1
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
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended: December 31, 1998
[ ] 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)
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE)(716) 549-1000
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. [ ].
As of January 31, 1999, the aggregate market value of the registrant's
common stock, $.50 par value, (the "Common Stock") held by nonaffiliates of the
registrant was approximately $59,850,810 based upon the per share sale prices
known to management at which the Company's Common Stock has actually been
transferred in private transactions prior to that date. There is not, and has
never been, an organized public trading market for the registrant's shares.
As of January 31, 1999, 1,697,598 shares of the registrant's Common Stock
were outstanding.
Page 1 of 91
Exhibit Index on Page 38
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement on Form 10, as amended
by Amendment Nos. 1 and 2 (Registration No. 0-18539), the Registrant's
Registration Statement on Form S-4 (Registration No. 33-25321), and the
Registrant's Report on form 10-QSB for the period ended March 31, 1995, and the
Registrant's Report on Form 10-KSB for the period ended December 31, 1995 and
the Registrant's Reports on Form 10-Q for the periods ended June 30, 1996 and
March 31, 1997 and the Registrant's Reports on Form 10-K for the period ended
December 31, 1997 are incorporated by reference in Part IV of this Form 10-K.
Portions of the Registrant's 1998 Annual Report to Shareholders are
incorporated by reference in Part II of this Form 10-K.
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TABLE OF CONTENTS
INDEX
PART I
PAGE
Item 1. BUSINESS................................................5
Evans Bancorp, Inc. ....................................5
Evans National Bank ....................................5
Market Area ............................................5
Average Balance Sheet Information ......................5
Securities Activities ..................................7
Securities Policy ...............................8
Lending Activities .....................................9
General .........................................9
Real Estate Loans ..............................10
Commercial Loans................................10
Installment Loans...............................11
Student Loans ..................................11
Other Loans ....................................11
Loan Maturities.................................12
Credit Losses...................................13
Sources of Funds - Deposits ...........................15
General.........................................15
Deposits........................................15
Environmental Matters..................................16
Employees .............................................16
Competition ...........................................16
Asset and Liability Management ........................17
Regulation ............................................18
Monetary Policy .......................................20
Item 2. PROPERTIES.............................................20
Item 3. LEGAL PROCEEDINGS......................................20
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS..........................20
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PART II
PAGE
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................21
Item 6. SELECTED FINANCIAL DATA....................................22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS.........................23
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................30
Item 8. FINANCIAL STATEMENTS ......................................30
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES....................31
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT.............................................31
Item 11. EXECUTIVE COMPENSATION.....................................34
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT...........................36
Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.......................................38
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K ...................................38
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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 "BHCA"), and conducts its
business through its wholly-owned subsidiary, Evans National Bank (the "Bank").
The principal business of the Company, through 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 which include checking and NOW accounts, passbook
and statement savings and certificates of deposit.
The Company has no material assets other than its investment in the
Bank. The Company's sole business, therefore, is the ongoing business of the
Bank.
EVANS NATIONAL BANK
The Bank was established in 1920 as a national banking association and
currently is regulated by 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 N. Main Street, Angola, New York 14006.
The Bank is a full service commercial bank offering secured and
unsecured commercial loans, consumer loans, educational loans and mortgages. It
also accepts time and demand deposits.
As of December 31, 1998, the Bank had total assets of $174,120,230,
total deposits of $144,083,636 and total stockholders' equity of $18,623,413.
MARKET AREA
The Bank's primary market area is located in southern Erie County,
northern Chautauqua County and northwestern Cattaraugus County, which includes
the towns of Evans, Boston, Hamburg, Eden, Orchard Park, West Seneca and
Hanover. This market area is the primary area where the Bank receives deposits
and makes loans.
AVERAGE BALANCE SHEET INFORMATION
The table on the following page presents the significant categories of
the assets and liabilities of the Company, interest income and interest expense,
and the corresponding yields earned and rates paid for the last two years. 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.
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1998 1997
---- ----
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
ASSETS ($000) ($000) ($000) ($000)
Interest-earning assets:
Loans, Net $105,856 $9,336 8.82% $96,511 $8,633 8.95%
Taxable securities 21,696 1,333 6.14% 21,071 1,373 6.52%
Tax-exempt securities 23,982 1,098 4.58% 20,524 945 4.60%
Federal funds sold 1,531 84 5.49% 2,266 123 5.43%
----- -- ----- ----- --- -----
Total interest-earning assets 153,065 11,851 7.74% 140,372 11,074 7.89%
Noninterest-earning assets
Cash and due from banks 5,479 5,407
Premises and equipment, net 3,771 3,830
Other assets 2,668 2,228
----- -----
Total $164,983 $151,837
======== ========
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
NOW accounts $7,275 $71 .98% $6,700 $71 1.06%
Savings deposits 46,925 1,281 2.73% 44,610 1,203 2.70%
Time deposits 63,338 3,399 5.37% 60,257 3,302 5.48%
Fed Funds Purchased & Securities 3,801 196 5.16% 425 12 2.82%
Sold U/A to Repurchase
----- --- ----- --- -- -----
Total interest-bearing liabilities 121,339 4,947 4.08% 111,992 4,588 4.10%
Noninterest-bearing liabilities:
Demand deposits 23,571 21,756
Other 2,308 1,899
----- -----
147,218 135,647
Shareholders' equity 17,765 16,190
------ ------
Total $164,983 $151,837
======== ========
Net interest earnings $6,904 $6,486
====== ======
Net yield on interest earning assets 4.51% 4.62%
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In 1998, the Company's interest income increased by $778,936 over 1997, compared
to an increase of $1,273,036 in 1997 over 1996. Also, interest expense on
deposits increased by $358,674 in 1998 over 1997 compared to an increase of
$675,295 in 1997 over 1996. The following table segregates these changes 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 due
to both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------------------------------------
(thousands)
VOLUME RATE TOTAL VOLUME RATE TOTAL
Interest earned on:
Loans $824 $(120) $704 $1,335 $(83) $1,251
Taxable securities 42 (82) (40) (120) 65 (55)
Tax-exempt securities 158 (5) 153 219 (40) 179
Federal funds sold (39) 1 (38) (83) 4 (79)
Time deposits in other banks 0 0 0 (23) 0 (23)
--- --- --- ----- -- -----
Total interest-earning assets $985 $(206) $779 $1,328 $(54) $1,273
==== ====== ==== ====== ===== ======
Interest paid on:
NOW accounts $6 $(6) $0 $4 $(13) $(9)
Savings deposits 63 15 78 (12) (35) (47)
Time deposits 162 (65) 97 750 (31) 719
Federal Funds Purchased & 166 18 184 12 0 12
Securities Sold U/A Repurch.
