SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended: December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to____________
Commission file number: 0-18539
EVANS BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 16-1332767
- ---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14-16 NORTH MAIN STREET, ANGOLA, NEW YORK 14006
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716) 549-1000
---------------------------------------------------
Registrant's telephone number (including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.50 PER SHARE
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of The Act).
Yes [ ] No [X]
On June 30, 2003, the aggregate market value of the registrant's common stock,
$.50 par value, (the "Common Stock") held by nonaffiliates of the registrant was
approximately $42.4 million, based upon the closing price of a share of the
registrant's common stock as quoted by the Nasdaq National Market.
As of February 27, 2004, 2,476,227 shares of the registrant's Common Stock were
outstanding.
Page 1 of 112
Exhibit Index on Page 73
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's 2004
Annual Meeting of Shareholders, to be held on April 20, 2004, are incorporated
by reference into Part III of this Annual Report on Form 10-K where indicated.
2
TABLE OF CONTENTS
INDEX
PAGE
PART I
ITEM 1. BUSINESS ......................................................... 5
Evans Bancorp, Inc. ................................................... 5
Evans National Bank ................................................... 5
Forward Looking Statements ............................................ 6
Market Area ........................................................... 6
Average Balance Sheet Information ..................................... 7
Securities Activities ................................................. 8
Investment Policy ................................................... 8
Lending Activities .................................................... 10
General ............................................................. 10
Real Estate Loans ................................................... 10
Commercial Loans .................................................... 11
Installment Loans ................................................... 11
Student Loans ....................................................... 11
Other Loans ......................................................... 11
Loan Maturities ..................................................... 12
Loan Losses ......................................................... 13
Sources of Funds - Deposits ........................................... 14
General ............................................................. 14
Deposits ............................................................ 14
Federal Funds Purchased & Other Borrowed Funds ...................... 15
Securities Sold Under Agreements to Repurchase ...................... 15
Market Risk ........................................................... 15
Environmental Matters ................................................. 16
Competition ........................................................... 17
Regulation ............................................................ 17
Subsidiaries of the Bank .............................................. 19
M&W Agency, Inc ..................................................... 19
ENB Associates Inc .................................................. 20
Evans National Holding Corp ......................................... 20
Employees ............................................................. 20
ITEM 2. PROPERTIES ....................................................... 21
ITEM 3. LEGAL PROCEEDINGS ................................................ 21
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS .................................... 21
3
Page
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS .................................. 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ............................. 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 24
ITEM 7A.QUANTATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................ 39
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......... 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES .......................... 72
ITEM 9A.CONTROLS AND PROCEDURES .......................................... 72
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT ................................................... 72
ITEM 11.EXECUTIVE COMPENSATION ........................................... 72
ITEM 12.SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS .................................. 72
ITEM 13.CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS ............................................. 72
PART IV
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES ........................... 72
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K .......................................... 73
SIGNATURES ....................................................... 75
4
PART I
ITEM 1. BUSINESS
EVANS BANCORP, INC.
Evans Bancorp, Inc. (the "Company") was organized as a New York business
corporation and incorporated under the laws of the State of New York on October
28, 1988 for the purpose of becoming a bank holding company. The Company is
registered with the Federal Reserve Board as a bank holding company under the
Bank Holding Company Act of 1956, as amended. The Company conducts its business
through its wholly-owned subsidiary, Evans National Bank (the "Bank"), and the
Bank's subsidiaries, ENB Associates Inc. ("ENB"), M&W Agency, Inc. ("M&W"), and
Evans National Holding Corp. ("ENHC"). Unless the context otherwise requires,
the term "Company" refers to Evans Bancorp, Inc. and its subsidiary. The
Company's principal office is located at 14-16 North Main Street, Angola, New
York 14006 and its telephone number is (716)549-1000. The Company's common stock
is quoted on the Nasdaq National Market system under the symbol "EVBN."
The Bank is a nationally chartered bank founded in 1920 as a national banking
association and is currently regulated by the Office of the Comptroller of the
Currency. Prior to February 1995, the Bank was known as The Evans National Bank
of Angola. Its legal headquarters is located at 14-16 North Main Street, Angola,
New York 14006. 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 nine banking offices located in Amherst,
Angola, Derby, Evans, Forestville, Hamburg, Lancaster (as of January 2004),
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. The Bank offers deposit products, which include checking and
NOW accounts, passbook and statement savings and certificates of deposit.
Deposits are insured to the applicable limit by the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation ("FDIC"). The Bank offers a variety
of loan products to its customers including commercial loans, commercial and
residential mortgage loans, and consumer loans. The Bank is regulated by the
Office of the Comptroller of the Currency.
ENB, a wholly-owned subsidiary of the Bank, offers non-deposit investment
products, such as annuities and mutual funds, to the Bank's customers.
M&W Agency, Inc., a wholly-owned subsidiary of the Bank, is an insurance agency,
which sells various premium-based insurance policies on a commission basis. M&W
has offices located in Angola, Cattaraugus, Derby, Eden, Gowanda, Hamburg, North
Boston, Randolph, Silver Creek, South Dayton, and West Seneca, New York.
ENHC was incorporated in February 2002, as a subsidiary of the Bank. ENHC
operates as a real estate investment trust ("REIT"), which provides additional
flexibility and planning opportunities for the business of the Bank.
The Company operates in two reportable segments-banking activities and insurance
agency activities.
At December 31, 2003, the Bank had total assets of $334.7 million, total
deposits of $266.3 million and total stockholders' equity of $33.3 million.
5
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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, or in the documents incorporated by reference herein,
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'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 on Form 10-K, as well as in the Company's periodic reports filed with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control and difficult to predict. 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.
MARKET AREA
The Company's primary market area is located in Erie County, northern Chautauqua
County and northwestern Cattaraugus County, New York, which includes the towns
of Amherst, New York, Boston, New York, Cheektowaga, New York, Depew, New York,
Derby, New York, Evans, New York, Forestville, New York, Hamburg, New York,
Hanover, New York, Lancaster, New York, and West Seneca, New York. This market
area is the primary area where the Bank receives deposits and makes loans and
the M&W Agency sells insurance.
6
AVERAGE BALANCE SHEET INFORMATION
The table presents the significant categories of the assets and liabilities of
the Bank, interest income and interest expense, and the corresponding yields
earned and rates paid in 2003, 2002 and 2001. The assets and liabilities are
presented as daily averages. The average loan balances include both performing
and nonperforming loans. Interest income on loans does not include interest on
loans for which the Bank has ceased to accrue interest. Interest and yield are
not presented on a tax-equivalent basis.
2003 2002 2001
------------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------ -------- -------- ------
($000) ($000) ($000) ($000) ($000) ($000)
ASSETS
Interest-earning assets:
Loans, Net $167,145 $ 10,737 6.42% $145,676 $ 10,593 7.27% $135,436 $ 11,051 8.16%
Taxable securities 72,464 2,226 3.07% 48,902 2,554 5.22% 46,001 2,892 6.29%
Tax-exempt securities 52,658 2,288 4.35% 43,656 1,987 4.55% 33,040 1,571 4.75%
Time deposits-other banks 721 18 2.55% 146 5 3.34% -- -- --
Federal funds sold 5,017 61 1.21% 5,148 73 1.44% 3,214 133 4.14%
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-earning assets 298,005 15,330 5.14% 243,528 15,212 6.25% 217,691 15,647 7.19%
Non interest-earning assets
Cash and due from banks 9,118 8,967 7,492
Premises and equipment, net 5,483 4,463 3,779
Other assets 13,743 8,315 8,130
-------- -------- --------
Total Assets $326,349 $265,273 $237,092
======== ======== ========
LIABILITIES & STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW accounts $ 10,753 23 0.22% $ 9,678 44 0.45% $ 8,510 76 0.89%
Regular savings deposits 110,001 1,022 0.93% 75,741 841 1.11% 63,953 1,415 2.21%
Time deposits 99,775 2,819 2.83% 90,890 3,397 3.74% 86,005 4,516 5.25%
Fed funds purchased 933 29 3.08% -- -- -- -- -- --
Securities sold U/A to
repurchase 5,971 57 0.95% 3,989 67 1.69% 4,057 125 3.07%
FHLB advances 13,072 510 3.90% 8,627 447 5.18% 7,386 377 5.11%
M&W notes 827 24 2.89% 451 21 4.61% 363 28 7.73%
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities 241,332 4,484 1.86% 189,376 4,817 2.54% 170,274 6,537 3.84%
Noninterest-bearing
liabilities:
Demand deposits 48,853 42,165 36,133
Other 4,299 4,889 4,437
-------- -------- --------
Total liabilities 294,484 236,430 210,844
Stockholders' equity 31,865 28,843 26,248
-------- -------- --------
Total Liabilities & Equity $326,349 $265,273 $237,092
======== ======== ========
Net interest earnings $ 10,846 $ 10,395 $ 9,110
======== ======== ========
Net yield on interest earning
assets 3.64% 4.27% 4.18%
In 2003, the Bank's interest income increased by $0.1 million from 2002,
compared to a decrease of $0.4 million in 2002 as compared to 2001. Interest
expense decreased by $0.3 million in 2003 from 2002 compared to a decrease of
$1.7 million in 2002 as compared to 2001.
7
SECURITIES ACTIVITIES
The primary objective of the Bank's securities portfolio is to provide liquidity
while maintaining safety of principal. Secondary objectives include investment
of funds in periods of decreased loan demand, interest sensitivity
considerations, providing collateral to secure local municipal deposits,
supporting local communities through the purchase of tax-exempt securities and
tax planning considerations. The Bank's Board of Directors is responsible for
establishing overall policy and reviewing performance.
The Bank's policy provides that acceptable portfolio investments include: U.S.
Government obligations, obligations of federal agencies, municipal obligations
(general obligations, revenue obligations, school districts and non-rated issues
from the Bank's general market area), banker's acceptances, certificates of
deposit, Industrial Development Authority Bonds, Public Housing Authority Bonds,
corporate bonds (each corporation limited to the Bank's legal lending limit),
collateral mortgage obligations, Federal Reserve stock and Federal Home Loan
Bank stock.
The Bank's investment policy is that in-state securities must be rated Moody's
BAA (or equivalent) at the time of purchase. Out-of-state issues must be rated
AA (or equivalent) at the time of purchase. Bonds or securities rated below A
are reviewed periodically to assure their continued credit worthiness. The
purchase of non-rated municipal securities is permitted, but limited to those
bonds issued by municipalities in the Bank's general market area which, in the
Bank's judgment, possess no greater credit risk than BAA (or equivalent) bonds.
The financial statements of the issuers of non-rated securities are reviewed by
the Bank and a credit file of the issuers is kept on each non-rated municipal
security with relevant financial information. In addition, the Bank's loan
policy permits the purchase of notes issued by various states and municipalities
which have not been rated by Moody's or Standard & Poors. The securities
portfolio of the Bank is priced on a monthly basis.
Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" promulgates accounting
treatment for investments in securities. All securities in the Bank's portfolio
are either designated as "held to maturity" or "available for sale."
Income from securities represented approximately 29.4% of total interest income
of the Company in 2003 as compared to 29.8% in 2002. At December 31, 2003, the
Bank's securities portfolio of $120.6 million consisted primarily of United
States ("U.S.") and federal agency obligations, state and municipal securities
and mortgage-backed securities issued by the Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corp.
The following table summarizes the Bank's securities with those designated as
available for sale valued at fair value and securities designated as held to
maturity valued at amortized costs as of December 31, 2003 and 2002:
2003 2002
-------- --------
($000) ($000)
Available for Sale:
U.S. Treasury and other U.S. government agencies $ 62,426 $ 54,543
States and political subdivisions in the U.S. 52,527 47,240
FRB and FHLB Stock 1,854 1,248
-------- --------
Total Securities Designated as Available for Sale $116,807 $103,031
-------- --------
Held to Maturity:
U.S. Treasury and other U.S. government agencies $ 36 $ 37
States and political subdivisions in the U.S. 3,713 3,604
-------- --------
Total Securities Designated as Held to Maturity $ 3,749 $ 3,641
-------- --------
Total Securities $120,556 $106,672
======== ========
8
The following table sets forth the contractual maturities and weighted
average interest yields of the Bank's securities portfolio (yields on tax-exempt
obligations are not presented on a tax-equivalent basis) as of December 31,
2003:
Maturing
-------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------------------- ------------------- ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
($000) ($000) ($000) ($000)
CLASSIFIED AS AVAILABLE FOR
SALE AT FAIR VALUE:
U.S. Treasury and other U.S.
government agencies $ -- -- $ 12,058 3.35% $ 27,986 4.75% $ 22,382 4.95%
States and political subdivisions 1,927 4.90 5,046 4.68 26,053 4.58 19,501 4.77
-------- -------- -------- --------
Total Available for Sale $ 1,927 4.90% $ 17,104 3.75% $ 54,039 4.67% $ 41,883 4.87%
======== ======== ======== ========
CLASSIFIED AS HELD TO MATURITY
AT AMORTIZED COST:
U.S. Treasury and other U.S.
government agencies $ -- -- $ -- -- $ -- -- $ 36 --
States and political subdivisions 1,382 1.34 575 4.07 859 3.18 897 3.74
-------- -------- -------- --------
Total Held to Maturity 1,382 1.34 575 4.07 859 3.18 933 3.74
======== ======== ======== ========
Total Securities $ 3,309 3.37% $ 17,679 3.76% $ 54,898 4.65% $ 42,816 4.84%
======== ======== ======== ========
9
LENDING ACTIVITIES
GENERAL. The Bank has a loan policy which is approved by its Board of Directors
on an annual basis. The loan policy addresses the lending authorities of Bank
officers, charge off policies, desired portfolio mix, and loan approval
guidelines.
The Bank offers a variety of loan products to its customers including
residential and commercial real estate mortgage loans, commercial loans, and
installment loans. The Bank primarily extends loans to customers located within
the Western New York area. Income on loans represented approximately 70.0% of
the total interest income of the Company in 2003 and approximately 69.6% of
total interest income in 2002. The Bank's loan portfolio after unearned
discounts, loan origination costs and allowances for credit losses totaled
$185.5 million and $149.0 million at December 31, 2003 and December 31, 2002,
respectively. At December 31, 2003, the Bank had $2.5 million as an allowance
for loan losses which is approximately 1.35% of total loans. This compares with
approximately $2.1 million at December 31, 2002 which was approximately 1.42% of
total loans. The increase to the provision for loan losses to $0.5 million in
2003 from $0.4 million in 2002 reflects management's assessment of the portfolio
composition, of which higher risk commercial real estate loans have been an
increasing component, and its assessment of the New York State and local
economy. The net loan portfolio represented approximately 55.4% and 51.6% of the
Bank's total assets at December 31, 2003 and December 31, 2002, respectively.
REAL ESTATE LOANS. Approximately 84.8% of the Bank's loan portfolio at December
31, 2003 consisted of real estate loans or loans collateralized by mortgages on
real estate including residential mortgages, commercial mortgages and other
types of real estate loans. The Bank's real estate loan portfolio was $159.5
million at December 31, 2003, compared to $127.5 million at December 31, 2002.
The real estate loan portfolio increased approximately 25.1% in 2003 over 2002
compared to an increase of 4.3% in 2002 over 2001.
The Bank offers fixed rate residential mortgages with terms of ten to thirty
years with up to an 80% loan-to-value ratio. Fixed rate residential mortgage
loans outstanding totaled $18.4 million at December 31, 2003, which was
approximately 9.8% of total loans outstanding. In 1995, the Bank entered into a
contractual arrangement with the Federal National Mortgage Association (FNMA)
whereby mortgages can be sold to FNMA and the Bank retains the servicing rights.
In 2003, approximately $15.7 million of mortgages were sold to FNMA under this
arrangement compared to $11.6 million of mortgages sold in 2002. The Bank
currently retains the servicing rights on $30.9 million in mortgages sold to
FNMA. The Company has recorded no net servicing asset for such loans as it is
considered immaterial.
Since 1993, the Bank has offered adjustable rate residential mortgages with
terms of up to thirty years. Rates on these mortgages remain fixed for the first
three years and are adjusted annually thereafter. On December 31, 2003, the
Bank's outstanding adjustable rate mortgages were $2.2 million or 1.2% of total
loans. This balance did not include any construction mortgages.
The Bank also offers commercial mortgages with up to a 75% loan-to-value ratio
for up to fifteen years on a variable and fixed rate basis. Many of these
mortgages either mature or are subject to a rate call after three to five years.
The Bank's outstanding commercial mortgages were $104.0 million at December 31,
2003, which was approximately 55.3% of total loans outstanding. This balance
included $13.5 million in fixed rate and $90.4 million in variable rate loans,
which include rate calls.
The Bank also offers other types of loans collateralized by real estate such as
home equity loans. The Bank offers home equity loans at variable and fixed
interest rates with terms of up to fifteen years and up to an 80% loan-to-value
ratio. At December 31, 2003, the real estate loan portfolio included $26.9
million of home equity loans outstanding which represented approximately 14.3%
of its total loans outstanding. This balance included $18.3 million in variable
rate and $8.6 million in fixed rate loans.
The Bank also offers both residential and commercial real estate-construction
loans at up to an 80% loan-to-value ratio at fixed interest or adjustable
interest rates and multiple maturities. At December 31, 2003, fixed rate real
estate-construction loans outstanding were $0.4 million or 0.2% of the Bank's
loan portfolio, and adjustable rate construction loans outstanding were $4.7
million or 2.5% of the portfolio.
As of December 31, 2003, approximately $1.4 million or 0.9% of the Bank's real
estate loans were 30 to 90 days delinquent, and approximately $0.2 million or
0.1% of real estate loans were nonaccruing.
10
COMMERCIAL LOANS. The Bank offers commercial loans on a secured and unsecured
basis including lines of credit and term loans at fixed and variable interest
rates and multiple maturities. The Bank's commercial loan portfolio totaled
$24.3 million and $20.5 million at December 31, 2003 and December 31, 2002,
respectively. Commercial loans represented approximately 12.9% and 13.5% of the
Bank's total loans at December 31, 2003 and December 31, 2002, respectively.
As of December 31, 2003, none of the Bank's commercial loans were 30 to 90 days
past due and $0.04 million or 0.2% of its commercial loans were nonaccruing.
