for sale securities are reported, net of taxes, as a separate
component of shareholders' equity. At December 31, 2001, the impact to equity
was a net unrealized gain of approximately $0.7 million.
DEPOSITS
Total deposits increased $17.6 million or 9.4% in 2001 over 2000. 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
which has resulted in an 8.2% increase in demand deposits and 10.7% increase in
savings accounts. The tiered rate premium savings product remains a strong
product with a 13.0% increase in 2001 over 2000. Time deposits of less than
$100,000 increased 19.8% in 2001 partially as a result of the favorable reaction
to the CD Plus promotion related to the relocation and grand opening of the
Bank's new North Boston branch in September 2001.
Certificates of deposit in excess of $100,000 decreased 6.2%. 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. Certificates of deposit in excess of $100,000 have increased
significantly over the past several years due to the Bank's expansion of its
trade area.
[BAR CHART]
TOTAL DEPOSITS
(in millions)
97 $138.4
98 $144.1
99 $169.9
00 $186.7
01 $204.3
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 $11.7 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.
[BAR CHART]
CORE DEPOSITS*
(in millions)
97 $115.5
98 $119.9
99 $141.1
00 $156.0
01 $175.4
All Bank deposits excluding CD's over $100,000
13
The Bank also has the ability to purchase $7 million 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, so that securities
mature at regular intervals, to provide funds from principal and interest
payments at various times as liquidity needs may arise. Contractual maturities
are also laddered, with consideration as to the volatility of market prices, so
that securities are available for sale from time to time without the need to
incur significant losses. At December 31, 2001 approximately 5.3% of the Bank's
securities had maturity dates of one year or less and approximately 14.6% had
maturity dates of five years or less. At December 31, 2001, the Bank had net
short-term liquidity of $37.0 million as compared to $18.0 million at December
31, 2000. Available assets of $86.7 million less public and purchased funds of
$48.9 million resulted in a long-term liquidity ratio of 177% versus 167% at
December 31, 2000.
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 increased approximately $1.3 million or 13.6%
from 2000 to 2001. During 2001, the Bank found itself in a liquid position as
funds entered the Bank as a result of uncertainty in major equities markets.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. The
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, 2001 the Bank was in a negative gap
position with $0.4 million more in rate-sensitive liabilities repricing over the
next year than in rate-sensitive assets. The Bank had a $13.0 million negative
gap position at December 31, 2000. Based on the decrease in the negative gap
position, management feels that the Bank is well positioned for potential future
prime rate increases in 2002, considering assets typically reprice more quickly
than liabilities. The Bank's asset/liability target, as defined in its
asset/liability policy, is a difference of +/- 15% of the Bank's total assets,
which amounted to +/- $37.4 million at December 31, 2001. The gap ratio
(rate-sensitive assets/rate-sensitive liabilities) at that date was 1.00%.
Off-balance sheet financial instruments at December 31, 2001 included $8.4
million in undisbursed lines of credit at an average interest rate of 5.9%, $5.2
million in fixed rate loan origination commitments at 9.4%, $12.8 million in
adjustable rate loan origination commitments at 5.9% and $1.9 million in
adjustable rate letters of credit at an average rate of 5.8%.
Expected maturity
Year ended December 31 2002 2003 2004 2005 2006 Thereafter Total Fair Value
Interest - Assets
($000s)
Loans Receivable, Fixed 8,824 6,044 5,089 5,049 5,040 17,042 47,088 52,723
Average Interest 8.58% 8.69% 8.31% 8.23% 8.08% 7.98%
Loans Receivable, Adj. 26,152 4,570 5,008 6,443 7,692 45,796 95,661 95,661
Average Interest 6.22% 7.54% 7.27% 8.04% 7.87% 7.37%
Federal Funds 2,800
Average Interest 1.75%
Investments 27,317 15,482 6,779 6,323 2,148 26,016 84,065 84,065
Average Interest 6.36% 6.89% 6.99% 7.25% 6.93% 7.33%
Interest - Liabilities
($000s)
Deposits 76,042 37,689 14,689 14,188 17,100 4,955 164,663 166,995
Average Interest 3.93% 3.26% 2.16% 2.08% 2.71% 2.00%
Borrowed Funds 6,039 3,165 2,318 1,367 674 104 13,667 13,667
Average Interest 3.78% 5.06% 5.36% 5.48% 5.34% 9.00%
14
MARKET RISK
When rates rise or fall, the market value of the Bank's rate sensitive 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. The Bank has established an acceptable range target of negative 25% of
total capital, before SFAS No. 115 (after tax), as the maximum impact to equity
as a result of marking available for sale securities to market. At year-end, the
impact to equity as a result of marking available for sale securities to market
was an unrealized gain of $0.7 million. On a quarterly basis, the available for
sale portfolio is shocked for immediate rate increases of 100 and 200 basis
points. At December 31, 2001 the Bank determined it would take an immediate
increase in rates in excess of 200 basis points to eliminate the current capital
cushion. The Bank's capital ratios are also reviewed on a quarterly basis.
Unrealized gains and losses on available for sale securities are not included in
the calculation of these ratios.