--- -- --- -- - --
Total interest-bearing liabilities $397 $(38) $359 $754 $(79) $675
==== ===== ==== ==== ===== ====
SECURITIES ACTIVITIES
Income from securities represented approximately 20.5% of total interest
income of the Company in 1998 and approximately 20.9% of total interest income
of the Company in 1997. At December 31, 1998, the Bank's securities portfolio of
$50,059,972 consisted primarily of United States ("U.S.") and federal agency
obligations, state and municipal securities, corporate bonds and mortgage-backed
securities by the Government National Mortgage Association, Federal National
Mortgage Association and Federal Home Loan Mortgage Corp.
In 1994, the Bank adopted Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities." As a
result, all securities in the Bank's portfolio are now designated as "held to
maturity" or "available for sale".
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The following table summarizes the Bank's securities with those
designated as available for sale at fair value and securities designated as held
to maturity valued at amortized cost as of December 31, 1998 and 1997:
1998 1997
---- ----
($000) ($000)
Available for Sale:
U.S. Treasury and other U.S. government agencies $22,105 $13,025
States and political subdivisions in the U.S. 22,913 19,867
Other 952 930
--- ---
Total Securities Designated as Available for Sale $45,970 $33,822
======= =======
Held to Maturity:
U.S. Treasury and other U.S. government agencies 47 3,483
States and political subdivisions in the U.S. 4,043 3,095
----- -----
Total Securities Designated as Held to Maturity $4,090 $6,578
====== ======
Total Securities $50,060 $40,400
======= =======
SECURITIES POLICY. The Bank's asset liability management policy encompasses the
areas of securities, capital, liquidity and interest sensitivity. The primary
objective of the 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 Board of Directors of the Bank 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 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), and Collateral Mortgage Obligations, Federal Reserve stock and
Federal Home Loan Bank stock.
The Bank's securities 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 will be 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 and the annual budgets of the issuers are reviewed by the
Bank. 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 and rated on a monthly basis.
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The following table sets forth the maturities and weighted average interest
yields of the Bank's securities portfolio (yields on tax-exempt obligations have
been computed on a tax equivalent basis) as of December 31, 1998:
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. $ 0 0% $ 500 6.35% $ 5,235 6.20% $16,370 6.76%
government agencies
States and political subdivisions 1,497 6.39 6,191 6.79 10,198 7.24 5,027 7.40
Other 952 6.63 0 0.00 0 0.00 0 0.00
Total Available for Sale $ 2,449 6.49 $6,691 6.76 $15,433 6.89 $21,397 6.91
CLASSIFIED AS HELD TO MATURITY
AT AMORTIZED COST:
U.S. Treasury and other U.S. 0 0.00 0 0.00 0 0.00 47 0.00
government agencies
States and political subdivisions 3,535 5.94 154 7.92 167 8.30 187 8.84
Total Held to Maturity 3,535 5.94 154 7.92 167 8.30 234 7.07
Total Securities $ 5,984 6.17 $6,845 6.79 $15,600 6.91 $21,631 6.92
At December 31, 1998, approximately $22,152,000 of the Bank's securities
portfolio were obligations of the U.S. Treasury and other U.S. government
agencies.
LENDING ACTIVITIES
GENERAL. The Bank has a loan policy which is approved by the Board of
Directors on an annual basis. The loan policy addresses the lending authorities
of Bank officers, charge off policies, desired portfolio mix, loan approval
guidelines.
The Bank offers a variety of loan products to its customers including
residential and commercial real estate mortgage loans, commercial loans,
installment loans and student loans. The Bank primarily extends loans to
customers located within the Western New York area. Income on loans represented
approximately 78.8% of the total interest income of the Company in 1998 and
approximately 78.0% of total interest income in 1997. The Bank's loan portfolio
after unearned discounts, loan origination costs and allowances for credit
losses totalled $110,526,449 and $101,627,427 at December 31, 1998 and December
31, 1997, respectively. At December 31, 1998, the Bank had established $729,199
as an allowance for credit losses which is approximately 0.66% of total loans.
This compares with $609,539 at December 31, 1997 which was approximately 0.60%
of total loans. The net loan portfolio represented approximately 63.5% and 64.1%
of the Bank's total assets at December 31, 1998 and December 31, 1997,
respectively.
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REAL ESTATE LOANS. Approximately 87.7% of the Bank's loan portfolio at
December 31, 1998 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
$97,539,555 at December 31, 1998, compared to $88,137,842 at December 31, 1997.
The real estate loan portfolio increased approximately 10.7% in 1998 over 1997
compared to an increase of 10.0% in 1997 over 1996.