Commercial lending entails significant additional risk as compared with real
estate loans. Collateral, where applicable, may consist of inventory,
receivables, equipment and other business assets. Approximately seventy-three
percent of the Bank's commercial loans are variable rate which are tied to the
prime rate.
INSTALLMENT LOANS. The Bank's installment loan portfolio (which includes
personal loans and revolving credit card balances) totaled $2.6 million and $2.4
million at December 31, 2003 and December 31, 2002, respectively, representing
approximately 1.4% of the Bank's total loans at December 31, 2003 and 1.6% of
the Bank's total loans at December 31, 2002. Traditional installment loans are
offered at fixed interest rates with various maturities up to 60 months, on a
secured and unsecured basis. At December 31, 2003, the installment loan
portfolio included $0.2 million in fixed rate credit card balances at an
interest rate of 15.6% and $0.08 million in the variable rate option. As of
December 31, 2003, approximately $0.06 million or 2.2% of the Bank's installment
loans were 30-90 days past due.
STUDENT LOANS. During 2002, the Bank completed the sale of all direct student
loans and entered into an agreement whereby it facilitates the submission of
student loan applications to the Student Loan Marketing Association (SLMA) for a
fee. The loans are then originated and subsequently serviced by SLMA. This
change was made in order to enhance application response time, as well as Bank
profitability.
OTHER LOANS. Other loans totaled $1.2 at December 31, 2003 and $0.5 million at
December 31, 2002. Other loans consisted primarily of loans to municipalities,
hospitals, churches and non-profit organizations. These loans are at fixed or
variable interest rates with multiple maturities. Other loans also include
overdrafts, which totaled $0.8 million and $0.1 million December 31, 2003 and
2002, respectively.
The Bank's ability to lend larger amounts to any one borrower is subject to
regulation by the Comptroller of the Currency. The Bank continually monitors its
loan portfolio to review compliance with new and existing regulations.
11
The following table summarizes the major classifications of the Bank's loans
(net of deferred origination costs) as of the dates indicated.
December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Mortgage loans on real estate:
Residential 1-4 family $ 30,160 $ 26,712 $ 31,035 $ 33,375 $ 31,683
Commercial and multi-family 99,684 77,919 70,853 57,219 47,265
Construction 5,090 2,174 1,520 1,966 3,538
Second mortgages 6,274 6,919 8,188 7,648 7,851
Equity lines of credit 18,262 13,780 10,684 8,976 8,517
---------- ---------- ---------- ---------- ----------
Total mortgage loans 159,470 127,504 122,280 109,184 98,854
Commercial loans 24,282 20,460 16,338 14,783 14,186
Consumer installment loans:
Personal 2,277 2,054 2,759 2,994 2,365
Credit cards 292 298 334 483 364
Other 1,209 492 2,191 2,391 1,101
---------- ---------- ---------- ---------- ----------
Total consumer installment loans: 3,778 2,844 5,284 5,868 3,830
Net deferred loan origination costs 537 336 353 372 401
---------- ---------- ---------- ---------- ----------
Total Loans 188,067 151,144 144,255 130,207 117,271
Allowance for loan losses (2,539) (2,146) (1,786) (1,428) (838)
---------- ---------- ---------- ---------- ----------
Net loans $ 185,528 $ 148,998 $ 142,469 $ 128,779 $ 116,433
========== ========== ========== ========== ==========
LOAN MATURITIES AND SENSITIVITIES OF LOANS IN INTEREST RATES. The following
table shows the maturities of commercial and real estate construction loans
outstanding as of December 31, 2003 and the classification of loans due after
one year According to sensitivity to changes in interest rates.
($000)
0-1 Year 1-5 Years Over 5 Years Total
-------- --------- ------------ -------
Commercial $ 3,474 $ 10,406 $ 10,402 $24,282
Real estate construction 3,346 1,744 -- 5,090
------- -------- ------------ -------
$ 6,820 $ 12,150 $ 10,402 $29,372
======= ======== ============ =======
Loans maturing after one year with:
Fixed Rates $ 4,890 $ 132
Variable Rates 7,260 10,270
------- -------
$12,150 $10,402
======= =======
12
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS. The following table summarizes the
Bank's non-accrual and accruing loans 90 days or more past due as of December
31, for the dates listed below. The Bank had no restructured loans as of those
dates. Any loans classified for regulatory purposes as loss, doubtful,
substandard or special mention that have not been disclosed do not (i) represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital resources, or
(ii) represent material credit about which management has serious doubts as to
the ability of such borrowers to comply with the loan repayment terms. See also
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations - Allowance for Loan Losses."
At December 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
($000)
Non-accruing loans:
One-to-four family $ - $ - $ - $ - $ -
Home equity - - - - -
Commercial real estate & multi family 256 1,104 545 1,071 1,532
Consumer - - - - -
Commercial business 40 93 179 124 193
------ ------ ------ ------ ------
Total $ 296 $1,197 $ 724 $1,195 $1,725
====== ====== ====== ====== ======
Accruing loans 90+ days past due 627 - 443 263 -
------ ------ ------ ------ ------
Total non-performing loans 923 1,197 1,167 1,458 1,725
====== ====== ====== ====== ======
Total non-performing loans to total assets 0.27% 0.36% 0.35% 0.44% 0.52%
====== ====== ====== ====== ======
Total non-performing loans to total loans 0.49% 0.79% 0.81% 1.13% 1.52%
====== ====== ====== ====== ======
The following table summarizes the Bank's allowance for loan losses and changes
in the allowance for loan losses by loan categories:
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR LOAN LOSSSES
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
($000)
BALANCE AT THE BEGINNING OF THE YEAR $ 2,146 $ 1,786 $ 1,428 $ 838 $ 729
CHARGE-OFFS
Commercial (54) (14) (24) (54) (26)
Real estate-mortgages (30) (42) (42) (48) (25)
Installment loans (11) (20) (14) (3) (19)
-------- -------- -------- -------- --------
TOTAL CHARGE-OFFS (95) (76) (80) (105) (70)
RECOVERIES
Commercial 7 2 11 - 1
Real estate-mortgages - - 1 1 -
Installment loans 1 14 6 5 8
-------- -------- -------- -------- --------
TOTAL RECOVERIES 8 16 18 6 9
-------- -------- -------- -------- --------
NET CHARGE-OFFS (87) (60) (62) (99) (61)
PROVISION FOR LOAN LOSSES 480 420 420 689 170
-------- -------- -------- -------- --------
BALANCE AT END OF YEAR $ 2,539 $ 2,146 $ 1,786 $ 1,428 $ 838
======== ======== ======== ======== ========
13
Management's provision for loan losses reflects the continued growth trend in
higher risk commercial loans and the Bank's assessment of the local and New York
State economic environment. Both the local and New York State economies have
lagged behind national prosperity which remains 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 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
the regulations promulgated by the Office of the Comptroller of the Currency,
and is reflective of its assessment of the local environment as well as a
continued trend in commercial loans.
SOURCES OF FUNDS - DEPOSITS
GENERAL. Customer deposits represent the major source of the Bank's funds for
lending and other investment purposes. In addition to deposits, other sources of
funds include loan repayments, loan sales on the secondary market, interest and
dividends from investments, matured investments, and borrowings from the Federal
Reserve Bank and the Federal Home Loan Bank, and from the First Tennessee Bank,
which is a correspondent bank.
DEPOSITS. The Bank offers a variety of deposit products including checking,
passbook, statement savings, NOW accounts, certificates of deposit and jumbo
certificates of deposit. Deposits of the Bank are insured up to the limits
provided by the Federal Deposit Insurance Corporation ("FDIC"). At December 31,
2003, the Bank's deposits totaled $266.3 million consisting of the following (in
thousands):
Demand deposits $ 51,885
NOW accounts 11,464
Regular savings 105,599
Time deposits, $100,000 and over 35,648
Other time deposits 61,729
--------
Total $266,325
========
The following table shows daily average deposits and average rates paid on
significant deposit categories by the Bank:
2003 2002 2001
------------------- ------------------- -------------------
Average Weighted Average Weighted Average Weighted
Balance Average Balance Average Balance Average
($000) Rate ($000) Rate ($000) Rate
Demand deposits $ 48,853 0.00% $ 42,165 0.00% $ 36,133 0.00%
NOW accounts 10,753 0.22% 9,678 0.45% 8,510 0.89%
Regular savings 110,001 0.93% 75,741 1.11% 63,953 2.21%
Time deposits 99,775 2.83% 90,890 3.74% 86,005 5.25%
-------- -------- --------
Total $269,382 1.43% $218,474 1.96% $194,601 3.09%
======== ======== ========
14
FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS. Another source of the Bank's
funds for lending and investing activities at December 31, 2003 consisted of
short and long term borrowings from the Federal Home Loan Bank.
Other borrowed funds consisted of various advances from the Federal Home Loan
Bank with both fixed and variable interest rate terms ranging from 1.10% to
5.34%. The maturities of other borrowed funds are as follows (in thousands):
2004 $15,936
2005 1,518
2006 760
2007 145
2008 28
Thereafter 7,000
-------
Total $25,387
=======
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. Securities sold
under agreements to repurchase totaled $5.5 million at December 31, 2003
compared to $6.5 million at December 31, 2002.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Bank's financial instruments. The primary market risk the
Company is exposed to is interest rate risk. The core banking activities of
lending and deposit-taking expose the Bank to interest rate risk, which occurs
when assets and liabilities reprice at different times and by different amounts
as interest rates change. As a result, net interest income earned by the Bank is
subject to the effects of changing interest rates. The Bank measures interest
rate risk by calculating the variability of net interest income in the future
periods under various interest rate scenarios using projected balances for
earning assets and interest-bearing liabilities. Management's philosophy toward
interest rate risk management is to limit the variability of net interest
income. The balances of financial instruments used in the projections are based
on expected growth from forecasted business opportunities, anticipated
prepayments of loans and investment securities and expected maturities of
investment securities, loans and deposits. Management supplements the modeling
technique described above with analysis of market values of the Company's
financial instruments and changes to such market values given changes in the
interest rates.
The Bank's Asset-Liability Committee, which includes members of senior
management, monitors the Bank's interest rate sensitivity with the aid of a
computer model that considers the impact of ongoing lending and deposit
gathering activities, as well as interrelationships in the magnitude and timing
of the repricing of financial instruments, including the effect of changing
interest rates on expected prepayments and maturities. When deemed prudent,
management has taken actions, and intends to do so in the future, to mitigate
exposure to interest rate risk through the use of on- or off-balance sheet
financial instruments. Possible actions include, but are not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and other financial
instruments used for interest rate risk management purposes.
15
SENSITIVITY OF NET INTERESTINCOME
TO CHANGES IN INTERESTRATES
Calculated increase (decrease)
in projected annual net interest income
Changes in interest rates December 31, 2003 December 31, 2002
- ------------------------- ----------------- -----------------
($000) ($000)
+200 basis points $ 515 $ 311
- -200 basis points (1,390) (435)
Many assumptions were utilized by the Bank to calculate the impact that changes
in interest rates may have on net interest income. The more significant
assumptions related to the rate of prepayments of mortgage-related assets, loan
and deposit volumes and pricing, and deposit maturities. The Bank also assumed
immediate changes in rates including 100 and 200 basis point rate changes. In
the event that a 100 or 200 basis point rate change cannot be achieved, the
applicable rate changes are limited to lesser amounts such that interest rates
cannot be less than zero. These assumptions are inherently uncertain and, as a
result, the Bank cannot precisely predict the impact of changes in interest
rates on net interest income. Actual results may differ significantly due to the
timing, magnitude, and frequency of interest rate changes in market conditions
and interest rate differentials (spreads) between maturity/repricing categories,
as well as any actions, such as those previously described, which management may
take to counter such changes. In light of the uncertainties and assumptions
associated with the process, the amounts presented in the table above and
changes in such amounts are not considered significant to the Bank's projected
net interest income.
The following schedule sets forth the maturities of the Bank's time deposits as
of December 31, 2003:
Time Deposit Maturity Schedule
(in millions)
0-3 3-6 6-12 over
Mos. Mos. Mos. 12 Mos. Total
----- ----- ----- ------- -----
Time deposits - $100,000 and over $10.4 $ 2.2 $ 4.8 $ 18.3 $35.7
Other time deposits 7.6 6.8 16.2 31.1 61.7
----- ----- ----- ------- -----
Total time deposits $18.0 $ 9.0 $21.0 $ 49.4 $97.4
===== ===== ===== ======= =====
ENVIRONMENTAL MATTERS
To date, the Bank has not been required to perform any investigation or clean-up
activities, nor has it been subject to any environmental claims. There can be no
assurance, however, that this will remain the case in the future.
In the course of its business, the Bank has acquired and may acquire in the
future, property securing loans that are in default. There is a risk that the
Bank could be required to investigate and clean-up hazardous or toxic substances
or chemical releases at such properties after acquisition by the Bank, and may
be held liable to a governmental entity or third parties for property damage,
personal injury and investigation and clean-up costs incurred by such parties in
connection with such contamination. In addition, the owner or former owners of
contaminated sites may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
16
COMPETITION
All phases of the Bank's business are highly competitive. The Bank competes
actively with local commercial banks as well as other commercial banks with
branches in the Bank's market area of Erie County, northern Chautauqua County,
and Northwestern Cattaraugus County, New York. The Bank considers its major
competition to be HSBC Bank USA and Manufacturers and Traders Trust Company,
both headquartered in Buffalo, New York. Other major competition consists of Key
Bank, N.A., and Fleet National Bank of New York, both headquartered in Albany,
New York, First Niagara Bank, headquartered in Lockport, New York and also
Community Bank, N.A., headquartered in DeWitt, New York. Additional competition
includes Charter One Bank, headquartered in Cleveland, Ohio and Citibank, NA,
headquartered in Rochester, New York. The Bank attempts to be generally
competitive with all financial institutions in its service area with respect to
interest rates paid on time and savings deposits, service charges on deposit
accounts, and interest rates charged on loans.
REGULATION
The operations of the Bank are subject to federal and state statutes applicable
to banks chartered under the banking laws of the United States, to members of
the Federal Reserve System and to banks whose deposits are insured by the
Federal Deposit Insurance Corporation ("the FDIC"). Bank operations are also
subject to regulations of the Comptroller of the Currency, the Federal Reserve
Board, the FDIC and the New York State Banking Department.
The primary supervisory authority of the Bank is the Comptroller of the
Currency, who regularly examines the Bank. The Comptroller of the Currency has
the authority under the Financial Institutions Supervisory Act to prevent a
national bank from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, the loans a bank makes and collateral it
takes, the activities of a bank with respect to mergers and consolidations and
the establishment of branches. Branches may be established within the permitted
areas of New York State only after approval by the Comptroller of the Currency.
A subsidiary bank (such as the Bank) of a bank holding company is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries and on
taking such stock or securities as collateral for loans. The Federal Reserve Act
and Federal Reserve Board regulations also place certain limitations and
reporting requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such legislation and
regulations would affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank holding company
(such as the Company) without prior notice to certain federal bank regulators.
Control is defined for this purpose as the power, directly, or indirectly, to
direct the management or policies of the bank or bank holding company or to vote
25% or more of any class of voting securities of the bank holding company.
In addition to the restrictions imposed upon a bank holding company's ability to
acquire control of additional banks, federal law generally prohibits a bank
holding company from acquiring a direct or indirect interest in, or control of
5% or more of the outstanding voting shares of any company, and from engaging
directly or indirectly in activities other than that of banking, managing or
controlling banks or furnishing services to subsidiaries, except that a bank
holding company may engage in, and may own shares of companies engaged in
certain activities found by the Federal Reserve Board to be closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The Gramm-Leach-Bliley Act of 1999 modernized the laws regarding the financial
services industry by expanding considerably the powers of banks and bank holding
companies to sell financial products and services. The Act authorizes operating
subsidiaries of national banks to sell financial products without geographic
limitation, reforms the Federal Home Loan Bank system to increase access to loan
funding, protects banks from certain state insurance regulation considered
discriminatory and includes new provision in the area of privacy and customer
information. The Bank utilized the provisions of this Act to commence the
operations of M&W Agency, Inc. and ENB Associates Inc.
The USA Patriot Act imposes additional obligations on U.S. financial
institutions, including banks, to implement policies, procedures and controls,
which are reasonably designed to detect and report instances of money laundering
and the financing of terrorism.
17
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Bank. It cannot be predicted whether any such legislation will
be adopted or how such legislation would affect the business of the Bank. As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Bank's business is particularly susceptible to being affected
by federal legislation and regulations that may increase the costs of doing
business.
Under the Federal Deposit Insurance Act, the Comptroller of the Currency
possesses the power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound banking
practice or would otherwise be in violation of law. Moreover, the Financial
Institutions and Interest Rate Control Act of 1978 ("FIRA") generally expanded
the circumstances under which officers or directors of a bank may be removed by
the institution's federal supervisory agency, restricts lending by a bank to its
executive officers, directors, principal shareholders or related interests
thereof, restricts management personnel of a bank from serving as directors or
in other management positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a specified geographic
area, and restricts management personnel from borrowing from another institution
that has a correspondent relationship with their bank. Additionally, FIRA
requires that no person may acquire control of a bank unless the appropriate
federal supervisory agency has been given 60 days prior written notice and
within that time has not disapproved of the acquisition or extended the period
for disapproval.
Under the Community Reinvestment Act of 1977, the Comptroller of the Currency is
required to assess the record of all financial institutions regulated by it to
determine if these institutions are meeting the credit needs of the communities
(including low and moderate income neighborhoods) which they serve and to take
this record into account in its evaluation of any application made by any such
institutions for, among other things, approval of a branch or other deposit
facility, office relocation, a merger or an acquisition of bank shares.
The Company must give prior notice to the Federal Reserve Board of certain
purchases or redemptions of its outstanding equity securities. The Federal
Reserve Board has adopted capital adequacy guidelines for bank holding companies
(on a consolidated basis) substantially similar to those that apply to the Bank.
Under guidelines adopted in January 1989, bank holding companies with at least
$150 million in assets are required to maintain a ratio of qualifying total
capital to risk weighted assets of at least 8% effective December 31, 1993. For
bank holding companies with less than $150 million in assets, the
above-described ratio will not apply on a consolidated basis, but will apply on
a bank-only basis unless (i) the parent holding company is engaged in non-bank
activities involving significant leverage, or (ii) the parent holding company
has a significant amount of outstanding debt held by the general public. The
Federal Reserve Board has the discretionary authority to require higher capital
ratios.