CAPITAL EXPENDITURES
The construction and furnishing of the new office planned in Amherst, New York
is anticipated to cost the Bank approximately $0.7 million in 2002. The Bank
executed a long-term land lease in early 2002 for the site. Based on prior
capital improvements, especially in information systems technology, the Bank
feels it has the appropriate infrastructure in place to absorb the additional
capacity of this expansion without incurring any significant additional overhead
costs. The tenant in the Erie Road building adjacent to the Derby Office vacated
the building in late fall of 2001. In early 2002, the Bank began to renovate the
building for its own use. These renovations and furnishings for such building
are expected to total approximately $0.4 million. The Bank also plans on
renovating its Angola site in Spring 2002 at an estimated cost of $0.1 million.
M&W Agency, Inc. expects to incur approximately $0.1 million in capital costs
related to improvement of its information systems infrastructure. 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
Several new Statement of Financial Accounting Standards ("SFAS") have been
adopted recently, none of which is expected to have a negative impact on the
Company's financial statements.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in September 2000. This statement
replaces SFAS No. 125, and requires certain disclosures, but carries over most
of the provisions of SFAS No. 125. SFAS No. 140 was effective for transfers and
servicing of financial assets and extinguishments of liabilities of the Company
occurring after March 31, 2001 and did not have a material impact on the
Company's financial statements.
SFAS No. 141, Business Combinations issued on June 29, 2001 requires business
combinations entered into after June 30, 2001 to be accounted for using the
purchase method of accounting. Specifically identifiable intangible assets
acquired, other than goodwill, will be amortized over their estimated useful
economic life. This pronouncement had no effect on the Company's 2001 financial
statements.
SFAS No. 142, Goodwill and Other Intangible Assets, issued on June 29, 2001,
addresses how intangible assets that are acquired individually or with a group
of other assets should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. This statement will result in the end to systematic
goodwill and other intangible amortization and require impairment testing on
those balances at least annually. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. At December 31, 2001,
the Company had approximately $2.8 million of goodwill and recorded
approximately $0.3 million of goodwill expense for the year ended December 31,
2001. The Company believes this pronouncement will result in the cessation of
the regular annual expense for goodwill amortization. However, the Company will
continue to evaluate the net amount of goodwill recorded at least annually for
impairment and expense any excess.
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, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. 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, 2001
and 2000 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Buffalo, New York
January 24, 2002
16
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2001 and 2000 2001 2000
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 7,835,530 $ 8,108,912
Federal funds sold 2,800,000 1,250,000
------------ ------------
Total cash and cash equivalents 10,635,530 9,358,912
Securities:
Available for sale, at fair value 81,735,376 69,645,817
Held to maturity 2,329,855 3,475,401
Loans, net of allowance for loan losses of $1,786,000 in 2001
and $1,428,000 in 2000 142,469,032
128,779,052
Properties and equipment, net 4,122,733 3,776,869
Other assets 7,860,886 9,513,092
------------ ------------
TOTAL ASSETS $249,153,412 $224,549,143
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 39,597,700 $ 36,607,680
NOW and money market 9,604,537 9,550,131
Regular savings 64,351,240 58,142,285
Time 90,706,585 82,401,223
------------ ------------
Total deposits 204,260,062 186,701,319
Other borrowed funds 9,660,748 4,409,068
Securities sold under agreements to repurchase 4,006,669 3,869,172
Other liabilities 4,265,164 4,390,512
------------ ------------
Total liabilities 222,192,643 199,370,071
------------ ------------
CONTINGENT LIABILITIES AND COMMITMENTS 0 0
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized;
2,206,467 and 2,199,501 shares issued and outstanding, respectively 1,103,234 879,801
Capital surplus 13,727,084 13,810,991
Retained earnings 11,464,273 9,953,780
Accumulated other comprehensive income, net of tax 666,178 534,500
------------ ------------
Total stockholders' equity 26,960,769 25,179,072
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $249,153,412 $224,549,143
============ ============
See notes to consolidated financial statements.
17
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
INTEREST INCOME:
Loans $ 11,051,419 $ 10,616,225 $ 9,294,995
Federal funds sold 133,130 158,635 180,292
Securities:
Taxable 2,891,901 2,746,273 1,761,594
Non-taxable 1,570,725 1,549,636 1,317,962
------------ ------------ ------------
Total interest income 15,647,175 15,070,769 12,554,843
INTEREST EXPENSE ON DEPOSITS AND
BORROWINGS 6,537,154 6,490,680 5,043,316
------------ ------------ ------------
NET INTEREST INCOME 9,110,021 8,580,089 7,511,527
PROVISION FOR LOAN LOSSES 420,000 689,000 170,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,690,021 7,891,089 7,341,527
NON-INTEREST INCOME:
Service charges 1,046,615 862,207 741,232
Insurance service and fees 2,412,900 646,484 0
Net gain (loss) on sales of assets 166,279 (88,114) 16,103
Premium on loans sold 28,791 7,818 14,155
Life insurance proceeds 0 1,380,318 0
Other 873,327 839,468 571,428
------------ ------------ ------------
Total non-interest income 4,527,912 3,648,181 1,342,918
------------ ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,023,449 3,951,446 3,212,869
Occupancy 1,156,215 1,024,465 909,304
Supplies 229,031 197,614 173,698
Repairs and maintenance 366,609 265,296 232,428
Advertising and public relations 171,248 147,460 160,480
Professional services 474,905 286,607 245,575
FDIC assessments 34,416 34,481 17,041
Other Insurance 276,815 359,206 274,456
Other 1,797,918 1,268,459 824,324
------------ ------------ ------------
Total non-interest expense 9,530,606 7,535,034 6,050,175
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 3,687,327 4,004,236 2,634,270
INCOME TAXES 1,108,000 781,250 607,000
------------ ------------ ------------
NET INCOME $ 2,579,327 $ 3,222,986 $ 2,027,270
============ ============ ============
Net income per common share - basic $ 1.17 $ 1.47 $ 0.95
============ ============ ============
Weighted average number of common shares 2,200,130 2,195,869 2,123,154
============ ============ ============
See notes to consolidated financial statements.