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 totalled $20,701,615 at December 31, 1998, which was
approximately 18.6% 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 1998, approximately $2,539,622 of mortgages were sold to FNMA under this
arrangement compared to $1,225,475 of mortgages sold in 1997. The Bank currently
retains the servicing rights on $4.7 million in mortgages sold to FNMA.
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, 1998,
the Bank's outstanding adjustable rate mortgages were $3,337,768 or 3.0% 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 $52,627,923 at December 31,
1998, which was approximately 47.3% of total loans outstanding. This balance
included $7,180,209 in fixed rate and $45,447,714 in variable rate loans, which
includes rate calls.
Commercial mortgage loan growth of 18.0% during 1998 reflected a
continued strong market resulting partially from low interest rates which
encouraged real estate acquisition and expansion, compared to an increase of
15.2% experienced in 1997.
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 a 80%
loan-to-value ratio. At December 31, 1998, the real estate loan portfolio
included $15,725,650 of home equity loans outstanding which represented
approximately 14.1% of its total loans outstanding. This balance included
$7,942,348 in variable rate and $7,783,302 in fixed rate loans.
The Bank also offers residential real estate-construction loans at up to
a 80% loan-to-value ratio at fixed interest rates and multiple maturities. At
December 31, 1998, fixed rate real estate-construction loans outstanding were
$499,098 or 0.45% of the Bank's loan portfolio, and adjustable rate construction
loans outstanding were $4,606,153 or 4.1% of the portfolio.
As of December 31, 1998, approximately $4,031,000 or 4.1% of the Bank's
real estate loans were 30 to 90 days delinquent, $688,000 or 0.71% of the bank's
real estate loans were more than 90 days delinquent and approximately $367,000
or 0.38% of real estate loans were nonaccruing.
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 $9,835,866 and $8,938,560 at December 31, 1998 and December 31, 1997,
respectively. Commercial loans represented approximately 8.8% and 8.7% of the
Bank's total loans at December 31, 1998 and December 31, 1997, respectively. The
commercial loan portfolio increased $897,306 or 10.0% in 1998.
Commercial lending entails significant additional risk as compared with
real estate loans. These loans typically involve larger loan balances to single
borrowers or groups of related borrowers. Collateral, where applicable, may
consist of inventory, receivables, equipment and other business assets.
Sixty-seven percent of the Bank's commercial loans are variable rate which are
tied to the prime rate. 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.
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As of December 31, 1998, approximately $188,000 or 1.9% of the Bank's
commercial loans were 30 to 90 days past due, $6,000 or .06% of its commercial
loans were more than 90 days past due and $387,000 or 3.9% of its commercial
loans were nonaccruing.
INSTALLMENT LOANS. The Bank's installment loan portfolio (which includes
commercial and automobile loans, personal loans and revolving credit card
balances) totaled $2,166,133 and $2,517,892 at December 31, 1998 and December
31, 1997, respectively, representing approximately 1.9% of the Bank's total
loans at December 31, 1998 and 2.5% of the Bank's total loans at December 31,
1997. Traditional installment loans are offered at fixed interest rates with
various maturities up to 60 months, on a secured and unsecured basis. On
December 31, 1998, the installment loan portfolio included $208,212 in fixed
rate card balances at an interest rate of 15.6% and $36,429 in the variable rate
option. As of December 31, 1998, approximately $62,000 or 2.9% of the Bank's
installment loans were 30-90 days past due and approximately $4,000 or .18% of
the Bank's installment loans were more than 90 days past due. None of the Bank's
installment loans were nonaccruing.
STUDENT LOANS. The Bank's student loan portfolio totaled $438,670 at
December 31, 1998 and $1,731,492 at December 31, 1997. Student loans represented
.39% of the Bank's total loans at December 31, 1998 and 1.7% of the Bank's total
loans at December 31, 1997. These loans are guaranteed by the federal government
and the New York State Higher Education Assistance Corporation. The Bank offers
student loans at variable interest rates with terms of up to 10 years. In 1995,
the Bank entered into a contract with the Student Loan Marketing Association.
Under terms of this agreement, SLMA services the Bank's loans to students who
are still in school and subsequently purchases those loans when the student goes
into repayment. The Bank sold $2,267,518 and $1,087,051 of its student loans to
SLMA in 1998 and 1997 respectively. Student loan products have been expanded to
include Federal Plus and HEAL loans.
OTHER LOANS. Other loans totaled $891,669 at December 31, 1998 and
$509,935 at December 31, 1997. 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.
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The following table summarizes the major classifications of the Bank's
loans (net of deferred origination costs) at December 31, 1998, and 1997:
December 31,
-------------------------------------
1998 1997
---- ----
(in thousands)
Real Estate $97,539 $88,138
Commercial 9,836 8,939
Installment 2,166 2,518
Student Loans 439 1,731
All Other 891 510
Net deferred loan origination costs 384 401
-------- --------
Total Loans $111,255 $102,237
-------- --------
Allowance for credit losses (729) (610)
-------- --------
Net loans $110,526 $101,627
======== ========
LOAN MATURITIES. The following table shows the maturities of commercial
and real estate construction loans outstanding as of December 31, 1998 and the
classification of loans due after one year according to sensitivity to changes
in interest rates:
(in thousands)
0-1 YR. 1-5 YRS. OVER 5 YRS. TOTAL
------- -------- ----------- -----
Commercial $2,934 $2,137 $4,765 $9,836
Real estate construction 4,105 1,000 0 5,105
----- ----- - -----
$7,039 $3,137 $4,765 $14,941
====== ====== ====== =======
Loans maturing after one year with:
Fixed rates $897 $0
Variable rates 2,240 4,765
----- -----
$3,137 $4,765
====== ======
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CREDIT LOSSES. The following table summarizes the Bank's non-accrual and past
due loans as of December 31, 1998 and December 31, 1997. 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
Provision for Loan Losses."