In connection with the risk-based capital framework applicable to bank holding
companies described above, the Federal Reserve Board applies a risk-based
capital framework for Federal Reserve member banks, such as the Bank. The
framework requires banks to maintain minimum capital levels based upon a
weighting of their assets according to risk. Since December 31, 1992, Federal
Reserve member banks have been required to maintain a ratio of qualifying total
capital to risk-weighted assets of a minimum of 8%, and Tier 1 Capital to Assets
ratio of 4%. A minimum leverage ratio of 3% is required for banks with the
highest regulatory examination ratings and not contemplating or experiencing
significant growth or expansion. All other banks are required to maintain a
minimum leverage ratio of at least 1-2% above the stated minimum leverage ratio
of 3%.
A comparison of the Bank's capital ratios as of December 31, 2003 and December
31, 2002 with these minimum requirements is presented below:
Bank
--------------- Minimum
2003 2002 Requirements
---- ---- ------------
Total Risk-based Capital 13.9% 16.2% 8%
Tier 1 Risk-based Capital 12.7% 14.9% 4%
Tier 1 Capital 8.3% 9.3% 3%
As of December 31, 2003 and 2002, the Bank met all three capital requirements.
18
The following table shows consolidated operating and capital ratios for the
Company for the last three years:
2003 2002 2001
----- ----- -----
Return on Average Assets 1.25% 1.36% 1.09%
Return on Average Equity 12.77% 12.51% 9.82%
Dividend Payout Ratio 37.71% 36.18% 41.44%
Equity to Assets Ratio 9.96% 10.69% 10.84%
Sarbanes-Oxley Act. On July 30, 2002, the Sarbanes-Oxley Act for 2002 ("SOA")
was signed into law. The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.
The SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC, the national securities exchanges
and the national securities associations to adopt and implement disclosure and
corporate governance standards, and mandates further studies of certain issues
by the SEC and the Comptroller General. The SOA represents significant federal
involvement in matters traditionally left to state regulatory systems, such as
the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board
of directors and its committees.
The SOA addresses, among other matters: audit committees; required reporting on
internal controls over financial reporting by management and auditors;
certification of financial statements by the Chief Executive Officer and the
Chief Financial Officer; the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer's securities by directors
and senior officers in the twelve month period following initial publication of
any financial statements that later require restatement; a prohibition on
insider trading during pension plan black out periods; disclosure of off-balance
sheet transactions; a prohibition on certain loans to directors and officers;
expedited filing requirements for Forms 4; the adoption of a code of ethics for
the issuer's principal executive officer and principal financial and accounting
officers, and disclosure of any change or waiver of such code; "real time"
filing of periodic reports; the formation of a public company accounting
oversight board; auditor independence; and various increased civil and criminal
penalties for violations of securities laws.
Some provisions of the SOA went into effect immediately (July 30, 2002), while
others required the SEC to adopt implementing rules within specified periods.
Nearly all of the implementing rules have been finalized by the SEC.
SUBSIDIARIES OF THE BANK
M&W AGENCY, INC. On September 1, 2000, the Company completed its acquisition of
the assets, business and certain liabilities of M&W Group, Inc., a retail
property and casualty insurance agency headquartered in Silver Creek, New York,
with offices located in Angola, New York, Derby, New York, Eden, New York,
Gowanda, New York, Hamburg, New York, North Boston, New York, South Dayton, New
York, Cattaraugus Counties, New York, Randolph, New York and West Seneca, New
York. The insurance agency acquired is operated through M&W Agency, Inc.
("M&W"), an operating subsidiary of the Bank.
M&W's legal headquarters are located at 265 Central Ave., Silver Creek, New York
14136. M&W is a full-service insurance agency offering personal, commercial and
financial services products. It also has a small consulting department. In 2003,
M&W acquired Frontier Claim Services, an insurance adjusting business, located
in Buffalo, New York. For the year ended December 31, 2003, M&W had a premium
volume of $23.2 million and net premium revenue of $3.5 million.
19
M&W's primary market area is Erie, Chautauqua and Cattaraugus counties. All
lines of personal insurance are provided including automobile, homeowners,
umbrellas, boats, recreational vehicles and landlord coverages. Commercial
insurance products are also provided, consisting of property, liability,
automobile, inland marine, workers compensation, umbrellas, bonds and crop
insurance. M&W also provides the following financial services products: life and
disability insurance, medicare supplements, long term care, annuities, mutual
funds, retirement programs and New York State Disability.
M&W has a small consulting division which does work almost exclusively with
school districts. The majority of the work is done in preparing specifications
for bidding and reviewing existing insurance programs. The majority of the
consulting accounts are located in Central and Eastern New York. In the personal
insurance area, the majority of M&W's competition comes from direct writers as
well as some small local agencies located in the same towns and villages in
which M&W has offices. In the commercial business segment, the majority of the
competition comes from larger agencies located in and around Buffalo, New York.
By offering the large number of carriers which it has available to its
customers, M&W has attempted to remain competitive in all aspects of their
business.
M&W is regulated by the New York State Insurance Department. It meets and
maintains all licensing and continuing education requirements required by the
State of New York.
ENB ASSOCIATES INC. ENB Associates Inc., a wholly-owned subsidiary of the Bank,
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 Associates Inc. has an investment services agreement
with O'Keefe Shaw & Co., Inc., through which ENB can purchase and sell
securities to its customers.
EVANS NATIONAL HOLDING CORP. ENHC holds certain real estate loans and provides
management services. ENHC is operated as a real estate investment trust (REIT)
which provides additional flexibility and planning opportunities for the
business of the Bank.
Commencing in 2000, the Company operates in two reportable segments-banking and
insurance. For the years ended December 31, 1999 and prior, the Company
determined that its business was comprised of banking activity only. For
disclosure of segmented operations, See Item 8 "Consolidated Financial
Statements and Supplementary Data", of this Report on Form 10-K.
EMPLOYEES
As of December 31, 2003, the Company had no direct employees. As of December 31,
2003, the Bank employed 96 persons on a full-time basis and 9 on a part-time
basis. In addition, ENB Associates Inc. employed 1 person on a full-time basis.
M&W Agency, Inc. also employed 38 persons on a full-time basis and 1 on a
part-time basis.
OTHER INFORMATION
The Company's Internet address is www.evansbancorp.com. Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of The Exchange Act, are available through the Company's website as soon
as reasonably practical after filing such material with, or furnishing it to,
the Securities and Exchange Commission. We are providing the address of the
Company's internet site solely for the information of investors. We do not
intend the address to be an active link or to otherwise incorporate the contents
of the website into this Report on Form 10-K.
20
ITEM 2. PROPERTIES
The Company conducts its business from its main office and nine branch offices.
The main office is located at 14-16 North Main Street in Angola, New York. The
main office facility is 9,344 square feet and is owned by the Bank. This
facility is occupied by the Office of the President and Chief Executive Officer
as well as the Administration Division.
The Bank owns seven of its nine branch offices. The main office mentioned above
is owned by the Bank. A 3,900 square foot facility is located at 8599 Erie Road
in the Town of Evans. Another is a 1,530 square foot facility located at 25 Main
Street, Forestville, New York and the fourth is a 3,650 square foot branch
located at 6840 Erie Road, Derby, New York. A fifth is a 2,880 square foot
facility located at 7205 Boston State Rd, Boston, New York. The sixth is a 3,500
square foot facility located on land it is leasing at 3388 Sheridan Drive,
Amherst, New York. The seventh is a 3,500 square foot facility located on land
the Bank is leasing at 4979 Transit Road, Lancaster, New York.
The Bank also owns a building adjacent to its Derby branch location which houses
its loan division operations.
The Bank currently leases branch offices in Hamburg and West Seneca. The 3,000
square foot branch office at 5999 South Park Avenue, Hamburg, New York, is
occupied pursuant to a long-term lease. In September 1999, the Bank relocated
its West Seneca branch office to 3,864 square feet of space at 938 Union Road,
West Seneca, N.Y. 14224, which carries a long-term lease. In addition, the Bank
leases 726 square feet for a drive-thru facility.
The Bank operates in-school branch banking facilities in the West Seneca East
High School, 4760 Seneca Street, West Seneca, N.Y. 14224 and the West Seneca
West High School, 3330 Seneca Street, West Seneca, N.Y. The in-school branches
each have a cash dispensing style ATM located at the sites. There are no lease
payments required.
M&W leases the following offices from Millpine Enterprises, a partnership owned
by Mr. Robert Miller and his family: 265 Central Avenue, Silver Creek, New York;
5 Commercial Street, Angola, New York; 11 Main Street, Cattaraugus, New York;
213 Pine Street, South Dayton, New York. Each lease is dated September 1, 2000
and extends for a period of four years with three options to renew each for an
additional three year term.
M&W also leases an office located at 7 Bank Street, Randolph, New York on a
month to month basis.
In January 2002, M&W entered into a five year lease for the office at the site
of the former Eden Agency whose business it acquired on January 1, 2002. This
site is located at 8226 North Main Street, Eden, New York 14057. In January
2003, M&W entered into a three year lease for the office at the site for
Frontier Claims Services. This site is located at 1481 Harlem Road, Buffalo, New
York 14216. In October 2003, M&W entered into a month to month lease for the an
office located at 25 Buffalo Street, Gowanda, New York, 14070.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party.
The nature of the Bank's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. However, in the
opinion of management of the Bank, there are no proceedings pending to which the
Bank is a party or to which its property is subject, which, if determined
adversely to the Bank, would be material in relation to the Bank's financial
condition, nor are there any proceedings pending other than ordinary routine
litigation incident to the business of the Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Bank or its subsidiaries by governmental authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of
the fiscal year covered by this report.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET. The Company's common stock is quoted on the Nasdaq National Market
system under the symbol: EVBN and has been traded on Nasdaq since July 9,
2001. The Company distributed a 5 percent stock dividend declared on
November 19, 2002 for shareholders of record on December 2, 2002 which was
distributed on January 29, 2003 and a 5 percent stock dividend declared on
September 16, 2003 for shareholders of record on October 14, 2003 which was
distributed on December 1, 2003. All share and per share data contained in
this Report on Form 10-K have been adjusted to reflect the stock dividends.
The following quotations reflect inter-dealer quotations that do not include
retail markups, markdowns or commissions and may not represent actual
transactions. The following table shows, for the periods indicated, the high and
low bid prices per share of the Company's common stock as reported on Nasdaq.
2003 2002
---------------- ----------------
QUARTER High Low High Low
- ------- ------ ------- ------ -------
FIRST $22.87 $ 19.48 $17.91 $ 16.37
SECOND $22.81 $ 19.68 $20.09 $ 16.28
THIRD $22.61 $ 20.00 $23.38 $ 14.74
FOURTH $24.30 $ 21.75 $22.27 $ 18.13
(b) HOLDERS. The approximate number of holders of record of the Company's
common stock at December 31, 2003 was 1,413.
(c) DIVIDENDS.
CASH DIVIDENDS.
The Company paid a cash dividend of $0.26 per share on April 2, 2002
to holders of record on March 12, 2002.
The Company paid a cash dividend of $0.28 per share on October 2, 2002
to holders of record on September 11, 2002.
The Company paid a cash dividend of $0.30 per share on April 1, 2003
to holders of record on March 11, 2003.
The Company paid a cash dividend of $0.32 per share on October 1, 2003
to holders of record on September 10, 2003.
The Company has declared a cash dividend of $0.33 per share payable on
April 6, 2004 to holders of record as of March 16, 2004.
All per share amounts have been adjusted to reflect the 5 percent
stock dividend paid on January 29, 2003 and the 5 percent stock
dividend paid on December 1, 2003.
The amount, if any, of future dividends will be determined by the
Company's Board of Directors and will depend upon the Company's
earnings, financial conditions and other factors considered by the
Board of Directors to be relevant. Banking regulations limit the
amount of dividends that may be paid without prior approval of the
Comptroller of the Currency. See Footnote 19 to the Consolidated
Financial Statements.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND RATIO DATA)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA
Assets $ 334,677 $ 288,711 $ 248,722 $ 224,549 $ 198,788
Interest-earning assets 308,722 267,142 231,120 204,579 183,721
Investment securities 120,556 106,672 84,065 73,121 63,000
Loans, net 185,528 148,998 142,469 128,779 116,433
Deposits 266,325 239,507 204,260 186,701 169,949
Borrowings 25,388 8,111 9,661 4,409 5,000
Stockholders' equity 33,323 30,862 26,961 25,179 18,285
INCOME STATEMENT DATA
Net interest income $ 10,847 $ 10,396 $ 9,110 $ 8,580 $ 7,512
Non-interest income 7,666 5,474 4,528 3,648 1,343
Non-interest expense 12,740 10,650 9,531 7,535 6,050
Net income 4,069 3,606 2,579 3,223 2,027
PER SHARE DATA
Earnings per share - basic $ 1.66 $ 1.48 $ 1.06 $ 1.33 $ 0.87
Earnings per share - diluted 1.66 1.48 1.06 1.33 0.87
Cash dividends 0.62 0.54 0.44 0.38 0.34
Book value 13.63 12.59 11.08 10.38 7.81
PERFORMANCE RATIOS
Return on average assets 1.25% 1.36% 1.09% 1.53% 1.10%
Return on average equity 12.77 12.51 9.82 15.96 10.81
Net interest margin 3.64 4.27 4.18 4.39 4.40
Efficiency ratio 64.70 63.04 65.98 57.79 63.42
Dividend payout ratio 37.71 36.18 41.44 27.89 39.37
CAPITAL RATIOS
Tier I capital to average assets 8.30% 9.30% 9.60% 9.90% 10.10%
Equity to assets 9.96 10.69 10.84 11.21 9.20
ASSET QUALITY RATIOS
Total non-performing assets to total assets 0.27% 0.51% 0.66% 0.67% 1.11%
Total non-performing loans to total loans 0.49 0.79 0.81 1.13 1.52
Net charge-offs to average loans 0.05 0.04 0.04 0.08 0.05
Allowance for loan losses to total loans 1.35 1.42 1.24 1.10 0.71
Allowance for loan losses to non-performing loans 276.47 179.27 153.04 97.96 47.31
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 "Consolidated Financial Statements and
Supplementary Data" of this Report on Form 10-K for further information and
analysis.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This discussion is intended to compare the performance of the Company for the
years ended December 31, 2003, 2002 and 2001. The review of the information
presented should be read in conjunction with the Consolidated Financial
Statements and Notes included in this Report on Form 10-K.
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 has three subsidiaries - ENB Associates Inc. and M&W Agency,
Inc., both wholly-owned subsidiaries, and Evans National Holding Corp. (which
the Bank owns 100% of the outstanding voting common shares). The Company
conducts its business through Evans National Bank and its subsidiaries. It does
not engage in any other substantial business activities.
The Company's financial objectives are focused on earnings growth and return on
average equity. Over the last five years, the Company's compounded annual net
income growth has been 14.77%, while return on average equity improved from
10.81% in 1999 to 12.77% in 2003. The compounded annual growth rate for gross
loans and deposits for the last five years were 11.07% and 13.07%, respectively.
To sustain future growth and to meet the Company's financial objectives, the
Company has defined a number of strategies. Five of the more important
strategies include:
- Expanding Bank market reach and penetration through de-novo branching
and potential acquisition;
- Continuing growth of non-interest income through insurance agency
internal growth and potential acquisition;
- Focusing on profitable customer segments;
- Leveraging technology to improve efficiency and customer service; and
- Maintaining a community based approach.
The Company's strategies are designed to direct tactical investment decisions
supporting its financial objectives. The Company's most significant revenue
source continues to be net interest income, defined as total interest income
less interest expense, which in 2003 accounted for approximately 67% of total
revenue. To produce net interest income and consistent earnings growth over the
long-term, the Company must generate loan and deposit growth at acceptable
economic spreads within its market of operation. To generate and grow loans and
deposits, the Company must focus on a number of areas including, but not limited
to, the economy, branch expansion, sales practices, customer and employee
satisfaction and retention, competition, evolving customer behavior, technology,
product innovation, interest rates, credit performance of its customers, and
vendor relationships.
The Company also considers non-interest income important to its continued
financial success. Fee income generation is partly related to the loan and
deposit operations, such as deposit service charges, as well as selling
financial products, such as: commercial and personal insurance through M&W
Agency, non-deposit investment products through ENB Associates Inc., and private
wealth management services through a strategic alliance with Mellon Financial
Services.
While the Company reviews and manages all customer segments, it has focused
increased efforts on four targeted segments: 1) high value consumers, 2) smaller
businesses with credit needs under $250,000, 3) medium-sized commercial
businesses with credit needs over $250,000 up to $4 million, and 4) commercial
real estate and construction-related businesses. These efforts have resulted in
material growth in the commercial and home equity loan portfolios as well as
core deposits over the last two years.
To support growth in targeted customer segments, the Bank has opened two
branches over the last two years with a third planned in mid 2004. With all new
and existing branches, totaling nine in January 2004, the Bank has strived to
maintain a local community based philosophy. The Bank has emphasized hiring
local branch and lending personnel with strong ties to the specific local
communities it enters and serves.
24
The Bank serves its market through nine banking offices located in Amherst, New
York, Angola, New York, Derby, New York, Evans, New York, Forestville, New York,
Hamburg, New York, Lancaster, New York, North Boston, New York 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, New York,
Cattaraugus, New York, Derby, New York, Eden, New York, Gowanda, New York,
Hamburg, New York, North Boston, New York, Silver Creek, New York, South Dayton,
New York, Randolph, New York, 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 activities and
insurance agency activities.
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, a 5 percent stock dividend paid on January 29, 2003, to
shareholders of record on December 2, 2002, and a 5 percent stock dividend paid
on December 1, 2003 to shareholders of record on October 14, 2003.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES 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 Company's Financial Statements
and Notes. These estimates, assumptions and judgments are based on information
available as of the date of the Consolidated Financial Statements. Accordingly,
as this information changes, the Consolidated Financial Statements could reflect
different estimates, assumptions and judgments. Certain policies inherently have
a greater reliance on the use of estimates, assumptions and judgments, and as
such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. When third-party information is not available, valuation
adjustments are estimated in good faith by management primarily through the use
of internal cash flow modeling techniques.
