1
- 38 -
EXHIBIT 13.1
2
- 39 -
CONTENTS
PROFILE
........... 1 ............
PRESIDENT'S MESSAGE
........... 2 ............
SELECTED
FINANCIAL INFORMATION
........... 4 ............
MANAGEMENT
DISCUSSION AND ANALYSIS
........... 5 ............
INDEPENDENT
AUDITOR'S REPORT
........... 10 ............
CONSOLIDATED
FINANCIAL STATEMENTS
........... 11 ............
CORPORATE INFORMATION
........... 28 ............
3
- 40 -
PROFILE
EVANS BANCORP, INC.
is a bank holding company headquartered in Angola, New York and conducts its
business through its wholly-owned subsidiary, Evans National Bank. The Bank is
a FDIC full-service commercial bank and as of December 31, 1996 had total
assets of $140,898,057, total deposits of $123,461,379 and total stockholders'
equity of $15,510,083. The Bank's primary market area is located in Western
New York State and specifically in southern Erie County, northern Chautauqua
County and northwestern Cattaraugus County.
The principal business of the Bank is commercial banking and consists of,
among other things, attracting deposits from the general public and using
these funds to extend credit and to invest in securities. The Bank offers a
variety of loan products to its customers including commercial loans,
commercial and residential mortgage loans, and consumer loans. In addition,
the Bank offers deposit products to include checking and NOW accounts,
passbook and statement savings, and certificates of deposits.
1
4
- 41 -
PRESIDENT'S MESSAGE
[Graphic "The Key Factor in the Growth of Assets was the Significant increase
in Loans."]
I am pleased to announce that 1996 was a year of record growth at
Evans National Bank. Total assets increased by 12.44%, to $140.9 million from
$125.3 million, the largest one-year increase in the history of the Bank. I
believe that this unprecedented growth in the balance sheet sets the framework
for future improvement in other key performance measures such as net income,
return on assets and return on equity. In order to sustain our philosophy of
controlled growth and dedication to customer service, the Bank in 1996
undertook several strategic initiatives, which included significant
investments in technology and in the branch system. These strategic
initiatives, among others, will enable Evans National Bank to continue to
provide quality products and quality services to our customers.
In order to achieve our long term objectives of growth, continued dedication
to our customers, the community, and our shareholders, it is necessary to
incur and absorb the costs that are associated with such a plan. As a result,
our current year performance measures were down slightly from those of a year
ago. Net income for the year was $1.61 million, down slightly from prior year
net income of $1.66 million, and accordingly, net income per share was down as
well, from $4.90 in 1995 to $4.75 in 1996. Return on average assets was 1.20%
in 1996 compared to 1.34% in 1995, while return on average equity was 10.75%
in 1996 compared to 11.59% in 1995. However, given the various initiatives
undertaken in 1996, as well as their associated costs, our performance was
above our projections for 1996 due to a large increase in the loan portfolio,
related interest income and effective cost management strategies.
The key factor in the growth of assets was the significant increase in loans.
Loans increased from $75.5 million to $92.1 million. This increase of $16.6
million represents growth of 22% over the prior year. Total deposits increased
to $123.5 million from $109.0 million, an increase of $14.5 million, or 13%.
The majority of the growth in deposits was comprised of higher yielding
certificates of deposit, with a slight increase in our core deposit base.
As previously mentioned, the Bank concluded various strategic initiatives
during 1996, which had both balance sheet and income statement implications.
The Evans Office was opened in May of 1996, allowing for increased customer
service capabilities. The newly renovated Angola Office subsequently became
our Operations Center and the site of the majority of our technological
investments. During 1996, we replaced our check processing equipment with a
modern item processing system which will include check imaging. Early in 1997,
we plan to replace our mainframe computer and
2
5
- 42 -
upgrade to a Unix-based operating system. In conjunction with this effort, a
state-of-the-art optical disk archival system will be installed providing a
highly efficient record storage and retrieval network.
During the second quarter of 1997, we plan to complete the final installation
phase of our new check processing technology, at which time our customers will
begin receiving laser-printed images of their cancelled checks. This
improvement will provide our customers with easier record keeping and check
storage capabilities, while allowing the Bank to reduce paper work, postage
costs, and improve our record storage and research methods. Although this
strategy represents a significant investment for the Bank, the projected
savings will enable the Bank to recoup its investment in approximately three
years, while improving our service and communication to customers. In
addition, the bank is investigating a new service allowing customers to access
account information through automated voice response or by a personal
computer.
Although expansion of operating and retail delivery capacity has increased our
fixed cost structure in the short term, we feel that we have implemented a
strategy to enhance customer service and commitment to the community, while
simultaneously increasing shareholder value.
In February 1996, the Board of Directors declared a stock dividend of 7.14%,
and in October 1996, paid a sixty-two cent per share cash dividend. A special
cash dividend of fifty cents per share was also declared in November 1996,
payable February 1, 1997. At December 31, 1996, shares of stock were selling
at $136 per share, which represents an increase of $26 per share, or 23.6%
over the December 31, 1995 price of $110 per share. The Board of Directors has
recommended a five for one stock split, which will be submitted to the
shareholders for approval at the annual meeting.
Evans National Bank has recently appointed American Stock Transfer and Trust
Company as its stock transfer agent and registrar. American Stock Transfer and
Trust Company will assume the responsibility for maintaining shareholder
records, processing, dividend distributions and similar functions. As the
number of shareholders of Evans Bancorp Inc. has increased over the past
years, the work required to maintain our shareholder records has also
increased. We believe this change will provide better service to you, our
shareholders, at less cost to the Company. We will be evaluating a dividend
reinvestment program through our transfer agent and will report the status to
you at our annual meeting.
During 1996, Evans National Bank continued its long-standing commitment to the
community by participating in various educational, charitable, and community
service functions. Additionally, employees and directors continue to be
involved in numerous organizations in an effort to assist the Bank in
identifying the needs of the community.
During the year, we recognized the following personnel for significant years
of service: Susan Herold and Elizabeth Mac with 20 years of service, Ramon
Gallardo and Mary Nytz with 10 years of service, and Julie Clark and Delana
Gage with 5 years of service. Additionally, the following promotions were
appointed by the Board of Directors: Mary Doeing, Thomas McDonnell, and
Jeffrey White to Vice President, and Michelle Bress, Mary Jane Gonzalez and
Howard Martin to Banking Officer.
In conclusion, I would like to thank our employees, the Board of Directors,
our shareholders, and customers for their support during 1996. We look forward
to the future with its challenges and opportunities.
