EXHIBIT 13
[EVANS NATIONAL BANK LOGO]
insight
diversity
opportunity
service
[EVANS BANCORP, INC. LOGO]
2002 Annual Report
TABLE OF CONTENTS
2 Letter to Shareholders
6 Business and Market Profile
8 Selected Financial Information
9 Management's Discussion and Analysis
22 Independent Auditor's Report
23 Consolidated Financial Statements
27 Notes to Consolidated Financial Statements
46 Shareholder and Corporate Information
47 Directors and Officers
[COVER PAGE]
ABOUT OUR COVER
The insight, diversity, opportunity and service images shown are reflective of
the fundamental strategies demonstrated by Evans Bancorp, Inc. in a year of
solid performance.
[EVANS BANCORP, INC. LOGO]
CORPORATE PROFILE
Evans Bancorp, Inc. is the holding company for Evans National Bank, a commercial
bank with eight branches located in Western New York with $288.7 million in
assets and $239.5 million in deposits at December 31, 2002. The Bank serves its
market through offices located in Amherst, Angola, Derby, Evans, Forestville,
Hamburg, North Boston and West Seneca, New York. The Bank announced in January
2003, its intent to open a new branch in Erie County in late 2003, further
extending its market service area in Erie County.
The M&W Agency, Inc. is a wholly-owned subsidiary of the Bank offering retail
property and casualty insurance from ten 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 purchases
and sells securities to its customers.
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. These statements are not historical facts or guarantees of future
performance, events or results. 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.
Forward-looking statements speak only as of the date they are made. The Company
undertakes no obligation to publicly update or revise forward-looking
information, whether as a result of new, updated information, future events or
otherwise.
INSIGHT
INVESTMENT HIGHLIGHTS
- - Five-year compounded annual growth rate in assets of 12.74 percent and net
loans of 7.95 percent
- - Management's focus on growth of the commercial loan portfolio, particularly
loans secured by real estate
- - Diverse financial services and insurance businesses, with 26.5 percent of
revenue derived from non-interest income
- - A price to book value ratio of 1.76 based on the closing price for Evans
Bancorp, Inc. common stock of $23.38 on December 31, 2002
- - A dividend yield of approximately 2.40 percent, based on the closing price
for Evans Bancorp, Inc. common stock of $23.38 on December 31, 2002
- - History of asset strength, with residential mortgage loans at 12.9 percent
of the total loan portfolio at December 31, 2002, and history of low loan
charge-offs
2002 PERFORMANCE HIGHLIGHTS
- - Net income grew to $3.6 million, a 39.8 percent increase over 2001
- - Non-interest income increased by 20.9 percent for the year
- - Gross loans increased 4.8 percent in 2002, with commercial loans growing by
10.6 percent. The Bank's loan servicing portfolio with FNMA increased 50.2
percent in 2002 to $24.0 million at December 31, 2002
- - Total deposits increased by 17.3 percent during 2002
- - Continued technology improvements including the implementation of a new
state of the art imaging
system and the launch of the Bank's Cash Manager product which offers
business customers significant online banking capabilities
- - Established Evans National Holding Corporation ("ENHC"), a real estate
investment trust subsidiary of the Bank, intended to provide the Bank with
additional flexibility and planning opportunities
- - Opened a new branch in Amherst, New York, in December 2002, extending the
Bank's market service area to the northeast suburbs of Buffalo
TOTAL ASSETS
[BAR CHART]
98 99 00 01 02
(in millions)
$174.1 $198.8 $224.5 $248.7 $288.7
5-Year CAGR 12.74%
CAGR: Compound Annual Growth rate
NET EARNINGS PER SHARE*
[BAR CHART]
98 99 00 01 02
$0.92 $0.91 $1.40 $1.12 $1.55
5-Year CAGR 13.86%
* All per share data reflects the June 2001 5-for-4 stock split and the 1-for-20
stock dividend paid to shareholders of record on December 2, 2002.
1
EVANS NATIONAL BANK DIVERSITY
TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES
Evans Bancorp, Inc., the holding company for Evans National Bank and its
subsidiaries M&W Agency, Inc., ENB Associates Inc. and the Evans National
Holding Company, achieved record earnings in 2002. Strong asset and deposit
growth that exceeded our plan, solid loan growth and continued success in our
financial services and insurance businesses contributed to these exceptional
results.
The volatile interest rate environment of 2001 stabilized during 2002. In 2002,
mortgage refinancing continued at a rapid pace because of historically low
interest rates, equity markets underperformed, global uncertainties prevailed
and economic challenges on a national level continued to impact our local
economies. In spite of these uncertainties and challenges, our Company was able
to grow net income by 39.8%. Total assets of the Company increased to $288.7
million at December 31, 2002 or 16.1% over 2001. While total gross loans
increased by 4.8%, our focus on commercial lending resulted in an increase of
$10.1 million in the commercial loan portfolio, at December 31, 2002 or 10.6%
over 2001. Consumer loans decreased, primarily due to refinancings of fixed
rate residential mortgages and subsequent sales of residential mortgages in
secondary markets. The Bank continues to sell fixed rate residential loans
originated under a certain interest rate level, while maintaining the servicing
rights to such loans. At December 31, 2002, the Bank had retained the servicing
rights to $24.0 million in residential mortgages sold to the Federal National
Mortgage Association (FNMA).
CASH DIVIDENDS PAID PER SHARE*
[BAR CHART]
98 99 00 01 02
$0.28 $0.36 $0.40 $0.47 $0.56
5-Year CAGR 19.48%
* All per share data reflects the June 2001 5-for-4 stock split and the 1-for-20
stock dividend paid to shareholders of record on December 2, 2002.
Deposits exceeded our plan and increased by $35.2 million at December 31, 2002
or 17.3% over December 31, 2001. Two key performance measures for financial
institutions, return on equity and return on assets, were 13.3% and 1.36%,
respectively, in 2002 as compared to 10.18% and 1.09%, respectively, in 2001. In
recognition of the strong performance of the Company in 2002, and coinciding
with the opening of the Bank's new branch in Amherst, New York, the Company in
December 2002 declared a special 5% stock dividend to shareholders. I refer you
to the Investment Highlights and 2002 Performance Highlights described on the
previous page and encourage you to review the Management's Discussion and
Analysis section of this report. These sections describe further the growth and
financial performance of the Company in 2002.
During the year, we achieved a number of key initiatives consistent with our
strategic plan in addition to the financial performance results. These
initiatives are the result of our focus on the precepts of insight, diversity,
opportunity and service.
Evans National Holding Corporation was established as a real estate investment
trust. The availability of a real estate investment trust provides the Bank with
additional flexibility in managing our mortgage loan portfolio and will provide
cost savings to the Company.
Supporting our growth strategy for the M&W Agency, Inc., we acquired the Eden
Agency in Eden, New York, in January 2002. This acquisition compliments our
current insurance business and provides the opportunity to bring our financial
services to a neighboring community. We also redesigned the Derby, New York Bank
branch to provide adequate space for a new M&W Agency, Inc. office.
Our Bank's presence in the Derby community grew during the spring of 2002, when
we relocated our entire loan division from Angola to a completely renovated
building, which is adjacent to our Derby branch. This move allowed us to
centralize the Bank's loan functions, create processing efficiencies and relieve
the overcrowded state of our Angola headquarters. Later in 2002, we renovated
the interior of our headquarters in Angola to provide new office space for our
professional staff, an enlarged conference room and additional space to
accommodate our technology department.
We also opened our eighth Bank branch office in Amherst, New York in 2002. We
believe our Amherst location is well situated to offer our banking, insurance
and financial services to retail and commercial customers in that community.
Included in our new office is space for an insurance office of the M&W Agency,
Inc., as well space for our loan representative to process residential mortgage
and home equity loan requests.
2
OPPORTUNITY
Opening branches is not the only means of bringing our services to a community.
In 2002, we placed an ATM on the campus of D'Youville College, on the west side
of Buffalo, and in 2003, placed an ATM at Hilbert College in Hamburg, New York.
An ATM is now available at West Seneca West High School in conjunction with our
second student banking center in the West Seneca School District. These machines
are available to students, staff, faculty and others having access to the
facility. We will continue to identify appropriate sites throughout Western New
York for our ATM services.
We also continued to develop new products and services, as well as delivery
channels to service our customers. Our Merchant Credit Card program grew
significantly during 2002, and the revenue generated represents an increasing
portion of our non-interest income. The Merchant Credit Card program offers
efficient, competitively-priced processing for credit card transactions. In an
effort to be competitive and better serve our municipal and school district
accounts, we restructured our Muni-Vest account to provide improved liquidity
and return to these important customers. This effort resulted in approximately
$23.1 million in deposits in Muni-Vest accounts at December 31, 2002. Enhancing
our web-banking services remains important to us as our traditional customers
embrace this technology and we position ourselves for the future. In 2002, we
introduced "Cash Manager," a highly functional component of Eas-E Net Banking,
to give our commercial customers greater control and access to managing their
bank accounts from their place of business.
Another new service to our personal checking account customers was developed in
2002 and introduced in early 2003. This new service was named "Safeguard
Overdraft Service" (SOS). It provides our valued retail customers with certain
protection against accidental overdrafts. We continue to research ways to ensure
that our customer's service experience meets with his or her needs.
A high priority objective in 2002 was improving our communication with you, our
shareholders. An "Investor Fact Sheet" was distributed to our shareholders and
potential investors in July. We also began distributing "The Quarterly," a
newsletter to our shareholders about Company activities and financial results.
Our first issue was published following the 3rd quarter of 2002 results and we
intend to continue to distribute this report on a quarterly basis. To further
support shareholders communications, we introduced our new Evans Bancorp, Inc.
website in September 2002. This site features financial highlights, officer and
director information, important shareholder relations information and overviews
of the Company and its subsidiaries. Access is at www.evansbancorp.com.
The continued development of our electronic banking component with a goal to
bring better delivery to our customers with state-of-the-art technology, while
being efficient and cost effective, encouraged us to develop a service-bureau
approach to the future. Our technology department began this process of
transformation in 2002. The first stages were completed this past year when we
successfully converted our Item Processing and Check Imaging System to the
next-generation technology. Our conversion efforts will continue throughout the
coming twelve months.
While these initiatives are important, our people represent the key to
continuing our growth plans and managing our strategies. During the year, we
added the following persons to our management team:
John B. Connerton, CPA, joined the Bank as controller. John brings significant
experience in the field of public accounting with an emphasis on the banking
industry. He will be responsible for financial reporting, accounting and the
customer service departments.
Ronald J. Kasianowicz joined the Bank as assistant vice president and
residential loan officer. He brings over 18 years lending experience in our
trade areas. Ron will be focused on the Amherst market.
In addition, Mary Jo Shults, the Bank's manager of residential mortgage
originations, was promoted to a vice president. Mary Jo joined the Bank in 1999
with significant experience and knowledge of residential lending in our Western
New York market.
BOOK VALUE PER SHARE*
[BAR CHART]
98 99 00 01 02
$ 8.36 $ 8.20 $10.90 $11.64 $13.22
5-Year CAGR 11.59%
* All per share data reflects the June 2001 5-for-4 stock split and the 1-for-20
stock dividend paid to shareholders of record on December 2, 2002.
3
SERVICE
In preparation for the opening of our Amherst office, we made several
appointments and additions to the Bank's branch staff. Douglas V. Carlson was
appointed branch manager at the new Amherst office. Suzanne M. Funk was
appointed assistant manager in Amherst. Mary K. Hosler was promoted to branch
manager and Kim M. Heimburg, was appointed assistant manager of the Evans
branch. Julie A. Gornikiewicz was promoted to branch manager and Beverly J.
Iskra was promoted to assistant manager of the Forestville branch. Pamela L.
Catalano was promoted to assistant manager of the Derby office.
As a community bank, we believe in community involvement. It is one of our
stated corporate values. We further believe that our success is built on
returning the trust placed in us back to the communities we serve. We
established the Evans National Bank Foundation in 2002. Funded through corporate
donations, the Foundation will be used to channel our financial support for
philanthropic organizations and community projects. Beyond the financial support
of the Evans National Bank Foundation, our Company's philosophy of community
involvement was very evident in the many volunteer efforts of our staff,
managers, directors and advisors. Our Company's total level of volunteerism now
stands at 10,500 hours annually, an impressive effort that strengthens Evans
Bancorp's reputation as a dedicated and respected corporate citizen. The Company
also made a significant commitment this year as the major sponsor of the
Briercliff Home Show. While this benefits our mortgage business, the event also
produced a major financial contribution to the Buffalo Chapter of the
Make-A-Wish Foundation.
The year 2002 ended on a sad note for all of us at Evans Bancorp and the Evans
community. The passing of David Koch in early December 2002 ended his many years
of service to our Company. David had served on our Board of Directors since
1979, and over this time, served on every standing committee of the Board. His
leadership, business knowledge, sense of humor, integrity, and presence in the
community will be greatly missed.
OUTLOOK
While 2002 provided exciting opportunities to pursue several of our growth
strategies, we believe 2003 will be equally exciting, and perhaps more
challenging, as we seek to manage these initiatives.
We have identified our theme for 2003 as "Managing for Value". This theme is
intended to encourage and influence employees, at every level, to perform in
ways that enhance their own personal value, improve the value of the Company and
ultimately enhance shareholder value. We believe this theme will help to enable
us to meet the challenges of the future and encourage a real sense of ownership
throughout the Company as it grows.
To support this philosophy, our Board of Directors has approved an Employee
Stock Purchase Plan. Pending shareholder approval, this plan will provide the
opportunity for our employees to purchase shares of Evans Bancorp, Inc. stock at
a discounted price through a convenient payroll deduction system. We see this as
an efficient and effective way of increasing employee ownership and encouraging
improved Company performance.