1998 1997
---- ----
(in thousands)
Nonaccrual loans $754 $627
Accruing loans past due 90 days or more 698 360
--- ---
Total $1,452 $987
====== ====
Information with respect to nonaccrual loans at December 31, 1998 and December
31, 1997 is as follows:
1998 1997
---- ----
(in thousands)
Nonaccrual loans $754 $627
Interest income that would have been 71 58
recorded under the original terms
Interest income recorded during the period 0 0
At December 31, 1998 $754,000 of nonaccrual loans are collateralized.
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The following tables summarize the Bank's allowance for credit losses
and changes in the allowance for credit losses by loan categories:
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
1998 1997
--------- ---------
BALANCE AT BEGINNING OF YEAR $ 609,539 $ 546,954
CHARGE-OFFS
Commercial, Financial, Agricultural 0 (394)
Real Estate - Mortgages (50,381) (25,000)
Installment Loans (21,077) (21,464)
Overdrafts 0 0
--------- ---------
TOTAL CHARGE-OFFS (71,458) (46,858)
RECOVERIES
Commercial, Financial, Agricultural 6,774 7,381
Real Estate - Mortgages 21,219 32,367
Installment Loans 11,925 8,495
Overdrafts 1,200 1,200
---------
TOTAL RECOVERIES 41,118 49,443
NET (CHARGEOFFS) RECOVERIES (30,340) 2,585
ADDITIONS CHARGED TO OPERATIONS 150,000 60,000
--------- ---------
BALANCE AT END OF YEAR $ 729,199 $ 609,539
========= =========
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
BALANCE AT BALANCE AT PERCENT OF LOANS IN
12/31/98 12/31/97 EACH CATEGORY TO
ATTRIBUTABLE TO: ATTRIBUTABLE TO: TOTAL LOANS:
1998 1997
Real Estate Loans $456,823 $424,257 88.0% 86.6%
Commercial Loans 77,552 58,306 8.8 8.7
Installment Loans (Includes Credit Cards) 53,322 49,189 2.0 2.5
Student Loans 0 0 0.4 1.7
All Other Loans 0 0 0.8 0.5
Unallocated 141,502 77,787 N/A N/A
------- ------ --- ---
Total $729,199 $609,539 100.0% 100.0%
======== ======== ====== ======
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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, Federal Home Loan Bank and First Tennessee Bank.
DEPOSITS. The Bank offers a variety of deposit products including
checking, passbook, statement savings, money market, 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, 1998, the Bank's deposits totalled $144,083,636 consisting of
the following:
Demand deposits $25,857,037
NOW and Money Market accounts 7,554,104
Regular savings 47,676,615
Time deposits, $100,000 and over 24,208,290
Other time deposits 38,787,590
$144,083,636
The following table shows daily average deposits and average rates paid on
significant deposit categories by the Bank:
1998 1997
---- ----
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
(in thousands) (in thousands)
Demand Deposits $ 23,571 ---% $ 21,756 ---%
NOW and Money Market Accounts 7,276 .98% 6,700 1.06%
Regular Savings 46,925 2.74% 44,610 2.66%
Time Deposits 63,337 5.37% 60,256 5.48%
Total $141,109 3.38% $133,322 3.43%
The Bank has a very stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
16
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FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS. Another source of the Bank's
funds for lending at December 31, 1998, consisted of short term and long term
borrowings from the Federal Home Loan Bank.
Federal funds purchased of $2,225,000 at December 31, 1998 mature within
four days of year-end.
Other Borrowed funds consisted of a $2,000,000 90-day renewable note
with an interest rate of 5.15%, and a $5,000,000 long-term borrowing. The
long-term borrowing consisted of various advances with interest rates ranging
from 4.83% to 5.07%. The maturities of other borrowed funds are as follows:
1999 $ 2,000,000
2000 1,000,000
2001 0
2002 1,000,000
2003 2,000,000
Thereafter 1,000,000
---------
Total $ 7,000,000
=============
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 site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from such property.
EMPLOYEES
As of February 28, 1999, the Bank employed 75 persons on a full-time
basis. There were also 14 part-time employees.
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 southern Erie County, northern
Chautauqua County, and northwestern Cattaraugus County, New York. The Bank
considers its major competition to be Marine Midland Bank, and Manufacturers and
Traders Trust Company, both headquartered in Buffalo, New York, and Key Bank,
N.A., and Fleet National Bank of New York, both headquartered in Albany, New
York and also Lockport Savings Bank, headquartered in Lockport, New York. The
Bank is 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.
17
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ASSET AND LIABILITY MANAGEMENT
Like all financial institutions, the Bank must constantly monitor its
exposure to interest rate risk. Proper management of interest sensitive funds is
necessary to help secure the Bank's earnings against extreme changes in interest
rates. In 1995, an Asset/Liability Management Committee ("ALCO") was established
for the purpose of evaluating the Bank's short-range and long-range liquidity
position and the potential impact of a sudden change in interest rates on the
Bank's capital and earnings. Specific minimum guidelines for liquidity and
capital ratios have been established, and maximum guidelines 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. These guidelines have been
delineated in the Bank's formal Asset/Liability Policy which also includes
guidelines for investment activities and funds management. The ALCO meets
regularly to review the Bank's liquidity, gap, interest rate risk and capital
positions and to formulate its strategy based on current economic conditions,
interest rate forecasts, loan demand, deposit volatility and the Bank's earnings
objectives.