/s/ Richard M. Craig
Richard M. Craig / President and Chief Executive Officer
3
6
- 43 -
SELECTED FINANCIAL INFORMATION
For the year ended December 31 1996 1995 1994 1993 1992
RESULTS OF OPERATIONS
- ---------------------
Interest Income $9,799,815 $9,226,500 $8,206,596 $7,989,392 $8,282,555
Interest Expense 3,912,761 3,418,782 2,747,297 2,680,003 3,366,960
Net Interest Income 5,887,054 5,807,718 5,459,299 5,309,389 4,915,595
Non-Interest Income 930,986 763,054 785,551 672,015 588,206
Non-Interest Expense 4,555,398 4,228,922 3,981,801 3,581,929 3,395,906
Net Income 1,614,642 1,664,783 1,617,049 1,612,392 1,432,489
BALANCE SHEET DATA
- ------------------
Total Assets $140,898,057 $125,308,204 $114,565,971 $112,465,797 $108,158,334
Loans - Net 92,087,902 75,468,504 71,998,929 67,754,002 59,466,817
Allowance for Loan Losses 546,954 557,961 628,957 612,921 478,775
Securities 36,054,324 38,954,494 32,341,350 33,371,944 38,013,829
Total Deposits 123,461,379 109,020,551 100,532,031 99,860,851 96,859,418
Stockholders' Equity 15,510,083 14,485,510 12,723,940 11,489,412 10,018,622
PER SHARE DATA
- --------------
Net Income $4.75 $4.90 $4.76 $4.75 $4.22
Cash Dividend $0.62 $0.75 $0.50 $0.45 $0.40
Stock Dividend 7.14% 7.14% 7.14% 7.14% 7.14%
Book Value at Year End $45.65 $45.63 $42.90 $41.45 $38.68
Market Value $136.00 $110.00 $70.00 $65.50 $50.00
Shares Outstanding 339,790 317,481 296,613 277,170 258,992
Weighted Average Shares 339,790 339,790 339,790 339,790 339,790
(Retroactively adjusted for stock dividends)
4
7
- 44 -
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie and
Chautauqua Counties of Western New York. The Bank serves it market through six
banking offices located in Angola, Derby, Evans, Forestville, Hamburg and
North Boston, 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.
The following discussion of financial conditions and results of operations of
the Company and the Bank should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Net income in 1996 of $1,614,642 resulted in earnings per share of $4.75,
which compares with net income of $1,664,783, or $4.90 per share, in 1995 and
$1,617,049, or $4.76 per share, in 1994. The decrease in net income of 3% in
1996 from 1995 reflects the impact on annual earnings of the $2.2 million
expansion plan implemented over the last two years. Non-interest expense
increased 7.7% in 1996 over 1995, largely due to increases in salary expense,
occupancy expense and advertising expense. These costs have risen as a result
of the opening of the newly-constructed branch office in Evans, NY in May,
1996, the operation of a branch office in Hamburg, NY, which opened for
business in October, 1995, and the recently completed renovation of the Angola
office in Angola, NY, which currently serves as the Bank's operations center,
in addition to housing the Bank's loan department and a small retail facility.
Net interest income, the difference between interest income and fees on
earning assets, such as loans and securities, and interest expense on
deposits, provides the basis for the Bank's results of operations. These
results are also affected by non-interest income, the provision for credit
losses, non-interest expense, and income taxes.
NET INCOME
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 1.4%
from 1995 to 1996, compared to an increase of 6.4% from 1994 to 1995. Although
average earning assets increased 7.7% in 1996, the tax-equivalent yield on
those assets was 8.27%, compared to 8.28% in 1995. The increase in income on
earning assets was largely offset by a volume increase in average
interest-bearing liabilities of 8.22% and an increase in the average cost of
funds from 3.77% in 1995 to 3.99% in 1996. In 1996, the Bank's net interest
margin was 4.64% compared to 4.99% in 1995.
The increase of 6.4% in net interest income in 1995 over 1994 was the combined
result of a volume increase of 3.2% in average earning assets in 1995 and an
increase in the tax-equivalent yield on those assets to 8.28% from 7.68% in
1994. This increase was offset in part by a volume increase in
interest-bearing liabilities of 1.6% and an increase in the average cost of
funds from 3.08% in 1994 to 3.77% in 1995. The net interest margin increased
from 4.60% in 1994 to 4.99% in 1995.
Rates remained fairly stable throughout most of 1996. The federal funds rate
and the discount rate were reduced a quarter of a percent at the January 31,
1996 meeting of the Federal Reserve Board. Despite indications of strong
economic growth, the Federal Reserve Bank failed to raise rates at later
meetings. This was a marked contrast to the
NET INTEREST INCOME
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
5
8
- 45 -
volatility experienced over the period from February 1994 through February
1995 when the Federal Reserve Board raised short-term rates seven times in its
efforts to control inflation.
The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. In 1995, the Bank established an
Asset/ Liability Management Committee ("ALCO") for the purpose of evaluating
the Bank's short-range and long-range liquidity position and the potential
impact on capital and earnings as a result of sudden changes in interest
rates. The Bank adopted an asset/liability policy which specifies minimum
limits for liquidity and capital ratios. Maximum limits have been set for the
negative impact acceptable on net interest income and the market value of
assets as a result of a shift in interest rates. The asset/liability policy
also includes guidelines for investment activities and funds management. The
ALCO meets monthly to review the Bank's status and formulate its strategy
based on current economic conditions, interest rate forecasts, loan demand,
deposit volatility, and the Bank's earning objectives.
PROVISION FOR CREDIT LOSSES
Credit losses represent the amount charged against earnings to establish a
reserve of allowance sufficient to absorb expected loan losses based on
management's evaluation of the loan portfolio. In 1996, $60,000 was charged
against earnings for credit losses. In 1995, the Bank updated the methodology
it uses to calculate the reserve amount for credit losses. After considering
loan concentrations, charge-off history, delinquent loan percentages and
general economic conditions, the Bank reversed $86,933 of its provision for
credit losses in 1995. In 1994, $16,000 was charged against earnings for
credit losses. The following table summarizes the Bank's actual credit losses,
total of non-performing loans and total allowance for credit losses for 1996,
1995 and 1994, both in dollars and as a percentage of total loans outstanding:
NON-PERFORMING LOANS TO TOTAL LOANS
[PERCENTAGE]
'92 '93 '94 '95 '96
? ? ? ? ?
1996 1995 1994
Actual Credit
Losses $ 77,000 0.08% $ 11,000 0.014% $ 13,000 0.020%
Non-Performing
Loans $230,000 0.20% $312,000 0.470% $854,000 0.700%
Allowance for
Credit Losses $546,954 0.59% $557,961 0.730% $628,957 0.870%
NON-INTEREST INCOME
Total non-interest income increased approximately $168,000 in 1996 from 1995
compared with a decrease of approximately $22,000 in 1995 from 1994. In 1996,
service charge income of $668,000 increased approximately $106,000 over 1995,
and approximately $167,000 over 1994. The additional income reflects the
impact of increases in service charges implemented in September of 1995 as
well as increased account activity and deposit volume.
Other non-interest income increased nearly $106,000 in 1996. This was
attributable, in part, to an increase of $45,000 in the cash surrender value
of life insurance policies carried on certain bank officers. Other
contributing factors included an overall increase in loan-related income as a
result of a high level of loan activity in 1996, and the receipt of $15,000 in
state and federal tax refunds for the 1994 tax year. Non-interest income had
declined approximately $84,000 from 1994 to 1995. In 1994, the Bank received a
life insurance payment of $97,128 that resulted in an unusually high level of
non-interest income that particular year.
Gains realized on the sale of assets decreased $44,000 in 1996 from 1995. In
1996, the Bank experienced a loss of $61,000 on a residual bond that was
called for redemption in full. This loss was offset by net gains on planned
sales of securities of $38,000, premiums on sales of student loans to the
Student Loan Marketing Association ("SLMA") of $28,000 and premiums of $6,000
received on sales of mortgages to the Federal National Mortgage Association
("FNMA"). The Bank became affiliated with SLMA in 1995, and the initial sales
volume in student loans resulted in $48,000 in premiums received in 1995. The
Bank did not anticipate that the volume of future sales would repeat 1995
levels. The Bank became a member of the Federal National Mortgage Association
in late 1995, realizing only about $1,000 in premiums that year.