18
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999 ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL
BALANCE, JANUARY 1, 1999 $ 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 $766,297 (1,628,404) (1,628,404)
------------
Total comprehensive income 398,866
------------
Cash dividends ($.38 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) 0 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 $550,271 1,719,596 1,719,596
------------
Total comprehensive income 4,942,582
------------
Cash dividends ($.42 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
Comprehensive income:
2001 net income 2,579,327 2,579,327
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $42,137 131,678 131,678
------------
Total comprehensive income 2,711,005
------------
Cash dividends ($.49 per
common share) (1,068,834) (1,068,834)
Five for four stock split
with fractional shares paid in cash 219,720 (241,317) (21,597)
Issuance of 7,425 shares under
Dividend Reinvestment Plan 3,713 157,410 161,123
Purchase of 3,086 shares for treasury (145,042) (145,042)
Reissuance of treasury stock under
stock dividend plan of 3,086 shares 145,042 145,042
----------- ------------ ------------ ---------- --------- ------------
BALANCE, DECEMBER 31, 2001 $ 1,103,234 $ 13,727,084 $ 11,464,273 $ 666,178 $ 0 $ 26,960,769
=========== ============ ============ ========== ========= ============
See notes to consolidated financial statements.
19
EVANS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
OPERATING ACTIVITIES:
Interest Received $ 16,054,390 $ 14,908,370 $ 12,559,167
Fees received 4,211,410 2,202,389 1,283,956
Interest paid (6,523,176) (6,314,332) (5,052,915)
Cash paid to employees and suppliers (6,743,750) (7,665,183) (5,750,114)
Income taxes paid (1,558,000) (992,235) (842,482)
------------ ------------ ------------
Net cash provided by operating activities 5,440,874 2,139,009 2,197,612
------------ ------------ ------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (47,716,648) (27,931,442) (30,158,490)
Proceeds from sales 15,547,047 15,544,257 3,121,468
Proceeds from maturities 21,390,184 4,786,927 8,423,564
Held to maturity securities:
Purchases (2,453,558) (2,962,044) (3,952,558)
Proceeds from maturities 2,595,887 2,935,536 7,099,039
Additions to properties and equipment (1,119,597) (359,547) (643,470)
Investment in joint venture 0 (10,500) 0
Increase in loans, net of repayments (23,594,878) (14,415,746) (11,666,342)
Proceeds from sales of loans 9,156,096 1,513,153 5,241,973
Proceeds from sale of other real estate owned 12,598 411,971 299,515
------------ ------------ ------------
Net cash used in investing activities (26,182,869) (20,487,435) (22,235,301)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds (repayments) from borrowing 5,389,178 (503,340) (412,234)
Increase in deposits 17,558,743 17,130,945 25,865,263
Dividends paid (907,711) (899,045) (798,196)
Fractional shares paid in cash in stock split (21,597 0 0
Purchase of treasury stock (145,042) (273,775) (205,368)
Sale of treasury stock 145,042 273,775 266,222
------------ ------------ ------------
Net cash provided by financing activities 22,018,613 15,728,560 24,715,687
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,276,618 (2,619,866) 4,677,998
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,358,912 11,978,778 7,300,780
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,635,530 $ 9,358,912 $ 11,978,778
============ ============ ============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 2,579,327 $ 3,222,986 $ 2,027,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,316,806 663,346 611,579
Provision for loan losses 420,000 689,000 170,000
(Gain) loss on sales of assets (195,070) 80,296 (16,103)
Proceeds from life insurance 0 (1,380,318) 0
Changes in assets and liabilities affecting cash flow:
Other assets 1,749,539 (981,869) (832,205)
Other liabilities (429,728) (154,432) 237,071
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,440,874 $ 2,139,009 $ 2,197,612
============ ============ ============
See notes to consolidated financial statements.
20
EVANS BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements / Years Ended December 31, 2001,
2000 and 1999
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 whereby 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 in accumulated other comprehensive income.
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 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.
21
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 provision for loan losses 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 during an economic downturn. This is particularly true of commercial
borrowers. Commercial loans represent a segment of significant past growth as
well as concentration in the Company's commercial real estate portfolio.
Commercial real estate values may be susceptible to decline in an adverse
economy. Management believes that the reserve is also in accordance with
regulations promulgated by the OCC, 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. Through December 31, 2001 goodwill was 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. Effective January 1, 2002, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. This statement addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company believes that this
pronouncement will result in the cessation of systematic amortization of its
goodwill. At December 31, 2001, the Company had approximately $2.8 million of
goodwill and recorded approximately $318,000 of goodwill expense for the year
ended December 31, 2001. The Company will continue to evaluate the net amount of
goodwill recorded at least annually for impairment.
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 2001, 2000 or 1999.