The following table summarizes the interest rate sensitivity analysis
for the Bank as of December 31, 1998 for the periods indicated:
0 TO 3 4 TO 12 ONE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS
(in millions)
Interest-earning assets $37.7 $24.2 $65.4 $33.3
Interest-bearing liabilities 41.9 34.9 75.4 1.0
---- ---- ---- ---
Interest sensitivity gap $(4.2) $(10.7) $(10) $32.3
====== ======= ===== =====
The primary assets and liabilities in the one year maturity range are
securities, commercial loans and time deposits. As of December 31, 1998, the
Bank's cumulative one year gap ratio (rate sensitive assets divided by rate
sensitive liabilities) was .81 as compared to .82 at December 31, 1997 and .83
as of December 31, 1996. The Bank has more liabilities than assets repricing
over the next twelve months. However, since liabilities tend to reprice less
quickly than assets, management believes that earnings will not be significantly
impaired should rates rise.
The following schedule sets forth the maturities of the Bank's time
deposits as of December 31, 1998:
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 $16.2 $4.6 $2.2 $1.2 $24.2
Other time deposits 11.1 11.3 9.3 7.1 38.8
---- ---- --- --- ----
Total time deposits $27.3 $15.9 $11.5 $8.3 $63.0
===== ===== ===== ==== =====
18
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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 maximum interest rates a bank may pay on deposits, 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.
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.
The Depository Institutions Deregulation and Monetary Control Act of
1980 became effective in March 1980. The principal effects of this law are to:
phase in the deregulation of the interest rates paid on personal deposits by
gradually eliminating regulatory ceilings on interest rate differential allowed
thrifts and savings institutions; enable all banks to offer personal interest
bearing checking type accounts; phase in mandatory and uniform reserve
requirements; and override certain usury limits on loan interest rates
established by state laws. On October 1, 1983, the Depository Institutions'
Deregulation Committee, acting under the provisions of this Act, removed all
remaining interest rate ceilings and other regulations on time deposits, except
for early withdrawal penalties.
19
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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 expands
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 community (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. In January 1989, the Federal Reserve Board adopted new risk-based
capital adequacy guidelines. Under these new guidelines, bank holding companies
with at least $150 million in assets are required to maintain a ratio or
qualifying total capital to weighted risk 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
weighing of their assets according to risk. Effective December 31, 1992, Federal
Reserve member banks were 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, 1998 and
December 31, 1997 with these minimum requirements is presented below:
BANK
-------------------------
Minimum
1998 1997 Requirements
---- ---- ------------
Total Risk-based Capital 16.9% 16.9% 8%
Tier 1 Risk-based Capital 16.3% 16.3% 4%
Leverage Ratio 10.5% 10.8% 3-5%
As of December 31, 1998, the Bank met all three capital requirements.
20
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Management is not aware of any known trends, events, uncertainties, or
current regulatory recommendations that will have, or that are reasonably
likely, to have a material effect on the Bank's liquidity, capital resources or
operations.
MONETARY POLICY. The earnings of the Company and the Bank are also
affected by the monetary policy of the Federal Reserve Board. An important
function of the Federal Reserve System is to regulate the money supply and
prevailing interest rates. Among the instruments used to implement those
objectives are open market operations in U.S. Government securities and changes
in reserve requirements against member bank deposits. These instruments are used
in varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may also affect interest rates
charged on loans by the Bank or paid on its deposits.
ITEM 2. PROPERTIES
The Bank conducts its business from its main office and six 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 as well as the Loan and
Administration Divisions.
The Bank also owns three of its six branch offices. One is a 3,900
square foot facility 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 third is a 3,650 square foot branch located at 6480 Erie Road, Derby,
New York.
In 1995, the Bank purchased property adjacent to the Derby Office,
providing additional parking facilities for customers and enabling future
expansion. An existing building on the property has been leased to a tenant for
a five year term commencing December 1, 1995. The lease provides for monthly
payments of $5,217 in Year One and increasing annually to $5,445 in Year Five.
The Bank leases branch offices in North Boston, Hamburg and West Seneca.
The 1,280 square foot branch office at 7186 North Boston State Road, Boston, New
York is occupied pursuant to a land lease which provides for monthly payments of
$1,375 through January 1, 2001, with an option to be renewed for an additional
five year term. The 3,000 square foot branch office at 5999 South Park Avenue,
Hamburg, New York, is occupied pursuant to a twenty year lease which provides
for monthly payments of $5,875 for the first five years through October 31,
2000. Thereafter, monthly payments increase annually from $6,162.50 in Year Six
to $7,967.50 in Year Twenty. The 3,196 square foot branch office at 1026-B Union
Road, West Seneca, New York is occupied pursuant to a five year lease which
provides for monthly payments of $2,904.38.
ITEM 3. LEGAL PROCEEDINGS
There are no 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 by governmental authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) MARKET. 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
Common Stock has actually been transferred in private transactions during the
periods indicated. In each period for which prices are shown, the management has
price information for the transaction(s). The prices for these transactions do
not include any retail markup, markdown or commission.
1998 1997(1)
------ --------
QUARTER HIGH Low HIGH LOW
- ------- ---- ---- ---
FIRST $40.00 $38.00 $27.20 $27.20
SECOND $43.00 $40.00 $32.00 $27.20
THIRD $45.00 $43.00 $33.00 $32.00
FOURTH $45.00 $45.00 $38.00 $33.00
(1) Adjusted for five for one stock split which was effective May 1, 1997.
(b) HOLDERS. As of January 31, 1999, 1,697,598 shares of the Company's
Common Stock were outstanding and the number of holders of record of the
Common Stock at that date was 1089.
(c) DIVIDENDS.
CASH DIVIDENDS.