NON-INTEREST EXPENSE
In 1996, the ratio of non-interest expense to average assets was 3.37%
compared to 3.40% in 1995 and 3.34% in 1994. The non-interest expense category
includes
6
9
- 46 -
salaries, occupancy expenses, repairs and maintenance, advertising and
professional services. All of these categories have been affected by the Town
of Evans office expansion and the Angola office renovation. Additional
staffing requirements have contributed to increases in salary and benefit
expenses of 8.9% from 1995 to 1996 and 13.5% from 1994 to 1995. Another factor
was the funding of a supplemental employee retirement plan for certain bank
officers. Occupancy expenses have grown due to the operation of the additional
branch locations, costs associated with the tenant-occupied property adjacent
to the Derby, NY office, and additional depreciation costs resulting from the
purchases of additional automated teller machines (ATMs) and newly upgraded
check processing equipment. An increase of 36% in advertising expense in 1996
over 1995 was due to the expansion of the Bank's trade area as well as the
continuing promotion of the home equity product and the marketing of a
15-month certificate of deposit special in the last quarter of 1996.
In 1996, the Bank's FDIC insurance assessment dropped to $2,000 from $120,231
in 1995 and $232,840 in 1994. The reductions over the past two years occurred
when the FDIC decreased premiums as a result of the full funding of the Bank
Insurance Fund. In 1995, the premium was reduced from $.23 per $100 of
deposits to $.04 per $100 of deposits. In 1996, the rate was reduced to zero
with a minimum charge of $500 per quarter for well capitalized banks. The Bank
was assessed at the minimum rate, as it remains well above the regulatory
minimums for the key measures of capital adequacies as disclosed in note 11 of
the financial statements.
STOCKHOLDERS' EQUITY
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
TAXES
The provision for taxes in 1996 of $588,000 reflects an effective tax rate of
27%. This compares to $764,000 and 32% in 1995 and $630,000 and 28% in 1994.
In 1996, there was a change in the composition of the deferred tax
calculation, resulting in an overall decrease in the effective tax rate. In
addition to income on tax-exempt securities, other non-taxable income items
included tax refunds and income resulting from the increase in the cash
surrender value of life insurance policies. Life insurance proceeds received
in 1994 were also exempt from taxation, resulting in a lower effective tax
rate in that year.
FINANCIAL CONDITION
The Bank had total assets of $140.9 million at December 31, 1996, increasing
$15.6 million or 12.4% over December 31, 1995. Loan balances increased $16.6
million or 22% in 1996 over 1995. This loan growth was funded by an increase
in deposits of 13.3% and by a reduction in the securities portfolio of 7.5%.
Capital increased 7.1%, basically due to the retention of earnings.
LOANS
Loans comprised 66% of the Bank's total average earning assets in 1996. The
increase of 22% in actual year-end balances in 1996 over 1995 compares to an
increase of 4.8% in 1995 over 1994. Loan demand was soft throughout 1994 and
the first three quarters of 1995. The Federal Reserve Board lowered rates in
July and December of 1995, and loan activity increased as a result. This
increase in loan activity was bolstered by a 25 basis point decrease in rates
on January 31, 1996. The Bank continues to focus its lending on commercial and
residential mortgages, small commercial loans and home equity loans.
Commercial mortgages make up the largest segment of the portfolio at 42.0%.
Residential mortgages comprise 27.8% of the portfolio and commercial loans
total 11.2%. Home equity loans make up 13.9% of total loans.
The Bank currently retains the servicing rights to $1.7 million in long-term
mortgages sold to the Federal National Mortgage Association ("FNMA"), since
becoming a member in 1995. This arrangement allows the Bank to offer long-term
mortgages without exposure to the associated risks, while retaining customer
account relationships.
The Bank continues its contractual arrangement with the Student Loan Marketing
Association ("SLMA") whereby SLMA services the Bank's loans to students who
are still in school and subsequently purchases those loans when the student
goes into repayment. As a result of this arrange-
NET LOANS
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
7
10
- 47 -
ment, student loan balances decreased 13.4% in 1996 from 1995 levels and
decreased 60% in 1995 from 1994 levels.
At December 31, 1996, the Bank had a loan-to-deposit ratio of 74.6%, and
estimated its unloaned core deposits at $9.5 million. The Bank monitors the
level of its unloaned core deposits to ensure that it is sufficient to fund
anticipated loan growth as it expands its market area and develops new
products.
SECURITIES
Securities and federal funds sold made up the remaining 34% of the Bank's
earning assets at December 31, 1996. Since deposit growth was insufficient to
fund the high level of loan demand experienced in 1996, securities that
matured or were sold were utilized as an additional funding source, thereby
reducing investment balances by $2.9 million from 1995. In 1995, when deposit
growth exceeded loan growth, $6 million in excess funds had been directed into
the securities portfolio. The portfolio remains concentrated in US government
and government agency securities and tax-exempt municipal bonds of varied
maturity.
In 1994, the Bank adopted Financial Accounting Standard No. 115 which outlines
accounting and reporting procedures for investment securities. At that time,
all securities in the Bank's portfolio were designated as either "held to
maturity" or "available for sale", as were all subsequent purchases.
Securities which the Bank designates as held to maturity are stated on the
balance sheet at amortized cost, and those designated as available for sale
are reported at fair market value. The unrealized gains and losses on
available for sale securities are recorded, net of taxes, as a separate
component of shareholders' equity. Transferring a security from one category
to another results in certain accounting consequences. In 1995, the Financial
Accounting Standards Board allowed a one-time reclassification of securities
without penalty. As a result of this one-time window of opportunity, the Bank
reclassified the majority of its bonds in the held to maturity category as
available for sale. This reclassification was made after careful consideration
of the Bank's anticipated liquidity needs and the present and future impact of
such a transfer on the Bank's earnings and capital.
SECURITIES
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
DEPOSITS
Total deposits increased $14.4 million in 1996 over 1995. Slight decreases
occurred in NOW and regular savings balances, while significant increases
occurred in demand deposit and time account balances. The actual 1996 year-end
balances of $20.1 million in demand deposits reflect an increase of 13.3% over
1995. Much of this growth can be attributed to the Bank's new presence in the
Hamburg, NY market. In addition to the expansion of the Bank's trade area,
municipal deposit activity contributed to growth of $7.7 million or 119% in
time accounts of $100,000 or more. Other time deposits increased $5.7 million
or 16.2% in 1996 over 1995. Most of this increase occurred in the fourth
quarter when the Bank promoted a special 15 month certificate of deposit.
The Bank continues to evaluate ways to improve its existing deposit products
to meet customer needs, as well as to develop new products which will keep the
Bank competitive in the marketplace.
TOTAL DEPOSITS
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
LIQUIDITY
The Bank seeks to manage its liquidity so that it is able to meet day to day
loan demand and deposit fluctuations, while attempting to maximize the amount
of net interest income on earning assets. Traditionally, the Bank has utilized
its federal funds balances and cash flows from the investment portfolio to
fulfill its liquidity requirements. In 1996, overnight federal funds sold
balances averaged $3.8 million. The maturities of the Bank's investments are
laddered in such a way as to provide runoff at times that a liquidity need may
arise. At December 31, 1996, approximately 9.1% of the Bank's securities had
contractual maturities of one year or less and 42.0% had maturity dates of
five years or less. At December 31, 1996, the Bank had net short-term
liquidity of $8.1 million compared to $8.6 million at December 31, 1995.