LOAN SERVICING - The Company, in its normal course of business, sells certain
residential mortgages which it originates to the Federal National Mortgage
Association ("FNMA"). The Company maintains servicing rights on the loans that
it sells to FNMA and earns a fee thereon. At December 31, 2001 and 2000, the
Company had approximately $15,997,000 and $8,904,000, respectively, in unpaid
principal balances of loans services for FNMA. The Company has recorded no net
servicing asset for such loans. For the year ended December 31, 2001, the
Company sold $8,500,000 in loans to FNMA.
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 opin-
22
ion 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.
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 splits. Only basic earnings per share is disclosed because
the Company does not have any dilutive securities or other contracts to issue
common stock or convert to common stock. All share and per share information
presented is stated after giving effect to stock splits.
STOCK SPLIT - A 5 for 4 stock split was distributed on June 12, 2001 to
shareholders of record as of May 25, 2001. Fractional shares were redeemed for
cash. The stock split resulted in the issuance of 439,441 shares of common stock
as well as fractional shares paid in cash totaling $21,597. All share and per
share data reflect the split.
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 continue to receive cash dividends, as declared, in the usual manner. Fifth
Third Bank, Corporate Trust 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 Company'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 $1,290,000 and $1,045,000 at
December 31, 2001 and 2000, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2000 and
1999 financial statements to conform with the presentation used in 2001.
ACCOUNTING STANDARDS PRONOUNCEMENTS: SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998. The Company adopted
the provisions of SFAS No. 133 effective October 1, 1998. The adoption of SFAS
No. 133 (as amended by SFAS 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, was issued in September 2000. This statement
replaces SFAS No. 125, and requires certain disclosures, but carries over most
of the provisions of SFAS No. 125. SFAS No. 140 was effective for transfers and
servicing of financial assets and extinguishments of liabilities of the Company
occurring after March 31, 2001 and did not have a material impact on the
Company's financial statements.
SFAS No. 141, Business Combinations issued on June 29, 2001 requires business
combinations entered into after June 30, 2001 to be accounted for using the
purchase method of accounting. Specifically identifiable intangible assets
acquired, other than goodwill, will be amortized over their estimated useful
economic life. This pronouncement had no effect on the Company's 2001 financial
statements.
SFAS No. 142, Goodwill and Other Intangible Assets, issued on June 29, 2001,
addresses how intangible assets that are acquired individually or with a group
of other assets should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. This statement will result in the end to systematic
goodwill and other intangible amortization and require impairment testing on
those balances at least annually. SFAS No. 142 is effective for the Company
beginning on January 1, 2002 and is applicable to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized.
23
2. SECURITIES
The amortized cost of securities and their approximate fair value at December 31
were as follows:
2001 - UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
Available for Sale:
U.S. Government and Agency Securities $ 24,934,682 $ 636,940 $ (44,445) $ 25,527,177
Mortgage Backed Securities 17,040,697 109,613 (12,236) 17,138,074
State and Municipal Securities 37,409,765 723,580 (316,320) 37,817,025
Other Securities 1,253,100 0 0 1,253,100
------------ ------------ ------------ ------------
Total $ 80,638,244 $ 1,470,133 $ (373,001) $ 81,735,376
============ ============ ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 39,610 $ 0 $ 0 $ 39,610
State and Municipal Securities 2,290,245 0 0 2,290,245
------------ ------------ ------------ ------------
Total $ 2,329,855 $ $ $ 2,329,855
============ ============ ============ ============
2000 - UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR 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
=========== ============ ============ ============
Available for sale securities with a total fair value of $29,410,581 at December
31, 2001 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, 2001 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 SALE SECURITIES HELD TO MATURITY SECURITIES
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
Due in one year or less $ 2,942,893 $ 2,956,009 $ 1,470,993 $ 1,470,993
Due after year one through five years 7,109,443 7,301,378 534,864 534,864
Due after five years through ten years 17,127,051 17,766,599 153,474 153,474
Due after ten years 53,458,857 53,711,390 170,524 170,524
----------- ----------- ----------- -----------
Total $80,638,244 $81,735,376 $ 2,329,855 $ 2,329,855
=========== =========== =========== ===========
Realized gains and losses from sales of securities for the years ended December
31, 2001, 2000 and 1999 are summarized as follows:
2001 2000 1999
Gross gains $ 184,204 $ 41,628 $ 3,084
Gross losses (523) (94,454) (3,841)
---------- --------- ---------
Net gain (loss) $ 183,681 $ (52,826) $ (757)
========== ========= =========
24
3. LOANS, NET
Major categories of loans at December 31, 2001 and 2000 are summarized as
follows:
2001 2000
Real estate - mortgages $ 120,765,599 $ 107,218,299
Real estate - construction 1,520,153 1,965,555
Commercial 16,332,735 14,783,192
Installment 2,858,944 3,140,291
Student Loans 233,678 337,536
Other 1,293,279 1,350,205
Direct financing lease 897,878 1,040,722
Net deferred loan origination costs 352,881 371,719
------------- -------------
144,255,147 130,207,519
------------- -------------
Allowance for loan losses (1,786,115) (1,428,467)
Loans, net $ 142,469,032 $ 128,779,052
============= =============
Changes in the allowance for loan losses for the years ended December 31, 2001,
2000 and 1999 were as follows:
2001 2000 1999
Balance, beginning of year $ 1,428,467 $ 838,167 $ 729,199
Provision for loan losses 420,000 689,000 170,000
Recoveries 17,250 6,356 9,511
Loans charged off (79,602) (105,056) (70,543)
----------- ----------- -----------
Balance, end of year $ 1,786,115 $ 1,428,467 $ 838,167
=========== =========== ===========
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 $724,000 and $1,195,000 at December 31, 2001 and 2000,
respectively. The average recorded investment in these loans during 2001, 2000,
and 1999 was approximately $601,600, $1,166,500, and $889,500, respectively. If
such loans had been in an accruing status, the Bank would have recorded
additional interest income of approximately $36,000, $78,000 and $76,000 in
2001, 2000 and 1999, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 2001.