We will continue to evaluate opportunities to expand our market area and bring
our style of banking and financial services to new communities. With assistance
from our consultant, Verdi & Company, we have identified additional markets in
Erie County and beyond, and are formalizing a five to eight-year strategic
expansion plan. Our plan will include improved training and efforts in
cross-selling to our current customer base, as well as additional financial
services facilities. Efforts to identify another branch location are presently
underway in order to close the market gap between our West Seneca and Amherst
locations. Our expansion plans call for another full-service branch
incorporating office space for insurance and investment services. Expansion
plans continue to include identification and pursuit of other acquisition
opportunities.
This spring, we plan to announce a new program for Trust and Private Wealth
Management services. As part of our strategy to grow non-interest income, this
program will fill a significant void in our family of products and services and
will enable us to serve a whole new market segment.
As a public company, we expect to focus considerable efforts in 2003 in
complying with the new requirements of the Sarbanes-Oxley Act of 2002 and other
changes in accounting and securities law disclosure requirements. We view these
changes as new opportunities to provide information about our Company to our
shareholders and the public and to continue our tradition as a community bank
accountable to our shareholders, customers and the communities we serve.
As described in the Proxy Statement for our Meeting of Shareholders to be held
on April 22, 2003, our Board of Directors has nominated two new directors for
election by the shareholders: Nancy Ware, the president of Edu-Kids, Inc.,
4
INSIGHT
an early childhood education center, and John O'Brien, the executive director of
financial administration for the Catholic Diocese of Buffalo. These individuals
bring strong business and financial experience to our Board. Along with these
additions to our governing Board of Directors, the Bank plans to increase the
size of its Regional Community Advisory Boards.
Our efforts to upgrade technology will continue in 2003, as we complete the
final installation phase of a new loan origination system, designed to provide
expedited turnaround on loan applications and disbursement. In addition, we will
finalize the conversion of our Item Processing and Check Imaging functions to a
service bureau-oriented environment in 2003. We anticipate cost savings and
efficiencies when these projects are fully completed.
To improve our balance between loans and deposits, we will continue to seek out
new opportunities to increase our commercial loan portfolio. We plan to recruit
additional, experienced commercial loan officers to focus on new markets and
customer relationships.
We greatly appreciate the support and confidence of our shareholders, customers
and the communities we serve. We approach 2003 with the same excitement and
enthusiasm that has driven past performance. You can remain certain that the
entire Evans Bancorp team is dedicated to our goals for 2003, ever mindful of
our mission to increase shareholder value. We know that we face an uncertain
economy and many critical issues on both national and local levels. However, we
believe our plans are well-formulated, our strategies are sound, and we have the
capability to carry them out.
Respectfully,
/s/ James Tilley
James Tilley
President and Chief Executive Officer
[PHOTO OF JAMES TILLEY]
5
EVANS NATIONAL BANK DIVERSITY
BUSINESS SUMMARY
LENDING
In 2002, we focused on increasing our commercial loan portfolio. Of the $10.1
million increase in total commercial loans, $6.5 million represented commercial
real estate loans. Our loan portfolio at year end consisted of 69.9% commercial
and 30.1% consumer loans. Real estate loans comprised the largest product
segment totalling 81.4% of total loans. Some of the products experiencing the
largest percentage growth at December 31, 2002, over December 31, 2001 include
commercial time/term loans, 34.6%, commercial lines of credit, 16.7%, commercial
mortgages, 8.9%, and home equity loans, 6.7%. 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.
Our lending activities include secured and unsecured commercial loans, consumer
loans, educational loans, commercial and consumer mortgages, home equity loans
and business loans.
FINANCIAL SERVICES
Evans Bancorp has quietly transformed itself into a diversified financial
services organization. Non-interest income in 2002 accounted for approximately
26.5% of revenue, allowing for a reduced reliance on net interest margin for
financial performance.
The Company's wholly-owned subsidiary, M&W Agency, whose business was acquired
September 1, 2000, offers full lines of personal and commercial insurance
products through ten locations throughout Western New York. The agency is also a
member of Combined Financial Services Inc., expanding product offerings further.
The addition of M&W Agency, significantly changed the distribution of Evans
Bancorp revenues, generating approximately $2.9 million in commission income or
14.2% of 2002 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 purchases and sells 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 69.7% in 2002.
GROSS LOAN COMPOSITION (DECEMBER 31, 2002)
[PIE CHART]
Gross Loans = $151.1 Million
Commercial Real Estate 51.5%
Residential 1 - 4 Family
Real Estate 17.7%
Second Mortgages 4.6%
Construction Mortgages 1.4%
Home Equity Lines
of Credit 9.1%
Commercial Loans 13.5%
Consumer Personal Loans 1.4%
Consumer Credit Cards .2%
Other Loans .6%
Revenue Components (2002)
[PIE CHART]
Total Revenue = $20.7 Million
Interest Income - Loans 51.2%
Interest Income - Securities 22.0%
Insurance Activities 14.2%
Other (including federal funds sold interest) 7.3%
Bank Deposit Account
Service Charges 5.3%
6
OPPORTUNITY
DEPOSITS
Evans National Bank's deposit account services include checking, savings, NOW
and time deposits. Total deposits were $239.5 million at December 31, 2002, an
increase of 17.3% from year end 2001. Our deposits have grown at a compound
annual growth rate of 11.59% over the last five years. Core deposits (excluding
CD accounts over $100,000) represent 88.1% of this growth.
TECHNOLOGY
During 2002, the Bank introduced Cash Manager, our Internet driven business
banking product which provides our business customers access to their accounts,
24 hours a day, 7 days a week. Cash Manager gives our customers the capability
to view and print transactions, transfer funds between accounts at our Bank and
elsewhere, make tax payments, and process direct deposit payroll, as well as
conduct other business, all under the protection of enhanced security. During
2002, the Bank also upgraded to the next generation of Items Processing/Check
Imaging Systems which offers additional flexibility, functionality and the
potential for cost savings. We also added two off-premise ATM's during 2002, and
plan to further expand our off-premise ATM network during 2003. Other electronic
banking services include full-service telephone banking, Internet 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. During 2002, the Bank also launched a separate website for Evans
Bancorp, Inc. accessible through www.evansbancorp.com.
MARKET AREA
Evans National Bank conducts its community banking business from eight branch
locations in Erie and northern Chautauqua counties in New York State. The Bank
plans to add a new branch in Erie County during late 2003.
M&W Agency, offers full lines of personal and commercial insurance products
through ten offices located in Erie, Cattaraugus and Chautauqua counties in New
York State. M&W's newest office was formerly the Gutekunst Insurance Agency,
whose business was acquired in January, 2003. M&W plans to open additional new
offices during the coming year.
DEPOSIT COMPOSITION (DECEMBER 31, 2002)
[PIE CHART]
Total Deposits = $239.5 Million
Savings 39.6%
Demand 18.7%
NOW 4.4%
Time 37.3%
[MAP]
7
SERVICE
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 2002 2001 2000 1999 1998
RESULTS OF OPERATIONS (in thousands)
Interest income $ 15,212 $ 15,647 $ 15,071 $ 12,555 $ 11,852
Interest expense 4,817 6,537 6,491 5,043 4,947
Net interest income 10,395 9,110 8,580 7,512 6,905
Non-interest income 5,474 A 4,528 3,648 C 1,343 1,220
Non-interest expense 10,650 B 9,531 7,535 6,050 5,197
Net income 3,606 AB 2,579 3,223 C 2,027 2,043
- -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (in thousands)
Total assets $ 288,711 $ 248,722 $ 224,549 $ 198,788 $ 174,120
Loans - net 148,998 142,469 128,779 116,433 110,526
Allowance for loan losses 2,146 1,786 1,428 838 729
Securities 106,672 84,065 73,121 63,000 50,060
Total deposits 239,507 204,260 186,701 169,949 144,084
Stockholders' equity 30,862 26,961 25,179 18,285 18,623
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA*
Net income $ 1.55 $ 1.12 $ 1.40 $ 0.91 $ 0.92
Cash dividend $ 0.56 $ 0.47 $ 0.40 $ 0.36 $ 0.28
Book value at year end $ 13.22 $ 11.64 $ 10.90 $ 8.20 $ 8.36
Market value at year end $ 23.38 $ 18.09 $ 35.81 $ 35.81 $ 34.29
Weighted average shares 2,325,414 2,310,137 2,305,662 2,229,311 2,229,428
- -----------------------------------------------------------------------------------------------------------------------
A Includes one-time insurance proceeds of approximately $0.2
million
B Includes adjustment to reduce pension expense by approximately $0.2 million
C Includes one-time insurance proceeds of approximately $1.4
million
* Retroactively adjusted for the June 2001 5-for-4 stock split and the 1-for-20
stock dividend paid to shareholders of record on December 2, 2002.
8
INSIGHT
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 to consumer and
commercial customers in Erie, Chautauqua and Cattaraugus Counties of Western New
York.
The Bank serves its market through eight banking offices located in Amherst,
Angola, Derby, Evans, Forestville, Hamburg, North Boston and West Seneca, New
York. The Bank's principal source of funding is through deposits, which it
reinvests in the community in the form of loans and investments. Deposits are
insured to the applicable limit by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the
Office of the Comptroller of the Currency ("OCC").
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
Company completed the acquisition of the assets, business and certain
liabilities of M&W Group, Inc., a retail property and casualty insurance agency
headquartered in Silver Creek, New York. The insurance agency acquired is
operated as 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. M & W
Agency, Inc. operates offices located in Angola, Cattaraugus, Colden, Derby,
Eden, North Collins, Silver Creek, South Dayton, Randolph, and West Seneca, New
York. Evans National Holding Corp. ("ENHC") was incorporated in February 2002,
as a subsidiary of the Bank. ENHC is operated as a real estate investment trust
("REIT"), which will provide additional flexibility and planning opportunities
for the business of the Bank.
The Company operates in two reportable segments - banking and insurance.
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, and a 1-for-20 stock dividend payable on January 29, 2003, to
shareholders of record on December 2, 2002.
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 filed by the Company with the Securities and Exchange Commission.
Many of these factors are beyond the Company's control. Forward-looking
statements speak only as of the date they are made. The Company undertakes no
obligation to publicly update or revise forward-looking information, whether as
a result of new, updated information, future events, or otherwise.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements, are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the industries in which it operates. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on
information available as of the date of the financial statements. Accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions and judgments. Certain policies inherently have a greater
reliance on the use of estimates, assumptions and judgments, and as such have a
greater possibility of producing results that could be materially different
than originally reported. Estimates, assumptions and judgments are necessary
when assets and liabilities are required to be recorded at fair value, when a
decline in the value of an asset not carried on the financial statements at fair
value warrants an impairment write-down or valuation reserve to be established,
or when an asset or liability needs to be recorded contingent upon a future
event. Carrying assets and liabilities at fair value inherently results in more
financial statement volatility. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based either
on quoted market prices or are provided by other third-party sources, when
available. When third-party information is not available, valuation adjustments
are estimated in good faith by management primarily through the use of internal
cash flow modeling techniques.
9
EVANS NATIONAL BANK DIVERSITY
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes and in this
financial review, provide information on how significant assets and liabilities
are valued in the financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions and estimates underlying those
amounts, management has identified the determination of the allowance for loan
losses and valuation of goodwill to be the accounting areas that require the
most subjective or complex judgments and as such could be most subject to
revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience and consideration
of current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the consolidated balance sheets. Note 1 to the consolidated financial statements
describes the methodology used to determine the allowance for loan losses.
The amount of goodwill reflected in the Company's consolidated financial
statements is required to be tested by management for impairment on at least an
annual basis. The test for impairment of goodwill on the identified reporting
unit is considered a critical accounting estimate because it requires judgement
and the use of estimates related to the growth assumptions and market multiples
used in the valuation model.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Note 1 to the consolidated financial statements discusses new accounting
policies adopted by the Company during 2002 and the expected impact of
accounting policies recently issued or proposed but not yet required to be
adopted. To the extent management believes the adoption of new accounting
standards materially affects the Company's financial condition, results of
operations, or liquidity, the impacts are discussed in the applicable section(s)
of this financial review and notes to the consolidated financial statements.
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 primary basis for the Bank's results of operations.
These results are also impacted by non-interest income, the provision for credit
losses, non-interest expense and income taxes. Net income of $3.6 million in
2002 consists of $3.1 million related to the Company's banking activities and
$0.5 million related to the Bank's insurance activities. The total net income of
$3.6 million or $1.55 per share in 2002 compares to $2.6 million or $1.12 per
share for 2001. The 2002 earnings reflect a one-time life insurance proceeds
receipt of approximately $0.2 million and an adjustment to reduce pension
expense by approximately $0.2 million. Both items, combined, resulted in a
positive impact on 2002 earnings of approximately $0.4 million or $0.16 per
share. Also in 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, under which the Company no longer amortizes
goodwill. Adjusting 2001 earnings to exclude the effects of goodwill
amortization, net income for such year increases by $0.3 million or $0.14 per
share. For 2002, net income rose $0.7 million or 24.4% over 2001 after adjusting
2001 results to exclude goodwill amortization.
Net income in 2000 was $3.2 million or $1.40 per share. However, 2000 net income
includes a one-time insurance proceeds benefit of $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 as part of the
Supplemental Employee Retirement Plan ("SERP"). Excluding the one-time
insurance proceeds, 2001 net income increased by $0.7 million or 40.0% over
2000.
NET INCOME
[BAR CHART]
98 99 00 01 02
(in millions)
$2.0 $2.0 $3.2 $2.6 $3.6
5-Year CAGR 14.88%
10
OPPORTUNITY
NET INTEREST INCOME
Net interest income is dependent on the amounts and yields on interest earning
assets as compared to the amounts of and rates on interest bearing liabilities.