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 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.
25
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 judgment
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 fiscal 2003 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 FOR YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
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 loan
losses, non-interest expense and income taxes. Net income of $4.1 million in
2003 consists of $3.7 million related to the Company's banking activities and
$0.4 million related to the Bank's insurance agency activities. The total net
income of $4.1 million or $1.66 per share, basic and diluted in 2003 compares to
$3.6 million or $1.48 per share, basic and diluted for 2002. All per share data
reflect the special 5 percent stock dividend paid on January 29, 2003 and the
special 5 percent stock dividend paid on December 1, 2003.
26
NET INTEREST INCOME
Net interest income is dependent on the amounts and yields earned on interest
earning assets as compared to the amounts of and rates paid 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.
2003 Compared to 2002 2002 Compared to 2001
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------- ----------------------------
All amounts in 000's
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
Interest earned on:
Loans $ 1,460 $(1,316) $ 144 $ 1,000 $(1,458) $ (458)
Taxable securities 956 (1,284) (328) 199 (538) (339)
Tax-exempt securities 394 (93) 301 481 (65) 416
Federal funds sold (1) (11) (12) 150 (209) (59)
Time deposits in other banks 15 (2) 13 5 -- 5
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 2,824 $(2,706) $ 118 $ 1,835 $(2,270) $ (435)
======= ======= ======= ======= ======= =======
Interest paid on:
NOW accounts $ 2 $ (23) $ (21) $ 12 $ (44) $ (32)
Savings deposits 338 (157) 181 319 (893) (574)
Time deposits 258 (836) (578) 274 (1,393) (1,119)
Federal funds purchased &
other borrowings 245 (160) 85 72 (67) 5
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 843 $(1,176) $ (333) $ 677 $(2,397) $(1,720)
======= ======= ======= ======= ======= =======
Net interest income, before the provision for loan losses, increased $0.5
million or 4.3% to $10.8 million in 2003, as compared to $10.4 million in 2002,
an increase of 14.1% from 2002 over 2001. This increase in 2003 is attributable
to the increase in average interest-earning assets of $54.5 million versus an
increase of $52.0 million in average interest-bearing liabilities over 2002.
This accounts, as indicated in the table above, for a net increase due to volume
of approximately $2.0 million in net interest income. The yield on
interest-earning assets decreased 111 basis points from 6.25% in 2002 to 5.14%
in 2003, while the cost of interest-bearing liabilities decreased 68 basis
points, from 2.54% in 2002 to 1.86% in 2003. These rate changes resulted in less
of a decrease in rate related changes on interest expense versus interest
income, or a net decrease in net interest income of approximately $1.5 million.
The Bank's net interest margin decreased from 4.27% during 2002 to 3.64% during
2003.
27
The decrease in net interest margin is due primarily to three factors: increased
competition from both a loan and deposit pricing perspective, a decrease in the
potential to adjust deposit rates significantly lower as a result of the
historically low interest rate environment, and a large amount of activity in
mortgage refinancing which led to an acceleration of amortization on investment
securities purchased at a premium that were backed by mortgages.
The Bank believes net interest margin will continue to be challenged in 2004 due
to two main factors. Banks, generally, 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.
In addition, 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 down. The historically low environment
provides the Bank a smaller interval to move rates on deposits to offset any
decrease in asset yield.
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 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 fair 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.
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 probable loan
losses based on management's evaluation of the loan portfolio. Factors
considered include the collectibility of individual loans, 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 Bank 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 internal credit rating of the loan,
using the Company's historical loss experience.
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 Bank's real estate portfolio. Commercial
real estate values may be susceptible to decline in an adverse economy.
Management believes that the Bank's loan loss reserve is 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 2003, the Company's provision for loan loss was $0.5 million as compared to
$0.4 million in 2002. Total non-performing loans amounted to $923,000 at
December 31, 2003, as compared to $1,197,000 at December 31, 2002.
28
The following table provides an analysis of the allowance for loan losses, the
total of charge-offs, non-performing loans and total allowance for loan losses
as a percentage of total loans outstanding for the three years ended December
31:
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
($000) ($000) ($000) ($000) ($000)
Balance, beginning of year $ 2,146 $ 1,786 $ 1,428 $ 838 $ 729
Provisions for loan losses 480 420 420 689 170
Recoveries 8 16 18 6 9
Loans charged off (95) (76) (80) (105) (70)
-------- -------- -------- -------- --------
Balance, end of year $ 2,539 $ 2,146 $ 1,786 $ 1,428 $ 838
======== ======== ======== ======== ========
Net Charge-offs to total loans 0.05% 0.05% 0.06% 0.08% 0.05%
Non-performing loans to total
loans 0.49% 0.79% 0.81% 1.13% 1.52%
Allowance for loan losses to
total loans 1.35% 1.42% 1.24% 1.10% 0.71%
An allocation of the allowance for loan losses by portfolio type over the past
five years follows:
Balance Percent Balance Percent Balance Percent
at of loans at of loans at of loans
12/31/2003 in each 12/31/2002 in each 12/31/2001 in each
Attributable category Attributable category Attributable category
to: to total to: to total to: to total
($000) loans: ($000) loans: ($000) loans:
------------ ------------ ------------ ------------ ------------ ------------
Real Estate Loans $ 1,619 85.1% $ 844 84.6% $ 455 85.0%
Commercial Loans 384 12.9 259 13.5 96 11.3
Consumer Loans 147 1.4 72 1.6 74 2.2
All other loans - 0.6 - 0.3 - 1.5
Unallocated 389 - 971 - 1,161 -
------------ ------------ ------------ ------------ ------------ ------------
Total $ 2,539 100.0% $ 2,146 100.0% $ 1,786 100.0%
============ ============ ============
Balance Percent Balance Percent
at of loans at of loans
12/31/2000 in each 12/31/1999 in each
Attributable category Attributable category
to: to total to: to total
($000) loans: ($000) loans:
------------ ------------ ------------ ------------
Real Estate Loans $ 600 84.1% $ 716 84.7%
Commercial Loans 96 11.4 50 12.1
Consumer Loans 66 2.7 56 2.3
All other loans - 1.8 - 0.9
Unallocated 666 - 16 -
------------ ------------ ------------ ------------
Total $ 1,428 100.0% $ 838 100.0%
============ ============
29
Both the total increase in allowance for loan losses and allocation of the
allowance to commercial loans are in response to the increase in total higher
risk commercial loans. Commercial real estate mortgages represent 62.5% or $99.7
million of total real estate mortgages at December 31, 2003, as compared to
61.1% or $77.9 million at December 31, 2002. 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, comprises 12.9% of total loans or $24.3
million at December 31, 2003, as compared to 13.5% or $20.5 million at December
31, 2002. The increased allowance and allocation to commercial categories
addresses the Bank's strategic decision to continue growing this segment, as
well as the local economy, which has lagged the national economy. Commercial
loans are more susceptible to decreases in credit quality in cyclical downturns
and the larger individual balances of commercial loans expose the Bank to larger
losses. In addition, growth in the size of the commercial loan portfolio during
2003 required additional allowance to provide for probable losses in these
loans.
The allowance for loan losses is based on management's estimate, and ultimate
losses will vary from current estimates. Factors underlying the determination of
the allowance for loan losses are continually evaluated by management based on
changing market conditions and other known factors. Some factors underlying the
allocation of loan losses have changed in 2003 as a result of the evaluation of
underlying risk factors within each loan category. The underlying methodology to
determine the adequacy of the allowance for loan losses is consistent with prior
years.
NON-INTEREST INCOME
Total non-interest income increased approximately $2.2 million or 40.1% in 2003
over 2002. This compares to an increase of approximately $0.9 million from 2001
to 2002. Bank service charge income in 2003 increased approximately $0.7 million
over 2002 due to a concentrated effort on increasing fee income in late 2002 and
early 2003 and the rollout of the Bank's Safeguard Overdraft Service in early
2003. Income from the M&W Agency, Inc. in 2003 accounted for approximately $0.5
million of the increase in non-interest income. Income earned on bank-owned life
insurance increased approximately $0.4 million over 2002 as a result of a $6.2
million bank-owned life insurance purchase in February 2003.
The competitive interest rate environment resulted in prepayment fees collected
on refinanced loans totaling an additional $0.3 million in 2003. 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 in 2003. ENB Associates also benefited from the
low interest rate environment as customers searched for higher yields in mutual
funds and annuities. ENB Associates' revenue increased $0.04 million in 2003 as
compared to 2002.
Additionally, the Bank grew its ATM network with the addition of six new offsite
locations during 2003. Also, the usage of the Bank's point-of-sale debit cards
has increased. Both data services have provided approximately an additional $0.2
million in fees in 2003 as compared to 2002.
Gains realized on the sale of assets, primarily sales of securities, totaled
approximately $0.3 million in 2003 versus an approximate $0.1 million gain
realized in 2002. During 2003, the Bank recognized losses on sales and write
downs in the carrying value of foreclosed real estate of $0.03 million versus
losses of $0.1 million in 2002.
NON-INTEREST EXPENSE
Total non-interest expense increased approximately $2.1 million or 19.6% in 2003
over 2002. In 2003, the ratio of non-interest expense to average assets was
3.90% compared to 4.01% in 2002 and 4.02% in 2001. 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 and benefits, occupancy,
advertising, and supplies, among others. Salary and benefit expense increased
23.1% in 2003. Of the $1.3 million increase in salary and benefit expense in
2003 over 2002, the Bank's operations contributed approximately $1.0 million and
M&W Agency contributed approximately $0.3 million. The addition of the Lancaster
branch, full operating year of the Amherst branch, increased loan staffing, M&W
Agency expansion and merit increases contributed to the increased salary costs.
M&W Agency acquired the business, assets and certain liabilities of the
Gutekunst Agency in the beginning of 2003, and completed a full year of
operations of Frontier Claim Services, Inc. which was acquired on January 1,
2003, which contributed to its increased salary and benefits.
Occupancy expense increased approximately $0.1 million or 8.7% from 2002 to
2003. M&W Agency's addition of the Frontier Claim Services, Inc. and a full year
operation of the Amherst branch location increased related occupancy expenses:
utilities, rent, and depreciation, among others. Professional services increased
$0.1 million or 15.4%. The Bank engaged an outside consulting firm for a revenue
enhancement project and attorneys to prepare and review new employee benefit
plans in 2003.
30
Miscellaneous other expenses increased $0.5 million or approximately 25.1% in
2003. 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. Other
expenses have increased approximately $0.3 million due to a number of items
including costs associated with the Bank's conversion to a next generation item
processing data center environment, which have resulted in increased capacity,
capability and opportunity for future efficiencies.
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. The Company's pension expense for all
pension plans, including the SERP, approximated $491,000 and $215,000 for the
years ended December 31, 2003, and December 31, 2002, 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% and compensation rate
increases of 4.75% in both 2003 and 2002. The increase is primarily due to a
change in benefit formula related to the SERP, which was changed in 2003 to
provide a benefit payment based on a percentage of final average earnings as
opposed to a fixed benefit under the superceded plan. Also, one additional
participant was added to the plan during 2003.
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. In evaluating compensation rate increases we
evaluated historical salary data as well as expected future increases. We will
continue to evaluate our actuarial assumptions, including our expected rate of
return and compensation rate increases 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 6.75% at September 30, 2002, for purposes of our defined benefit
pension plan and at December 31, 2002, for purposes of our SERP, both of which
are the measurement dates, to 6.25% for both plans at September 30, 2003 and
December 31, 2003, respectively.
TAXES
The provision for income taxes in 2003 of $1.2 million reflects an effective tax
rate of approximately 23.1%. This compares to $1.2 million or 24.9% in 2002 and
$1.1 million or 30.0% in 2001. There were three main factors for the decrease in
the effective tax rate in 2003 and 2002. The first was due to the establishment
of ENHC as a REIT. In addition to providing the flexibility and planning
opportunities for the Bank, it also provided state tax benefits. Life insurance
proceeds recorded in 2002 were tax exempt and contributed to a more favorable
tax position. Also, the additional bank-owned life insurance income earned in
2003 improved the Bank's effective tax rate. The Bank continues to maintain a
substantial investment in tax-advantaged municipal bonds, which contributes to
its favorable tax position.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
NET INCOME
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 $1.48 per share in 2002
compares to $2.6 million or $1.06 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 $0.15 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
$0.13 per share. For 2002, net income rose $0.7 million or 24.4% over 2001 after
adjusting 2001 results to exclude goodwill amortization.
31
NET INTEREST INCOME
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. This increase in
2002 is attributable to the increase in average interest-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
yield on interest-earning assets decreased 94 basis points from 7.19% in 2001 to
6.25% in 2002, while the cost of funds had a greater decrease of 130 basis
points, from 3.84% 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 4.18% during 2001 to 4.27% during 2002.
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 2002 rate environment.
ALLOWANCE FOR LOAN LOSSES
In 2002, the Bank charged $0.4 million against earnings for loan losses as
compared to $0.4 million in 2001. Total non-performing loans amounted to
$1,197,000 at December 31, 2002, as compared to $1,167,000 at December 31, 2001.
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 represented 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, 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 provided for the 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.
NON-INTEREST INCOME
Total non-interest income increased approximately $0.9 million or 20.9% in 2002
over 2001. This compared 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 which totaled 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 grew its ATM network with the addition of one at the
Amherst branch and two offsite locations during 2002. Also, the usage of the
Bank's point-of-sale debit cards has increased. Both data services 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.
32
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. 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 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.
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 offset the increases mentioned above by approximately $0.3
million, which was the expense recognized in 2001.
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.
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 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.
FINANCIAL CONDITION
The Bank had total assets of $334.7 million at December 31, 2003, an increase of
$46.0 million or 15.9% over $288.7 million at December 31, 2002. Net loans of
$185.5 million increased 24.5% or $36.5 million over 2002. Securities increased
$13.9 million or 13.0% and cash and cash equivalents decreased $11.3 million or
56.9%. Deposits grew by $26.8 million or 11.2%. Stockholders' equity increased
$2.5 million or 8.0%. Net unrealized gains/losses on investment securities held
by the Bank decreased $0.3 million over 2002.
LOANS
Loans comprised 56.1% of the Bank's total average earning assets in 2003. Actual
year-end balances increased 24.5% versus an increase of 4.6% in 2002 and 10.8%
in 2001. 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 55.3% of total loans. Residential
mortgages comprise 11.0% of the portfolio and 14.3% are home equity loans. Other
commercial loans account for 15.5% of outstanding loans. Commercial loans total
$133.1 million at December 31, 2003, reflecting a 26.2% or $27.6 million
increase for the year. Consumer loans total $54.4 million at December 31, 2003,
reflecting a $9.1 million or 20.1% increase for the year. Total consumer loan
growth was primarily attributed to home equity loans and residential mortgage
loans. A significant portion of fixed rate residential mortgages originated was
sold to the secondary market in order 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.
33
At December 31, 2003, the Bank had a loan/deposit ratio of 69.7%. This compares
to a loan/deposit ratio of 62.2% at December 31, 2002.
At December 31, 2003, the Bank retained the servicing rights to $30.9 million in
long-term mortgages sold to the FNMA. This compares to a loan servicing
portfolio principal balance of $24.0 million at December 31, 2002. The
arrangement that the Bank has with FNMA allows it to offer long-term mortgages
without exposure to the associated interest rate risks, while retaining customer
account relationships. In 2003 and 2002, the Bank sold loans to FNMA totaling
approximately $15.7 million and $11.6 million respectively. The Bank did not
record any related asset to the servicing portfolio rights as management
determined it is immaterial.
SECURITIES AND FEDERAL FUNDS SOLD
Securities and federal funds sold made up the remaining 43.6% of the Bank's
total average interest earning assets at December 31, 2003. These categories
provide the Bank with additional sources of liquidity and income. The Bank's
securities portfolio increased 13.0% over the prior year. It continues to be
strongly concentrated in tax-advantaged municipal bonds, which make up 46.7% of
the portfolio, US government-guaranteed mortgage-backed securities which make up
34.4% of the portfolio, and US government-sponsored agency bonds of various
types which comprise 17.4% of the total. As a member of both the Federal Reserve
System and the Federal Home Loan Bank, the Bank is required to hold stock in
those entities. These investments made up 1.5% of the portfolio at December 31,
2003. The credit quality of the securities portfolio is strong, with 96.9% of
the securities portfolio carrying the equivalent of a Moodys rating of AAA.
Federal funds sold balances are largely maintained for liquidity purposes. The
average balance maintained in federal funds sold decreased slightly in 2003 to
1.7% of total average earning assets from 2.1% in 2002. At December 31, 2003 the
Bank was in a federal funds purchased position of $13.5 million, which is
reported as part of "other borrowed funds" on the Consolidated Balance Sheets.
The Bank has attempted to take advantage of the relatively low cost of such
funds for funding purposes as a result of the current rate environment.
The yield earned on securities and federal funds sold decreased 121 basis points
in 2003 moving from 4.72% in 2002 to 3.51% in 2003. This compares to 5.59% in
2001. The decrease for 2003 from 2002 reflects the continued low interest rate
environment, which has resulted in accelerated amortization of mortgage backed
security premiums as mortgages prepay. These prepayments then are being
reinvested in yields on investments that have declined throughout the year.
Based on the Company's evaluation, mortgage-backed securities continue to be an
appropriate investment vehicle in response to a low interest rateenvironment.
Mortgage-backed securities offer competitive yields, provide monthly cash flows,
serve as acceptable collateral for many borrowing and pledging purposes and have
most of the liquidity characteristics of US Treasury notes and bonds. Total
mortgage-backed securities decreased $3.2 million, or 7.1% from 2002.
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 developed 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 $0.3 million in net gains on these
sales in 2003.
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 Company's Consolidated Balance Sheets included in
this Report on Form 10-K under Item 8 "Consolidated Financial Statements and
Supplementary Data," at amortized cost. Those designated as available for sale
are reported at fair market value. At December 31, 2003, $3.7 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.
The available for sale portfolio totaled $116.8 million or approximately 96.9%
of the Bank's securities portfolio at December 31, 2003. Net unrealized gains
and losses on available for sale securities resulted in a net unrealized gain of
$3.1 million at December 31, 2003, as compared to $3.4 million at December 31,
2002. Unrealized gains and losses on available for sale securities are reported,
net of taxes, as a separate component of shareholders' equity. At December 31,
2003, the impact to equity was a net unrealized gain of approximately $1.9
million.