As of December 31, 2001 and 2000, 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 $897,878 at
December 31, 2001. Unearned income totaled $144,658 at December 31, 2001. All
future minimum lease payments are expected to be collected.
At December 31, 2001 the scheduled future minimum lease payments are as follows:
2002 $ 211,265
2003 224,469
2004 264,082
2005 198,062
-----------
Total $ 897,878
===========
25
4. OTHER ASSETS
Other assets at December 31, were as follows:
2001 2000
Bank owned life insurance $ 832,755 $ 689,915
Goodwill 2,843,363 3,182,143
Deferred tax asset 1,439,172 1,279,585
Accrued interest receivable 1,469,607 1,599,780
Life insurance proceeds receivable 0 1,650,000
Other 1,275,989 1,111,669
------------- ------------
Total $ 7,860,886 $ 9,513,092
============= ============
5. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
2001 2000
Land $ 268,485 $ 268,485
Buildings and improvements 4,468,428 3,737,942
Equipment 3,931,185 3,520,974
Construction in Progress 0 21,100
----------- -----------
8,668,098 7,548,501
Less accumulated depreciation (4,545,365) (3,771,632)
----------- -----------
Properties and equipment, net $ 4,122,733 $ 3,776,869
=========== ===========
Depreciation expense totaled $613,117 in 2001, $578,407 in 2000, and $506,381 in
1999.
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 14, the Company was a party to financial instruments with off-balance sheet
risk at December 31, 2001 and 2000. Such financial instruments consist of
commitments
26
to extend permanent financing and letters of credit. If the options are
exercised by the prospective borrowers, these financial instruments will become
interest-earning assets of the Company. If the options expire, the Company
retains any fees paid by the counterparty in order to obtain the commitment or
guarantee. The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate commitments, the fair value estimation takes into consideration
an interest rate risk factor. The fair value of guarantees and letters of credit
is based on fees currently charged for similar agreements. The fair value of
these off-balance sheet items at December 31, 2001 and 2000 approximates the
recorded amounts of the related fees, which are not considered material.
At December 31, 2001 and 2000, the estimated fair values of the Company's
financial instruments were as follows:
2001 2000
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
Financial Assets:
Cash and cash equivalents $ 10,635,530 $ 10,635,530 $ 9,358,912 $ 9,358,912
============ ============ ============ ============
Securities $ 84,065,231 $ 84,065,231 $ 73,121,218 $ 73,121,218
============ ============ ============ ============
Loans $144,255,147 $130,207,519
Less: allowance for loan losses 1,786,115 1,428,467
------------ ------------
Loans, net $142,469,032 $148,103,833 $128,779,052 $129,163,941
============ ============ ============ ============
Financial Liabilities
Deposits $204,260,062 $206,592,532 $186,701,319 $187,233,211
============ ============ ============ ============
Other borrowed funds $ 9,660,748 $ 9,660,748 $ 4,409,068 $ 4,409,068
============ ============ ============ ============
7. DEPOSITS
Time deposits, with minimum denominations of $100,000 each, totaled $28,864,608
and $30,779,658 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of time deposits are as follows:
2002 $ 62,239,972
2003 23,889,847
2004 888,908
2005 387,774
2006 3,207,171
Thereafter 92,913
------------
$ 90,706,585
============
8. OTHER BORROWED FUNDS
Other borrowed funds include $9,660,748 of long-term borrowing at December 31,
2001. The long-term borrowing 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:
2002 $ 2,032,393
2003 3,165,143
2004 2,318,226
2005 1,366,527
2006 778,459
-----------
Total $ 9,660,748
===========
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
27
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.
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.
2001 2000
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,912,951 $ 1,851,106
Service cost 170,990 110,067
Interest cost 155,046 145,860
Employer contributions 85,835 93,807
Actuarial gain (270,175) (444)
Benefits paid (96,255) (287,445)
----------- -----------
Benefit obligations at end of year 1,958,392 1,912,951
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,897,429 $ 1,932,394
Actual return on plan assets (151,892) 158,673
Employer contributions 85,835 93,807
Benefits paid (96,255) (287,445)
----------- -----------
Fair value of plan assets at end of year 1,735,117 1,897,429
----------- -----------
Funded status (223,275) (15,522)
Unrecognized net actuarial gain 177,041 59,635
Unrecognized prior service cost (197,696) (212,403)
----------- -----------
Accrued benefit cost $ (243,930) $ (168,290)
=========== ===========
The Plan's assets are primarily invested in equity and fixed income mutual
funds. Valuations of the pension plan as shown above were conducted as of
October 1, 2001 and 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%
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:
2001 2000 1999
Service cost $ 170,990 $ 110,067 $ 89,062
Interest cost 155,046 145,860 132,676
Expected return on plan assets (148,392) (149,085) (135,913)
Net amortization and deferral (16,169) (16,169) (16,169)
--------- --------- ---------
Net periodic benefit cost $ 161,475 $ 90,673 $ 69,656
========= ========= =========
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 $166,000 and $119,000 at
December 31, 2001 and 2000, respectively. The face values of these policies were
approximately $1,750,000 at December 31, 2001 and 2000. 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.