The following table segregates changes in interest earned and paid for the past
two years into amounts attributable to changes in volume and changes in rates by
major categories of assets and liabilities. The change in interest income and
expense due to both volume and rate has been allocated in the table to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
2002 COMPARED TO 2001 2001 COMPARED TO 2000
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
($000)
VOLUME RATE TOTAL VOLUME RATE TOTAL
Interest earned on:
Loans $ 1,000 $(1,458) $ (458) $ 982 $ (547) $ 435
Taxable securities 199 (538) (339) 263 (117) 146
Tax-exempt securities 481 (65) 416 (16) 37 21
Federal funds sold 150 (209) (59) 51 (77) (26)
Time deposits in other banks 5 0 5 0 0 0
------- ------- ------- ------- ------- -------
Total interest-bearing assets $ 1,835 $(2,270) $ (435) $ 1,280 $ (704) $ 576
======= ======= ======= ======= ======= =======
Interest paid on:
NOW accounts $ 12 $ (44) $ (32) $ (2) $ (7) $ (9)
Savings deposits 319 (893) (574) 105 (354) (249)
Time deposits 274 (1,393) (1,119) 414 (226) 188
Federal funds purchased &
other borrowings 72 (67) 5 149 (33) 116
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 677 $(2,397) $(1,720) $ 666 $ (620) $ 46
======= ======= ======= ======= ======= =======
Net interest income, before the provision for credit losses,
increased to $10.4 million or 14.1% in 2002, as compared to $9.1
million in 2001, an increase of 6.2% from 2000 to 2001. This increase
in 2002 is attributable to the increase in average earning assets of
$25.8 million versus an increase of $19.1 million in average
interest-bearing liabilities over 2001. This accounts, as indicated
in the table above, for a net increase due to volume of approximately
$1.2 million in net interest income. The tax-equivalent yield on
earning assets decreased 87 basis points from 7.58% in 2001 to 6.71%
in 2002, while the cost of funds had a greater decrease of 131 basis
points, from 3.85% in 2001 to 2.54% in 2002. This resulted in a
greater decrease in rate related changes on interest expense versus
interest income, or a net increase in net interest income of
approximately $0.1 million. The Bank's net interest margin increased
from 4.20% during 2001 to 4.32% during 2002.
The increase in net interest income, before the provision for credit
losses, in 2001 was 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 the increase in net interest margin from 2001 to
2002 is a result of a more stable interest rate environment during
2002. After the Federal Reserve cut key interest rates eleven times
in 2001, 2002 had only one decrease of 50 basis points. The more
stable rate environment allowed the Bank to more effectively manage
within the current environment.
11
SERVICE
The Bank believes net interest margin will be challenged in 2003 due to two main
factors. Banks are not only competing with each other for available business,
but with other providers of loan and investment products, such as credit unions
and insurance companies. A wealth of information is easily obtained by consumers
via the Internet, from television and through print media. Competitors exist
beyond the geographic trade area and 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.
Secondly, as the Bank responds to competitive pricing for assets, the current
low interest rate environment will make it difficult to competitively adjust the
pricing of liabilities much further. The historically low environment provides
the Bank a smaller interval to move rates on deposits to offset any decrease on
assets.
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. Ranges have been set for the negative impact
acceptable on net interest income and on the market value of equity 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.
NET INTEREST INCOME
[BAR CHART]
98 99 00 01 02
(in millions)
$6.9 $7.5 $8.6 $9.1 $10.4
5-Year CAGR 9.90%
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 current loan concentrations, charge-off history, delinquent
loan percentages, input from regulatory agencies and general economic
conditions.
On a quarterly basis, management of the Bank meets to review the adequacy of the
allowance for loan losses. In making this determination, the Company analyzes
the ultimate collectibility of the loans in its portfolio by incorporating
feedback provided by internal loan staff, an independent loan review function
and information provided by examinations performed by regulatory agencies.
The analysis of the allowance for loan losses is composed of three components:
specific credit allocation, general portfolio allocation and subjectively by
determined allocation. The specific credit allocation includes a detailed review
of the credit in accordance with SFAS No. 114 and No. 118, and allocation is
made based on this analysis. The general portfolio allocation consists of an
assigned reserve percentage based on the credit rating of the loan.
The subjective portion of the allowance reflects management's current assessment
of the New York State and local economies. Both have lagged behind national
prosperity, which has continued to remain unsettled. Marginal job growth, in
conjunction with a declining population base, has left the Bank's market more
susceptible to potential credit problems. 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. 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.
In 2002, the Bank charged $0.4 million against earnings for loan losses as
compared to $0.4 million in 2001. In 2000, $0.7 million was charged against
earnings for this purpose. Total non-performing loans amounted to $1,197,000 at
December 31, 2002, as compared to $1,167,000 at December 31, 2001 and $1,460,000
at December 31, 2000.
12
INSIGHT
The amount charged to loan losses over the past three years has been greater
than the Bank's actual loan losses. The following table provides an analysis of
the allowance for loan losses, the total of non-performing loans and total
allowance for loan losses as a percentage of total loans outstanding for the
three years ended December 31:
2002 2001 2000
Balance, beginning of year $ 1,786,115 $ 1,428,467 $ 838,167
Provisions for loan losses 420,000 420,000 689,000
Recoveries 15,689 17,250 6,356
Loans charged off (76,198) (79,602) (105,056)
----------- ----------- -----------
Balance, end of year $ 2,145,606 $ 1,786,115 $ 1,428,467
----------- ----------- -----------
Actual loan losses 0.05% 0.06% 0.08%
Non-performing loans 0.79% 0.81% 1.13%
Allowance for loan losses 1.42% 1.24% 1.11%
An allocation of the funding allowance for loan losses by portfolio type over
the past five years follows:
(ALL AMOUNTS IN $000)
BALANCE AT BALANCE AT BALANCE AT BALANCE AT BALANCE AT
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
TO: TO: TO: TO: TO:
Real estate loans $ 844 $ 455 $ 600 $ 716 $ 457
Commercial loans & leases 259 96 96 50 78
Installment loans (including credit cards) 72 74 66 56 53
Student loans 0 0 0 0 0
All other loans 0 0 0 0 0
Unallocated 971 1,161 666 16 141
-------- --------- --------- ------- ------
Total $ 2,146 $ 1,786 $ 1,428 $ 838 $ 729
======== ========= ========= ======= ======
Both the total increase in allowance for loan losses and allocation of the
allowance to commercial loans and leases are in response to the increase in
total commercial loans. Commercial real estate mortgages represent 61.1% or
$77.9 million of total real estate mortgages at December 31, 2002, as compared
to 57.9% or $70.8 million at December 31, 2001. Commercial real estate contains
mortgage loans to developers and owners of commercial real estate. Additionally,
commercial loans, which represent loans to a wide variety of businesses, small
and moderate across varying industries, has increased to 13.5% of total loans or
$20.5 million at December 31, 2002, as compared to 11.3% or $16.3 million at
December 31, 2001. The increased allowance and allocation to commercial
categories are to provide for the current economic condition deterioration.
Commercial loans are more susceptible to decreases in credit quality in cyclical
downturns and the larger individual balances of commercial loans expose the
Company to larger losses. In addition, growth in the size of the commercial loan
portfolio during 2002 required additional allowance to provide for probable
losses inherent but undetected in the new loans originated during the year.
The unallocated portion of the allowance reflects estimated probable inherent
but undetected losses within the portfolio due to uncertainties in economic
conditions, delays in obtaining information, including unfavorable information
about a borrower's financial condition, the difficulty in identifying triggering
events that correlate perfectly to subsequent loss rates and risk factors that
have not yet manifested themselves in loss allocation factors. In addition, the
unallocated allowance includes a component that explicitly accounts for the
inherent imprecision in loan loss models.
The Company has changed its portfolio mix in recent years. As a result,
historical loss experience data used to establish allocation estimates might
not precisely correspond to the current portfolio. The longer-term consequences
of the September 11, 2001 terrorist attacks and the recessionary environment
also affect the precision of the allocation model's estimates of loss. Given
these recent factors, the losses in the historical testing period may not be
representative of the actual losses inherent in the portfolio that have not yet
been recognized.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. The methodology to determine the adequacy of the
allowance for loan losses is consistent with prior years.
13
EVANS NATIONAL BANK DIVERSITY
NON-INTEREST INCOME
Total non-interest income increased approximately $0.9 million or 20.9% in 2002
over 2001. This compares to an increase of approximately $0.9 million from 2000
to 2001. Non-interest income for 2002 included approximately $0.2 million of
life insurance proceeds, which the Bank recorded as the beneficiary of a life
insurance policy on a director. Excluding this one-time item, non-interest
income increased $0.7 million or 16.8% from 2001 to 2002. Income from the M&W
Agency, Inc. accounted for a substantial portion of this increase in
non-interest income, approximately $0.5 million. The competitive interest rate
environment resulted in prepayment fees collected on refinanced loans totaling
an additional $0.1 million. New mortgage volume and refinancings also increased
appraisal fees and premiums received on residential mortgages sold to the
Federal National Mortgage Association ("FNMA") for approximately $0.1 million.
ENB Associates also benefited in the low interest rate environment as customers
searched for higher yields in mutual funds and annuities. ENB Associates'
revenue increased $0.1 million in 2002 as compared to 2001.
Additionally, the Bank has grown its ATM network with the addition of one at the
new Amherst branch and two new offsite locations during 2002. Also, the usage of
the Bank's point-of-sale debit cards has increased. Both data services have
provided approximately an additional $0.1 million in fees as compared to 2001.
These increases were offset by a decrease of approximately $0.1 million in gains
realized on the sale of assets, primarily planned sales of securities, totaling
approximately $0.1 million in 2002 versus an approximate $0.2 million gain
realized in 2001. During 2002, the Bank also recognized losses on sales and
write downs in the carrying value of foreclosed real estate of $0.1 million.
NON-INTEREST INCOME
[BAR CHART]
98 99 00 01 02
(in millions)
$1.2 $1.3 $3.6 $4.5 $5.5
5-Year CAGR 41.92%
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 in 2001, which
was the first full year it was operated by the Company. 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 $1.1 million or 11.7% in 2002
over 2001. In 2002, the ratio of non-interest expense to average assets was
4.01% compared to 4.01% in 2001 and 3.55% in 2000. 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 10.1% in 2002.
Of the $0.5 million in salary and benefit expense increases in 2002, the Bank's
operations contributed approximately $0.3 million of the increase and M&W Agency
contributed approximately $0.2 million of the increase from 2001. The addition
of the Amherst branch, increased loan staffing, M&W Agency expansion and
promotional increases contributed to the increased salary costs. M&W Agency
acquired the business, assets and certain liabilities of the Eden Agency in the
beginning of 2002, and opened an additional office at the Derby Bank branch
location, which led to its increased salary and benefits. The increased costs
were offset by an adjustment to reduce pension expense of approximately $0.2
million related to the supplemental executive retirement plan ("SERP").
Occupancy expense increased approximately $0.2 million or 15.7%. The Bank's
capital expenditures completed in 2002 included a new branch in Amherst,
renovation of an owned building to house the Bank's loan operations, renovations
to the Bank's administrative offices in Angola, New York, and M&W Agency's
addition of the Eden location. All additions increased related occupancy
expenses: utilities, rent, and depreciation, among others. Professional services
increased $0.1 million or 29.6%. The Bank engaged outside consulting firms and
attorneys for a revenue enhancement project, strategic expansion study and
assistance in formation of ENHC.
14
OPPORTUNITY
Miscellaneous other expenses increased $0.2 million or approximately 11.2% in
2002. Expenses associated with Internet banking, ATM expense, telephone and data
line costs, postage costs, maintenance on foreclosed properties, director fees
and correspondent bank service charges fall under miscellaneous expenses. All of
these categories increased in 2002 as compared to 2001, for approximately $0.5
million. Due to the January 1, 2002, SFAS No. 142 adoption by the Company,
systematic goodwill amortization ceased and the net goodwill recorded by the
Company is evaluated for impairment on an annual basis. The cessation of
amortization expense offsetthe increases mentioned above by approximately $0.3
million, which was the expense recognized in 2001.
Salary and benefit expense increased 27.1% in 2001, over 2000. 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.
In 2001, 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. New assessment rates went into effect on January 1, 2000. Other
insurance decreased approximately $0.1 million or 22.9% in 2001 due to onetime
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.
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 due to a full year of
operation as a part of the Company in 2001 versus four months during 2000.
PENSION
The Company maintains a qualified defined benefit pension plan, which covers
substantially all employees. Additionally, the Company has entered into
individual retirement agreements with certain current executives providing for
unfunded supplemental pension benefits. Our pension expense for all pension
plans, including the SERP, approximated $215,000 and $458,000 for the years
ended December 31, 2002, and December 31, 2001, respectively, and is calculated
based upon a number of actuarial assumptions, including an expected long-term
rate of return on our plan assets of 6.75%.
In developing our expected long-term rate of return assumption, we evaluated
input from our actuary in conjunction with our historical returns based on the
asset allocation of our portfolio. We will continue to evaluate our actuarial
assumptions, including our expected rate of return, at least annually, and will
adjust as necessary.
We base our determination of pension expense or income on a market-related
valuation of assets, which reduces year-to-year volatility. This market-related
valuation recognizes investment gains or losses over a three-year period from
the year in which they occur. Investment gains or losses for this purpose are
the difference between the expected return calculated using the market-related
value of assets and the actual return based on the market-related value of
assets. Since the market-related value of assets recognizes gains or losses over
a three-year period, the future value of assets will be impacted as previously
deferred gains or losses are recorded.
The discount rate utilized for determining future pension obligations is based
on a review of long-term bonds that receive one of the two highest ratings given
by a recognized rating agency. The discount rate determined on this basis has
decreased from 7.50% at September 30, 2001, for purposes of our deferred benefit
pension plan and at December 31, 2001, for purposes of our SERP, both of which
are the measurement dates, to 6.75% for both plans at September 30, 2002 and
December 31, 2002, respectively.
TAXES
The provision for income taxes in 2002 of $1.2 million reflects an effective tax
rate of approximately 24.9%. This compares to $1.1 million or 30.0% in 2001 and
$0.8 million or 19.5% in 2000. There were two main factors for the decrease in
the effective tax rate in 2002. The first was due to the establishment of ENHC
as a REIT. In addition to the flexibility and planning opportunities for the
Bank, it also provided state tax benefits. Additionally, the life insurance
proceeds recorded in 2002 were tax exempt and contributed
15
SERVICE
to a more favorable tax position. The Bank also continues to maintain a
substantial investment in tax-advantaged municipal bonds, which contributes to
its favorable tax position.