34
BANK-OWNED LIFE INSURANCE
The Bank purchased $6.2 million of bank-owned life insurance in February 2003 on
directors and certain officers, the income on which is used to indirectly fund
certain benefits provided to employees at the Bank and its subsidiaries,
including new benefit plans implemented during 2003.
DEPOSITS
Total deposits increased $26.8 million or 11.2% in 2003 over 2002. Core deposit
growth has been an area the Bank has focused on and its success is evident in
the 16.2% increase in demand deposits, 8.8% increase in NOW accounts, and 11.3%
increase in savings accounts. Time deposits of less than $100,000 decreased 1.2%
in 2003.
Certificates of deposit in excess of $100,000 increased 25.3%. 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 2003 over the past several years due to the Bank's expansion of
its trade area.
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 $16.0 million can be drawn on the FHLB via
the Bank's Overnight Line of Credit Agreement. An amount equal to 25% of the
Bank's total assets could be borrowed through the advance programs under certain
qualifying circumstances. The Bank also has the ability to purchase up to $8
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, 2003, approximately 2.8% of the Bank's
debt securities had maturity dates of one year or less and approximately 17.7%
had maturity dates of five years or less. At December 31, 2003, the Bank had net
short-term liquidity of $6.7 million as compared to $36.9 million at December
31, 2002. The decrease in short term liquidity at December 31, 2003 compared to
December 31, 2002 was primarily due to an increase in the federal funds
purchased position from $0 on December 31, 2002 to $13.5 million at December 31,
2003, which is reported as a part of "other borrowed funds" on the Consolidated
Balance Sheets. The Bank has attempted to take advantage of the relatively low
cost of funds for funding purposes as a result of the current rate environment.
Available assets of $125.0 million, less public and purchased funds of $101.9
million, resulted in a long-term liquidity ratio of 123% at December 31, 2003,
versus 158% at December 31, 2002.
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.
35
CONTRACTUAL OBLIGATIONS
The Company is party to contractual financial obligations, including repayment
of borrowings, operating lease payments and commitments to extend credit. The
table below presents certain future financial obligations.
PAYMENTS DUE WITHIN TIME PERIOD AT DECEMBER 31, 2003
-------------------------------------------------------------------------
0-12 MONTHS 1-3 YEARS 4-5 YEARS DUE AFTER 5 YEARS TOTAL
----------- ----------- ----------- ----------------- -----------
Securities sold under agreeement
to repurchase $ 5,460,472 $ - $ - $ - $ 5,460,472
Operating leases 371,000 495,000 427,000 2,676,000 3,969,000
Other Borrowed Funds 15,935,976 2,278,629 172,968 7,000,000 25,387,573
----------- ----------- ----------- ----------- -----------
Total $21,767,448 $ 2,773,629 $ 599,968 $ 9,676,000 $34,817,045
=========== =========== =========== =========== ===========
At December 31, 2003, the Company had commitments to extend credit of $45.5
million compared to $41.8 million at December 31, 2002. For additional
information regarding future financial commitment, this disclosure should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes included under Item 8 of this Report including Note 15 "Contingent
Liabilities and Commitments."
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 19 "Regulatory Matters" to the Consolidated Financial Statements under Item
8 of this Report on Form 10-K.
Total stockholders' equity was $33.3 million at December 31, 2003, up from $30.9
million at December 31, 2002. Equity as a percentage of assets was 10.0% at
December 31, 2003, compared to 10.7% at December 31, 2002. Book value per common
share rose to $13.63 at December 31, 2003, up from $12.59 at December 31, 2002.
In September 2001, the Company's Board of Directors authorized the repurchase of
up to 50,000 shares of the Company's outstanding common stock over the following
two years. In October of 2003, the Board approved an extension of the repurchase
plan for two years. Shares are held for reissue in connection with the Company's
Stock Dividend Reinvestment Plan and general corporate purposes. During 2003 and
2002, the Company repurchased under the plan 26,295 shares and 1,100 shares,
respectively. Subject to ongoing capital and investment considerations,
management intends to continue to repurchase shares in 2004 on an opportunistic
basis.
The Company paid dividends per share of common stock of $0.62 in 2003, $0.54 in
2002 and $0.44 in 2001. The dividend payout is continually reviewed by
management and the Company's Board of Directors. The dividend payout ratio,
which represents cash dividends paid divided by earnings, was 37.71%, 36.18% and
41.44% for the years 2003, 2002 and 2001 respectively.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Bank's financial instruments. The primary market risk the
Company is exposed to is interest rate risk. The core banking activities of
lending and deposit-taking expose the Bank to interest rate risk, which occurs
when assets and liabilities reprice at different times and by different amounts
as interest rates change. As a result, net interest income earned by the Bank is
subject to the effects of changing interest rates. The Bank measures interest
rate risk by calculating the variability of net interest income in the future
periods under various interest rate scenarios using projected balances for
interest-earning assets and interest-bearing liabilities. Management's
philosophy toward interest rate risk management is to limit the variability of
net interest income. The balances of financial instruments used in the
projections are based on expected growth from forecasted business opportunities,
anticipated prepayments of loans and investment securities and expected
maturities of investment securities, loans and deposits. Management supplements
the modeling technique described above with analysis of market values of the
Bank's financial instruments and changes to such market values given changes in
the interest rates.
36
The Bank's Asset Liability Committee, which includes members of senior
management, monitors the Bank's interest rate sensitivity with the aid of a
computer model that considers the impact of ongoing lending and deposit
gathering activities, as well as interrelationships in the magnitude and timing
of the repricing of financial instruments, including the effect of changing
interest rates on expected prepayments and maturities. When deemed prudent,
management has taken actions, and intends to do so in the future, to mitigate
exposure to interest rate risk through the use of on - or off-balance sheet
financial instruments. Possible actions include, but are not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and other financial
instruments used for interest rate risk management purposes.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
Calculated increase (decrease)
in projected annual net interest income
($000) ($000)
Changes in interest rates December 31, 2003 December 31, 2002
----------------- -----------------
+200 basis points $ 515 $ 311
- -200 basis points (1,390) (435)
Many assumptions were utilized by the Bank to calculate the impact that changes
in interest rates may have on net interest income. The more significant
assumptions related to the rate of prepayments of mortgage-related assets, loan
and deposit volumes and pricing, and deposit maturities. The Bank also assumed
immediate changes in rates including 100 and 200 basis point rate changes. In
the event that a 100 or 200 basis point rate change cannot be achieved, the
applicable rate changes are limited to lesser amounts such that interest rates
cannot be less than zero. These assumptions are inherently uncertain and, as a
result, the Bank cannot precisely predict the impact of changes in interest
rates on net interest income. Actual results may differ significantly due to the
timing, magnitude, and frequency of interest rate changes in market conditions
and interest rate differentials (spreads) between maturity/repricing categories,
as well as any actions, such as those previously described, which management may
take to counter such changes. In light of the uncertainties and assumptions
associated with the process, the amounts presented in the table and changes in
such amounts are not considered significant to the Bank's projected net interest
income.
Financial instruments with off balance sheet risk at December 31, 2003 included
$15.2 million in undisbursed lines of credit at an average interest rate of
4.0%, $4.7 million in fixed rate loan origination commitments at 9.0%, $23.7
million in adjustable rate loan origination commitments at 5.2% and $1.9 million
in adjustable rate letters of credit at an average rate of 5.0%.
37
The following table represents expected maturities of interest-bearing assets
and liabilities and their corresponding average interest rates.
EXPECTED MATURITY
YEAR ENDED DECEMBER 31, 2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
------- ------ ------ ------ ----- ---------- ------- ----------
Interest - Assets ($000s)
Loans receivable, fixed 27,774 11,731 12,653 11,482 9,529 61,066 134,235 141,955
Average interest 5.54% 7.47% 7.29% 6.77% 6.86% 7.48% 6.96%
Loans receivable, adj. 10,608 4,522 4,316 4,337 2,791 27,258 53,832 53,832
Average interest 4.44% 4.63% 4.59% 4.44% 4.59% 4.09% 4.30%
Deposits in other banks 98 98 98
Average interest 1.70% 1.70%
Investment securities 5,162 2,065 3,089 4,808 7,718 97,714 120,556 120,556
Average interest 2.55% 3.48% 2.90% 3.76% 4.17% 4.73% 4.49%
Interest - Liabilities ($000s)
Interest bearing deposits 165,025 35,180 4,217 1,908 8,101 9 214,440 216,254
Average interest 1.16% 2.75% 4.87% 4.15% 3.89% 3.11% 1.63%
Borrowed funds & Securities
sold under agreements
to repurchase 21,397 1,518 760 145 28 7,000 30,848 30,727
Average interest 1.66% 5.43% 5.49% 8.97% 9.00% 3.39% 2.37%
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 monthly basis, the available for sale portfolio is shocked
for immediate rate increases of 100 and 200 basis points. At December 31, 2003,
the Bank determined it would take an immediate increase in rates in excess of
200 basis points to eliminate the current capital cushion in excess of
regulatory requirements. The Bank's capital ratios are also reviewed on a
quarterly basis.
CAPITAL EXPENDITURES
The Bank has approved the construction and furnishing of a new branch office in
2004. The cost to the Bank is expected to be approximately $0.6 million. The
Bank has signed a letter of intent to purchase a building in Hamburg, New York,
which will function as its administrative building in 2004. The cost to the Bank
is expected to be approximately $1.0 million. The Bank intends to spend
approximately an additional $0.2 million to $0.4 million to ready the building
for its intended purpose. 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.
38
IMPACT OF INFLATION AND CHANGING PRICES
There will continually be economic events, such as the changes in the economic
policies of the Federal Reserve Board that will have an impact on the
profitability of the Company. Inflation may result in impaired asset growth,
reduced earnings and substandard capital ratios. The net interest margin can be
adversely impacted by the volatility of interest rates throughout the year.
Since these factors are unknown, management attempts to structure the balance
sheet and repricing frequency of assets and liabilities to avoid a significant
concentration that could result in a negative impact on earnings.
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 activities and insurance agency 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 $3.7 million in 2003, which
represents a $0.6 million or 18.9% increase over 2002. The increase in net
income from banking activities was driven by significant increases in
non-interest income including an increase in service charges of $0.7 million
from 2002. Total assets of the banking activities segment increased $45.5
million or 16.0% during 2003 to $329.6 million at December 31, 2003, due
primarily to normal banking activities and growth in deposits which were
utilized to fund loans, the investment securities portfolio and additional bank
owned life insurance purchase in 2003.
The insurance activities segment includes activities of the M&W Agency, Inc.,
which is a retail property and casualty insurance agency with eleven locations
in the Western New York area. Growth in the overall M&W Agency property and
casualty lines of business as well as the acquisition of the business of the
Gutekunst Agency on January 1, 2003, contributed to the improvement in total
revenue in 2003 of $0.5 million or 18.6% over 2002. Losses of $0.1 million in
2003 incurred from Frontier Claim Services, Inc. and a new policy during 2003 of
allocating administrative expenses to M&W which amounted to $0.1 million in 2003
offset revenue gains. Net income from insurance activities was $0.3 million in
2003, which represents a $0.1 million or 27.1% decrease from 2002. Total assets
of the insurance activities segment increased $0.5 million or 10.1% during 2003
to $5.1 million at December 31, 2003, due primarily to the acquisition of the
business of the Gutekunst Agency during 2003.
NEW ACCOUNTING STANDARDS
Accounting Standard Pronouncements -- On January 1, 2003, the Company
implemented the provisions of Financial Accounting Standards Board
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", which was an interpretation of a number of FASB statements. FIN 45
elaborates on the disclosures to be made by a guarantor in its periodic
financial statements. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The provisions of this
interpretation did not have a material impact on the Company's consolidated
financial statements.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," and revised it in December 2003
with the issuance of FIN 46r. The FASB's intent in issuing these interpretations
was to clarify the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. These
interpretations require an enterprise to consolidate a variable interest entity
(as defined) if that enterprise has a variable interest (or combination of
variable interests) that will absorb a majority of the entity's expected losses
if they occur, receive a majority of the entity's expected returns if they
occur, or both. These interpretations apply to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. The provisions of this
interpretation did not have a material impact on the Company's consolidated
financial statements.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations "Interest Rate Risk"
and "Market Risk," and is incorporated by reference into this item.
39
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of KPMG LLP, Independent Auditors ........................................................... 41
Report of Deloitte & Touche LLP, Independent Auditors .............................................. 42
Consolidated Balance Sheets - December 31, 2003 and 2002 ........................................... 43
Consolidated Statements of Income - Years Ended December 31, 2003, 2002 and 2001 ................... 44
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2003, 2002 and 2001 ..... 45
Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002 and 2001 ............... 46
Notes to Consolidated Financial Statements ......................................................... 48
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evans Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Evans Bancorp,
Inc. and subsidiary as of December 31, 2003, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The accompanying
consolidated financial statements of Evans Bancorp, Inc. and subsidiary as of
December 31, 2002 and for the two years then ended, were audited by other
auditors whose report dated January 28, 2003 expressed an unqualified opinion on
those statements and included an explanatory paragraph that described the change
in the Company's method of accounting for goodwill and other intangible assets
in 2002 to adopt Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Evans
Bancorp, Inc. and subsidiary as of December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
January 23, 2004
Buffalo, New York
41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Evans Bancorp, Inc.
Angola, New York
We have audited the accompanying consolidated balance sheet of Evans Bancorp,
Inc. and subsidiary (the "Company") as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two 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 the results of their operations and their cash flows for each of the two
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 6 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."
/s/ DELOITTE AND TOUCHE LLP
BUFFALO, NEW YORK
JANUARY 28, 2003
42
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
------------- -------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 8,508,705 $ 11,308,727
Federal funds sold - 8,450,000
------------- -------------
Total cash and cash equivalents 8,508,705 19,758,727
Interest bearing deposits at other banks 98,333 877,230
Securities:
Available for sale, at fair value 116,806,879 103,031,200
Held to maturity 3,749,321 3,640,714
Loans, net of allowance for loan losses of $2,538,933 in 2003
and $2,145,606 in 2002 185,528,148 148,997,646
Properties and equipment, net 5,981,616 5,348,994
Goodwill 2,944,913 2,944,913
Intangible assets 1,176,952 787,115
Bank-owned life insurance 7,323,013 662,733
Other assets 2,559,056 2,661,588
------------- -------------
TOTAL ASSETS $ 334,676,936 $ 288,710,860
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 51,885,433 $ 44,664,537
NOW and money market 11,463,977 10,535,456
Regular savings 105,599,106 94,907,508
Time 97,376,454 89,399,334
------------- -------------
Total deposits 266,324,970 239,506,835
Other borrowed funds 25,387,573 8,110,964
Securities sold under agreements to repurchase 5,460,472 6,543,456
Other liabilities 4,180,443 3,687,604
------------- -------------
Total liabilities 301,353,458 257,848,859
============= =============
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized; 2,459,246 and
2,450,870 shares issued, respectively and 2,444,285 and 2,450,555
shares outstanding, respectively 1,229,620 1,167,081
Capital surplus 19,359,133 16,578,868
Retained earnings 11,145,068 11,179,871
Accumulated other comprehensive income, net of tax 1,917,894 1,942,295
Less: Treasury stock, at cost (14,961 and 315 shares, respectively) (328,237) (6,114)
------------- -------------
Total stockholders' equity 33,323,478 30,862,001
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 334,676,936 $ 288,710,860
============= =============
See notes to consolidated financial statements.
43
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
INTEREST INCOME:
Loans $ 10,737,270 $ 10,592,702 $ 11,051,419
Federal funds sold/Interest bearing deposits at other banks 79,091 78,824 133,130
Securities:
Taxable 2,225,776 2,553,604 2,891,901
Non-taxable 2,288,026 1,987,285 1,570,725
------------ ------------ ------------
Total interest income 15,330,163 15,212,415 15,647,175
INTEREST EXPENSE
Deposits 3,864,106 4,281,861 6,007,080
Borrowings 619,537 534,861 530,074
------------ ------------ ------------
Total interest expense 4,483,643 4,816,722 6,537,154
NET INTEREST INCOME 10,846,520 10,395,693 9,110,021
PROVISION FOR LOAN LOSSES 480,000 420,000 420,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,366,520 9,975,693 8,690,021
NON-INTEREST INCOME:
Bank sevice charges 1,812,138 1,095,611 1,046,615
Insurance service and fees 3,495,077 2,947,381 2,412,900
Commission fees 272,369 227,666 134,134
Net gain on sales of securities 270,955 111,302 183,681
ORE loss (26,920) (138,992) (17,402)
Premium on loans sold 123,576 59,017 28,791
Life insurance proceeds - 184,745 -
Other 1,719,155 987,011 739,193
------------ ------------ ------------
Total non-interest income 7,666,350 5,473,741 4,527,912
------------ ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 6,813,346 5,532,613 5,023,449
Occupancy 1,453,778 1,337,469 1,156,215
Supplies 282,828 231,521 229,031
Repairs and maintenance 377,283 411,696 366,609
Advertising and public relations 262,839 205,662 171,248
Professional services 710,675 615,613 474,905
FDIC assessments 39,878 35,002 34,416
Other insurance 297,808 280,695 276,815
Other 2,501,088 1,999,858 1,797,918
------------ ------------ ------------
Total non-interest expense 12,739,523 10,650,129 9,530,606
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,293,347 4,799,305 3,687,327
INCOME TAXES 1,224,000 1,193,258 1,108,000
------------ ------------ ------------
NET INCOME $ 4,069,347 $ 3,606,047 $ 2,579,327
============ ============ ============
Net income per common share - basic $ 1.66 $ 1.48 $ 1.06
============ ============ ============
Net income per common share - diluted $ 1.66 $ 1.48 $ 1.06
============ ============ ============
Weighted average number of basic common shares 2,450,334 2,441,685 2,425,644
============ ============ ============
Weighted average number of diluted shares 2,450,527 2,441,685 2,425,644
============ ============ ============
See notes to consolidated financial statements.