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.
2001 2000
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,384,729 $ 1,216,689
Service cost 130,879 194,792
Interest cost 109,902 73,633
Actuarial gain (loss) (214,574) (100,385)
----------- -----------
Benefit obligation at end of year 1,410,936 1,384,729
----------- -----------
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 (1,410,936) (1,384,729)
Unrecognized net actuarial loss 276,052 453,519
----------- -----------
Accrued benefit cost $(1,134,884) $ (931,210)
=========== ===========
Valuations of the nonqualified supplemental executive retirement plan as shown
above were conducted as of January 1, 2001 and 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:
2001 2000 1999
Service cost $130,879 $194,792 $ 83,898
Interest cost 109,902 73,633 63,592
Net amortization and deferral 55,669 51,602 51,602
-------- -------- --------
Net periodic benefit cost $296,450 $320,027 $199,092
======== ======== ========
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $71,000, $212,000
and $73,000 in 2001, 2000 and 1999, respectively. The estimated present value of
the benefit obligation, included in other liabilities, was $983,000 and $959,000
at December 31, 2001 and 2000, respectively. This obligation is indirectly
funded by life insurance contracts (naming the Bank as beneficiary) with
aggregate cash surrender values of approximately $381,000 and $285,000 at
December 31, 2001 and 2000, respectively. The face values
29
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 defined contribution Employee Savings 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 first 4% of the employees contribution plus 1% of the employees
base pay. The Bank can also make discretionary contributions to the Plan. The
Bank's expense under this Plan was approximately $44,000, $43,000 and $39,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
11. STOCK OPTION PLAN
The Company maintains a Stock Option Plan (the "Plan"). Under the provisions of
the Plan, awards, up to an aggregate 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 Compensation 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, 2001 no awards have been granted.
12. INCOME TAXES
The components of the provision for income taxes were as follows:
2001 2000 1999
Income taxes currently payable $ 1,293,000 $ 1,250,000 $ 769,000
Deferred benefit (185,000) (468,750) (162,000)
----------- --------- ---------
Net provision $ 1,108,000 $ 781,250 $ 607,000
=========== ========= =========
At December 31, 2001 and 2000 the components of the net deferred tax asset were
as follows:
2001 2000
Deferred Tax Assets:
Allowance for loan losses $ 651,000 $ 519,000
Pension premiums 654,000 554,000
Deferred compensation 386,000 383,000
Other 0 85,000
---------- ----------
Gross deferred tax assets 1,691,000 1,541,000
---------- ----------
Deferred Tax Liabilities:
Depreciation 0 24,000
SERP premiums 113,000 114,000
Prepaid expenses 139,000 149,000
Unrestricted gains/losses on securities 431,000 314,000
---------- ----------
Gross deferred tax liabilities 683,000 601,000
---------- ----------
Net deferred tax assets $1,008,000 $ 940,000
========== ==========
The net deferred tax asset at December 31, 2001 and 2000 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.
30
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, 2001 2000 1999
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Tax provision at statutory rate $ 1,254,000 34% $ 1,361,000 34% $ 896,000 34%
Increase (decrease) in taxes resulting from:
Tax-exempt income (534,000) (15) (527,000) (13) (448,000) (17)
Tax exempt insurance proceeds (469,000) (12) 0 0
State taxes, net of federal benefit 240,000 7 210,000 5 159,000 6
Non-deductible Goodwill 108,000 3 36,000 1 0 0
Other items, net 40,000 1 170,250 4 0 0
----------- -- ----------- -- --------- --
Provision for income taxes $ 1,108,000 30% $ 781,250 19% $ 607,000 23%
=========== == =========== == ========= ==
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, 2001 and 2000 was $4,993,555 and
$4,689,588, respectively. During 2001 and 2000, new loans to such related
parties amounted to $15,613,495 and $9,384,541, respectively, and repayments
amounted to $15,304,528 and $9,181,300.
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, 2001 and 2000 is as follows:
2001 2000
Commitments to extend credit $26,457,000 $27,435,000
Standby letters of credit 1,843,000 1,203,000
----------- -----------
Total $28,300,000 $28,638,000
=========== ===========
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
All 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, which is Western New York. 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.
31
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 segments are the same as those described in Note 1. The
following table sets forth information regarding these segments for the years
ended December 31, 2001 and 2000.