Available assets of $38.3 million less public and purchased liabilities
8
11
- 48 -
of $18.8 million resulted in a long-term liquidity ratio of 204%, compared to
298% at December 31, 1995. Although the Bank believes it has sufficient
resources in its securities portfolio to meet its short-term and long-term
liquidity needs, the Bank also has the option to borrow $1 million each from
two different correspondent banks.
The Bank is a member and shareholder of the Federal Home Loan Bank ("FHLB"),
which will make cash advances of various terms at competitive rates to its
members. Advances of up to $10 million can be drawn on the FHLB, via the
Overnight Line of Credit Agreement, and another $5 million could be borrowed
based on the collateral provided by the Bank's FHLB capital stock holdings.
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 amount of US government and US government agency
securities and New York State municipal bonds that can be pledged as
collateral for these deposits.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. The
Bank's ALCO analyzes the gap position on a monthly basis to determine the
Bank's exposure to interest rate risk. The gap position is the difference
between the total of the Bank's rate sensitive assets and rate sensitive
liabilities maturing or repricing during a given time frame. A "positive" gap
results when more assets than liabilities reprice and a "negative" gap results
when more liabilities than assets reprice in a given time period. Because
assets historically reprice faster than liabilities, a slightly negative gap
position is considered preferable. At December 31, 1996, the Bank was in a
negative gap position, with $9.2 million more in rate sensitive liabilities
repricing over the next year than in rate sensitive assets. The Bank's asset
liability limit, as defined in its asset liability policy, is a difference of
+/-15% of the Bank's total assets which amounted to +/-$21.1 million at
December 31, 1996. Therefore, the Bank's negative gap position at December 31,
1996 was well within its own policy limit. The gap ratio (rate sensitive
assets/rate sensitive liabilities) at that date was 83%.
MARKET RISK
When rates rise or fall, the market value of the Bank's assets and liabilities
will increase or decrease. As 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 accepted. 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 Financial Accounting
Standard No. 115. A limitation of a negative ten percent of total capital
before FAS 115 (after tax) has been set forth in the asset liability policy as
the maximum impact to equity that would be acceptable. At year end, the impact
to equity as a result of marking available for sale securities to market was
an unrealized loss of $23,000. On a quarterly basis, the available for sale
portfolio is shocked for immediate increases of 100 and 200 basis points. At
December 31, 1996, the Bank determined that it would take an immediate
increase in excess of 200 basis points to eliminate the current capital
cushion. The Asset/Liability Committee also reviews the Bank's capital ratios
on a quarterly basis. Unrealized gains or losses on available for sale
securities are not included in the calculation of these ratios.
CAPITAL EXPENDITURES
In order to keep pace with check and statement processing volume, and to
provide the continual high level of customer service, the Bank plans to
purchase statement imaging equipment and upgraded mainframe computer operating
and archiving systems in 1997. The cost of the statement imaging equipment is
estimated at $200,000 and the mainframe upgrades will total approximately
$150,000. The Bank believes that it has a sufficiently strong capital base to
support these capital expenditures with current assets and retained earnings.
IMPACT OF INFLATION AND CHANGING PRICES
There will always be economic events, such as 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
the repricing frequency of its interest-sensitive assets and liabilities to
avoid a significant concentration that could result in a material negative
impact on earnings.
9
12
- 49 -
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
EVANS BANCORP, INC.
We have audited the accompanying consolidated balance sheets of
Evans Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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 generally accepted
auditing standards. 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 financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1996 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Buffalo, New York
January 24, 1997
10
13
- 50 -
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995 1996 1995
ASSETS
- ------
Cash and due from banks $ 5,662,231 $ 5,693,255
Interest bearing deposits with banks 0 250,000
Federal funds sold 1,450,000 500,000
-------------- --------------
Cash and cash equivalents 7,112,231 6,443,255
Securities:
Available for sale, at fair value 30,201,120 32,813,099
Held to maturity, at amortized cost 5,853,204 6,141,395
Loans, net of allowance for loan losses of $546,954 and $557,961, respectively 92,087,902 75,468,504
Properties and equipment, net 3,748,663 2,614,399
Other assets 1,894,937 1,827,552
-------------- --------------
TOTAL ASSETS $140,898,057 $125,308,204
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Demand $ 20,149,152 $ 17,790,113
NOW and money market 6,437,613 6,777,826
Regular savings 42,136,290 43,033,338
Time ($100,000 and over) 14,096,821 6,432,749
Other time 40,641,503 34,986,525
-------------- --------------
Total Deposits 123,461,379 109,020,551
Other liabilities 1,926,595 1,802,143
-------------- --------------
Total Liabilities 125,387,974 110,822,694
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $2.50 par value, 1,000,000 shares authorized;
339,790 and 317,481 shares issued and outstanding, respectively 849,475 793,703
Capital surplus 10,990,720 8,592,502
Retained earnings 3,692,659 4,953,075
Unrealized (loss) gain on available for sale securities, net
of deferred taxes of $11,000 and $109,000, respectively (22,771) 146,230
-------------- --------------
Total 15,510,083 14,485,510
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $140,898,057 $125,308,204
============== ==============
See notes to consolidated financial statements.
11
14
- 51 -
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994
INTEREST INCOME
- ---------------
Loans $7,381,871 $6,760,511 $6,061,650
Federal funds sold 201,831 276,698 132,087
Securities:
Taxable 1,427,890 1,381,740 1,189,244
Non-taxable 765,123 761,741 743,985
Deposits with banks 23,100 45,810 79,630
------------- ------------- -------------
TOTAL INTEREST INCOME 9,799,815 9,226,500 8,206,596
INTEREST EXPENSE ON DEPOSITS AND BORROWINGS 3,912,761 3,418,782 2,747,297
------------- ------------- -------------
NET INTEREST INCOME 5,887,054 5,807,718 5,459,299
PROVISION FOR LOAN LOSSES 60,000 (86,933) 16,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,827,054 5,894,651 5,443,299
NON-INTEREST INCOME
- -------------------
Service charges 667,839 561,525 501,025
Gains on sales of assets 11,103 55,477 8,422
Other 252,044 146,052 276,104
------------- ------------- -------------
TOTAL NON-INTEREST INCOME 930,986 763,054 785,551
NON-INTEREST EXPENSE
- --------------------
Salaries and employee benefits 2,602,752 2,389,838 2,105,828
Occupancy 637,007 504,648 474,724
Supplies 118,740 109,226 96,351
Repairs and maintenance 147,383 132,620 107,030
Advertising and public relations 131,753 97,116 74,712
Professional services 212,601 224,269 204,431
FDIC assessments 2,000 120,231 232,840
Other 703,162 650,974 685,885
------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE 4,555,398 4,228,922 3,981,801
------------- ------------- -------------
Income before provision for income taxes 2,202,642 2,428,783 2,247,049
PROVISION FOR INCOME TAXES 588,000 764,000 630,000
------------- ------------- -------------
NET INCOME $1,614,642 $1,664,783 $1,617,049
============= ============= =============
Net income per common share $ 4.75 $ 4.90 $ 4.76
------------- ------------- -------------
Weighted average number of common shares 339,790 339,790 339,790
============= ============= =============
See notes to consolidated financial statements.