44
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL
---------- ----------- ----------- ------------- --------- -----------
BALANCE -- DECEMBER 31, 2000 $ 879,801 $13,810,991 $ 9,953,780 $ 534,500 $ - $25,179,072
Comprehensive income:
2001 net income 2,579,327 2,579,327
Unrealized gain on available
for sale securities, net of
reclassification
adjustment and tax effect 131,678 131,678
-----------
Total comprehensive income 2,711,005
-----------
Cash dividends ($.44 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 (145,042) (145,042)
for treasury
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 - 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 1,436,616 1,436,616
Additional minimum pension liability
net of tax effect - $102,393 (160,499) (160,499)
-----------
Total comprehensive income 4,882,164
-----------
Cash dividends ($.54 per common share) (1,304,585) (1,304,585)
Issuance of 9,423 shares under
Dividend Reinvestment Plan 4,487 158,481 162,968
Purchase 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 5 percent with 598
fractional shares to be paid in cash 55,292 2,530,279 (2,585,571) -
---------- ----------- ----------- ------------- --------- -----------
BALANCE -- DECEMBER 31, 2002 1,167,081 16,578,868 11,179,871 1,942,295 (6,114) 30,862,001
Comprehensive income
2003 net income 4,069,347 4,069,347
Unrealized loss on available
for sale securities, net of
reclassification
adjustment and tax effect (184,900) (184,900)
Additional minimum liability, net of tax effect 160,499 160,499
-----------
Total comprehensive income 4,044,946
-----------
Cash dividends ($.62 per common share) (1,534,447) (1,534,447)
Stock option expense 102,570 102,570
Fractional shares paid in cash on stock dividends (28,221) (28,221)
Issued 8,618 shares under dividend
reinvestment plan 4,309 185,443 189,752
Purchase of 26,295 shares for treasury (575,591) (575,591)
Reissuance of 4,618 shares under
Employee Stock Purchase plan (19,451) 101,319 81,868
Reissuance of 7,948 shares under
dividend reinvestment plan 8,010 172,590 180,600
Stock dividend 5 percent 58,230 2,492,252 (2,530,041) (20,441) -
---------- ----------- ----------- ------------- --------- -----------
BALANCE -- DECEMBER 31, 2003 $1,229,620 $19,359,133 $11,145,068 $ 1,917,894 $(328,237) $33,323,478
========== =========== =========== ============= ========= ===========
See notes to consolidated financial statements.
45
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------- ------------- -------------
OPERATING ACTIVITIES:
Interest received $ 16,087,379 $ 15,733,836 $ 16,054,390
Fees received 7,014,690 5,140,994 4,211,410
Interest paid (4,541,209) (4,951,700) (6,523,176)
Cash paid to employees and suppliers (12,234,615) (10,188,956) (6,685,194)
Income taxes paid (1,173,820) (1,314,877) (1,558,000)
------------- ------------- -------------
Net cash provided by operating activities 5,152,425 4,419,297 5,499,430
------------- ------------- -------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (100,522,274) (70,218,780) (47,716,648)
Proceeds from sales 26,907,647 7,554,063 15,547,047
Proceeds from maturities 59,955,066 43,580,011 21,390,184
Held to maturity securities:
Purchases (3,126,414) (4,113,680) (2,453,558)
Proceeds from maturities 3,017,807 1,925,595 2,595,887
Cash paid for bank-owned life insurance (6,200,000) - -
Additions to properties and equipment (1,004,503) (1,891,860) (1,119,597)
Increase in loans, net of repayments (52,541,327) (18,954,336) (23,594,878)
Proceeds from sales of loans 15,732,250 11,989,008 9,156,096
Proceeds from sale of other real estate owned 248,080 69,420 12,598
Acquisition of intangible assets (254,000) (62,000) -
------------- ------------- -------------
Net cash used in investing activities (57,787,668) (30,122,559) (26,182,869)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowing 16,193,625 502,002 5,389,179
Increase in deposits 26,877,635 35,246,832 17,558,743
Dividends paid, net (1,344,695) (974,525) (907,711)
Fractional shares paid in cash on stock dividends (28,221) - (21,597)
Purchase of treasury stock (575,591) (22,831) (145,042)
Reissuance of treasury stock 262,468 16,424 145,042
------------- ------------- -------------
Net cash provided by financing activities 41,385,221 34,767,902 22,018,614
------------- ------------- -------------
Net (decrease)increase in cash and cash
equivalents (11,250,022) 9,064,640 1,335,175
CASH AND CASH EQUIVALENTS:
Beginning of year 19,758,727 10,694,087 9,358,912
------------- ------------- -------------
End of year $ 8,508,705 $ 19,758,727 $ 10,694,087
============= ============= =============
(Continued)
46
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 4,069,347 $ 3,606,047 $ 2,579,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,246,006 1,062,390 1,316,806
Deferred taxes (171,000) (148,258) 185,000
Provision for loan losses 480,000 420,000 420,000
Net gain on sales of assets (244,035) 27,690 (166,279)
Premiums on loans sold (123,576) (59,017) (28,791)
Proceeds from life insurance - (184,745) -
Stock options expensed 102,570 - -
Changes in assets and liabilities affecting cash flow:
Other assets 81,163 36,304 1,623,095
Other liabilities (288,050) (341,114) (429,728)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 5,152,425 $ 4,419,297 $ 5,499,430
=========== =========== ===========
Supplemental disclosure of non cash investments and
financial activities:
Acquistion of insurance agencies $ 256,000 $ 457,800 $ -
=========== =========== ===========
See notes to consolidated financial statements. (Concluded)
47
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 the Bank's
subsidiaries, M&W Agency, Inc. ("M&W") and ENB Associates Inc. ("ENB"),
both wholly-owned, and Evans National Holding Corp. ("ENHC"), of which the
Bank owns 100% of the outstanding voting common stock.
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 administrative office is located in Angola, New York and it
has branches in Amherst, Angola, Derby, Evans, Forestville, Hamburg,
Lancaster, North Boston, and West Seneca.
M&W is a retail property and casualty insurance agency headquartered in
Silver Creek, New York. Through its several branch offices, M&W earns
commissions, on the sale of various premium-based insurance policies.
ENB provides non-deposit investment products, such as mutual funds and
annuities, to bank customers through the branch network. ENB has an
agreement with a licensed broker whereby ENB can purchase and sell
securities for bank customers.
ENHC holds certain real estate loans and provides management services to
the Bank. ENHC is operated as a real estate investment trust (REIT) which
provides additional flexibility and planning opportunities for the business
of the Bank.
The Company operates in two reportable segments - banking activities and
insurance agency activities.
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"), the Office of the Comptroller of the Currency ("OCC"), and the
Securities and Exchange Commission ("SEC").
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company, the Bank and subsidiaries. All material
inter-company 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 classified as held to maturity and 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. These securities represent
debt issuances of local municipalities in the Bank's market area for which
market prices are not readily available. The amortized cost of the
securities approximates market value. Management periodically evaluates the
financial condition of the municipalities for impairment.
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 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
write-down 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.
48
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Company follows 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.
Management reviewed contracts from various functional areas of the Company
to identify potential derivatives embedded within selected contracts.
Management identified embedded derivatives in some loan commitments for
residential mortgages where the Company has the 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 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 numerous factors,
including 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 those loans at
the time they were originated. 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 it 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 commercial loans and mortgages 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 status and are subject to charge off at an earlier date if
collection of principal or interest is considered doubtful.
All interest due but not collected for loans that are placed on nonaccrual
status 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 it again qualifies for an accrual basis. Loans are returned to
accrual status when all the principal and interest amounts contractually
due are brought current, the adverse circumstances which resulted in the
delinquent payment status are resolved, and payments are made in a timely
manner for a period of time sufficient to reasonably assure their future
dependability.
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 probable 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 Bank
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.
49
The subjective portion of the allowance reflects management's evaluation of
various conditions, and involves a higher degree of uncertainty because
this component of the allowance is not identified with specific problem
credits or portfolio segments. The conditions evaluated in connection with
this element include the following: industry and regional conditions;
seasoning of the loan portfolio and changes in the composition of and
growth in the loan portfolio; the strength and duration of the business
cycle; existing general economic and business conditions in the lending
areas; credit quality trends in nonaccruing loans; historical loan
charge-off experience; and the results of bank regulatory examinations.
FORECLOSED REAL ESTATE - Foreclosed real estate is initially recorded at
the lower of book or fair value (net of costs of disposal) at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are
expensed. Assessments are periodically performed by management, and an
allowance for losses is established by a charge to operations if the
carrying value of a property exceeds fair value. Foreclosed real estate is
classified as other assets on the consolidated balance sheets.
GOODWILL - Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired in connection with the Company's
acquisition of the M&W Group, Inc. Through December 31, 2001 goodwill was
being amortized on a straight-line basis over ten years. Effective January
1, 2002, the Company adopted the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets." The Company periodically assesses whether events
or changes in circumstances indicate that the carrying amount of goodwill
may be impaired. This statement addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in
the financial statements.
BANK-OWNED LIFE INSURANCE - The Bank has purchased insurance on the lives
of Company directors and a certain group of key members of Bank, M&W and
ENBA management. 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 computed using the straight-line
method over the estimated useful lives of the assets which range from 3 to
39 years. Impairment losses on properties and equipment are realized if the
carrying amount is not recoverable from its undiscounted cash flows and
exceeds its fair value.
LOAN SERVICING - The Company, in its normal course of business, sells
certain residential mortgages which it originates to the Federal National
Mortgage Association ("FNMA"). The Company maintains servicing rights on
the loans that it sells to FNMA and earns a fee thereon. At December 31,
2003 and 2002, the Company had approximately $30,924,000 and $24,026,000,
respectively, in unpaid principal balances of loans that it services for
FNMA. For the years ended December 31, 2003 and 2002, the Company sold
$15,732,000 and $11,617,000, respectively, in loans to FNMA. The Company
did not record any related asset to the servicing portfolio rights as
management determined it immaterial.
INCOME TAXES - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the periods in which the deferred
tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through income tax expenses.
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. Dilutive
earnings per common share is based on increasing the weighted-average
number of shares of common stock by the number of shares of common stock
that would be issued assuming the exercise of stock options. Such
adjustments to weighted-average number of shares of common stock
outstanding are made only when such adjustments are expected to dilute
earnings per common share. Basic and diluted earnings per share are the
same for December 31, 2003, 2002, and 2001. The Company's potential
dilutive securities included 387 for the year ended December 31, 2003.
There were no dilutive securities for the years ended December 31, 2002 and
2001. All share and per share information presented is stated after giving
effect to stock dividends.
50
STOCK DIVIDENDS - A 5 percent stock dividend was declared on September 16,
2003 for shareholders of record on October 14, 2003. The stock dividend
resulted in the issuance of 116,459 shares of common stock, paid $16,083
for fractional shares, and was issued on December 1, 2003. Additionally, a
5 percent stock dividend was declared on November 19, 2002 for shareholders
of record on December 2, 2002. The stock dividend resulted in the issuance
of 110,589 shares of common stock, paid $12,138 for fractional shares, and
was issued on January 29, 2003. All share data and per share data contained
in this document have been adjusted to reflect the stock dividends, except
for the share data contained in the consolidated statements of
stockholders' equity.
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.
EMPLOYEE BENEFITS - The Company maintains a non-contributory, qualified,
defined benefit pension plan ("the pension plan") that covers substantially
all employees who meet certain age and service requirements. The
actuarially determined pension benefit in the form of a life annuity is
based on the employee's combined years of service, age and compensation.
The Company's policy is to fund the minimum amount required by government
regulations.
Additionally, the Company maintains a defined contribution 401(k) plan and
accrues contributions due under this plan as earned by employees.
STOCK-BASED COMPENSATION - At December 31, 2003 the Company has stock-based
employee and non-employee compensation plans, which are described more
fully in footnote 12. The Company accounts for these plans under SFAS No.
123, "Accounting for Stock-Based Compensation." Under SFAS No. 123 the fair
value of the stock options granted are recognized in compensation salaries
and employee benefits expense.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK - In the ordinary course
of business the Bank has entered into off balance sheet financial
arrangements 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 $1,090,000 and $1,221,000
at December 31, 2003 and 2002, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2002
and 2001 financial statements to conform with the 2003 presentation.
ACCOUNTING STANDARD PRONOUNCEMENTS - On January 1, 2003, the Company
implemented the provisions of Financial Accounting Standards Board
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others," which was an interpretation of a number of Financial Accounting
Standards Board ("FASB") statements. FIN 45 elaborates on the disclosures
to be made by a guarantor in its periodic financial statements. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The provisions of this interpretation did not have a
material impact on the Company's consolidated financial statements.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," and revised it in December
2003 with the issuance of FIN 46r. The FASB's intent in issuing these
interpretations was to clarify the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support
from other parties. These interpretations require an enterprise to
consolidate a variable interest entity (as defined) if that enterprise has
a variable interest (or combination of variable interests) that will absorb
a majority of the entity's expected losses if they occur, receive a
majority of the entity's expected returns if they occur, or both. These
interpretations apply to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains
an interest after that date. The provisions of this interpretation did not
have a material impact on the Company's consolidated financial statements.
51
2. SECURITIES
The amortized cost of securities and their approximate fair value at
December 31 were as follows:
2003
-----------------------------------------------------
UNREALIZED
----------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- --------- ------------
Available for Sale:
U.S. Government and
Agency Securities $ 20,814,990 $ 111,712 $ (15,467) $ 20,911,235
Mortgage Backed Securities 41,671,059 64,246 (220,658) 41,514,647
State and Municipal Securities 49,325,367 3,204,359 (2,679) 52,527,047
FRB and FHLB Stock 1,853,950 - - 1,853,950
------------ ---------- --------- ------------
Total $113,665,366 $3,380,317 $(238,804) $116,806,879
============ ========== ========= ============
Held to Maturity:
U.S. Government and
Agency Securities $ 36,599 $ - $ - $ 36,599
State and Municipal Securities 3,712,722 - - 3,712,722
------------ ---------- --------- ------------
Total $ 3,749,321 $ - $ - $ 3,749,321
============ ========== ========= ============
2002
---------------------------------------------------
UNREALIZED
---------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- ------------
Available for Sale:
U.S. Government and
Agency Securities $ 9,477,460 $ 369,503 $ - $ 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
FRB and FHLB Stock 1,248,350 - - 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 $ - $ - $ 37,201
State and Municipal Securities 3,603,513 - - 3,603,513
----------- ---------- -------- ------------
Total $ 3,640,714 $ - $ - $ 3,640,714
=========== ========== ======== ============
Available for sale securities with a total fair value of $86,901,240 at
December 31, 2003 were pledged as collateral to secure public deposits and
for other purposes required or permitted by law.
52
The scheduled maturities of debt securities at December 31, 2003 are
summarized below. Actual maturities may differ from contractual maturities
because certain issuers have the right to call or prepay obligations with
or without call premiums.
AVAILABLE FOR HELD TO MATURITY
SALE SECURITIES SECURITIES
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ 1,900,260 $ 1,926,707 $ 1,381,333 $ 1,381,333
Due after year one through
five years 16,758,837 17,104,276 575,300 575,300
Due after five years through
ten years 52,331,530 54,038,642 859,022 859,022
Due after ten years 40,820,789 41,883,304 933,666 933,666
------------ ------------ ------------ ------------
Total $111,811,416 $114,952,929 $ 3,749,321 $ 3,749,321
============ ============ ============ ============
Realized gains and losses from $26,907,647, $7,554,063, and $15,547,047 of
gross sales on securities for the years ended December 31, 2003, 2002 and
2001 are summarized as follows:
2003 2002 2001
--------- --------- ---------
Gross gains $ 446,681 $ 127,284 $ 184,204
Gross losses (175,726) (15,982) (523)
--------- --------- ---------
Net gain $ 270,955 $ 111,302 $ 183,681
========= ========= =========
Information regarding unrealized losses within the Company's available for
sale securities is summarized below. The securities are all US
government-guaranteed agency securities or fully insured municipal
securities. All unrealized losses are considered temporary and related to
market interest rate fluctuations.
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------- ------------------------- -------------------------
UNREALIZED UNREALIZED UNREALIZED
Description of Securities FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
----------- ----------- ----------- ----------- ----------- -----------
U.S. Government and
Agency Securities $ 4,525,400 $ 15,467 $ - $ - $ 4,525,400 $ 15,467
Mortgage Backed Securities 25,989,484 218,152 692,664 2,506 $26,682,148 $ 220,658
State and Municipal
Securities 529,731 2,679 - - 529,731 2,679
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired
securities $31,044,615 $ 236,298 $ 692,664 $ 2,506 $31,737,279 $ 238,804
=========== =========== =========== =========== =========== ===========
53
3. LOANS, NET
Major categories of loans at December 31, 2003 and 2002 are summarized as
follows:
2003 2002
------------- -------------
Mortgage loans on real estate:
Residential 1-4 family $ 30,160,275 $ 26,712,205
Commercial and multi-family 99,683,730 77,918,498
Construction 5,090,022 2,174,277
Second mortgages 6,274,178 6,919,081
Equity lines of credit 18,262,175 13,779,526
------------- -------------
Total real estate loans 159,470,380 127,503,587
Commercial loans 24,281,627 20,460,244
Consumer loans 3,777,855 2,843,256
Net deferred loan origination costs 537,219 336,165
------------- -------------
188,067,081 151,143,252
Allowance for loan losses (2,538,933) (2,145,606)
------------- -------------
Loans, net $ 185,528,148 $ 148,997,646
============= =============
Changes in the allowance for loan losses for the years ended December 31,
2003, 2002 and 2001 were as follows:
2003 2002 2001
----------- ----------- -----------
Balance, beginning of year $ 2,145,606 $ 1,786,115 $ 1,428,467
Provision for loan losses 480,000 420,000 420,000
Recoveries 8,108 15,689 17,250
Loans charged off (94,781) (76,198) (79,602)
----------- ----------- -----------
Balance, end of year $ 2,538,933 $ 2,145,606 $ 1,786,115
=========== =========== ===========
Non-accrual loans, for which an allowance for loan impairment was not
required under SFAS No. 114 due to the adequacy of related collateral
values, totaled approximately $296,000 and $1,197,000 at December 31, 2003
and 2002, respectively. The average recorded investment in these loans
during 2003, 2002, and 2001 was approximately $121,100, $637,500, and
$601,600, respectively. If such loans had been in an accruing status, the
Bank would have recorded additional interest income of approximately
$20,000, $68,000 and $36,000 in 2003, 2002 and 2001, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at
December 31, 2003.