2001
BANKING ACTIVITIES INSURANCE ACTIVITIES TOTAL
Net Interest income (loss) $ 9,138,090 $ (28,069) $ 9,110,021
Provision for credit losses 420,000 0 420,000
----------- ---------- -----------
Net interest income (loss) after provision for credit loses 8,718,090 (28,069) 8,690,021
Non-interest income 1,948,733 0 1,948,733
Insurance commissions and fees 2,412,900 2,412,900
Net gain (loss) on sales of assets 166,279 166,279
Non-interest expense 7,671,705 1,858,901 9,530,606
----------- ---------- -----------
Income before income taxes 3,161,397 525,930 3,687,327
Income tax expense 897,400 210,600 1,108,000
----------- ---------- -----------
$ 2,263,997 $ 315,330 $ 2,579,327
=========== ========== ===========
2000
BANKING ACTIVITIES INSURANCE 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 loses 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 gain (loss) on sales of assets (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
----------- ----------- -----------
$ 3,178,293 $ 44,693 $ 3,222,986
=========== =========== ===========
IDENTIFIABLE ASSETS, NET DECEMBER 31, 2001 December 31, 2000
Banking activities $245,342,374 $220,798,870
Insurance activities 3,811,038 3,750,273
------------ ------------
Consolidated Total Assets $249,153,412 $224,549,143
============ ============
For the year ended December 31, 1999, the Company determined that its business
was comprised of banking activities only.
32
17. 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, 2001 and 2000, that
the Bank met all capital adequacy requirements to which it is subject.
As of June 30, 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:
2001
MINIMUM TO BE WELL
MINIMUM FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total Capital (to Risk Weighted Assets) $ 25,226,000 16.4% $ 12,333,000 8.0% $ 15,417,000 10.0%
----------- ---- ------------ --- ------------- ----
Tier I Capital (to Risk Weighted Assets) $ 23,451,000 15.2% $ 6,167,000 4.0% $ 9,250,000 6.0%
----------- ---- ------------ --- ------------- ----
Tier I Capital (to Average Assets) $ 23,451,000 9.6% $ 9,763,000 4.0% $ 12,204,000 5.0%
----------- ---- ------------ --- ------------- ----
2000
MINIMUM TO BE WELL
MINIMUM FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES 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%
------------ ---- ----------- --- ----------- ----
33
18. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as
follows:
2001 2000 1999
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
Cash $ 36,779 $ 41,205
Investment in subsidiary 26,923,990 25,137,867
------------ ------------
Total assets $ 26,960,769 $ 25,179,072
============ ============
STOCKHOLDERS' EQUITY
Stockholders' Equity:
Common stock $ 1,103,234 $ 879,801
Capital surplus 13,727,084 13,810,991
Retained earnings 11,464,273 9,953,780
Accumulated other comprehensive income, net of tax 666,178 534,500
------------ ------------
Total stockholders' equity $ 26,960,769 $ 25,179,072
============ ============
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000, and 1999
Dividends from subsidiary $ 1,068,834 $ 899,046 $ 798,195
Other revenue 185,000 50,000 50,000
Expenses (189,426) (47,813) (49,681)
------------ ------------ ------------
Income before equity in undistributed earnings of subsidiary 1,064,408 901,233 798,514
Equity in undistributed earnings of subsidiary 1,514,919 2,321,753 1,228,756
------------ ------------ ------------
Net income $ 2,579,327 $ 3,222,986 $ 2,027,270
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
Operating Activities:
Net income $ 2,579,327 $ 3,222,986 $ 2,027,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary (1,514,919) (2,321,753) (1,228,756)
------------ ------------ ------------
Net cash provided by operating activities 1,064,408 901,233 798,514
Financing Activities - Cash dividends paid (1,068,834) (899,046) (798,195)
------------ ------------ ------------
Net (increase) decrease in cash (4,426) 2,187 319
Cash, beginning 41,205 39,018 38,699
------------ ------------ ------------
Cash, ending $ 36,779 $ 41,205 $ 39,018
============ ============ ============
34
19. SUBSEQUENT EVENTS
Subsequent to the Balance Sheet date of December 31, 2001, M&W Agency, Inc,
completed its acquisition of the assets, business and certain liabilities of the
Eden Agency, Inc., a retail property and casualty insurance company located in
Eden, New York. The pro forma impact of this acquisition is not material to the
revenue, net income or earnings per share assuming the acquisition had taken
place at January 1, 2001.
Subsequent to the Balance Sheet date of December 31, 2001, the Bank signed a
long-term land lease commitment in Amherst, New York, upon which it plans to
construct its eighth branch. Construction of the branch is expected to begin in
late spring 2002 with an expected completion date of fall 2002.
Subsequent to the Balance Sheet date of December 31, 2001, the Bank was in the
process of establishing a wholly owned subsidiary, Evan National Holding Corp, a
New York Corporation that will elect to be taxed as a real estate investment
trust. The business activities of this subsidiary will be limited to purchasing
and servicing loans and beneficial interest thereunder.
20. QUARTERLY FINANCIAL DATA - UNAUDITED
(In thousands, except per share data) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
2001
Interest Income $3,701 $3,947 $3,998 $4,001
Interest Expense 1,434 1,611 1,699 1,793
------ ------ ------ ------
Net Interest Income 2,267 2,336 2,299 2,208
Net Income 548 725 650 655
Earnings per share** 0.24 0.33 0.30 0.30
2000
Interest Income $3,832 $3,886 $3,754 $3,599
Interest Expense 1,788 1,627 1,579 1,497
------ ------ ------ ------
Net Interest Income 2,044 2,259 2,175 2,102
Net Income 1,350* 695 635 543
Earnings per share** 0.59 0.32 0.30 0.26
* Fourth quarter 2000 net income includes a one-time life insurance benefit of
approximately $1.4 million on the former Chairman, President and CEO.
** All share and per share information is stated after giving effect to the June
2001, 5 for 4 stock split.