12
15
- 52 -
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, UNREALIZED
1996, 1995 and 1994 COMMON STOCK (LOSS) GAIN
- ------------------------ ------------------------ ON AVAILABLE
NO. OF CAPITAL RETAINED FOR SALE
SHARES AMOUNT SURPLUS EARNINGS SECURITIES, NET TOTAL
------- --------- ----------- ---------- --------------- -------
Balance, January 1, 1994 277,170 $692,925 $ 5,959,003 $4,837,484 $ 0 $11,489,412
1994 Net Income 1,617,049 1,617,049
Stock dividends, with
fractional shares
redeemed for cash 19,443 48,608 1,224,909 (1,296,760) (23,243)
Cash dividends ($.50
per common share) (148,306) (148,306)
Unrealized gain on
available for sale
securities upon
adoption of SFAS
No. 115, net of
deferred taxes of
$332,000 440,694 440,694
Change in unrealized
(loss) gain on
available for sale
securities, net of
deferred taxes of
$489,000 (651,666) (651,666)
----------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1994 296,613 741,533 7,183,912 5,009,467 (210,972) 12,723,940
1995 Net Income 1,664,783 1,664,783
Stock dividends, with
fractional shares
redeemed for cash 20,868 52,170 1,408,590 (1,483,065) (22,305)
Cash dividends ($.75
per common share) (238,110) (238,110)
Change in unrealized
(loss) gain on
available for sale
securities, net of
deferred taxes of
$266,000 357,202 357,202
----------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1995 317,481 793,703 8,592,502 4,953,075 146,230 14,485,510
1996 Net Income 1,614,642 1,614,642
Stock dividends, with
fractional shares
redeemed for cash 22,309 55,772 2,398,218 (2,494,493) (40,503)
Cash dividends ($1.12
per common share) (380,565) (380,565)
Change in unrealized
(loss) gain on
available for sale
securities, net of
deferred taxes of
$120,000 (169,001) (169,001)
----------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1996 339,790 $849,475 $10,990,720 $3,692,659 $(22,771) $15,510,083
=========== =========== ============ =========== =========== ===========
See notes to consolidated financial statements.
13
16
- 53 -
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994
OPERATING ACTIVITIES
- ---------------------
Interest received $10,047,637 $9,172,841 $8,308,463
Fees received 1,025,437 856,806 803,611
Interest paid (3,847,407) (3,261,153) (2,718,104)
Cash paid to employees and suppliers (4,443,431) (4,207,102) (3,668,794)
Income taxes paid (743,444) (790,017) (549,602)
------------ ----------- -----------
Net cash provided by operating activities 2,038,792 1,771,375 2,175,574
INVESTING ACTIVITIES
- --------------------
Available for sale securities:
Purchases (16,562,178) (15,256,737) (2,157,309)
Proceeds from sales 14,414,736 4,019,578 7,271,211
Proceeds from maturities 4,597,881 3,090,254 1,659,330
Held to maturity securities:
Purchases (1,177,002) (4,650,173) (7,837,501)
Proceeds from maturities 1,314,873 7,154,605 1,794,335
Additions to properties and equipment (1,482,935) (1,344,741) (380,790)
Increase in loans, net of repayments (19,258,136) (7,671,007) (4,326,106)
Proceeds from sales of loans 2,593,290 4,179,236 0
------------ ----------- -----------
Net cash used in investing activities (15,559,471) (10,478,985) (3,976,830)
FINANCING ACTIVITIES
- --------------------
Increase in deposits 14,440,828 8,488,520 671,179
Dividends paid (251,173) (260,415) (171,551)
------------ ----------- -----------
Net cash provided by financing activities 14,189,655 8,228,105 499,628
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 668,976 (479,505) (1,301,628)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 6,443,255 6,922,760 8,224,388
------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,112,231 $6,443,255 $6,922,760
============ =========== ===========
(Continued)
14
17
- 54 -
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- --------------------------------
Net income $1,614,642 $1,664,783 $1,617,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 344,086 221,359 283,153
Provision for credit losses 60,000 (86,933) 16,000
Gains on sales of assets (11,103) (55,477) (8,422)
----------- ----------- ----------
Changes in assets and liabilities affecting cash flow:
Other assets 96,609 (177,558) (230,286)
=========== =========== ==========
Other liabilities (65,442) 205,201 498,080
NET CASH PROVIDED BY OPERATING ACTIVITIES $2,038,792 $1,771,375 $2,175,574
(Concluded)
See notes to consolidated financial statements.
15
18
- 55 -
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
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. In January 1989, the shareholders of the Evans
National Bank (the "Bank") approved an Agreement and Plan of Reorganization
(the "Reorganization") whereby the Bank effectively became a wholly-owned
subsidiary of the Company. The Bank is in the commercial banking business,
attracting deposits from and making loans to the general public in its
immediate geographical area. The Bank's main office is located in Angola, New
York and it has branches in Derby, Evans, Forestville, Hamburg and North
Boston.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and the Bank. All material intercompany accounts
and transactions are eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities - In January 1994, the Bank adopted Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Financial statements
for prior years have not been restated. The unrealized gain on available for
sale securities, net of deferred income taxes, upon adoption of SFAS No. 115
was $440,694. Securities for which the Bank has the positive intent and
ability to hold to maturity are stated at cost, adjusted for discounts and
premiums that are recognized in interest income over the period to the earlier
of call date or maturity using a method that approximates level yield.
Securities held to maturity have been designated as unavailable to be sold as
part of the Bank's asset-liability management activities.
Securities classified as available for sale are stated at fair value, with
unrealized gains and losses excluded from earnings and reported, net of
deferred income taxes, in stockholders' equity. Gains and losses on sales of
securities are computed using the specific identification method.
Securities which have experienced an other than temporary decline in fair
value are written down to a new cost basis with the amount of the writedown
included in earnings as a realized loss. The new cost basis is not changed for
subsequent recoveries in fair value. Factors which management considers in
determining whether an impairment in value of an investment is other than
temporary include the issuer's financial performance and near term prospects,
the financial conditions and prospects of the issuer's geographic region and
industry, and recoveries in market value subsequent to the balance sheet date.
The Bank does not engage in securities trading activities.
Allowance for Loan Losses - The allowance for loan losses is established
through a provision for loan losses. Recoveries on loans previously charged
off are credited directly to the allowance for loan losses. The allowance is
an amount that management believes adequate to absorb losses on existing loans
that may become uncollectible. Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan-loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrowers' ability to repay, estimated value of any underlying collateral,
and current economic conditions.
16
19
- 56 -
In addition, various regulatory agencies, as part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of their
examination.
Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting By
Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure".
Under the provisions of SFAS No. 114, a loan is defined as impaired when,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. SFAS No. 114 does not apply to large groups of homogenous
loans which are collectively evaluated for impairment. For the Bank, these
loans consist of residential real estate mortgages, installment loans and
student loans. As required, the Bank has applied SFAS No. 114 and SFAS No. 118
prospectively. No previously issued financial statements have been restated.
Properties and Equipment - Properties and equipment are stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets which range from 3 to 31
years.
Effective January 1, 1996, the Bank adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Under the provisions of SFAS No. 121, long-lived assets to be held and used by
the Bank must be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and long-lived assets to be disposed of must be reported at the
lesser of their carrying amount or fair value less cost to sell. As required,
the Bank has applied SFAS No. 121 prospectively. No previously issued
financial statements have been restated.
Interest Income on Loans - Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that
the borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed and any cash received
is credited to the outstanding principal balance. Such loans are returned to
accrual status when they are made current and, in the opinion of management,
the borrower has the ability to continue making timely payments. Loan
origination and commitment fees and certain direct loan origination costs are
deferred and recognized over the lives of the related assets as an adjustment
of the loans' yields using the level yield method.
Income Taxes - Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the tax rate expected to be in effect when the taxes are
actually paid or recovered.