The Company paid a cash dividend of $.30 per share (adjusted for
the five for one stock split) on October 21, 1997 to holders of record
on October 1, 1997.
The Company paid a cash dividend of $.17 per share on March 26,
1998 to holders of record on March 2, 1998.
The Company paid a cash dividend of $.20 per share on October 6,
1998 to holders of record on September 22, 1998.
The Company has declared a cash dividend of $.23 per share
payable on April 1, 1999 to holders of record on February 23, 1999.
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 13 to the Consolidated
Financial Statements.
STOCK DIVIDENDS. There was no stock dividend in 1998 or 1997. On April
29, 1997, the shareholders approved a five for one stock split which
was effective May 1, 1997.
22
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The following table shows consolidated operating and capital ratios for
the Company for the last three years:
1998 1997 1996
Return on Average Assets 1.24% 1.19% 1.20%
Return on Average Equity 11.63% 11.06% 10.75%
Dividend Payout Ratio 30.84% 28.30% 23.58%
Equity to Assets Ratio 10.81% 10.95% 11.37%
ITEM 6. SELECTED FINANCIAL DATA
EVANS BANCORP, INC.
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 1998 1997 1996 1995 1994
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
Interest Income $ 11,851,787 $ 11,072,851 $ 9,799,815 $ 9,226,500 $ 8,206,596
- ----------------------------------------------------------------------------------------------------------
Interest Expense 4,946,730 4,588,056 3,912,761 3,418,782 2,747,297
- ----------------------------------------------------------------------------------------------------------
Net Interest Income 6,905,057 6,484,795 5,887,054 5,807,718 5,459,299
- ----------------------------------------------------------------------------------------------------------
Non-Interest Income 1,220,194 950,662 930,986 763,054 785,551
- ----------------------------------------------------------------------------------------------------------
Non-Interest Expense 5,196,900 4,849,182 4,555,398 4,228,922 3,981,801
- ----------------------------------------------------------------------------------------------------------
Net Income 2,043,351 1,802,275 1,614,642 1,664,783 1,617,049
- ----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------
Total Assets $174,120,230 $158,542,163 $140,898,057 $125,308,204 $114,565,971
- ----------------------------------------------------------------------------------------------------------
Loans - Net 110,526,449 101,627,427 92,087,902 75,468,504 71,998,929
- ----------------------------------------------------------------------------------------------------------
Allowance for Loan Losses 729,199 609,539 546,954 557,961 628,957
- ----------------------------------------------------------------------------------------------------------
Securities 50,059,972 40,400,374 36,054,324 38,954,494 32,341,350
- ----------------------------------------------------------------------------------------------------------
Total Deposits 144,083,636 138,391,327 123,461,379 109,020,551 100,532,031
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity 18,623,413 17,039,300 15,510,083 14,485,510 12,723,940
- ----------------------------------------------------------------------------------------------------------
PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------
Net Income $ 1.20 $ 1.06 $ 0.95 $ 0.97 $ 0.95
- ----------------------------------------------------------------------------------------------------------
Cash Dividend $ .37 $ 0.30 $ 0.22 $ 0.14 $ 0.09
- ----------------------------------------------------------------------------------------------------------
Book Value at Year End $ 10.96 $ 10.03 $ 9.13 $ 8.53 $ 7.49
- ----------------------------------------------------------------------------------------------------------
Market Value $ 45.00 $ 38.00 $ 27.20 $ 22.00 $ 14.00
- ----------------------------------------------------------------------------------------------------------
Weighted Average Shares 1,698,612 1,698,950 1,698,950 1,698,950 1,698,950
- ----------------------------------------------------------------------------------------------------------
(Retroactively adjusted for stock dividends and stock splits)
CORRECTION: Book Value at Year End For 1995 and Earlier and Market Value For
1996 and Earlier Under PER SHARE DATA Have Been Corrected to
Reflect the Five-For-One Stock Split in 1997.
23
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is intended to compare the performance of the Company
for the years ended December 31, 1998, 1997 and 1996. The review of the
information presented should be read in conjunction with the consolidated
financial statements and accompanying notes.
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 its 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 of $2,043,351 in 1998 resulted in earnings per share of $1.20. This
is an increase of 13.4% over net income for 1997 of $1,802,275 or $1.06 per
share. Income in 1997 had improved 11.6% over net income of $1,614,642 or $.95
per share in 1996. The strong earnings performance of the Bank in 1997 and 1998
illustrates the positive income impact of the $2.2 million expansion plan
implemented over 1995 and 1996, which included the addition of the Hamburg and
Evans branch offices.
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 INTEREST INCOME
Net interest income, before the provision for credit losses, increased 6.5% from
1997 to 1998, compared to an increase of 10.2% from 1996 to 1997. The increase
in net interest income in 1998 is due to an increase in average earning assets
of $12.4 million or 8.8% over 1997. The tax-equivalent yield earned on those
assets decreased 20 basis points, from 8.31% in 1997 to 8.11% in 1998. The
average cost of funds on interest-bearing liabilities, which increased $9.3
million or 8.3% in 1998, decreased only two basis points, from 4.11% in 1997 to
4.09% in 1998. As a result, the Bank's net interest margin narrowed from 4.59%
in 1997 to 4.52% in 1998.
In 1997, the increase of 10.2% in net interest income over 1996 was the
result of an increase in the volume of average earning assets of $15.8 million
and an increase in the yield earned on those assets, 8.31% compared to 8.27% the
previous year. Average interest-bearing liabilities also increased in volume,
$13.3 million or 13.6% in 1997 over 1996, and the average cost of funds
increased from 3.99% in 1996 to 4.11% in 1997. The Bank's net interest margin
was 4.59% in 1997 compared to 4.64% in 1996.