35
SHAREHOLDER AND CORPORATE INFORMATION
GENERAL SHAREHOLDER INFORMATION
As of December 31, 2001, there were 1,197 shareholders of record of the
Company's common stock. Total shares outstanding were 2,206,467.
ANNUAL MEETING
Tuesday, April 23, 2002 at 9:00 a.m.
Romanello's South Restaurant
5793 South Park Avenue
Hamburg, NY 14075
INVESTOR INFORMATION
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE COMPANY'S REPORT ON FORM
10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2001, 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, NY 14006
Investor and shareholder information regarding Evans Bancorp, Inc., including
all filings with the Securities and Exchange Commission, is available through
the Company's website at www.evansnationalbank.com.
STOCK TRANSFER AGENT
AND REGISTRAR
Shareholders requiring a change of name, address or ownership of stock, as well
as information about shareholders records, lost or stolen certificates,
dividend checks, dividend direct deposit, and dividend reinvestment plan should
contact:
Fifth Third Bank
Corporate Trust Services
38 Fountain Square Plaza
Mail Drop #10AT66
Cincinnati, OH 45202
1-800-837-2755 or (513) 579-5320
CORPORATE HEADQUARTERS
14-16 North Main Street
Angola, NY 14006
(716) 549-1000
AUDITORS
Deloitte & Touche LLP
50 Fountain Plaza
Buffalo, NY 14202
(716) 843-7200
CORPORATE OFFICERS
EVANS NATIONAL BANK
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
James Tilley
SENIOR VICE PRESIDENT
William R. Glass
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Mark DeBacker
VICE PRESIDENTS
Katherine M. Allen
George L. Catalano
Mary E. Doeing
Susan J. Herold
Timothy F. Jachlewski
Howard M. Martin, Jr.
Michael R. Noville
Michael C. Schafer
Jeffrey M. Werdein
Jeffrey L. White
ASSISTANT VICE PRESIDENTS
Rita A. Boyland
Michelle A.Bress
Rose Marie Hinckley
Nadine G. Houghton
Cathy E. Rohrich
Mary Jo Shults
BANK OFFICERS
Julie Gornikewicz
Lori L. Kuczka
Linda Noecker
Mary K. Nytz
Mary D. Philbin
M&W AGENCY, INC.
PRESIDENT
Robert G. Miller, Jr.
VICE PRESIDENTS
Louis Atti
Frederick Gould
Ronald E. Miller
ENB ASSOCIATES INC.
PRESIDENT
Robert G. Miller, Jr.
VICE PRESIDENT
Emily S. Hazlett
QUARTERLY STOCK PRICES*
3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01
=========================================================== =========================================================
HIGH $37.60 $37.60 $37.60 $37.60 HIGH $37.60 $37.60 $30.00 $22.57
- ----------------------------------------------------------- ---------------------------------------------------------
LOW $37.60 $37.60 $37.60 $37.60 LOW $37.60 $37.60 $18.00 $17.40
* Evans Bancorp, Inc. distributed a 5 for 4 split of its common stock on June
12, 2001 and the information listed has been adjusted to reflect this stock
split. The common stock began trading on the NASDAQ National Market system on
July 9, 2001. Prior to that time, the stock was not traded on an exchange and
the price information listed represents the highest and lowest per share
prices known to management at which the stock of the Company was sold in
private transactions during the periods indicated, without retail markup,
markdown or commission.
36
CORPORATE INFORMATION
BOARD OF DIRECTORS
Phillip Brothman
Chairman of the Board
Partner, Hurst, Brothman & Yusick
Thomas H. Waring, Jr.
Vice Chairman of the Board
Principal, Waring Financial Group
Robert W. Allen, Secretary
Retired
William F. Barrett
Property Developer and Real Estate Manager
James Biddle, Jr.
Treasurer, Mader Construction Corporation, Inc.
and related companies
Laverne G. Hall
Retired
David C. Koch
Chairman and Chief Executive Officer,
New Era Cap Co., Inc.
Robert G. Miller, Jr.
President, M&W Agency
James Tilley
President and Chief Executive Officer,
Evans National Bank
David M. Taylor
President, Concord Nurseries, Inc.
DIRECTORS EMERITUS
Floyd H. Hurst
Richard C. Stevenson
Carl F. Ulmer
OFFICERS
EVANS BANCORP, INC.
James Tilley
President and Chief Executive Officer
Robert W. Allen
Secretary
William R. Glass
Treasurer
[PHOTO]
BOARD OF DIRECTORS
Standing: James Biddle, Jr.; David C. Koch; David M. Taylor;
Robert G. Miller, Jr.; William F. Barrett; Laverne G. Hall
Seated: James Tilley; Robert W. Allen; Philip Brothman; Thomas H. Waring, Jr.
[PHOTO]
EXECUTIVE COMMITTEE
Left to right: Thomas H. Waring, Jr., Vice Chairman of the Board; James Tilley,
President and Chief Executive Officer; Phillip Brothman, Chairman of the Board;
William R. Glass, Senior Vice President; Mark DeBacker, Senior Vice President
and Chief Financial Officer
[PHOTO]
OPERATING COMMITTEE
Left to right: Mark DeBacker, Senior Vice President and Chief Financial Officer;
William R. Glass, Senior Vice President; James Tilley, President and Chief
Executive Officer; George L. Catalano, Vice President
37