Net Income per Common Share - Net income per common share is based on the
weighted average number of shares outstanding during each year, retroactively
adjusted for stock dividends.
Employee Benefits and Deferred Compensation Plan - Costs are charged to
salaries and employee benefits expense. Pension costs are funded on a current
basis in compliance with the Employee Retirement Income Security Act and are
accounted for in compliance with SFAS No. 87, "Employers' Accounting for
Pensions".
Off Balance Sheet Financial Instruments - In the ordinary course of business
the Bank has entered into off balance sheet financial instruments consisting
of commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when the transaction is
executed.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, interest bearing deposits in
other banks and federal funds sold. Generally, federal funds sold are
purchased for one-day periods.
Cash and due from banks includes reserve balances that the Bank is required to
maintain with Federal Reserve Banks. The required reserves are based upon
deposits outstanding and were approximately $681,000 and $1,148,000 at
December 31, 1996 and 1995, respectively.
17
20
- 57 -
2. SECURITIES
The amortized cost of securities and their approximate fair value at December
31 were as follows:
1996
-----------------------------------------------------------
UNREALIZED
-------------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
Available for Sale:
U.S. Government and Agency Securities $12,976,948 $ 25,450 $(167,765) $12,834,633
Mortgage Backed Securities 1,694,066 41,553 0 1,735,619
State and Municipal Securities 14,638,658 183,826 (14,466) 14,808,018
Other Securities 822,850 0 0 822,850
------------ --------- ---------- -----------
Total $30,132,522 $250,829 $(182,231) $30,201,120
============ ========= ============ ===========
Held to Maturity:
U.S. Government and Agency Securities $ 3,948,322 $ 15,194 $ 0 $ 3,963,516
State and Municipal Securities 1,904,882 0 (12) 1,904,870
------------ --------- ---------- -----------
Total $ 5,853,204 $ 15,194 $ (12) $ 5,868,386
============ ========= ============ ============
1995
-----------------------------------------------------------
UNREALIZED
------------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
Available for Sale:
U.S. Government and Agency Securities $16,229,297 $137,218 $(130,653) $16,235,862
Mortgage Backed Securities 1,215,332 46,365 0 1,261,697
State and Municipal Securities 14,243,934 357,089 (16,583) 14,584,440
Other Securities 731,100 0 0 731,100
------------ --------- ------------- ------------
Total $32,419,663 $540,672 $(147,236) $32,813,099
============ ========= ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 4,072,567 $ 60,170 $ 0 $ 4,132,737
State and Municipal Securities 2,068,828 0 (24) 2,068,804
------------ --------- ------------- ------------
Total $ 6,141,395 $ 60,170 $ (24) $ 6,201,541
============ ========= ============= ============
On November 30, 1995, in conjunction with adopting the implementation guidance
contained in "A Guide to Implementation of Statement No. 115 on Accounting For
Certain Investments in Debt and Equity Securities", issued by the Financial
Accounting Standards Board, the Company reclassified a portion of its
held-to-maturity securities as available-for-sale. The market value and
amortized cost of these securities at that date totalled $12,192,578 and
$12,365,907, respectively.
During 1994, the Bank transferred certain securities classified as available
for sale when acquired to the held to maturity portfolio. The securities were
transferred at fair value. The unrealized holding loss at the date of transfer
is being amortized over the period to maturity. The unrealized loss, net of
deferred income taxes, remaining in stockholders' equity, for such transferred
securities, at December 31, 1996 was $69,418.
Assets, principally securities, with an amortized cost of $3,473,969 for held
to maturity securities and a fair value of $16,389,064 for available for sale
securities at December 31, 1996 were pledged as collateral to secure public
deposits and for other purposes required or permitted by law.
18
21
- 58 -
The scheduled maturities of debt securities at December 31, 1996 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
------------------------- --------------------------
FAIR FAIR
COST VALUE COST VALUE
Due in one year or less $ 1,991,036 $ 2,001,939 $1,267,202 $1,267,202
Due after year one through five years 11,457,720 11,416,229 427,676 427,664
Due after five years through ten years 14,227,070 14,289,482 63,330 63,330
Due after ten years 2,456,696 2,493,470 4,094,996 4,110,190
----------- ----------- ---------- ----------
Total $30,132,522 $30,201,120 $5,853,204 $5,868,386
=========== =========== ========== ==========
Gains and losses from sales of securities for the years ended December 31, 1996,
1995 and 1994 are summarized as follows:
1996 1995 1994
Gross gains $ 103,865 $ 22,705 $ 31,226
Gross losses (127,595) (13,266) (22,804)
--------- -------- --------
Net (loss) gain $ (23,730) $ 9,439 $ 8,422
========= ======== ========
3. LOANS, NET
Major categories of loans at December 31, 1996 and 1995 are summarized as
follows:
1996 1995
Real estate - mortgages $78,706,052 $61,009,095
Real estate - construction 1,404,290 1,501,871
Commercial 6,993,852 7,709,115
Installment 2,646,246 2,731,891
Student loans 1,692,334 1,919,549
Other 769,322 711,902
Net deferred loan origination costs 422,760 443,042
----------- -----------
92,634,856 76,026,465
Allowance for loan losses (546,954) (557,961)
----------- -----------
Loans, net $92,087,902 $75,468,504
=========== ===========
Changes in the allowance for loan losses for the years ended December 31, 1996,
1995 and 1994 were as follows:
1996 1995 1994
Balance, beginning of year $ 557,961 $ 628,957 $ 612,921
Provision for loan losses 60,000 (86,933) 16,000
Recoveries 5,597 23,281 15,067
Loans charged off (76,604) (7,344) (15,031)
--------- --------- ---------
Balance, end of year $ 546,954 $ 557,961 $ 628,957
========= ========= =========
19
22
- 59 -
Non-accrual loans for which interest has been reduced totaled approximately
$180,000 and $220,000 at December 31, 1996 and 1995 respectfully. If such loans
had been in an accruing status, the Bank would have recorded additional interest
income of approximately $19,000, $29,000 and $14,000 in 1996, 1995 and 1994,
respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 1996.
As of December 31, 1996 and 1995, the Bank had no loans which were impaired as
defined by SFAS No. 114.
4. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
1996 1995
Land $ 268,485 $ 268,485
Buildings and improvements 3,310,902 2,095,704
Equipment 2,365,026 1,756,060
Construction in progress 0 341,229
----------- -----------
5,944,413 4,461,478
Less accumulated depreciation (2,195,750) (1,847,079)
----------- -----------
Properties and equipment, net $ 3,748,663 $ 2,614,399
=========== ===========
At December 31, 1995, construction in progress consisted of costs accumulated
in connection with the Bank's new branch in Evans. This project was completed
and placed in service in 1996.
Depreciation expense totalled $348,671 in 1996, $271,507 in 1995 and $285,464
in 1994.
5. 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. For variable rate loans, the carrying amount is a
reasonable estimate of fair value.
Deposits - The fair value of demand deposits, NOW and money market accounts
and regular savings accounts is the amount payable on demand at the reporting
date. The fair value of time deposits is estimated using the rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit - As described in
Note 9, the Company was a party to financial instruments with off-balance
sheet risk at December 31, 1996. 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
20
23
- 60 -
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, 1996 approximates the recorded amounts of the related fees, which are not
material.