Management believes this reduction in net interest margin in 1998 is due to
several factors. The Federal Reserve Board decreased the federal funds rate
three times between September and December, 1998 for a total of 75 basis points.
These decreases were followed in the marketplace by corresponding decreases in
the prime rate, which immediately impacted the yield earned on variable rate
loans. Despite the fact that these interest rate moves were the first initiated
by the Federal Reserve since late March of 1997 (a 25 basis point increase),
other market rates declined over 1998. Volatility in world financial markets has
encouraged investors to turn to the safety provided by the US bond market,
driving prices up and yields down on financial instruments which are priced
relative to treasury securities. Certain loan pricing was also impacted.
24
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The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. The Bank's Asset/Liability Management
Committee ("ALCO") meets monthly for the purpose of evaluating the Bank's
short-range and long-range liquidity position and the potential impact on
capital and earnings as a result of sudden changes in interest rates. The Bank
has adopted an asset/liability policy 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. 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.
PROVISION FOR LOAN LOSSES
Loan 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. Factors considered include loan
concentrations, charge-off history, delinquent loan percentages and general
economic conditions. In 1998, the Bank increased the amount charged against
earnings for loan losses to $150,000 from $60,000 charged against earnings in
each of the years 1996 and 1997. Substantial sustained growth in loan volume
over the past three years warranted such an increase.
The following table summarizes the Bank's actual loan losses, total of
non-performing loans and total allowance for loan losses for 1998, 1997 and
1996, both in dollars and as a percentage of total loans outstanding:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Actual Loan Losses $ 71,458 0.06% $ 46,858 0.05% $ 76,604 0.08%
- ---------------------------------------------------------------------------------------------------------------------------
Non-Performing Loans $1,452,000 1.32% $ 987,000 0.96% $ 230,000 0.20%
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses $ 729,199 0.66% $ 609,539 0.59% $ 546,954 0.59%
Although, during 1998, non-performing loans increased over the prior year,
all loans in this category are considered well-collateralized and in the process
of collection. As a result, no significant losses are anticipated.
NON-INTEREST INCOME
Total non-interest income increased approximately $270,000 in 1998 over 1997
which compares to an increase of approximately $20,000 in 1997 from 1996.
Several factors contributed to the increase in 1998, such as an increase in the
Bank's service charges implemented June 1, 1998 and fees earned through the
merchant VISA program which began in late 1997. Comparatively low rates
encouraged consumers to apply for new loans or pursue refinancing, contributing
to an increase in loan-related fee income.
Non-interest income also included approximately $165,000 for the cash
surrender value of life insurance policies held on certain bank officers. This
compares to $64,000 in 1997. The 1998 figure includes a one-time gain of
approximately $97,000 which resulted when the original policies were surrendered
due to a change of insurer.
Gains realized on the sale of loans and securities totaled $66,208 in 1998
versus $33,809 in 1997. Planned sales of securities had resulted in net losses
of $4,450, but these losses were offset by a gain of $14,513 which was realized
when one of the Bank's residual bonds was called for full redemption in
December. In 1997, net losses on securities transactions were approximately
$2,000. Premiums received on sales of student loans to the Student Loan
Marketing Association ("SLMA") were approximately $43,000 in 1998 as compared to
$28,000 in 1997.
25
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Premiums in 1998 included approximately $28,000 received when the Bank sold the
majority of its remaining student loan portfolio to SLMA. The Bank also had an
increase in premiums received on sales of mortgages to the Federal National
Mortgage Association ("FNMA"). These premiums were approximately $12,800 in 1998
as compared to $8,000 in 1997. The Bank has been affiliated with both SLMA and
FNMA since 1995.
NON-INTEREST EXPENSE
In 1998, the ratio of non-interest expense to average assets was 3.14% compared
to 3.18% in 1997 and 3.37% in 1996. Non-interest expense categories include
salaries, occupancy expense, repairs and maintenance, advertising and
professional services , among others. Occupancy expenses remained stable in
1998, and there was little change in the Bank's FDIC insurance assessment.
Advertising costs decreased 7.2% and professional services decreased 5.8%.
Salary and benefit expense increased 8.3% in 1998, due to additional staffing,
merit/promotional increases and costs related to the supplemental employee
retirement plan ("SERP"). Miscellaneous other expenses in 1998 included costs
related to maintaining foreclosed properties and premiums paid for life
insurance policies held on certain bank officers.
TAXES
The provision for taxes in 1998 of $735,000 reflects an effective tax rate of
27%. This compares to $724,000 and 28% in 1997 and $588,000 and 26% in 1996. The
Bank maintains a substantial investment in tax-advantaged municipal bonds which
contributes to its favorable tax position. In addition, in 1998, the Bank
received $97,000 in non-taxable income as the result of surrendering life
insurance policies held on certain bank officers due to a change in insurer.
FINANCIAL CONDITION
The Bank had total assets of $174.1 million at December 31, 1998, increasing
$15.6 million or 9.8% over December 31, 1997. Net loans of $110.5 million
reflected an increase $8.9 million or 8.8% over the prior year. Securities
increased $9.7 million or 23.9%. Cash and cash equivalents decreased $3.0
million, or 29.3%. Deposits grew by $5.7 million or 4.1% and capital increased
$1.6 million or 9.3%.
LOANS
Loans comprised 69.3% of the Bank's total average earning assets in 1998. Actual
year end balances increased 8.8% compared to an increase of 10.4% at December
31, 1997 and 22% at December 31, 1996. The relatively low rates available on
most types of loans over the past three years has fueled both new loan activity
and refinancing. Expansion of the Bank's trade area has also contributed to the
significant loan growth over that time period.