A significant reason for the increase in the effective tax rate in 2001 over
2000 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.
FINANCIAL CONDITION
The Bank had total assets of $288.7 million at December 31, 2002, an increase of
$40.0 million or 16.1% over $248.7 million at December 31, 2001. Net loans of
$149.0 million increased 4.6% or $6.5 million over the previous year. Securities
increased $22.6 million or 26.9% and cash and cash equivalents increased $9.1
million or 84.8%. Deposits grew by $35.2 million or 17.3%. Shareholders' equity
increased $3.9 million or 14.5%. Net unrealized gains/losses on investment
securities held by the Bank increased $1.3 million over 2001.
LOANS
Loans comprised 59.8% of the Bank's total average earning assets in 2002.
Actual year-end balances increased 4.6% versus an increase of 10.8% in 2001 and
10.6% in 2000. The Bank continues to focus its lending on commercial and
residential mortgages, commercial loans and home equity loans. Commercial
mortgages make up the largest segment of the portfolio at 53.2% of total loans.
Residential mortgages comprise 12.9% of the portfolio and 15.3% are home equity
loans. Other commercial loans account for 16.6% of outstanding loans.
Commercial loans total $105.5 million at December 31, 2002, reflecting a 10.6%
or $10.1 million increase for the year. Total loan growth was in spite of a
decrease in total consumer loans of 6.6% or $3.2 million for the year,
primarily due to the refinancings of fixed rate residential mortgages and
corresponding sales of such mortgages in the secondary market, as a result of
the low interest rate environment and to minimize interest rate risk in the
Bank's portfolio. Given the current low interest rate environment, the Bank
continues to sell certain fixed rate residential loans originated under a
certain interest rate level, while maintaining the servicing right to such
loans.
NET LOANS
[BAR CHART]
98 99 00 01 02
(in millions)
$110.5 $116.4 $128.8 $142.5 $149.0
5-Year CAGR 7.95%
At December 31, 2002, the Bank had a loan/deposit ratio of 63.1%. This compares
to a loan/deposit ratio of 70.6% at December 31, 2001.
At December 31, 2002, the Bank retained the servicing rights to $24.0 million in
long-term mortgages sold to the FNMA since becoming a member in 1995. This
compares to a loan servicing portfolio principal balance of $16.0 million at
December 31, 2001. This arrangement allows the Bank to offer long-term mortgages
without exposure to the associated interest rate risks, while retaining customer
account relationships. In 2002 and 2001, the Bank sold loans to FNMA totaling
approximately $11.6 million and $8.5 million respectively. The Bank did not
record any related asset to the servicing portfolio rights as management
determined it immaterial.
SECURITIES AND FEDERAL FUNDS SOLD
Securities and federal funds sold made up the remaining 40.2% of the Bank's
total average earning assets at December 31, 2002. These categories provide the
Bank with additional sources of liquidity and income. The Bank's securities
portfolio increased 26.9% 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
41.9% of the portfolio, and US government-sponsored agency bonds of various
types which comprise 9.2% 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 1.2% of the portfolio at December 31,
2002. The credit quality of the securities portfolio is strong, with 93.9% of
the securities 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 2002 to
2.1% of total average earning assets from 1.5% in 2001.
The tax-equivalent yield earned on securities and federal funds sold decreased
79 basis points in 2002 moving from 6.70% in 2001 to 5.91% in 2002. This
compares to 7.00% in 2000. Available yields on investments have declined
throughout the year. The Bank's investment strategy has been focused on the
purchase of seasoned and new production mortgage-backed securities of moderate
average lives (3 to 5 years), which have been purchased at discounts, at par,
and at premiums, to par. Based on the Company's evaluation,
16
INSIGHT
mortgage-backed securities are an appropriate investment vehicle in response to
a low interest rate environment. Mortgage-backed securities offer competitive
yields, provide monthly cash flows, serve as acceptable collateral, and have
most of the liquidity characteristics of US Treasury notes and bonds. Total
mortgage-backed securities increased $15.1 million, or 51.0% from 2001.
All fixed and adjustable rate mortgage pools contain a certain amount of risk
related to the uncertainty of prepayments of the underlying mortgages. Interest
rate changes have a direct impact on prepayment rates. The Company uses a third
party's computer simulation model to monitor the average life and yield
volatility of mortgage pools under various interest rate assumptions.
The Company manages its securities available for sale portfolio on a total
return basis. In this respect, management regularly reviews the performance of
its securities and sells specific securities to enhance net interest income and
net interest margin. The Bank experienced $0.1 million in net gains on these
sales in 2002.
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, 2002, $3.6
million in securities were designated as held to maturity. These bonds are
primarily municipal investments that the Bank has made in its local trade area.
TOTAL DEPOSITS
[BAR CHART]
98 99 00 01 02
(in millions)
$144.1 $169.9 $186.7 $204.3 $239.5
5-Year CAGR 11.59%
The available for sale portfolio totaled $103.0 million or approximately 96.6%
of the Bank's securities portfolio at December 31, 2002. Net unrealized gains
and losses on available for sale securities resulted in a net unrealized gain of
$3.4 million at December 31, 2002, as compared to $1.1 million at December 31,
2001. Interest rates decreased in 2002 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, 2002, the impact to equity
was a net unrealized gain of approximately $1.9 million.
DEPOSITS
Total deposits increased $35.2 million or 17.3% in 2002 over 2001. Core deposit
growth has been an area the Bank has focused on and its success is evident in
the 12.8% increase in demand deposits, 9.7% increase in NOW accounts, and 47.5%
increase in savings accounts. Savings deposit growth is primarily due to the
Bank's success in attracting municipal deposits with a revamped money market
type product called Muni-Vest. Muni-Vest is geared at paying higher money market
equivalent rates of return to municipalities and school districts in markets
where the Bank operates. Time deposits of less than $100,000 decreased 1.4% in
2002, as the Bank was less aggressive in 2002 in pursuing these generally more
costly deposits.
Certificates of deposit in excess of $100,000 decreased 1.5%. These funds are
generally not considered core deposits. Many 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 an FDIC-insured
deposit. Certificates of deposit in excess of $100,000 have increased
significantly in 2002 over the past several years prior to 2002 due to the
Bank's expansion of its trade area.
CORE DEPOSITS*
BAR CHART]
98 99 00 01 02
(in millions)
$119.9 $141.1 $156.0 $175.4 $211.1
5-Year CAGR 12.81%
*All Bank deposits excluding CD's over
$100,000
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 $13.1 million can be drawn on the FHLB
via the Overnight Line of Credit Agreement. An
17
EVANS NATIONAL BANK DIVERSITY
amount equal to 25% of the Bank's total assets could be borrowed through the
advance programs under certain qualifying circumstances. The Bank also has the
ability to purchase up to $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.
Additionally, the Bank has access to capital markets as a funding source.
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, 2002, approximately 6.4% of the Bank's
securities had maturity dates of one year or less and approximately 19.2% had
maturity dates of five years or less. At December 31, 2002, the Bank had net
short-term liquidity of $36.9 million as compared to $37.0 million at December
31, 2001. Available assets of $115.1 million, less public and purchased funds of
$73.0 million, resulted in a long-term liquidity ratio of 158% at December 31,
2002, versus 177% at December 31, 2001.
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.
CAPITAL
The Bank has consistently maintained regulatory capital ratios at, or above
"well capitalized" standards. For further detail on capital and capital ratios,
see Note 18 to the Consolidated Financial Statements.
Total stockholders' equity was $30.9 million at December 31, 2002, up from $27.0
million at December 31, 2001. Equity as a percentage of assets was 10.7% at
December 31, 2002, compared to 10.8% at December 31, 2001. Book value per
common share rose to $13.22 at December 31, 2002, up from $11.64 at December 31,
2001.
In September 2001, the Company's Board of Directors authorized the repurchase of
up to 50,000 shares of Evans Bancorp's outstanding common stock over the
following two years. In July of 2002, the Board approved an extension of the
repurchase plan for two years from the July 2002 date.
Shares are held for reissue in connection with the Company's "Stock Dividend
Reinvestment Plan" and general corporate purposes. During 2002 and 2001 the
Company repurchased under the plan 1,100 shares and 0 shares, respectively.
Subject to ongoing capital and investment considerations, management intends to
continue to repurchase shares in 2003 on an opportunistic basis.
Evans Bancorp paid dividends per share of common stock of $0.56 in 2002, $0.47
in 2001 and $0.40 in 2000. The dividend payout is continually reviewed by
management and the Board of Directors. The dividend payout ratio, which
represents dividends per share divided by earnings per share, was 36.1%, 42.0%
and 28.6% for the years 2002, 2001 and 2000, respectively.
INTEREST RATE RISK
The Company's asset/liability management strategy is to maximize earnings and
return on capital while limiting exposure to risks associated with a volatile
interest rate environment. The Company's exposure to interest rate risk is
managed primarily through the Company's strategy of selecting the type and terms
of interest earning assets and interest bearing liabilities that generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates.
Management uses income simulation models to quantify the potential impact on
earnings and capital with changes in interest rates. The model uses cash flows
and repricing information from loans and certificates of deposit, plus repricing
assumptions on products without specific repricing dates (e.g. savings and
interest bearing demand accounts), to calculate durations of each of the Bank's
assets and liabilities. In addition, the model uses management assumptions on
growth with duration to project income. The model also projects the effect on
income due to changes in interest rates as well as the value of the Company's
equity in each of the theoretical rate environments.
The Company maintains specific interest rate risk management policy limits.
Based on simulation modeling, these guidelines include a +/- 5.25% of net
interest income and a 6% of capital threshold on the value of the Company's
economic value of equity. At December 31, 2002, the effect of an immediate 200
basis point increase in interest rate would increase the Company's annual net
interest income by 2.7%, or $0.3 million. A 200 basis point decrease in interest
rate would decrease annual net interest income by 3.8% or approximately $0.4
million.
18
OPPORTUNITY
The Company and its subsidiary, M&W Agency, Inc., lease certain offices, land
and equipment under long-term operating leases. The aggregate minimum annual
rental commitments under these leases total approximately $293,000 in 2003,
$265,000 in 2004, $175,000 in 2005, $173,000 in 2006, $179,220 in 2007 and
$1,727,000 thereafter.
Financial instruments with off balance sheet risk at December 31, 2002 included
$10.4 million in undisbursed lines of credit at an average interest rate of
5.1%, $3.9 million in fixed rate loan origination commitments at 8.9%, $25.7
million in adjustable rate loan origination commitments at 5.5% and $1.7 million
in adjustable rate letters of credit at an average rate of 5.3%.
The following table represents expected maturities of interest-bearing assets
and liabilities and their corresponding average interest rates.
For the Year Ended
December 31, 2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
INTEREST - ASSETS
Loans receivable, fixed 7,441 5,178 4,434 5.312 4,696 16,246 43,307 56,380
Average interest 7.60% 8.20% 8.03% 7.92% 7.52% 7.58%
Loans receivable, adjustable 22,395 6,455 7,585 8,453 6,182 56,766 107,836 107,836
Average interest 5.53% 6.69% 7.28% 6.95% 6.88% 6.63%
Federal funds 8,450
Average interest 1.25%
Time demand other banks 877
Average interest 2.60%
Investment securities 17,711 15,431 6,607 3,673 4,529 58,721 106,672 106,672
Average interest 4.44% 5.46% 5.32% 5.58% 5.88% 6.85%
INTEREST - LIABILITIES
Deposits 169,844 15,869 3,320 3,901 1,908 0 194,842 196,095
Average interest 1.75% 2.68% 3.98% 5.30% 4.16% 0%
Borrowed funds 9,933 2,437 1,467 707 91 19 14,654 14,654
Average interest 2.70% 5.24% 5.43% 5.49% 8.91% 9.00%
MARKET RISK
When rates rise or fall, the market value of the Bank's rate-sensitive assets
and liabilities increases or decreases. 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 $1.9 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 Bank has approved the construction and furnishing of a new branch office in
2003. The cost to the Bank is expected to be approximately $0.9 million. Other
planned expenditures include replacing a number of personal computers,
replacing/adding automated teller machines (ATMs) and miscellaneous other
equipment. 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
19
SERVICE
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.
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 2002 was approximately $0.9 million or
$0.37 per share, which reflects an increase of approximately $0.3 million or
57.7% from approximately $0.5 million or $0.24 per share in the fourth quarter
2001. Adjusting fourth quarter 2001 earnings to exclude the effects of goodwill
amortization, net income for such quarter increases $80 thousand or $0.03 per
share. For the fourth quarter of 2002, net income rose $236 thousand or 37.6%,
after adjusting 2001 results to exclude goodwill amortization. All per share
results reflect the 5-for-4 stock split distributed in June 2001 and the 5%
stock dividend payable to shareholders of record as of December 2, 2002, on
January 29, 2003.
During the fourth quarter of 2002, net interest income was $2.5 million, which
reflects an increase of $0.3 million or 11.3% over the same time period in 2001.
An increase in average earning assets and a widening of the Bank's net interest
margin were the most significant factors contributing to the improvement in net
interest income.
Non-interest income was $1.4 million in the fourth quarter of 2002, which
reflects a $0.4 million or 35.7% increase over the same time period in 2001.
Insurance sales and fees comprised $0.2 million of this increase due to growth
in the business of M&W Agency, Inc. Also, approximately $0.2 million of the
increase was due to an adjustment in the actuarial retirement calculations,
which is reflected as a decrease in SERP expense in the consolidated statements
of income.
Non-interest expense for the fourth quarter of 2002 was $2.8 million, which
reflects a $0.3 million or 13.9% increase over the same time period in 2001.