At December 31, 1996, the estimated fair values of the Company's financial
instruments were as follows:
CARRYING FAIR
AMOUNT VALUE
Financial Assets:
Cash and cash equivalents $ 7,112,231 $ 7,112,231
============= =============
Securities $ 36,054,324 $ 36,069,506
============= =============
Loans $ 92,634,856
Less: allowance for loan losses (546,954)
-------------
Loans, net $ 92,087,902 $ 92,056,134
============= =============
Financial Liabilities:
Deposits $ 123,461,379 $ 123,863,439
============= =============
6. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLAN
The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees'
compensation and years of service. The Bank uses an actuarial method of
amortizing prior service cost and unrecognized net gains or losses which result
from actual experience and assumptions being different than those that are
projected. The amortization method the Bank is using recognizes the prior
service cost and net gains or losses over the average remaining service period
of active employees which exceeds the required amortization. The amount charged
to expense for this plan totaled $35,335 in 1996, $52,201 in 1995 and $169,776
in 1994. The components of the pension cost charged to expense for 1996, 1995
and 1994 consisted of the following:
1996 1995 1994
Service cost $ 44,615 $ 46,891 $ 149,752
Interest cost on projected benefit obligation 94,565 85,948 96,325
Actual return on plan assets (87,676) (67,352) (60,132)
Net amortization and deferral (16,169) (13,286) (16,169)
--------- --------- ---------
Total $ 35,335 $ 52,201 $ 169,776
========= ========= =========
The following table sets forth the Plan's funded status as of October 1, 1996
and 1995, and the amounts recognized in the accompanying consolidated
financial statements as of December 31, 1996 and 1995:
1996 1995
Vested benefits $ 1,002,977 $ 897,290
=========== ===========
Accumulated benefit obligation $ 1,012,721 $ 910,228
=========== ===========
Projected benefit obligation $ 1,354,390 $ 1,217,964
Plan assets available for benefits at fair value 1,373,109 1,114,459
----------- -----------
Plan assets in excess (deficient) of projected benefit obligations 18,719 (103,505)
Unrecognized net loss 71,556 110,260
Unrecognized net obligation (17,543) (19,005)
Unrecognized prior service cost (271,231) (285,938)
----------- -----------
Amount included in other liabilities $ (198,499) $ (298,188)
=========== ===========
21
24
- 61 -
The Plan's assets are primarily invested in a money market fund, stocks, and
bonds. Valuations of the pension plan as shown above were conducted as of
October 1, 1996 and 1995. Assumptions used by the Bank in both years in the
determination of pension plan information consisted of the following:
Weighted-average discount rate 7.50 %
Rate of increase in compensation levels 4.75 %
Expected long-term rate of return on plan assets 7.50 %
During the year ended December 31, 1995, the Bank adopted nonqualified
supplemental executive retirement plans covering certain members of senior
management. The plans provide a fixed benefit which is specific to the
participant. The obligations related to these plans are indirectly funded by
life insurance contracts (naming the Bank as beneficiary) with aggregate cash
surrender values of approximately $45,000 and $0 at December 31, 1996 and 1995,
respectively. The face values of these policies at both dates was approximately
$1,650,000. The Bank uses an actuarial method of amortizing unrecognized net
gains or losses which result from actual experience and assumptions being
different than those that are projected. The amortization method the Bank is
using recognizes the net gains or losses over the average remaining service
period of active employees which exceeds the required amortization. The amount
charged to expense for these plans totaled $97,633 and $87,058 in 1996 and 1995,
respectively. The components of the pension cost charged to expense consisted of
the following:
1996 1995
Service cost $50,138 44,562
Interest cost on projected benefit obligation 25,280 20,281
Net amortization and deferral 22,215 22,215
------- -------
Total $97,633 $87,058
======= =======
The following table sets forth the Plans' funded status as of October 1, 1996
and 1995, and the amount recognized in the accompanying consolidated financial
statements as of December 31, 1996 and 1995:
1996 1995
Vested benefits $ 356,685 $ 286,925
========= =========
Accumulated benefit obligation $ 356,685 $ 286,925
========= =========
Projected benefit obligation $ 356,685 $ 286,925
Plan assets available for benefits at fair value 0 0
--------- ---------
Projected benefit obligation in excess of plan assets (356,685) (286,925)
Unrecognized net gain (9,432) (3,774)
Unrecognized net obligation 181,426 203,641
--------- ---------
Accrued pension cost (184,691) (87,058)
Adjustment required to recognize minimum liability (171,994) (199,867)
--------- ---------
Amount included in other liabilities $(356,685) $(286,925)
========= =========
Valuations of the pension plans as shown above were conducted as of October 1,
1996 and 1995. Assumptions used by the Bank in both years in the determination
of pension plan information consisted of the following:
Weighted-average discount rate 7.50 %
Expected long-term rate of return on plan assets 7.50 %
22
25
- 62 -
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $64,000, $64,000
and $123,000 in 1996, 1995 and 1994, respectively. The estimated present value
of the benefit obligation, included in other liabilities, was $671,000 and
$643,000 at December 31, 1996 and 1995, respectively. This obligation is
indirectly funded by life insurance contracts (naming the Bank as beneficiary)
with aggregate cash surrender values of approximately $130,000 and $116,000 at
December 31, 1996 and 1995, respectively. The face values of these policies at
both dates was approximately $1,036,000. Premiums on the aforementioned life
insurance contracts were paid by the Bank in lieu of payment of directors'
fees.
The Bank also has a deferred contribution Retirement and Thrift 401(k) Plan
for its employees who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute between
1% and 15% of their annual salary, with a matching contribution by the Bank
equal to 25% of the employees contribution up to 4% of their annual salary.
The Bank can also make discretionary contributions to the Plan. The Bank's
expense under this Plan was $34,209, $47,701 and $42,026 for the years ended
December 31, 1996, 1995 and 1994, respectively.
7. INCOME TAXES
The components of the provision for income taxes were as follows:
1996 1995 1994
Income taxes currently payable $ 728,000 $ 741,000 $ 745,000
Deferred (benefit) income taxes (140,000) 23,000 (115,000)
--------- --------- ---------
Net provision $ 588,000 $ 764,000 $ 630,000
========= ========= =========
At December 31, 1996 and 1995 the components of the net deferred tax asset
were as follows:
1996 1995
Deferred Tax Assets:
Allowance for credit losses $148,000 $128,000
Pension premiums 153,000 128,000
Deferred compensation 268,000 260,000
SFAS No. 115 11,000 0
Other 22,000 26,000
-------- --------
Gross deferred tax assets 602,000 542,000
Deferred Tax Liabilities:
Depreciation 25,000 25,000
Prepaid expenses 169,000 260,000
SFAS No. 115 0 109,000
-------- --------
Gross deferred tax liabilities 194,000 394,000
-------- --------
Net deferred tax assets $408,000 $148,000
======== ========
The net deferred tax asset at December 31, 1996 and 1995 was included in other
assets in the accompanying consolidated financial statements.
23
26
- 63 -
The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes.
A reconciliation of the differences is as follows:
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------- ------------------------- ------------------------
Tax provision at
statutory rate $ 749,000 34 % $ 826,000 34 % $ 764,000 34 %
Increase (decrease) in
taxes resulting from:
Tax-exempt income (260,000) (12) (259,000) (11) (299,000) (13)
State taxes, net of
federal benefit 110,000 5 154,000 6 129,000 6
Other items, net (11,000) (1) 43,000 2 36,000 1
--------- ------ --------- ------ --------- -------
Provision for
income taxes $ 588,000 26 % $ 764,000 31 % $ 630,000 28 %
========= ====== ========= ====== ========= =======
8. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with its directors, significant
shareholders and their affiliates (related parties). The aggregate amount of
loans to such related parties at December 31, 1996 was $2,247,931. During
1996, new loans to such related parties amounted to $746,980 and repayments
amounted to $1,867,538.