As of December 31, 2003 and 2002, the Bank had no other loans which were
impaired as defined by SFAS No. 114.
54
4. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
2003 2002
------------ ------------
Land $ 268,485 $ 268,485
Buildings and improvements 5,603,228 5,557,263
Equipment 4,917,999 4,773,451
Construction in progress 774,749 -
------------ ------------
11,564,461 10,599,199
Less accumulated depreciation (5,582,845) (5,250,205)
------------ ------------
Properties and equipment, net $ 5,981,616 $ 5,348,994
============ ============
Depreciation expense totaled $679,600 in 2003, $665,530 in 2002, and
$613,117 in 2001.
5. OTHER ASSETS
Other assets at December 31, were as follows:
2003 2002
---------- ----------
Deferred tax asset $ 241,916 $ 55,941
Accrued interest receivable 1,445,531 1,405,887
Life insurance proceeds receivable - 184,745
Prepaid expenses 416,282 374,020
Other real estate owned - 275,000
Other 455,327 365,995
---------- ----------
Total $2,559,056 $2,661,588
========== ==========
6. 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 an
annual basis.
55
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill effective January 1, 2002. 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:
2003 2002 2001
------------- ------------- -------------
Reported net income $ 4,069,347 $ 3,606,047 $ 2,579,327
Goodwill amortization, net of tax - - 318,480
Pro forma adjusted net income 4,069,347 3,606,047 2,897,807
------------- ------------- -------------
Reported earnings per share $ 1.66 $ 1.48 $ 1.06
------------- ------------- -------------
Goodwill amortization, net of tax per share - - 0.13
Pro forma adjusted basic earnings per share $ 1.66 $ 1.48 $ 1.19
Pro forma adjusted diluted earnings per share $ 1.66 $ 1.48 $ 1.19
Changes in the carrying amount of goodwill for the twelve-month period
ended December 31, 2003, by operating segment, are as follows:
BANKING INSURANCE
ACTIVITIES ACTIVITIES TOTAL
---------- ---------- ----------
Balance as of January 1, 2003 $ - $2,944,913 $2,944,913
Goodwill acquired during the period - - -
---------- ---------- ----------
Balance as of December 31, 2003 $ - $2,944,913 $2,944,913
========== ========== ==========
Information regarding the Company's other intangible assets follows:
GROSS
CARRYING ACCUMULATED WEIGHTED AVERAGE
AMOUNT AMORTIZATION NET AMORTIZATION PERIOD
---------- ------------ ----------- -------------------
Noncompete agreements $ 549,000 $(147,850) $ 401,150 5 yrs
Intangible asset related to pension plan 551,999 - 551,999 9 N/A
Insurance expirations 349,003 (125,200) 223,803 5 yrs
---------- ------------ ----------
Total $1,450,002 $(273,050) $1,176,952 5 yrs
========== ========= ==========
Amortization expense related to intangibles for the years ended December
31, 2003, 2002, and 2001 were $168,500, $78,800, and $21,800, respectively.
Estimated amortization expense for each of the five succeeding fiscal years
is as follows:
YEAR ENDING
DECEMBER 31 AMOUNT
2004 $179,600
2005 175,650
2006 157,800
2007 100,800
2008 11,100
56
7. DEPOSITS
Time deposits, with minimum denominations of $100,000 each, totaled
$35,647,154 and $28,440,994 at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of time deposits are as
follows:
2004 $47,961,340
2005 35,179,590
2006 4,216,970
2007 1,908,425
2008 8,110,129
-----------
$97,376,454
===========
8. OTHER BORROWED FUNDS
Other borrowed funds include $25,387,573 of borrowings at December 31,
2003. The borrowings consisted of various advances from the Federal Home
Loan Bank with interest rates ranging from 1.10% to 5.34%. These advances
are collateralized by certain qualifying assets. The maturities of other
borrowed funds are as follows:
2004 $15,935,976
2005 1,518,337
2006 760,292
2007 145,349
2008 27,619
Thereafter 7,000,000
-----------
Total $25,387,573
===========
Short-term borrowing of $13,450,000 and $0 at December 31, 2003 and 2002,
respectively, consisted of an overnight line of credit with the Federal
Home Loan Bank at a rate of 1.10%. The Bank has an additional $2,500,000
available with Federal Home Loan Bank on the overnight line of credit and
the ability to borrow up to $8,000,000 of federal funds purchased from one
its correspondent banks at December 31, 2003.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into agreements with depositors to sell to the depositors
securities owned by the Bank and repurchase the identical security,
generally within one day. No physical movement of the securities is
involved. The depositor is informed the securities are held in safekeeping
by the Bank on behalf of the depositor.
57
10. COMPREHENSIVE INCOME
The following tables display the components of other comprehensive income:
2003
-----------------------------------------
BEFORE-TAX INCOME
AMOUNT TAXES NET
----------- ----------- -----------
Unrealized losses on investment securities:
Unrealized holding losses
during period $ (31,915) $ 12,840 $ (19,075)
Less: reclassification
adjustment for gains realized
in net income 270,955 (105,130) 165,825
----------- ----------- -----------
Net unrealized (loss) gain (302,870) 117,970 (184,900)
Decrease in additional
minimum liability 262,892 (102,393) 160,499
----------- ----------- -----------
Net other comprehensive (loss) income $ (39,978) $ 15,577 $ (24,401)
=========== =========== ===========
2002
-----------------------------------------
BEFORE-TAX INCOME
AMOUNT TAXES NET
----------- ----------- -----------
Unrealized gains on investment securities:
Unrealized holding gains
during period $ 2,458,551 $ (953,818) $ 1,504,733
Less: reclassification
adjustment for gains realized
in net income 111,302 (43,185) 68,117
----------- ----------- -----------
Net unrealized gain (loss) 2,347,249 (910,633) 1,436,616
Decrease in additional
minimum liability (262,892) 102,393 (160,499)
----------- ----------- -----------
Net other comprehensive income (loss) $ 2,084,357 $ (808,240) $ 1,276,117
=========== =========== ===========
2001
-----------------------------------------
BEFORE-TAX INCOME
AMOUNT TAXES NET
----------- ----------- -----------
Unrealized gains on investment securities:
Unrealized holding gains
during period $ 403,144 $ (161,257) $ 241,887
Less: reclassification
adjustment for gains realized
in net income 183,681 (73,472) 110,209
----------- ----------- -----------
Net unrealized gain (loss) 219,463 (87,785) 131,678
----------- ----------- -----------
Net other comprehensive income (loss) $ 219,463 $ (87,785) $ 131,678
=========== =========== ===========
58
11. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLAN
EMPLOYEES' PENSION 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 consolidated balance sheets, and the amounts recognized
consolidated balance sheets.
2003 2002
----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,514,194 $ 1,958,392
Service cost 156,902 168,533
Interest cost 158,345 160,857
Assumption change 199,036 -
Actuarial (gain) loss (147,607) 266,140
Benefits paid (193,890) (39,728)
----------- -----------
Benefit obligations at end of year 2,686,980 2,514,194
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 2,011,048 1,735,117
Actual return on plan assets 269,994 (19,647)
Employer contributions 193,420 335,306
Benefits paid (193,890) (39,728)
----------- -----------
Fair value of plan assets at end of year 2,280,572 2,011,048
----------- -----------
Funded status (406,408) (503,146)
Unrecognized net actuarial loss 492,486 585,429
Unrecognized prior service cost (175,591) (182,989)
----------- -----------
Net amount recognized (89,513) (100,706)
=========== ===========
Amount recognized in the statements of financial position
consists of:
Accrued benefit liability (89,513) (100,706)
----------- -----------
Net amount recognized $ (89,513) $ (100,706)
=========== ===========
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, 2003 and 2002. Assumptions used by the Bank in the determination
of pension plan information consisted of the following:
2003 2002
------ ------
Weighted-average discount rate 6.25% 6.75%
Rate of increase in compensation levels 4.75% 4.75%
Expected long-term rate of return on plan assets 6.75% 6.75%
59
The components of net periodic benefit cost consisted of the following:
2003 2002 2001
--------- --------- ---------
Service cost $ 156,902 $ 168,533 $ 170,990
Interest cost 158,345 160,857 155,046
Expected return on plan assets (134,346) (121,139) (148,392)
Net amortization and deferral 1,326 (16,169) (16,169)
--------- --------- ---------
Net periodic benefit cost $ 182,227 $ 192,082 $ 161,475
========= ========= =========
The accumulated benefit obligations for years ended December 31, 2003 and
2002 are $1,930,820, and $1,609,717, respectively.
In developing our expected long-term rate of return assumption, we
evaluated input from our actuaries, including their review of asset class
return expectations by several respected consultants as well as long-term
inflation assumptions. Projected returns by such consultants are based on
broad equity and bond indices. We also considered our historical 5-year and
10-year average annual simple annual returns of 20.90% and 34.59%,
respectively, which have been in excess of these broad equity and bond
benchmark indices. We anticipate that our investment managers will continue
to generate long-term returns of at least 6.75%. Our expected long-term
rate of return on Qualified Plan assets is based on an asset allocation
assumption of 63% with equity managers, 37% with fixed income managers.
Because of market fluctuation, our actual asset allocation as of September
30, 2003, the plan valuation measurement date, was 61.50% with equity
managers and 38.50% with fixed income managers. We believe, however, that
our long-term asset allocation on average will approximate 60%-70% with
equity managers and 30%-40% with fixed income managers. We regularly review
our actual asset allocation and periodically rebalance our investments to
our targeted allocation when considered appropriate. We continue to believe
that 6.75% is a reasonable long-term rate of return on our Qualified Plan
assets. Qualified Plan assets had a return of approximately 12.60% for the
plan year ended September 30, 2003. We will continue to evaluate our
actuarial assumptions, including our expected rate of return, at least
annually, and will adjust as necessary. Our required minimum contribution
to the pension plan for the 2004 plan year is approximately $218,000.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - The Bank also maintains a
nonqualified supplemental executive retirement plan covering certain
members of senior management. The plan was amended during 2003 to provide a
benefit based on a percentage of final average earnings, as opposed to the
fixed benefit that the superceded plan provided for. The obligations
related to the plan are indirectly funded by various life insurance
contracts naming the Bank as beneficiary. The Bank has also indirectly
funded the supplemental executive retirement plan as well as other benefits
provided to other employees through Bank-owned life insurance which was
purchased in February 2003. 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 made an adjustment in the
actuarial retirement calculation of approximately $180,000, which is
reflected as a decrease in SERP expense in the consolidated statements of
income.
60
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 consolidated balance sheets, and the amounts recognized
in the consolidated balance sheets.
2003 2002
----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,589,106 $ 1,410,936
Service cost 72,943 49,147
Interest cost 132,203 109,084
Plan amendments 415,854 -
Actuarial loss 115,544 112,715
Benefits Paid (92,776) (92,776)
----------- -----------
Benefit obligation at end of year 2,232,874 1,589,106
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year - -
Actual return on plan assets - -
Contributions to the plan 92,776 92,776
Benefits paid (92,776) (92,776)
----------- -----------
Fair value of plan assets at end of year - -
----------- -----------
Funded status (2,232,874) (1,589,106)
Unrecognized actuarial loss 371,708 262,892
Unrecognized prior service cost 566,715 247,665
----------- -----------
Net amount recognized $(1,294,451) $(1,078,549)
=========== ===========
Amounts recognized in the statements of financial position consist of:
Accrued benefit liability (1,846,450) (1,589,106)
Intangible asset 551,999 247,665
Accumulated other comprehensive income - 262,892
----------- -----------
Net amount recognized $(1,294,451) $(1,078,549)
=========== ===========
Valuations of the nonqualified supplemental executive retirement plan as
shown above were conducted as of January 1, 2003 and 2002. The accumulated
benefit obligations for years ended December 31, 2003 and 2002 were
$1,846,450, and $1,589,106, respectively. Assumptions used by the Bank in
both years in the determination of pension plan information consisted of
the following:
2003 2002
Weighted-average discount rate 6.25% 6.75%
Expected long-term rate of return on plan assets n/a n/a
Salary Scale 4.75% n/a
61
The components of net periodic benefit cost consisted of the following:
2003 2002 2001
-------- -------- --------
Service cost 72,943 49,147 130,879
Interest cost 132,203 109,084 109,902
Net amortization and deferral 103,532 61,824 55,669
-------- -------- --------
Net periodic benefit cost $308,678 $220,055 $296,450
======== ======== ========
OTHER COMPENSATION PLANS
The Bank also maintains a non-qualified deferred compensation plan for
certain directors. Accrued expenses under this plan were approximately
$71,000, $71,000 and $71,000 in 2003, 2002 and 2001, respectively. The
estimated present value of the benefit obligation, included in other
liabilities was $1,006,000 and $983,000 at December 31, 2003 and 2002,
respectively. This obligation is indirectly funded by life insurance
contracts naming the Bank as beneficiary. 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.
Effective April 1, 2003, the Company implemented a non-qualified deferred
compensation plan whereby certain directors and certain officers may defer
a portion of their base pre-tax compensation. Additionally, effective April
1, 2003, the Company implemented a non-qualified executive incentive
retirement plan, whereby the Company will defer on behalf of certain
officers a portion of their base compensation as well as an incentive based
upon Company performance, until retirement on termination of service,
subject to certain vesting arrangements. Expense under these plans was
approximately $38,000 in 2003. The benefit obligation, included in other
liabilities, in the consolidated balance sheets was $150,000 at December
31, 2003.
Many of the new benefit plans put in place in 2003 are indirectly funded by
Bank-owned life insurance contracts with a total aggregate cash surrender
values of approximately $6,473,000 at December 31, 2003. The increase in
cash surrender value is included in the "Other" financial statement line on
the consolidated statements of income. Incidental to the Bank's purchase of
Bank-owned life insurance in 2003, endorsement split-dollar life insurance
benefits have also been provided to directors and certain officers of the
Bank and its subsidiaries.
The Bank also has a defined contribution Retirement and Thrift 401(k) Plan
for its employees who meet certain length of service and age requirements.
The provisions of the 401(k) Plan allow eligible employees to contribute
between 1% and 15% of their annual salary, with a matching contribution by
the Bank equal to 1% of the employees' base compensation plus 25% of the
employees contribution up to 4% of their annual salary. The Bank can also
make discretionary contributions to the Plan. The Bank's expense under this
Plan was approximately $100,000, $50,000 and $44,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
The Company has a Dividend Reinvestment Plan (the "Plan") which provides
each holder of record of the Bank's common stock the opportunity to
reinvest automatically the cash dividends they receive on shares of the
Bank's common stock. Stockholders who do not wish to participate in the
Plan continue to receive cash dividends, as declared, in the usual manner.
Computer share Investor Services LLC (the "Agent") is the administrator of
the Plan. Shares purchased under the Plan are held in safekeeping by the
Agent until the stockholder terminates his/her participation in the Plan.
The Agent also acts as transfer agent and registrar for the Company's
common stock.
12. STOCK-BASED COMPENSATION
At December 31, 2003 the Company has two stock-based compensation plans,
which are described below. The Company accounts for the fair value of its
grants under those plans in accordance with Statement 123. The Company
granted stock options for the first time in 2003. The compensation cost
that has been charged against income for those plans was $102,570 for 2003.
62
FIXED STOCK OPTION PLANS
The Company has a fixed option plan. Under the 1999 Employee Stock Option
and Long Term Incentive plan, as amended, the Company may grant options to
its employees for up to 250,000 shares of common stock. Under the plan, the
exercise price of each option is not to be less than 100% of the market
price of the Company's stock on the date of grant and an option's maximum
term is ten years. The options have vesting schedules from two years
through nine years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003: dividend yield of 2.73 percent;
expected volatility of 28.43 percent, risk-free interest rates of between
1.07 percent and 4.0 percent; and expected lives of between 2 and 10 years.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 2003, and changes during the year ending, is presented below:
2003
---------------------------
WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
-------- ----------------
Outstanding at beginning of year - -
Granted 26,500 22.55
Exercised - -
Forfeited - -
-------- -----
Outstanding at end of year 26,500 22.55
-------- -----
Options exercisable at year-end 11,000
Weighted-average fair value of
options granted during the year $ 6.44
The following table summarizes information about fixed stock options
outstanding at December 31, 2003.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -------------------
NUMBER NUMBER
OUTSTANDING REMAINING EXERCISABLE
EXERCISE PRICE AT 12/31/2003 CONTRACTUAL LIFE AT 12/31/2003
- -------------- ------------- ---------------- -------------------
$ 22.92 $ 11,000.00 9.3 11,000
$ 22.28 $ 15,500.00 9.6 -
EMPLOYEE STOCK PURCHASE PLAN
On February 18, 2003, the Board of Directors of the Company adopted the
Evans Bancorp, Inc. Employee Stock Purchase Plan. The Company is authorized
to issue up to 105,000 shares of common stock to its full-time employees,
nearly all of whom are eligible to participate. Under the terms of the
plan, employees can choose each year to have up to 15 percent of their
annual base earnings withheld to purchase the Company's common stock. The
Company grants options on January 1 and July 1 of each year that the
employee stock purchase plan is in effect. The purchase price of the stock
is 85 percent of the lower of its value on the grant date or the exercise
date price. 78 percent of eligible employees participated in the plan in
the last year 2003. Under the plan, the Company sold 4,618 shares to
employees in 2003. Compensation cost is recognized for the fair value of
the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions for 2003: dividend yield of 2.73
percent; and expected life of six months; expected volatility of 28.83
percent; and risk-free interest rates of 0.9 percent. The fair value of
those purchase rights granted in 2003 was $6.49 per share.