Occupancy expense comprised $0.1 million of the increase due to costs related
to Company expansion including the new Bank branch in Amherst, New York, M&W
Agency growth and Bank administrative space remodeling. Goodwill amortization
expense decreased in the fourth quarter of 2002 by approximately $0.1 million
from the same time period in 2001, due to the cessation of goodwill
amortization as a result of implementation of SFAS No. 142 on January 1, 2002.
Professional services increased in the fourth quarter of 2002 by approximately
$0.1 million from the same time period in 2001, due to fees related to two
consulting projects related to market expansion strategy and revenue
enhancement in 2002. Other non-interest expense increased $0.2 million in the
fourth quarter 2002, over the same time period in 2001. This was due to a
number of factors including: ATM card fees due to increased off-premise ATM
activity, telephone and data line expenses due to Bank branch and M&W Agency
expansion, appraisal expense as a result of increased mortgage origination and
refinancing activity and greater charitable contributions in funding the Bank's
newly created Foundation for charitable giving purposes.
During the fourth quarter 2002, net loans increased by $0.7 million or 0.5% to
$149.0 million at December 31, 2002. During the fourth quarter 2002, commercial
loans increased by $1.5 million or 1.5% to $105.5 million at December 31, 2002.
During the fourth quarter 2002, consumer loans decreased $0.7 million or 1.6%
to $45.3 million at December 31, 2002. These changes are primarily due to the
Company's strategy to continue emphasizing commercial loan originations, while
selling fixed rate residential mortgages originated under a certain interest
rate level.
During the fourth quarter, deposits increased $23.5 million or 10.9% to $239.5
million at December 31, 2002, due primarily to growth in municipal savings with
the Bank's revamped product called Muni-Vest, which provides municipalities and
school districts with a money market type of product.
SEGMENT INFORMATION
In accordance with the provisions of SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, the Company's reportable segments have
been determined based upon its internal profitability reporting system, which
are comprised of banking and insurance activities.
The banking activities segment includes all of the activities of Evans National
Bank in its function as a full-service commercial bank. This includes the
operations of ENB Associates Inc., which provides non-deposit investment
products. Net income from banking activities was $3.1 million in 2002, which
represents a $0.9 million or 38.2% increase over 2001. The increase in net
income from banking activities was driven significantly by an improvement in net
interest income as a result of the more stable interest rate environment during
2002 as compared to 2001. Total assets of the banking activities segment
increased $39.2 million or 16.0% during 2002 to $284.1 million at December 31,
2002, due primarily to normal banking activities and growth in deposits which
were utilized to fund loans and the investment securities portfolio.
The insurance activities segment includes activities of the M&W Agency, Inc.,
which is a retail property and casualty insurance agency with ten locations in
the Western New York area. Net income from insurance activities was $0.5 million
in 2002, which represents a $0.2 million or 51.0% increase over 2001. Growth in
the overall M&W Agency property and casualty lines of business as well as the
acquisition of the business of the Eden Agency on January 1, 2002,
20
INSIGHT
contributed to the improvement in net income in 2002 over 2001. Total assets of
the insurance activities segment increased $0.8 million or 20.4% during 2002 to
$4.6 million at December 31, 2002, due primarily to the acquisition of the
business of the Eden Agency and Frontier Claim Services during 2002.
NEW ACCOUNTING STANDARDS
SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, was
issued August 2001. This statement supercedes SFAS 121, APB No. 30, and amends
ARB No. 51. The Statement establishes a single accounting model for long-lived
assets to be disposed of by sale and resolve significant implementation issues
related to SFAS No. 121. However, this Statement retains fundamental provisions
of SFAS No. 121, APB Opinion 30, and ARB No. 51. The Statement was effective for
the Company beginning on January 1, 2002 and did not have a material impact on
the Company's financial statements.
SFAS No. 147, Acquisitions of Certain Financial Institutions, was issued October
2002. This statement amends SFAS Nos. 72 and 144 and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both SFAS No.
72 and FASB Interpretation 9 and requires that those transactions be accounted
for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. In addition, this Statement amends SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor and borrower-relationship intangible
assets and credit card holder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that SFAS No. 144
requires for the other long-lived assets that are held and used. The Statement
is effective after September 30, 2002 and did not have a material impact on the
Company's financial statements.
FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, was issued by the FASB in November 2002. This interpretation expands
the disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party.
Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under
capital lease arrangements, commercial letters of credit, loan commitments,
subordination interests in an Special Purpose Entity (SPE), and guarantees of a
company's own future performance. Other guarantees are subject to the
disclosure requirements of FIN 45, but not to the recognition provisions and
include, among others, a guarantee accounted for as a derivative instrument
under SFAS No. 133, a parent's guarantee of debt owed to a third party by its
subsidiary or vice versa, and guarantee, which is based on performance not
price. The disclosure requirements of FIN 45 are effective for the Company as
of December 31, 2002, and require disclosure of the nature of the guarantee,
the maximum potential amount of future payments that the guarantor could be
required to make under the guarantee, and the current amount of the liability,
if any, for the guarantor's obligations under the guarantee. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002. The requirements of FIN 45 did not have a
material impact on the results of operations, financial position or liquidity.
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, was issued by FASB in January 2003. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and to determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in a
entity will need to consolidate the entity if the company's interests in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. The requirements of FIN 46 did not
have a material impact on the results of operations, financial position or
liquidity.
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure,
was issued in December 2002, which provides guidance on how to transition from
the intrinsic value method of accounting for stock-based employee compensation
under APB No. 25 to SFAS No. 123's fair value method of accounting, if a company
so elects. The Company currently has no outstanding stock-based employee
compensation.
21
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, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002. 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, 2002
and 2001 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 5 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to adopt Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
DELOITTE & TOUCHE LLP
BUFFALO, NEW YORK
JANUARY 28, 2003
22
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001 2002 2001
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 11,308,727 $ 7,894,087
Federal funds sold 8,450,000 2,800,000
-------------- --------------
Total cash and cash equivalents 19,758,727 10,694,087
Interest bearing accounts in other banks 877,230 0
Securities:
Available for sale, at fair value 103,031,200 81,735,376
Held to maturity, at cost 3,640,714 2,329,855
Loans, net of allowance for loan losses of $2,145,606 in 2002
and $1,786,115 in 2001 148,997,646 142,469,032
Properties and equipment, net 5,348,994 4,122,733
Goodwill assets 2,944,913 2,760,113
Intangible assets 787,115 368,729
Other assets 3,324,321 4,242,533
-------------- --------------
TOTAL ASSETS $ 288,710,860 $ 248,722,458
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 44,664,537 $ 39,597,700
NOW and money market 10,535,456 9,604,537
Regular savings 94,907,508 64,351,240
Time 89,399,334 90,706,585
-------------- --------------
Total deposits 239,506,835 204,260,062
Other borrowed funds 8,110,964 9,660,748
Securities sold under agreements to repurchase 6,543,456 4,006,669
Other liabilities 3,687,604 3,834,210
-------------- --------------
Total liabilities 257,848,859 221,761,689
============== ==============
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized;
2,334,162 and 2,316,790 shares issued and outstanding, respectively 1,167,081 1,103,234
Capital surplus 16,578,868 13,727,084
Retained earnings 11,179,871 11,464,273
Accumulated other comprehensive income, net of tax 1,942,295 666,178
Less: Treasury stock, at cost (300 shares) (6,114) 0
-------------- --------------
Total stockholders' equity 30,862,001 26,960,769
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 288,710,860 $ 248,722,458
============== ==============
See notes to consolidated financial statements.
23
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 2002 2001 2000
INTEREST INCOME:
Loans $ 10,592,702 $ 11,051,419 $ 10,616,225
Federal funds sold & interest on deposits in other banks 78,824 133,130 158,635
Securities:
Taxable 2,553,604 2,891,901 2,746,273
Non-taxable 1,987,285 1,570,725 1,549,636
------------- ------------- -------------
Total interest income 15,212,415 15,647,175 15,070,769
INTEREST EXPENSE ON DEPOSITS AND BORROWINGS 4,816,722 6,537,154 6,490,680
------------- ------------- -------------
NET INTEREST INCOME 10,395,693 9,110,021 8,580,089
PROVISION FOR LOAN LOSSES 420,000 420,000 689,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,975,693 8,690,021 7,891,089
NON-INTEREST INCOME:
Service charges 1,095,611 1,046,615 862,207
Insurance service and fees 2,947,381 2,412,900 646,484
Commission fees 227,666 134,134 57,767
Net gain (loss) on sales of securities 111,302 183,681 (52,825)
Loss on other real estate owned (138,992) (17,402) (35,289)
Premium on loans sold 59,017 28,791 7,818
Life insurance proceeds 184,745 0 1,380,318
Other 987,011 739,193 781,701
------------- ------------- -------------
Total non-interest income 5,473,741 4,527,912 3,648,181
------------- ------------- -------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,532,613 5,023,449 3,951,446
Occupancy 1,337,469 1,156,215 1,024,465
Supplies 231,521 229,031 197,614
Repairs and maintenance 411,696 366,609 265,296
Advertising and public relations 205,662 171,248 147,460
Professional services 615,613 474,905 286,607
FDIC assessments 35,002 34,416 34,481
Other Insurance 280,695 276,815 359,206
Other 1,999,858 1,797,918 1,268,459
------------- ------------- -------------
Total non-interest expense 10,650,129 9,530,606 7,535,034
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 4,799,305 3,687,327 4,004,236
INCOME TAXES 1,193,258 1,108,000 781,250
------------- ------------- -------------
NET INCOME $ 3,606,047 $ 2,579,327 $ 3,222,986
============= ============= =============
Net income per common share - basic $ 1.55 $ 1.12 $ 1.40
============= ============= =============
Weighted average number of common shares 2,325,414 2,310,137 2,305,662
============= ============= =============
See notes to consolidated financial statements.
24
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL
BALANCE - JANUARY 1, 2000 $ 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 $550,271 1,719,596 1,719,596
-----------
Total comprehensive income 4,942,582
-----------
Cash dividends ($.40 per common share) (899,045) (899,045)
Purchase of 6,116 shares for treasury (273,775) (273,775)
Reissuance of 6,116 shares of
treasury stock under dividend
reinvestment plan 273,775 273,775
Issuance of 79,604 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 $42,137 131,678 131,678
-----------
Total comprehensive income 2,711,005
-----------
Cash dividends ($.47 per common share) (1,068,834) (1,068,834)
Five for four stock split
with 481 fractional shares paid in cash 219,720 (241,317) (21,597)
Issuance of 7,796 shares under
dividend reinvestment plan 3,713 157,410 161,123
Purchase of 3,240 shares for treasury (145,042) (145,042)
Reissuance of 3,240 shares of treasury
stock under dividend reinvestment plan 145,042 145,042
------------ ----------- ----------- ------------ --------- -----------
BALANCE - DECEMBER 31, 2001 1,103,234 13,727,084 11,464,273 666,178 0 26,960,769
Comprehensive income: 2002 net income 3,606,047 3,606,047
Unrealized gain on available
for sale securities, net of reclassification
adjustment and tax effect of $910,633 1,436,616 1,436,616
Additional minimum pension liability,
net of tax effect - $102,393 (160,499) (160,499)
-----------
Total comprehensive income 4,882,164
-----------
Cash dividends ($.56 per common share) (1,304,585) (1,304,585)
Issued 9,423 shares under dividend
reinvestment plan 4,487 158,481 162,968
Purchases of 1,100 shares for treasury (22,831) (22,831)
Issued 8,546 shares under dividend
reinvestment plan 4,068 163,024 167,092
Reissuance of 800 shares of treasury stock
under dividend reinvestment plan (293) 16,717 16,424
Stock dividend 1-for-20 with 598
fractional shares to be paid in cash 55,292 2,530,279 (2,585,571) 0
------------ ----------- ----------- ------------ --------- -----------
BALANCE - DECEMBER 31, 2002 $ 1,167,081 $16,578,868 $11,179,871 $ 1,942,295 $ (6,114) $30,862,001
============ =========== =========== ============ ========= ===========
See notes to consolidated financial statements.
25
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 2002 2001 2000
OPERATING ACTIVITIES:
Interest received $ 15,733,836 $ 16,054,390 $ 14,908,370
Fees received 5,140,994 4,211,410 2,202,389
Interest paid (4,951,700) (6,523,176) (6,314,332)
Cash paid to employees and suppliers (10,188,956) (6,685,194) (7,665,183)
Income taxes paid (1,314,877) (1,558,000) (992,235)
------------ ------------ ------------
Net cash provided by operating activities 4,419,297 5,499,430 2,139,009
------------ ------------ ------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (70,218,780) (47,716,648) (27,931,442)
Proceeds from sales 7,554,063 15,547,047 15,544,257
Proceeds from maturities 43,580,011 21,390,184 4,786,927
Held to maturity securities:
Purchases (4,113,680) (2,453,558) (2,962,044)
Proceeds from maturities 1,925,595 2,595,887 2,935,536
Additions to properties and equipment (1,891,860) (1,119,597) (359,547)
Investment in joint venture 0 0 (10,500)
Increase in loans, net of repayments (18,954,336) (23,594,878) (14,415,746)
Proceeds from sales of loans 11,989,008 9,156,096 1,513,153
Proceeds from sale of other real estate owned 69,420 12,598 411,971
Acquisition of agencies (62,000) 0 0
------------ ------------ ------------
Net cash used in investing activities (30,122,559) (26,182,869) (20,487,435)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds (repayments) from borrowing 502,002 5,389,179 (503,340)
Increase in deposits 35,246,773 17,558,743 17,130,945
Dividends paid (974,759) (907,711) (899,045)
Fractional shares paid in cash in stock split 0 (21,597) 0
Purchase of treasury stock (22,831) (145,042) (273,775)
Sale of treasury stock 16,717 145,042 273,775
------------ ------------ ------------
Net cash provided by financing activities 34,767,902 22,018,614 15,728,560
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 9,064,640 1,335,175 (2,619,866)
CASH AND CASH EQUIVALENTS:
Beginning of year 10,694,087 9,358,912 11,978,778
------------ ------------ ------------
End of year $ 19,758,727 $ 10,694,087 $ 9,358,912
============ ============ ============
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,606,047 $ 2,579,327 $ 3,222,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,062,390 1,316,806 663,346
Provision for loan losses 420,000 420,000 689,000
(Gain) loss on sales of assets (31,328) (195,070) 80,296
Proceeds from life insurance (184,745) 0 (1,380,318)
Changes in assets and liabilities affecting cash flow:
Other assets (111,954) 1,808,095 (981,869)
Other liabilities (341,113) (429,728) (154,432)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,419,297 $ 5,499,430 $ 2,139,009
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCIAL ACTIVITIES
Acquisition of insurance agencies
Debt incurred $ 472,800 $ 0 $ 87,500
------------ ------------ ------------
See notes to consolidated financial statements.