9. 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, 1996 is as follows:
Commitments to extend credit $15,115,000
Standby letters of credit 515,000
-----------
Total $15,630,000
===========
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.
10. 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. 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.
24
27
- 64 -
11. REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the Comptroller
of the Currency. Under such restrictions, the Bank may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess of
the sum of the current year's earnings (as defined) plus the retained earnings
(as defined) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from its regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios were as follows:
1996
------------------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------- ------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total Capital (to Risk
Weighted Assets) $16,063,000 17.7 % $7,250,000 8.0 % $9,065,000 10.0 %
=========== ==== ========== === ========== ====
Tier I Capital (to Risk
Weighted Assets) $15,516,000 17.1 % $3,625,000 4.0 % $5,438,000 6.0 %
=========== ==== ========== === ========== ====
Tier I Capital
(to Average Assets) $15,516,000 11.1 % $5,581,000 4.0 % $6,976,000 5.0 %
=========== ==== ========== === ========== ====
1995
--------------------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------ ---------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total Capital (to Risk
Weighted Assets) $14,919,000 19.6 % $6,078,000 8.0 % $7,598,000 10.0 %
=========== ==== ========== === ========== ====
Tier I Capital (to Risk
Weighted Assets) $14,361,000 18.9 % $3,039,000 4.0 % $4,559,000 6.0 %
=========== ==== ========== === ========== ====
Tier I Capital
(to Average Assets) $14,361,000 11.4 % $5,027,000 4.0 % $6,283,000 5.0 %
=========== ==== ========== === ========== ====
25
28
- 65 -
12. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as
follows:
CONDENSED BALANCE SHEETS
- ------------------------
December 31, 1996 and 1995 1996 1995
ASSETS
Cash $ 6,897 $ 37,728
Dividends receivable 169,895 0
Investment in subsidiary 15,503,186 14,447,782
------------ ------------
Total assets $ 15,679,978 $ 14,485,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 169,895 $ 0
Stockholders' Equity:
Common stock 849,475 793,703
Capital Surplus 10,990,720 8,592,502
Retained earnings 3,692,659 4,953,075
Unrealized (loss) gain on available for sale securities, net (22,771) 146,230
------------ ------------
Total stockholders' equity 15,510,083 14,485,510
------------ ------------
Total liabilities and stockholders' equity $ 15,679,978 $ 14,485,510
============ ============
CONDENSED STATEMENTS OF INCOME
- ------------------------------
Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994
Dividends from subsidiary $ 421,068 $ 260,415 $ 171,549
Expenses (30,831) (17,542) (18,103)
------------ ------------ ------------
Income before equity in undistributed earnings of subsidiary 390,237 242,873 153,446
Equity in undistributed earnings of subsidiary 1,224,405 1,421,910 1,463,603
------------ ------------ ------------
Net income $ 1,614,642 $ 1,664,783 $ 1,617,049
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994
Operating Activities:
Net income $ 1,614,642 $ 1,664,783 $ 1,617,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary (1,224,405) (1,421,910) (1,463,603)
Increase in dividends receivable (169,895) 0 0
------------ ------------ ------------
Net cash provided by operating activities 220,342 242,873 153,446
Financing Activities - Cash dividends paid (251,173) (260,415) (171,549)
------------ ------------ ------------
Net decrease in cash (30,831) (17,542) (18,103)
Cash, beginning 37,728 55,270 73,373
------------ ------------ ------------
Cash, ending $ 6,897 $ 37,728 $ 55,270
============ ============ ============
26
29
- 66 -
BOARD OF DIRECTORS
EVANS BANCORP, INC. AND EVANS NATIONAL BANK
[PHOTO] [PHOTO] [PHOTO]
Carl F. Ulmer Phillip Brothman David C. Koch
Chairman Partner - Hurst, Brothman & Yusick Chairman and CEO
Retired New Era Cap Co., Inc.
[PHOTO] [PHOTO] [PHOTO]
Robert W. Allen Richard M. Craig Richard C. Stevenson
Secretary President and CEO Evans National Bank President - Metro Stevenson Realty
Retired
[PHOTO] [PHOTO] [PHOTO]
William F. Barrett LaVerne G. Hall David M. Taylor
Property and Investment Manager Chairman - L.G. Hall Building President - Concord Nurseries, Inc.
Contractors, Inc.
- -------------------------------- ------------------------------- ------------------------------------
DIRECTORS EMERTI OFFICERS ADVISORY BOARDS
Floyd H. Hurst EVANS BANCORP, INC. DERBY
Joseph LaClair Richard A. Gradl
Carl F. Ulmer Raymond S. Hazard
Chairman
FORESTVILLE
Richard M. Craig Homer Bowker, Jr.
President and CEO
Robert W. Allen
Secretary
James Tilley
Assistant Secretary
William R. Glass
Treasurer
27
30
- 67 -
EVANS NATIONAL BANK OFFICERS
PRESIDENT AND CHIEF John S. Eagleton BANK OFFICER
EXECUTIVE OFFICER William J. Gray Rita A. Boyland
Richard M. Craig Thomas Q. McDonnell Karen M. Blecha
Jeffrey L. White Michelle A. Bress
SENIOR VICE PRESIDENT Nancy A. Ferraro
William R. Glass ASSISTANT VICE PRESIDENT M. Jane Gonzalez
James Tilley Susan J. Herold
Katherine M. Allen Nadine G. Houghton
VICE PRESIDENT Ramon Gallardo, Jr. Howard M. Martin, Jr.
George L. Catalano Rose Marie Hinckley
Mary E. Doeing Elizabeth A. Mac
Cathy E. Rohrich
CORPORATE INFORMATION
There has never been an organized public trading market for the Company's
outstanding common stock. The following table represents the highest and
lowest per share prices known to management at which the Company's stock has
actually been transferred in private transactions during the periods
indicated. In each period for which prices are shown, management has price
information for the transaction. The prices do not include any retail markup,
markdown or commission.
1996 1995
----------------------------- --------------------------
QUARTER HIGH LOW HIGH LOW
- ------- ---------- ---------- ---------- ----------
First $ 115.00 $ 110.00 $ 80.00 $ 70.00
Second $ 135.00 $ 115.00 $ 83.00 $ 80.00
Third $ 136.00 $ 135.00 $ 100.00 $ 83.00
Fourth $ 136.00 $ 136.00 $ 110.00 $ 100.00
As a result of the stock dividend in April, 1996, 22,309 additional shares
were issued which increased total shares outstanding to 339,790 as of December
31, 1996. There were 785 shareholders of record on December 31, 1996.
Upon written request of any shareholder, a copy of the Company's report on
Form 10-K for its fiscal year ended December 31, 1996, including the financial
statements and the schedules thereto, required to be filed with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
may be obtained, without charge, from Richard M. Craig, President and Chief
Executive Officer, Evans Bancorp, Inc., 14-16 N. Main Street, Angola, N.Y.
14006.
THE ANNUAL MEETING
The Annual Meeting of the Shareholders of the Company will be held on Tuesday,
April 29, 1997 at 6:30 p.m. at Romanello's South, 5793 South Park Avenue,
Hamburg, NY.
INQUIRIES
Communications regarding transfer requests, lost certificates, and change of
address should be directed to: AMERICAN STOCK TRANSFER AND TRUST CO., 40 Wall
Street, New York, NY. 10005
28