63
13. INCOME TAXES
The components of the provision for income taxes were as follows:
2003 2002 2001
----------- ----------- -----------
Income taxes currently payable $ 1,053,000 $ 1,045,000 $ 1,293,000
Deferred tax expense (benefit) 171,000 148,258 (185,000)
----------- ----------- -----------
Net provision $ 1,224,000 $ 1,193,258 $ 1,108,000
=========== =========== ===========
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:
2003 2002 2001
----------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------------- ---------------------- ----------------------
Tax provision at
statutory rate $ 1,796,000 34% $ 1,632,000 34% $ 1,254,000 34%
Increase (decrease) in taxes resulting from:
Tax-exempt
income (729,000) (14) (628,000) (13) (534,000) (15)
Tax-exempt
insurance proceeds - - (63,000) (1) - -
State taxes, net of
federal benefit 110,000 2 132,000 3 240,000 7
Non-deductible
Goodwill - - - - 108,000 3
Other items, net 47,000 1 120,258 2 40,000 1
Provision for
----------- --- ----------- --- ----------- ---
income taxes $ 1,224,000 23% $ 1,193,258 25% $ 1,108,000 30%
=========== === =========== === =========== ===
At December 31, 2003 and 2002 the components of the net deferred tax asset
were as follows:
Deferred tax assets:
Allowance for loan losses $ 925,000 $ 767,000
Pension premiums 539,000 460,000
Deferred compensation 423,000 392,000
Stock options granted 45,000 -
Additional minimum liability - 102,000
---------- ----------
Gross deferred tax assets 1,932,000 1,721,000
---------- ----------
Deferred tax liabilities:
Depreciation 257,000 193,000
Prepaid expenses 209,000 131,000
Net unrealized gains on securities 1,224,000 1,341,000
---------- ----------
Gross deferred tax liabilities 1,690,000 1,665,000
---------- ----------
Net deferred tax asset $ 242,000 $ 56,000
========== ==========
64
The net deferred tax asset at December 31, 2003 and 2002 is included in
"other assets" in the accompanying consolidated balance sheets.
In assessing the realizability of the deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, availability of operating loss carrybacks, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical taxable income, the opportunity for net
operating loss carrybacks, and projections for future taxable income over
the periods which deferred tax assets are deductible, management believes
it is more likely than not the Company will realize the benefits of these
deductible differences at December 31, 2003.
14. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with certain directors,
significant shareholders and their affiliates (related parties). The
aggregate amount of loans to such related parties at December 31, 2003 and
2002 was $6,229,749 and $4,933,174, respectively. During 2003 and 2002, new
loans to such related parties amounted to $3,212,789 and $886,090,
respectively, and repayments amounted to $1,916,215 and $1,881,860. Terms
of these loans have prevailing market pricing that would be offered to a
similar customer base.
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, 2003 and 2002 is as
follows:
2003 2002
----------- -----------
Commitments to extend credit $43,593,000 $40,094,000
Standby letters of credit 1,892,000 1,739,000
----------- -----------
Total $45,485,000 $41,833,000
=========== ===========
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the
customer. The Bank's credit policies and procedures for credit commitments
and financial guarantees are the same as those for extensions of credit
that are recorded on the consolidated balance sheets. Because these
instruments have fixed maturity dates, and because they may expire without
being drawn upon, they do not necessarily represent cash requirements to
the Bank. The Bank has not incurred any losses on its commitments during
the past three years.
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 consolidated
balance sheets as these derivatives are not considered material.
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 $371,000
in 2004, $268,000 in 2005, $227,000 in 2006, $224,000 in 2007, $203,000 in
2008, and $2,676,000 thereafter. The Bank has executed a letter of intent
to purchase a building in Hamburg, New York for approximately $1 million,
which will function as its administrative building beginning in mid-2004.
65
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.
17. SEGMENT INFORMATION
The Company is comprised of two primary business segments: banking and
insurance agency 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, 2003
and 2002.
2003
----------------------------------------------
BANKING INSURANCE AGENCY
ACTIVITIES ACTIVITIES TOTAL
Net interest income (expense) $ 10,870,296 $ (23,776) $ 10,846,520
Provision for credit losses 480,000 - 480,000
------------ ------------ ------------
Net interest income (expense) after
provision for credit losses 10,390,296 (23,776) 10,366,520
Non-interest income 3,927,238 - 3,927,238
Insurance commissions and fees - 3,495,077 3,495,077
Net gain on sales of assets 244,035 - 244,035
Non-interest expense 9,846,984 2,892,539 12,739,523
------------ ------------ ------------
Income before income taxes 4,714,585 578,762 5,293,347
Income tax expense 992,495 231,505 1,224,000
------------ ------------ ------------
Net Income $ 3,722,090 $ 347,257 $ 4,069,347
============ ============ ============
2002
----------------------------------------------
BANKING INSURANCE AGENCY
ACTIVITIES ACTIVITIES TOTAL
Net interest income (expense) $ 10,416,225 $ (20,532) $ 10,395,693
Provision for credit losses 420,000 - 420,000
------------ ------------ ------------
Net interest income (expense) after
provision for credit losses 9,996,225 (20,532) 9,975,693
Non-interest income 2,554,050 - 2,554,050
Insurance commissions and fees - 2,947,381 2,947,381
Net loss on sales of assets (27,690) - (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
------------ ------------ ------------
Net Income $ 3,129,933 $ 476,114 $ 3,606,047
============ ============ ============
66
2001
----------------------------------------------
BANKING INSURANCE AGENCY
ACTIVITIES ACTIVITIES TOTAL
Net interest income (expense) $ 9,138,090 $ (28,069) $ 9,110,021
Provision for credit losses 420,000 - 420,000
------------ ------------ ------------
Net interest income (expense) after
provision for credit losses 8,718,090 (28,069) 8,690,021
Non-interest income 1,948,733 - 1,948,733
Insurance commissions and fees - 2,412,900 2,412,900
Net loss on sales of assets 166,279 - 166,279
Non-interest expense 7,671,705 1,858,901 9,530,606
------------ ------------ ------------
Income before income taxes 3,161,397 525,930 3,687,327
Income tax expense 897,400 210,600 1,108,000
------------ ------------ ------------
Net Income $ 2,263,997 $ 315,330 $ 2,579,327
============ ============ ============
DECEMBER 31. DECEMBER 31.
IDENTIFIABLE ASSETS, NET 2003 2002
------------ ------------
Banking activities $329,622,614 $284,120,833
Insurance agency activities 5,054,322 4,590,027
------------ ------------
Consolidated Total Assets $334,676,936 $288,710,860
============ ============
18. 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 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
approximates 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.
67
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, 2003 and 2002. 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, 2003 and 2002
approximates the recorded amounts of the related fees, which are not
considered material.
At December 31, 2003 and 2002, the estimated fair values of the Company's
financial instruments were as follows:
2003 2002
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Financial assets:
Cash and cash
equivalents $ 8,508,705 $ 8,508,705 $ 19,758,727 $ 19,758,727
Interest bearing deposits
at other banks $ 98,333 $ 98,333 $ 877,230 $ 877,230
============ ============ ============ ============
Securities $120,556,200 $120,556,200 $106,671,914 $106,671,914
============ ============ ============ ============
Loans, net $185,528,148 $193,248,181 $148,997,646 $162,071,427
============ ============ ============ ============
Financial liabilities:
deposits $266,324,970 $268,138,508 $239,506,835 $240,759,785
============ ============ ============ ============
Other borrowed funds $ 25,387,573 $ 25,266,596 $ 8,110,964 $ 8,407,200
============ ============ ============ ============
19. 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 that follows) 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, 2003 and 2002, that the Bank met all capital adequacy
requirements to which it is subject.
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.
68
The Bank's actual capital amounts and ratios were as follows:
2003
---------------------------------------------------------------
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) $29,811,000 13.9% $17,182,000 8.0% $21,477,000 10.0%
=========== ==== =========== === =========== ====
Tier I Capital (to Risk
Weighted Assets) $27,283,000 12.7% $ 8,591,000 4.0% $12,886,000 6.0%
=========== ==== =========== === =========== ====
Tier I Capital
(to Average Assets) $27,283,000 8.3% $13,220,000 4.0% $16,526,000 5.0%
=========== ==== =========== === =========== ====
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%
=========== ==== =========== === =========== ====
69
20. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information
is as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------------
2003 2002
------------ ------------
ASSETS
Cash $ 124,682 $ 48,171
Investment in subsidiary 33,198,796 30,813,830
------------ ------------
Total assets $ 33,323,478 $ 30,862,001
============ ============
STOCKHOLDERS' EQUITY
Stockholders' Equity:
Common stock $ 1,229,303 $ 1,167,081
Capital surplus 19,346,093 16,578,868
Retained earnings 11,137,984 11,179,871
Accumulated other comprehensive
income, net of tax 1,917,894 1,942,295
Treasury Stock (307,796) (6,114)
------------ ------------
Total stockholders' equity $ 33,323,478 $ 30,862,001
============ ============
CONDENSED STATEMENTS OF INCOME
DECEMBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Dividends from subsidiary $ 1,534,447 $ 1,304,585 $ 1,068,834
Other revenue 363,365 163,213 185,000
Expenses (286,854) (151,821) (189,426)
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiary 1,610,958 1,315,977 1,064,408
Equity in undistributed earnings of subsidiary 2,458,389 2,290,070 1,514,919
----------- ----------- -----------
Net income $ 4,069,347 $ 3,606,047 $ 2,579,327
=========== =========== ===========
70
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED
2003 2002 2001
----------- ----------- -----------
Operating Activities:
Net income $ 4,069,347 $ 3,606,047 $ 2,579,327
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of subsidiary (2,458,389) (2,290,070) (1,514,919)
----------- ----------- -----------
Net cash provided by operating activities 1,610,958 1,315,977 1,064,408
Financing Activities - Cash dividends paid (1,534,447) (1,304,585) (1,068,834)
----------- ----------- -----------
Net decrease (increase) in cash 76,511 11,392 (4,426)
Cash, beginning 48,171 36,779 41,205
----------- ----------- -----------
Cash, ending $ 124,682 $ 48,171 $ 36,779
=========== =========== ===========
21. SUBSEQUENT EVENTS
Subsequent to the Balance Sheet date of December 31, 2003, M&W Agency, Inc,
completed its acquisition of the assets, and business of the Easy PA
Agency, Inc. and Ellwood Agency, Inc., retail property and casualty
insurance companies located in Hamburg, New York. The combined purchase
prices of $840,000 included $116,250 in cash and the Company issued 31,942
shares of common stock valued at $723,750. The assets purchased included
certain fixed assets and intangible assets. 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, 2003.
22. QUARTERLY FINANCIAL DATA - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
2003
Interest income $3,986 $3,645 $3,878 $3,821
Interest expense 1,023 1,126 1,200 1,135
------ ------ ------ ------
Net interest income 2,963 2,519 2,678 2,686
Net income 974 1,009 1,012 1,074
Earnings per share basic * 0.40 0.41 0.41 0.44
Earnings per share diluted * 0.40 0.41 0.41 0.44
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 basic* 0.35 0.39 0.38 0.36
Earnings per share diluted* 0.35 0.39 0.38 0.36
* All share and per share information is stated after giving effect to the 5
percent stock dividend paid in January 2003 and the 5 percent stock dividend
paid in December 2003.
*****
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's principal
executive officer and principal financial officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, the
Company's principal executive and principal financial officers concluded that
the Company's disclosure controls and procedures as of December 31, 2003 (the
end of the period covered by this Report) have been designed and functioning
effectively to provide reasonable assurance that the information required to be
disclosed by the Company in reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (Items 401, 405 and 406 of Regulation S-K)
relating to our directors and director nominees, executive officers, the Audit
Committee (including our "audit committee financial experts"), the Company's
code of ethics and compliance with Section 16(a) of the Exchange Act is in our
Proxy Statement related to the 2004 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item (Item 402 of Regulation S-K) relating to
executive and director compensation is in our Proxy Statement related to the
2004 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item (Items 201(d) and 403 of Regulation S-K)
relating to security ownership of certain beneficial owners and management, and
securities authorized for issuance under equity compensation plans is in our
Proxy Statement related to the 2004 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item (Item 404 of Regulation S-K) is included
under the caption "Certain Relationships and Related Transactions" in our Proxy
Statement related to the 2004 Annual Meeting of Shareholders and is incorporated
herein by reference.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is included under the caption "Independent
Auditors" in our Proxy Statement related to the 2004 Annual Meeting of
Shareholders and is incorporated herein by reference.
72
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report on Form 10-K:
1. Financial Statements: See "Index to Consolidated Financial Statements"
under Part II, Item 8 of this Report on Form 10-K.
2. All other schedules are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements
or Notes thereto included in this Report on Form 10-K.
3. Exhibits
Exhibit No Exhibit Description
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3a of the Company's Registration Statement
on Form S-4 (Registration No. 33-25321) as filed on No. November
7, 1988).
3.1.1 Certificate of Amendment to the Company's Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 of the
Company's Form 10-Q for the fiscal quarter ended March 31, 1997
as filed on May 14, 1997).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3b of
the Company's Registration Statement on Form S-4 (Registration
No. 33-25321) as filed on November 7, 1998).
3.2.1 Amended Bylaws, amended Section 204 (incorporated by reference to
Exhibit 3.3 of the Company's Form 10-Q for the fiscal quarter
ended June 30, 1996 as filed on August 5, 1996).
3.2.2 Amended Bylaws, amended Section 203 (incorporated by reference to
Exhibit 3.5 of the Company's Form 10-K for the fiscal year ended
December 31, 1997 as filed on March 30, 1998).
4.1 Evans Bancorp Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.7 of the Company's Registration Statement
on Form S-8 (Registration No. 333-106655 as filed on June 30,
2003).
4.2 Evans Bancorp, Inc. 1999 Stock Option and Long-Term Incentive
Plan (Filed herewith).
4.3 Evans Bancorp, Inc. Dividend Reinvestment Plan, as amended
(incorporated by reference to the Company's Registration
Statement on Form S-3 (Registration No. 333-34347 as filed on
August 27, 1997 and incorporated by reference).
4.4 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Company's Form 10-Q for the fiscal quarter
ended March 31, 1997 as filed on May 14, 1997.)
10.1* Employment Agreement between Evans National Bank and Richard M.
Craig (incorporated by reference to Exhibit 10.1 of the Company's
Form 10-K for the fiscal year ended December 31, 1997 as filed on
March 30, 1998).
10.2* Employment Agreement between Evans National Bank and James Tilley
(incorporated by reference to Exhibit 10.2 of the Company's Form
10-K for the fiscal year ended December 31, 1997 as filed on
March 30, 1998).
10.3* Employment Agreement between Evans National Bank and William R.
Glass (incorporated by reference to Exhibit 10.3 of the Company's
Form 10-K for the fiscal year ended December 31, 1997 as filed on
March 30, 1998).
10.4* Specimen 1984 Director Deferred Compensation Agreement
(incorporated by reference to Exhibit 10.5 of the Company's Form
10 (Registration No. 0-18539) as filed on April 30, 1990).
73
Exhibit No Exhibit Description
10.5* Specimen 1989 Director Deferred Compensation Agreement
(incorporated by reference to Exhibit 10.6 of the Company's Form
10 (Registration No. 0-18539) as filed on April 30, 1990).
10.6* Summary of Provisions of Director Deferred Compensation
Agreements (incorporated by reference to Exhibit 10.7 of the
Company's Form 10 (Registration No. 0-18539) as filed on April
30, 1990).
10.7* Employment Agreement between Evans National Bank and Robert
Miller (incorporated by reference to Exhibit 10.11 of the
Company's Form 10-K for the fiscal year ended December 31, 2000
as filed on March 29, 2001).
10.8 Investment Service Agreement between O'Keefe Shaw & Co., Inc. and
ENB Associates Inc. (incorporated by reference to Exhibit 10.1 of
the Company's Form 10-Q for the fiscal quarter ended March 31,
2000 as filed on May 8, 2000).
10.9* Employment Agreement between Evans National Bank and Mark
DeBacker (incorporated by reference to Exhibit 10.15 of the
Company's Form 10-Q for the fiscal quarter ended June 30, 2001 as
filed on August 1, 2001).
10.10* Evans National Bank Executive Life Insurance Plan (filed
herewith).
10.11* Evans National Bank Supplemental Executive Retirement Plan (filed
herewith).
10.12* Evans National Bank Deferred Compensation Plan for Officers and
Directors (filed herewith).
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit on the Company's 10-K for the fiscal year ended on
December 31, 1997 as filed on March 30, 1998).
23.1 Independent Auditors' Consent from KPMG LLP (filed herewith).
23.2 Independent Auditors' Consent from Deloitte & Touche LLP (filed
herewith).
31.1 Certification of James Tilley pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of The
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Mark DeBacker pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of The
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of James Tilley pursuant to 18 USC Section 1350
Chapter 63 of Title 18, United States Code, as adopted pursuant
to Section 906 of The Sarbanes -Oxley Act of 2002 (filed
herewith).
32.2 Certification of Mark DeBacker pursuant to 18 USC Section 1350
Chapter 63 of Title 18, United States Code, as adopted pursuant
to Section 906 of The Sarbanes -Oxley Act of 2002 (filed
herewith).
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on October 22, 2003 for purposes
of reporting under Item 5 the Company's stock repurchase plan and under Item 12
the Company's third quarter earnings for the quarter ended September 30, 2003.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(2d) of the Securities Exchange
Act of 1934, EVANS BANCORP, INC. has duly caused this Annual Report to be signed
on its behalf by the undersigned thereunto duly authorized:
EVANS BANCORP, INC.
By:/s/ James Tilley
----------------------------------
James Tilley, President and CEO
Date: March 18, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ James Tilley President and CEO/Director March 18, 2004
- ----------------------------
James Tilley
/s/ Mark DeBacker Treasurer March 18, 2004
- ----------------------------
Mark DeBacker
/s/ Phillip Brothman Chairman of the Board/ March 18, 2004
- ----------------------------
Phillip Brothman Director
/s/ Thomas H. Waring Jr. Vice Chairman March 18, 2004
- ----------------------------
Thomas H. Waring, Jr. of the Board/Director
/s/ James E. Biddle, Jr. Secretary/Director March 18, 2004
- ----------------------------
James E. Biddle, Jr
/s/LaVerne G. Hall Director March 18, 2004
- ----------------------------
LaVerne G. Hall
/s/ David M. Taylor Director March 18, 2004
- ----------------------------
David M. Taylor
/s/ Robert W. Allen Director March 18, 2004
- ----------------------------
Robert W. Allen
/s/ William F. Barrett Director March 18, 2004
- ----------------------------
William F. Barrett
/s/ Robert G. Miller, Jr. Director March 18, 2004
- ----------------------------
Robert G. Miller, Jr.
/s/ John R. O'Brien Director March 18, 2004
- ----------------------------
John R. O'Brien
/s/ Nancy W. Ware Director March 18, 2004
- ----------------------------
Nancy W. Ware
75