26
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001
AND 2000
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"), ENB Associates Inc. ("ENB"), and Evans National Holding Corp. ("ENHC").
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
Amherst, Derby, Evans, Forestville, Hamburg, North Boston, and West Seneca, New
York.
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
purchases and sells securities to bank customers. ENB commission revenue is
reflected as commission fees in the Consolidated Statements of Income.
ENHC was incorporated in February, 2002, as a subsidiary of the Bank. In March
2002, the Bank assigned its interests in approximately $65.7 million in real
estate mortgages to Evans National Holding Corp. in exchange for 10 shares of
common stock, 1,600 shares of preferred stock and 2,400 shares of excess stock,
which represented all of the outstanding stock at that time. ENHC also entered
into a Management and Servicing Agreement with the Bank to provide management
and other services to it. ENHC is operated as a real estate investment trust
("REIT"), which will provide additional flexibility and planning opportunities
for the business of the Bank.
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 accounting principles generally accepted in the United States of America,
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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - Effective October 1, 1998 the
Company early adopted the Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities, which require that an entity
recognize all derivatives as either assets or liabilities on a balance sheet and
measure those instruments at fair value. Changes in the fair value of
derivatives must be recognized in earnings when they occur, unless the
derivative qualifies as a hedge. If a derivative qualifies as a hedge, a company
can elect to use hedge accounting to eliminate or reduce income statement
volatility that would arise from reporting changes in a derivative's fair value
in income. SFAS No. 133 was amended by SFAS No. 137, which delayed the effective
date of SFAS No. 133 to the first quarter of fiscal years beginning after June
15, 2000. SFAS No. 133 was also amended by SFAS No.
27
138, which addresses and clarifies issues causing implementation difficulties
for numerous entities applying SFAS No. 133. SFAS No. 138 includes amendments to
SFAS No. 133, which resulted from decisions made by the Financial Accounting
Standards Board ("FASB") related to the Derivatives Implementation Group ("DIG")
process. The DIG was created by the FASB to facilitate implementation by
identifying issues that arise from applying the requirements of SFAS No. 133 and
to advise the FASB on how to resolve those issues. Management reviewed contracts
from various functional areas of the Company to identify potential derivatives
embedded within selected contracts. In accordance with the guidance provided by
DIG Issue C13, management identified embedded derivatives in some loan
commitments for residential mortgages where the Company has intent to sell to an
investor such as the Federal National Mortgage Association ("FNMA"). Due to the
short-term nature of these loan commitments (30 days or less) and the historical
dollar amount of commitments outstanding at period end, the adoption of SFAS No.
133 did not have a material impact on the Company's financial condition or
results of operations.
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 for 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.
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 is adequate to absorb losses on existing loans that
will ultimately be 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. This is particularly true of commercial borrowers, which is a segment
of significant past growth as well as a 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 management's 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 value 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.
28
GOODWILL - Goodwill primarily 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 Agency, Inc. Through December 31, 2001, goodwill was
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 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. See Note 5 for further information.
BUSINESS COMBINATIONS - Since the issuance of SFAS No. 141, Business
Combinations by the FASB, business combinations initiated after June 30, 2001,
are required to be accounted for by the purchase method. Under the purchase
method, net assets of the business acquired are recorded at their estimated fair
values as of the date of acquisition, with any excess of the cost of the
acquisition over the fair value of the net tangible and intangible assets
acquired recorded as goodwill. Results of operations of the acquired business
are included in the income statement from the date of acquisition.
BANK-OWNED LIFE INSURANCE - The Company has purchased insurance on the lives of
a certain group of employees. The policies accumulate asset values to meet
future liabilities including the payment of employee benefits such as retirement
benefits. Increases in the cash surrender value are recorded as other income in
the Consolidated Statements of Income.
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 39
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 needed to be recognized for
applicable assets in 2002, 2001 or 2000.
LOAN SERVICING - The Company, in its normal course of business, sells certain
residential mortgages which it originates to FNMA. The Company maintains
servicing rights on the loans that it sells to FNMA and earns a fee thereon. At
December 31, 2002, and 2001, the Company had approximately $24,026,000 and
$15,997,000, respectively, in unpaid principal balances of loans serviced for
FNMA. The Company has recorded no net servicing asset for such loans, as such
amount is considered immaterial by management. For the years ended December 31,
2002, and 2001, the Company sold $11,617,000 and $8,500,000, respectively, 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 opinion of management, the
borrower has the ability to continue making timely payments. Loan origination
and commitment fees and certain direct loan origination costs are deferred and
recognized over the lives of the related assets as an adjustment of the loans'
yields using the level yield method.
INCOME TAXES - Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the tax rate expected to be in effect when the taxes are
actually paid or recovered.
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 and stock dividends. Only basic earnings per share is
disclosed because the Company does not have any outstanding dilutive securities
or other contracts to issue common stock or, which convert to common stock. All
share and per share information presented is stated after giving effect to stock
splits and stock dividends.
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.
STOCK DIVIDEND - A 1-for-20 stock dividend was declared on November 19, 2002,
for shareholders of record on December 2, 2002. The stock dividend will result
in the issuance of 110,589 shares of common stock on January 29, 2003. The
Company valued the dividend stock price on December 31, 2002, at the amount of
$23.38 per share, as determined by the Nasdaq National Market December 31, 2002
close price. The appropriate amount of retained earnings was reclassified to
common stock and capital surplus. All share and per share data reflect the stock
dividend.
COMPREHENSIVE INCOME - Comprehensive income includes both net income and other
comprehensive income, including the change in unrealized gains and losses on
securities available for sale and the change in additional minimum liability
related to pension costs, net of tax.
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 automatically reinvest 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 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
29
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.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK - 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 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 $1,221,000 and $1,290,000, at
December 31, 2002 and 2001, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2001 and
2000 financial statements to conform with the presentation used in 2002.
ACCOUNTING STANDARDS PRONOUNCEMENTS - SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets, was issued August 2001. This Statement
supercedes SFAS No. 121, Accounting Principle Board Opinion (APB) No. 30, and
amends Accounting Research Bulletin (ARB) No. 51. The Statement establishes a
single accounting model for long-lived assets to be disposed of by sale and
resolve significant implementation issues related to SFAS No. 121. However, this
Statement retains fundamental provisions of SFAS No. 121, APB 30, and ARB No.
51. The Statement was effective for the Company beginning on January 1, 2002 and
did not have a material impact on the Company's financial statements.
SFAS No. 147, Acquisitions of Certain Financial Institutions, was issued October
2002. This Statement amends SFAS Nos. 72 and 144 and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both SFAS No.
72 and FASB Interpretation No. 9 and requires that those transactions be
accounted for in accordance with SFAS No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. In addition, this Statement amends
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor and borrower-relationship intangible
assets and credit card holder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that SFAS No. 144
requires for the other long-lived assets that are held and used. The Statement
was effective for the Company beginning October 1, 2002 and did not have a
material impact on the Company's financial statements.
FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, was issued by the FASB in November 2002. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating
to guarantees. In general, FIN 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is related to an asset,
liability, or equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition requirements of
this interpretation, including, among others, guarantees relating to employee
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordination interests in
Special Purpose Entity (SPE), and guarantees of a company's own future
performance. Other guarantees are subject to the disclosure requirements of FIN
45, but not to the recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under SFAS No. 133, a parent's
guarantee of debt owed to a third party by its subsidiary or vice versa, and
guarantee, which is based on performance not price. The disclosure requirements
of FIN 45 are effective for the Company as of December 31, 2002, and require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. The requirements of FIN 45 did not have a material impact on the results
of operations, financial position or liquidity.
FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest
Entities, was issued by the FASB in January 2003. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and to determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in a
entity will need to consolidate the entity if the company's interests in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires
30
additional disclosures by primary beneficiaries and other significant variable
interest holders. The provisions of this interpretation became effective upon
issuance. The requirements of FIN 46 did not have a material impact on the
results of operations, financial position or liquidity.
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, was issued in December 2002, which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB No. 25 to SFAS No. 123's fair value method of
accounting, if a company so elects. The Company currently has no outstanding
stock-based employee compensation.
2. SECURITIES
The amortized cost of securities and their approximate fair value at December 31
were as follows:
2002
----------
UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
Available for sale:
U.S. government and agency securities $ 9,477,460 $ 369,503 $ 0 $ 9,846,963
Mortgage backed securities 44,282,736 481,778 (68,351) 44,696,163
State and municipal securities 44,578,271 2,688,872 (27,419) 47,239,724
Other securities 1,248,350 0 0 1,248,350
-------------- --------------- ----------- -------------
Total $ 99,586,817 $ 3,540,153 $ (95,770) $ 103,031,200
============== =============== =========== =============
Held to maturity:
U.S. government and agency securities $ 37,201 $ 0 $ 0 $ 37,201
State and municipal securities 3,603,513 0 0 3,603,513
-------------- --------------- ----------- -------------
Total $ 3,640,714 $ 0 $ 0 $ 3,640,714
============== =============== =========== =============
2001
----------
UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
Available for sale:
U.S. government and agency securities $ 12,553,896 $ 531,045 $ (19,249) $ 13,065,692
Mortgage backed securities 29,421,483 215,508 (37,432) 29,599,559
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 $ 0 $ 0 $ 2,329,855
============== =============== =========== =============
31
Other securities contain both Federal Reserve and Federal Home Loan Bank stock,
which are restricted and carried at cost.
Available for sale securities with a total fair value of $50,623,651 at December
31, 2002, were pledged as collateral to secure public deposits and for other
purposes required or permitted by law.
Mortgage backed securities include mortgage backed obligations of U.S.
Government agencies and corporations, mortgage backed securities issued by other
organizations and other asset backed securities. These obligations have
contractual maturities ranging from less than one year to 30 years and have an
anticipated average life to maturity ranging from less than one year to 17
years. All mortgage backed securities contain a certain amount of risk related
to the uncertainty of prepayments of the underlying mortgages. Interest rate
changes have a direct impact upon prepayment speeds, therefore, the Company uses
a third party's computer simulation model to test the average life and yield
volatility of all mortgage backed securities under various interest rate
scenarios to insure that volatility falls within acceptable limits. At December
31, 2002 and 2001, the Company owned no high risk mortgage backed securities as
defined by the Federal Financial Institutions Examination Council's Supervisory
Policy Statement on Securities Activities.
The scheduled maturities of debt securities at December 31, 2002, 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 $ 4,003,286 $ 4,040,160 $ 2,773,438 $ 2,773,438
Due after year one through five years 12,675,305 13,056,320 609,359 609,359
Due after five years through ten years 27,876,311 29,268,414 220,716 220,716
Due after ten years 55,031,915 56,666,306 37,201 37,201
-------------- --------------- -------------- -------------
Total $ 99,586,817 $ 103,031,200 $ 3,640,714 $ 3,640,714
============== =============== ============= =============
Realized gains and losses from sales of securities for the years ended December
31, 2002, 2001 and 2000 are summarized as follows:
2002 2001 2000
Gross gains $ 127,284 $ 184,204 $ 41,629
Gross losses (15,982) ( 523) ( 94,454)
-------------- -------------- -------------
Net gain (loss) $ 111,302 $ 183,681 $ (52,825)
============== ============== =============
32
3. LOANS, NET
Major categories of loans at December 31, 2002 and 2001 are summarized as
follows:
2002 2001
Mortgage loans on real estate:
Residential 1 - 4 family $ 26,712,205 $ 31,034,992
Multi-family commercial 77,918,498 70,858,450
Construction 2,174,277 1,520,153
Second mortgages 6,919,081 8,188,040
Equity lines of credit 13,779,526 10,684,118
Commercial loans 20,460,244 16,332,735
Consumer installment loans:
Personal 2,054,117 2,525,272
Credit cards 297,964 333,671
Student loans 0 233,678
Other 491,175 1,293,279
Direct financing lease 0 897,878
Net deferred loan origination costs 336,165 352,881
------------- -------------
151,143,252 144,255,147
Allowance for loan losses (2,145,606) (1,786,115)
------------- -------------
Loans, net $ 148,997,646 $ 142,469,032
============= ============
Changes in the allowance for loan losses for the years ended December 31, 2002,
2001 and 2000 were as follows:
2002 2001 2000
Balance, beginning of year $ 1,786,115 $ 1,428,467 $ 838,167
Provision for loan losses 420,000 420,000 689,000
Recoveries 15,689 17,250 6,356
Loans charged off (76,198) (79,602) (105,056)
------------ ------------- -------------
Balance, end of year $ 2,145,606 $ 1,786,115 $ 1,428,467
============ ============= =============
Loans evaluated for impairment, for which an allowance for loan impairment was
not required under SFAS No. 114 due to the adequacy of related collateral
values, totaled approximately $1,197,000 and $724,000 at December 31, 2002 and
2001, respectively. The average recorded investment in these loans during 2002,
2001, and 2000 was approximately $637,500, $601,600 and $1,166,500,
respectively. If such loans had been in an accruing status, the Bank would have
recorded additional interest income of approximately $68,000, $36,000 and
$78,000 in 2002, 2001 and 2000, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 2002.
As of December 31, 2002 and 2001, the Bank had no other loans which were
impaired as defined by SFAS No. 114.
4. OTHER ASSETS
Other assets at December 31, were as follows:
2002 2001
Bank owned life insurance $ 662,733 $ 547,276
Deferred tax asset 55,941 1,008,218
Accrued interest receivable 1,405,887 1,469,607
Life insurance proceeds receivable 184,744 0
Prepaid expenses 374,081 394,354
Other real estate owned 275,000 483,412
Other 365,935 339,666
------------- -------------
Total $ 3,324,321 $ 4,242,533
============= =============
33
5. GOODWILL AND INTANGIBLE ASSETS
As of January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside of a business
combination and for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill be separately
disclosed from other intangible assets in the balance sheet, and no longer be
amortized but tested for impairment on a periodic basis. The provisions of this
accounting standard also require the completion of a transitional impairment
test within six months of adoption, which was performed during 2002 and no
impairment was identified.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002, which decreased non-interest expense and
increased net income in 2002 as compared to 2001 and 2000. A reconciliation of
previously reported net income and earnings per share to the pro forma amounts
adjusted for the exclusion of goodwill amortization net of the related income
tax effect follows:
2002 2001 2000
Reported net income $ 3,606,047 $ 2,579,327 $ 3,222,986
Goodwill amortization 0 318,480 106,158
------------- ------------- --------------
Pro forma adjusted net income $ 3,606,047 $ 2,897,807 $ 3,329,144
------------- ------------- --------------
Reported earnings per share $ 1.55 $ 1.12 $ 1.40
Goodwill amortization per share 0.00 0.14 0.04
------------- ------------- --------------
Pro forma adjusted earnings per share $ 1.55 $ 1.26 $ 1.44
============= ============= ==============
Changes in the carrying amount of goodwill for the twelve-month period ended
December 31, 2002, by operating segment, are as follows:
BANKING INSURANCE
ACTIVITIES ACTIVITIES TOTAL
Balance as of January 1, 2002 $ 0 $ 2,760,113 $ 2,760,113
Goodwill acquired during the period 0 184,800 184,800
------------ -------------- -------------
Balance as of December 31, 2002 $ 0 $ 2,944,913 $ 2,944,913
============ ============== =============
As required by the statement, intangible assets that do not meet the criteria
for recognition apart from goodwill must be reclassified. As a result of the
Company's analysis, no reclassifications were required as of December 31, 2002.
Information regarding the Company's other intangible assets follows:
CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
Noncompete agreements $ 459,000 $ (44,050) $ 414,950
Capitalized pension costs 247,665 0 247,665
Insurance expirations 185,000 (60,500) 124,500
------------ ------------- -------------
Total $ 891,665 $ (104,550) $ 787,115
============ ============= =============
Amortization expense related to intangibles for the years ended December 31,
2002, 2001 and 2000 was $78,800, $21,800 and $3,950, respectively. Estimated
amortization expense for each of the five succeeding fiscal years is as follows:
YEAR ENDING DECEMBER 31 AMOUNT
2003 $ 111,800
2004 111,800
2005 106,350
2006 107,000
2007 50,000
34
6. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
2002 2001
Land $ 268,485 $ 268,485
Buildings and improvements 5,557,263 4,468,428
Equipment 4,773,451 3,931,185
------------- -------------
10,599,199 8,668,098
Less accumulated depreciation (5,250,205) (4,545,365)
------------- -------------
Properties and equipment, net $ 5,348,994 $ 4,122,733
============= =============
Depreciation expense totaled $665,530 in 2002, $613,117 in 2001, and $578,407 in
2000.
7. 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 15, the Company was a party to financial instruments with off-balance sheet
risk at December 31, 2002 and 2001. Such financial instruments consist of
commitments to extend permanent financing and letters of credit. If the options
are exercised by the prospective borrowers, these financial instruments will
become interest-earning assets of the Company. If the options expire, the
Company retains any fees paid by the counterparty in order to obtain the
commitment or guarantee. The fair value of commitments is estimated based upon
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate commitments, the fair value estimation takes into
consideration an interest rate risk factor. The fair value of guarantees and
letters of credit is based on fees currently charged for similar agreements. The
fair value of these off-balance sheet items at December 31, 2002 and 2001
approximates the recorded amounts of the related fees, which are not considered
material.
35
At December 31, 2002 and 2001, the estimated fair values of the Company's
financial instruments were as follows:
2002 2001
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Financial assets:
Cash and cash equivalents $ 19,758,727 $ 19,758,727 $ 10,694,087 $ 10,694,087
Interest bearing accounts in other banks 877,230 877,230 0 0
============ ============ ============ ============
Securities $106,671,914 $106,733,021 $ 84,065,231 $ 84,065,231
============ ============ ============ ============
Loans $151,143,252 144,255,147
Less: allowance for loan losses 2,145,606 1,786,115
------------ ------------ ------------ ------------
Loans, net $148,997,646 $162,071,427 $142,469,032 $148,103,833
============ ============ ============ ============
Financial liabilities:
Deposits $239,506,835 $240,759,785 $204,260,062 $206,592,532
============ ============ ============ ============
Other borrowed funds $ 8,110,964 $ 8,110,964 $ 9,660,748 $ 9,660,748
============ ============ ============ ============
8. DEPOSITS
Time deposits, with minimum denominations of $100,000 each, totaled $28,440,994
and $28,864,608 at December 31, 2002 and 2001, respectively. Additionally, the
interest expense related to these deposits for the years ended December 31,
2002, 2001 and 2000 was $981,000, $1,544,000 and $1,747,000 respectively.
At December 31, 2002, the scheduled maturities of time deposits are as follows:
2003 $ 64,400,671
2004 17,869,442
2005 1,320,451
2006 3,901,056
2007 1,907,714
--------------
$ 89,399,334
==============
9. OTHER BORROWED FUNDS
Other borrowed funds include $8,110,964 of long-term borrowing at December 31,
2002. The long-term borrowing consisted of various advances from the Federal
Home Loan Bank with interest rates ranging from 4.90% to 5.34%. These advances
are collateralized by certain qualifying assets. The maturities of other
borrowed funds are as follows:
2003 $ 3,389,551
2004 2,437,042
2005 1,467,368
2006 706,971
2007 90,899
Thereafter 19,133
--------------
Total $ 8,110,964
==============
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into agreements with depositors to sell to the depositors
securities owned by the Bank and repurchase the identical security, generally
within one day. No physical movement of the securities is involved. The
depositor is informed the securities are held in safekeeping by the Bank on
behalf of the depositor.
36
11. 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.
2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,958,392 $ 1,912,951
Service cost 168,533 170,990
Interest cost 160,857 155,046
Actuarial loss (gain) 266,140 (184,340)
Benefits paid (39,728) (96,255)
----------- -----------
Benefit obligations at end of year $ 2,514,194 $ 1,958,392
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,735,117 $ 1,897,429
Actual return on plan assets (19,647) (151,892)
Employer contributions 335,306 85,835
Benefits paid (39,728) (96,255)
----------- -----------
Fair value of plan assets at end of year $ 2,011,048 $ 1,735,117
----------- -----------
Funded status $ (503,146) $ (223,275)
Unrecognized net actuarial loss 585,429 177,041
Unrecognized prior service cost (182,989) (197,696)
----------- -----------
Net amount recognized $ (100,706) $ (243,930)
=========== ===========
Amount recognized in the statement of financial position consists of:
Accrued benefit liability (100,706) (243,930)
----------- -----------
Net amount recognized $ (100,706) $ (243,930)
=========== ===========
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, 2002 and 2001. Assumptions used by the Bank in the determination of
pension plan information consisted of the following:
2002 2001
Weighted-average discount rate 6.75% 7.50%
Rate of increase in compensation levels 4.75% 4.75%
Expected long-term rate of return on plan assets 6.75% 7.50%
The components of net periodic cost consisted of the following:
2002 2001 2000
Service cost $ 168,533 $ 170,990 $ 110,067
Interest cost 160,857 155,046 145,860
Expected return on plan assets (121,139) (148,392) (149,085)
Net amortization and deferral (16,169) (16,169) (16,169)
--------- --------- ---------
Net periodic cost $ 192,082 $ 161,475 $ 90,673
========= ========= =========
37
The Bank also maintains a non-qualified supplemental executive retirement plan
("SERP") 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 $225,986 and
$166,000 at December 31, 2002 and 2001, respectively. The face values of these
policies were approximately $1,750,000 at December 31, 2002 and 2001. 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. During 2002, the Bank reduced pension
expense by approximately $180,000 to correct a prior over accrual.
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 Statements of
Financial Position.
2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,410,936 $ 1,384,729
Service cost 49,147 130,879
Interest cost 109,084 109,902
Actuarial loss (gain) 112,715 (121,798)
Benefits paid (92,776) (92,776)
----------- -----------
Benefit obligation at end of year $ 1,589,106 $ 1,410,936
----------- -----------
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 92,776 92,776
Benefits paid (92,776) (92,776)
----------- -----------
Fair value of plan assets at end of year $ 0 $ 0
----------- -----------
Funded status $(1,589,106) $(1,410,936)
Unrecognized actuarial loss 262,892 0
Unrecognized prior service cost 247,665 276,052
----------- -----------
Net amount recognized $(1,078,549) $(1,134,884)
=========== ===========
Amounts recognized in the statement of financial position consists of:
Accrued benefit liability $(1,589,106) $(1,410,936)
Intangible asset 247,665 276,052
Accumulated other comprehensive income 262,892 0
----------- -----------
Net amount recognized $(1,078,549) $(1,134,884)
=========== ===========
Valuations of the non-qualified supplemental executive retirement plan as shown
above were conducted as of January 1, 2002 and 2001. Assumptions used by the
Bank in both years in the determination of pension plan information consisted of
the following:
2002 2001
Weighted-average discount rate 6.75% 7.50%
Expected long-term rate of return on plan assets 6.75% 7.50%
38
The components of net periodic cost consisted of the following:
2002 2001 2000
Service cost $ 49,147 $130,879 $194,792
Interest cost 109,084 109,902 73,633
Net amortization and deferral 61,824 55,669 51,602
-------- -------- --------
Net periodic cost $220,055 $296,450 $320,027
======== ======== ========
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $71,000, $71,000 and
$212,000 in 2002, 2001 and 2000, respectively. The estimated present value of
the benefit obligation, included in other liabilities, was $1,006,000 and
$983,000 at December 31, 2002 and 2001, respectively. This obligation is
indirectly funded by life insurance contracts (naming the Bank as beneficiary)
with aggregate cash surrender values of approximately $436,000 and $381,000 at
December 31, 2002 and 2001, respectively. The face values of these policies at
December 31, 2002 and 2001 was approximately $3,000,000, and $3,200,000,
respectively. The increase in cash surrender value is included in the "Other"
financial statement line on the Consolidated Statements 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 Retirement and Thrift 401(k) Plan for
employees, who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute up to the
maximum IRS allowance with a base contribution by the Bank equal to 1% of the
employees' base compensation plus a 25% match of the employees' contribution up
to 4% of their annual salary. The Bank can also make discretionary contributions
to the Plan. The Bank's expense under this Plan was approximately $50,000,
$44,000 and $43,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
12. STOCK OPTION PLAN
The Company maintains a Stock Option Plan (the "Plan"). Under the provisions of
the Plan, awards, up to an aggregate of 106,250 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 Human Resources Committee of the Company's
Board of Directors ("The Committee") 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 not generally 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, 2002, no awards have been granted. Refer to Note 1
for information regarding a new accounting pronouncement, which provides
guidance on valuing stock options.
39
13. INCOME TAXES
The components of the provision for income taxes were as follows:
2002 2001 2000
Income taxes currently payable $ 1,045,000 $ 1,293,000 $ 1,250,000
Deferred tax expense (benefit) 148,258 (185,000) (468,750)
----------- ----------- -----------
Total provision $ 1,193,258 $ 1,108,000 $ 781,250
=========== =========== ===========
At December 31, 2002 and 2001, the components of the net deferred tax assets
were as follows:
2002 2001
Deferred tax assets:
Allowance for loan losses $ 767,000 $ 651,000
Pension premiums 556,000 654,000
Deferred compensation 392,000 386,000
Additional minimum liability 102,000 0
---------- ----------
Gross deferred tax assets $1,817,000 $1,691,000
---------- ----------
Deferred tax liabilities:
Depreciation $ 193,000 $ 0
SERP premiums 96,000 113,000
Prepaid expenses 131,000 139,000
Net unrestricted gains on securities available for sale 1,341,000 431,000
---------- ----------
Gross deferred tax liabilities $1,761,000 $ 683,000
---------- ----------
Net deferred tax asset $ 56,000 $1,008,000
========== ==========
The net deferred tax asset at December 31, 2002 and 2001 is included in "Other"
assets in the accompanying consolidated balance sheets.
In assessing the realizability of the deferred tax assets and the need for a
valuation allowance, the Company believes it is more likely than not that the
net deferred assets will be recognized.
The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
DECEMBER 31
2002 2001 2000
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Tax provision at statutory rate $ 1,632,000 34% $ 1,254,000 34% $ 1,361,000 34%
(Decrease) increase in taxes resulting from:
Tax-exempt income (628,000) (13) (534,000) (15) (527,000) (13)
Tax exempt insurance proceeds (63,000) (1) 0 0 (469,000) (12)
State taxes, net of federal benefit 132,000 3 240,000 7 210,000 5
Non-deductible goodwill 0 0 108,000 3 36,000 1
Other items, net 120,258 2 40,000 1 170,250 4
-------------------- ------------------- --------------------
Provision for income taxes $ 1,193,258 25% $ 1,108,000 30% $ 781,250 19%
==================== =================== ====================
40
14. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with certain directors, significant
shareholders and their affiliates (related parties). The Company extends credit
under substantially the same terms as comparable third-party arrangements, and
is in compliance with applicable banking regulations. The aggregate amount of
loans to such related parties at December 31, 2002 and 2001 was $3,997,786 and
$4,993,555, respectively. During 2002 and 2001, new loans to such related
parties amounted to $886,090 and $15,613,495, respectively, and repayments
amounted to $1,881,860 and $15,304,528.
15. 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, 2002 and 2001 is as follows:
2002 2001
Commitments to extend credit $40,094,000 $26,457,000
Standby letters of credit 1,739,000 1,843,000
----------- -----------
Total $41,833,000 $28,300,000
=========== ===========
Commitments to extend credit and standby letters of credit 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.
Certain lending commitments for conforming residential mortgage loans to be sold
into the secondary market are considered derivative instruments under the
guidelines of SFAS No. 133. The changes in the fair value of these commitments
due to interest rate risk are not recorded on the balance sheet as these
derivatives are not considered material. Further discussion on derivative
instruments is included in Note 1.
The Company has entered into contracts with third parties which have
indemnification clauses included. Examples of such contracts include third party
service providers, agreements with brokers and dealers, correspondent banks,
purchasers of residential mortgages and certain directors and officers. Due to
the nature of these indemnification provisions, it is not possible to quantify
the aggregate exposure to the Company resulting from them.
The Company and its subsidiary, M&W Agency, Inc., lease certain offices, land
and equipment under long-term operating leases. The aggregate minimum annual
rental commitments under these leases total approximately $293,000 in 2003,
$265,000 in 2004, $175,000 in 2005, $173,000 in 2006, $179,220 in 2007 and
$1,727,000 thereafter.
The Company is subject to possible litigation proceedings in the normal course
of business. As of December 31, 2002, the Company did not have any asserted
claims pending against the Company.
16. 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.
41
17. 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, 2002 and 2001.
2002
BANKING INSURANCE
ACTIVITIES ACTIVITIES TOTAL
Net interest income (loss) $ 10,416,225 $ (20,532) $ 10,395,693
Provision for credit losses 420,000 0 420,000
------------ ------------ ------------
Net interest income (loss) after provision for credit losses 9,996,225 (20,532) 9,975,693
Non-interest income 2,554,050 0 2,554,050
Insurance commissions and fees 0 2,947,381 2,947,381
Net loss on sales of assets (27,690) 0 (27,690)
Non-interest expense 8,513,837 2,136,292 10,650,129
------------ ------------ ------------
Income before income taxes 4,008,748 790,557 4,799,305
Income tax expense 878,815 314,443 1,193,258
------------ ------------ ------------
$ 3,129,933 $ 476,114 $ 3,606,047
============ ============ ============
2001
BANKING INSURANCE
ACTIVITIES 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 losses 8,718,090 (28,069) 8,690,021
Non-interest income 1,948,733 0 1,948,733
Insurance commissions and fees 0 2,412,900 2,412,900
Net gain on sales of assets 166,279 0 166,279
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 INSURANCE
ACTIVITIES ACTIVITIES TOTAL
Net interest income (loss) $ 8,596,869 $ (16,780) $ 8,580,089
Provision for credit losses 689,000 0 689,000
------------ ------------ ------------
Net interest income (loss) after provision for credit losses 7,907,869 (16,870) 7,891,089
Non-interest income 3,054,523 0 3,054,523
Insurance commissions and fees 0 646,484 646,484
Net 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
============ ============ ============
42
DECEMBER 31, DECEMBER 31,
IDENTIFIABLE ASSETS, NET 2002 2001
Banking activities $284,120,833 $244,911,420
Insurance activities 4,590,027 3,811,038
------------ ------------
Consolidated Total Assets $288,710,860 $248,722,458
============ ============
The majority of the insurance segment assets are related to net goodwill of
approximately $2.9 million. The related amortization of goodwill for 2001 was
reported as an expense on the banking segment.
18. REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the Comptroller of
the Currency. Under such restrictions, the Bank may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained earnings (as
defined) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002 and 2001, that
the Bank met all capital adequacy requirements to which it is subject.
As of June 30, 2002, 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:
2002
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total capital (to risk weighted assets) $27,554,000 16.2% $13,635,000 8.0% $17,044,000 10.0%
================== ================== ===================
Tier I capital (to risk weighted assets) $25,434,000 14.9% $ 6,818,000 4.0% $10,226,000 6.0%
================== ================== ===================
Tier I capital (to average assets) $25,434,000 9.3% $10,901,000 4.0% $13,626,000 5.0%
================== ================== ===================
2001
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES 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%
================== ================== ===================
43
19. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as
follows:
CONDENSED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001 2002 2001 2000
ASSETS
Cash $ 48,171 $ 36,779
Investment in subsidiary 30,813,830 26,923,990
------------ ------------
Total assets $ 30,862,001 $ 26,960,769
============ ============
STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock $ 1,167,081 $ 1,103,234
Capital surplus 16,578,868 13,727,084
Retained earnings 11,179,871 11,464,273
Accumulated other comprehensive income, net of tax 1,942,295 666,178
Treasury stock (6,114) 0
------------ ------------
Total stockholders' equity $ 30,862,001 $ 26,960,769
============ ============
CONDENSED STATEMENTS OF INCOME
DECEMBER 31, 2002, 2001 AND 2000
Dividends from subsidiary $ 1,304,585 $ 1,068,834 $ 899,046
Other revenue 163,213 185,000 50,000
Expenses (151,821) (189,426) (47,813)
------------ ------------ ------------
Income before equity in undistributed earnings of subsidiary 1,315,977 1,064,408 901,233
Equity in undistributed earnings of subsidiary 2,290,070 1,514,919 2,321,753
------------ ------------ ------------
Net income $ 3,606,047 $ 2,579,327 $ 3,222,986
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Operating activities:
Net income $ 3,606,047 $ 2,579,327 $ 3,222,986
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of subsidiary (2,290,070) (1,514,919) (2,321,753)
------------ ------------ ------------
Net cash provided by operating activities 1,315,977 1,064,408 901,233
Financing activities - cash dividends paid (1,304,585) (1,068,834) (899,046)
------------ ------------ ------------
Net increase (decrease) in cash 11,392 (4,426) 2,187
Cash, beginning of year 36,779 41,205 39,018
------------ ------------ ------------
Cash, ending of year $ 48,171 $ 36,779 $ 41,205
============ ============ ============
44
20. ACQUISITION
On January 1, 2002, M&W Agency, Inc. completed its acquisition of assets,
business and certain liabilities of Eden Agency, Inc., a retail property and
insurance company located in Eden, New York. The purchase price of $764,800
included $50,000 in cash, $250,000 of notes payable, and $172,800 of liabilities
assumed. The assets and liabilities assumed included certain fixed assets,
goodwill, intangible assets and notes payable.
On December 30, 2002, M&W Agency, Inc., completed its acquisition of the assets,
business and certain liabilities of Frontier Claim Services, Inc., an insurance
adjusting business, located in Buffalo, New York. The pro forma impact of this
acquisition is not material to the revenue, net income or net income per share
assuming the acquisition had taken place at January 1, 2002. The acquisition
cost of $292,000 included $42,000 in cash and $250,000 in notes payable. The
assets purchased included certain fixed assets and an intangible asset.
21. SUBSEQUENT EVENTS
Subsequent to December 31, 2002, M&W Agency, Inc, completed its acquisition of
the assets, business and certain liabilities of the Gutekunst Insurance Agency,
a retail property and casualty insurance company, located in Colden, New York.
The pro forma impact of this acquisition is not material to the net sales, net
income or basic earnings per share assuming the acquisition had taken place at
January 1, 2002.
Subsequent to December 31, 2002, ENHC accepted the subscription of 119 shares of
non-voting preferred stock. These subscriptions raised approximately $60,000 in
capital to be used in the business and activities of ENHC.
22. QUARTERLY FINANCIAL DATA - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
2002
Interest income $3,571 $3,794 $3,903 $3,944
Interest expense 1,046 1,168 1,275 1,327
------ ------ ------ ------
Net interest income 2,525 2,626 2,628 2,617
Net income 865 935 927 879
Earnings per share * 0.37 0.40 0.40 0.38
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 0.32 0.28 0.28
* All share and per share information is stated after giving effect to the June
2001 5-for-4 stock split, and the 1-for-20 stock dividend, payable on January
29, 2003 to shareholders of record as of December 2, 2002.
45
SHAREHOLDER AND CORPORATE INFORMATION
GENERAL SHAREHOLDER INFORMATION
As of December 31, 2002, there were 1,152 shareholders of record of the
Company's common stock. Total shares outstanding were 2,334,162.
ANNUAL MEETING
Tuesday, April 22, 2003 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, 2002, 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.evansbancorp.com.
STOCK TRANSFER AGENCY 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
Monday through Friday 8 a.m. to 5 p.m. EST
CORPORATE HEADQUARTERS
14 - 16 North Main Street
Angola, New York 14006
(716) 549-1000
AUDITORS
Deloitte & Touche LLP
50 Fountain Plaza
Buffalo, New York 14202
(716) 843-7200
QUARTERLY STOCK PRICES* AND CASH DIVIDENDS PAID**
3/31/01 6/30/01 9/30/01 12/31/01
================================================================
HIGH $35.81 $35.81 $28.57 $21.49
- ----------------------------------------------------------------
LOW $35.81 $35.81 $17.14 $16.57
================================================================
CASH DIVIDENDS PER SHARE** $ 0.21 $ 0.00 $ 0.00 $ 0.26
- ----------------------------------------------------------------
3/31/02 6/30/02 9/30/02 12/31/02
================================================================
HIGH $18.81 $21.09 $24.55 $23.38
- ----------------------------------------------------------------
LOW $17.19 $17.10 $15.48 $19.04
================================================================
CASH DIVIDENDS PER SHARE** $ 0.00 $ 0.26 $ 0.00 $ 0.30
- ----------------------------------------------------------------
* Evans Bancorp, Inc. distributed a 5-for-4 split of its common stock on June
12, 2001, and a 1-for-20 stock dividend payable on January 29, 2003, to
sharehold- ers of record on December 2, 2002. This information listed has been
adjusted to reflect the stock split and stock dividend. The common stock began
trading on the Nasdaq National Market system on July 9, 2001. Prior to that
time, there was no established public trading market for the stock and the price
information listed rep- resents the highest and lowest prices known to
management at which the stock of the Company was sold in private transactions
during the periods indicated, with- out retail markup, markdown or commission.
** Cash dividends are paid by Evans Bancorp, Inc. on a semi-annual basis. The
amounts listed are stated in the quarter paid and are adjusted to reflect the
stock split and stock dividend noted in * above.
46
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
Susan J. Herold
Timothy F. Jachlewski
Howard M. Martin, Jr.
Michael R. Noville
Michael C. Schafer
Mary Jo Shults
Jeffrey M. Werdein
Jeffrey L. White
CONTROLLER
John B. Connerton
ASSISTANT VICE PRESIDENTS
Michelle A. Bress
Rose Marie Hinckley
Mary K. Hosler
Nadine G. Houghton
Ronald J. Kasianowicz
Lori L. Kuczka
Linda C. Noecker
Cathy E. Rohrich
BANK OFFICERS
Douglas V. Carlson
Julie Gornikiewicz
Cindy A. Gracon
Kim M. Heimburg
Mary D. Philbin
Robin L. Roseman
M&W AGENCY, INC.
PRESIDENT
Robert G. Miller, Jr.
VICE PRESIDENTS
Louis Atti
Frederick E. Gould
Ronald E. Miller
ENB ASSOCIATES INC.
PRESIDENT
Robert G. Miller, Jr.
VICE PRESIDENT
Emily S. Hazlett
EVANS NATIONAL BANK COMMUNITY ADVISORY BOARD MEMBERSHIP
NORTH REGION:
Timothy F. Jachlewski
Chairperson (Evans National Bank)
Roy Emerling
Emerling Chevrolet, Inc.
William J. Gray
retired Evans National Bank commercial loan officer
Kenneth Kirst
Kirst Construction, Inc.
David Paulus
Paulus & Co.
Dr. Barbara Radolinski
Private practice
Charles Spinner
Attorney
SOUTH REGION:
George L. Catalano
Chairperson (Evans National Bank)
Mary Addison
Heimburg-Addison Funeral Home
Dr. Maria Rita P. Andaya
Private practice
Anthony Borrello
Pro Oil, Inc.
Robert Drago, Jr.
Entrepreneur
Michael Gacioch
National Property Management, Inc.
Richard Gradl
Gradl Landscaping
David Mackowiak
Johnson Mackowiak Moore & Myott LLP
Thomas Syroczynski
Jubilee
47
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.
Chairman, Mader Construction Company, Inc.
and related companies
Laverne G. Hall
Retired
Robert G. Miller, Jr.
President,
M&W Agency, Inc.
David M. Taylor
President,
Concord Nurseries, Inc.
James Tilley
President and Chief Executive Officer,
Evans National Bank
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 OF DAVID KOCH]
In memory of David Koch, who served on the Board of Directors from 1979 through
2002, for his many years of service, leadership, knowledge and integrity.
48
BOARD OF DIRECTORS
STANDING:
Robert G. Miller, Jr., James Biddle, Jr., William F. Barrett, Laverne G. Hall,
David M. Taylor
SEATED:
Robert W. Allen, James Tilley, Phillip Brothman, Thomas H. Waring, Jr.
[PHOTO OF BOARD OF DIRECTORS]
EXECUTIVE COMMITTEE
STANDING:
Mark DeBacker, Senior Vice President and Chief Financial Officer; William R.
Glass, Senior Vice President
SEATED:
James Tilley, President and Chief Executive Officer; Phillip Brothman, Chairman
of the Board; Thomas H. Waring, Jr., Vice Chairman of the Board
[PHOTO OF EXECUTIVE COMMITTEE]
OPERATING COMMITTEE
STANDING:
George L. Catalano, Vice President; Mark DeBacker, Senior Vice President
SEATED:
James Tilley, President and Chief Executive Officer; William R. Glass, Senior
Vice President
[PHOTO OF OPERATING COMMITTEE]
[EVANS BANCORP, INC. LOGO]
EVANS BANCORP, INC.
14 - 16 North Main Street
Angola, New York 14006
www.evansbancorp.com