The Bank continues to focus its lending on commercial and residential
mortgages, small commercial loans and home equity loans. Commercial mortgages
continue to make up the largest segment of the portfolio at 47.7%. Residential
mortgages comprise 22.0% of the portfolio and commercial loans total 13.3%. Home
equity loans make up 14.2% of total loans. At December 31, 1998, the Bank had a
loan-to-deposit ratio of 77.22%. This compares to a loan-to-deposit ratio of
73.9% at December 31, 1997.
The Bank currently retains the servicing rights to $5.0 million in
long-term mortgages sold to the Federal National Mortgage Association ("FNMA")
since becoming a member in 1995. This arrangement allows the Bank to offer
long-term mortgages without exposure to the associated interest rate risks,
while retaining customer account relationships.
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. In
December, 1998, the Bank sold approximately $1.2 million in student loans to
SLMA. As a result, student loan balances decreased nearly 75% in 1998. This
compares to growth of 2.3% in 1997 over 1996 and a decrease of 13.4% in 1996
from 1995.
SECURITIES
Securities made up the remaining 30.7% of the Bank's earning assets at December
31, 1998. In previous years, the size of the investment portfolio was determined
by the relationship of deposit growth to loan growth. When excess deposits were
not needed to fund loans, the investment
26
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portfolio was increased. When deposit growth was not sufficient to fund loan
demand, maturing investments were not replaced, Federal Funds sold balances were
reduced, and when necessary, bonds were sold. In 1998, even though loan growth
exceeded deposit growth, there was an increase in the securities portfolio. This
was possible through the use of the Federal Home Loan Bank ("FHLB") as an
alternative funding source. By utilizing the fixed rate advance program at the
FHLB, the Bank was able to borrow $5 million to fund the purchase of
government-guaranteed securities with a similar average life, achieving a
favorable earnings spread.
The Bank's investments remain concentrated in US government and US
government agency securities and tax-advantaged municipal bonds of varied
maturity. The tax-equivalent yield on the Bank's investments in federal funds
sold and securities was 6.48%, declining from 6.57% in 1997. The yield in 1996
was 6.51%.
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. On October 1,
1998 the Bank adopted Financial Accounting Standard No. 133 which provided a
second opportunity to reclassify securities without penalty. The Bank
reclassified approximately $3 million in collateralized mortgage obligations as
available for sale. The majority of bonds remaining in the held to maturity
category represent the Bank's investment in the local communities which it
serves.
DEPOSITS
Total deposits increased $5.7 million in 1998 over 1997. All major categories of
deposits increased, with the exception of time deposits of less than $100,000.
Demand deposits increased 19.3% over the prior year. Growth in regular savings
balances of 7.7% was bolstered by the positive response of customers to the
tiered rate Premium Savings product introduced in May of 1997. Time deposits
over $100,000 increased 5.8%. Such deposits are obtained from local
municipalities through the competitive bidding process and from commercial and
retail customers looking for the safety of an insured deposit.
Competition for time deposits under $100,000 has intensified as informed
consumers shop for the best return available. Aggressive promotional efforts by
other banks offering above the market rates have had an impact on the Bank's
certificate of deposit balances, as evidenced in the 8.7% decline in this
category since 1997. Alternative savings instruments, such as 401K plans and
mutual funds, among others, now attract dollars that at one time would have been
deposited into a certificate of deposit or savings account.
The Bank's competitive edge comes from providing value through outstanding
customer service. In 1998, the Bank provided customer service training to its
entire staff and adopted written customer service standards. In addition, Eas-E
Line telephone and personal computer banking was introduced in November, 1998.
This service provides customers with access to their accounts during banking and
non-banking hours, either by telephone or personal computer.
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. As a member and shareholder of the Federal Home Loan
Bank ("FHLB") the Bank also has many borrowing options. The FHLB will make cash
advances of various terms at competitive rates to its members. Advances of up to
$8.1 million can be drawn on the FHLB, via the Overnight Line of Credit
Agreement, and 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 option to purchase up to $4,000,000 in federal funds from
one of its correspondents.
27
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The cash flows from the investment portfolio are laddered to provide funds
from principal and interest payments at such times as liquidity needs may arise.
Contractual maturities are also laddered, with consideration as to the
volatility of market prices to ensure that a sufficient amount of securities are
available that could be sold without incurring significant losses. At December
31, 1998, approximately 12% of the Bank's securities had contractual maturities
of one year or less and approximately 26% had maturity dates of five years or
less. At December 31, 1998 the Bank had net short-term liquidity of $4.0 million
as compared to $5.9 million at December 31, 1997. Available assets of $48.1
million less public and purchased funds of $37.5 million resulted in a long-term
liquidity ratio of 128% compared to 149% at December 31, 1997.
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 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, 1998, the Bank was in a negative gap
position, with $14.9 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 +/-$26.1 million at December 31, 1998.
Therefore, the Bank's negative gap position was well within its policy limits.
The gap ratio (rate sensitive assets/rate sensitive liabilities) at that date
was 81%.
The following table provides information about the Bank's on-balance sheet
instruments that are sensitive to changes in interest rates. Expected maturity
date values for interest-earning assets were calculated by adjusting the
contractual maturity date for expectations of prepayments. Expected maturity
date values for interest-bearing core deposits were calculated based upon
estimates of the period over which the deposits would be outstanding.
Expected maturity date -
year ended December 31, 1999 2000 2001 2002 2003 There-after Total Fair Value
INTEREST-EARNING
ASSETS ($000S)
- ---------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Fixed Rate 9,632 5,976 4,146 3,726 3,775 16,001 43,256 42,805
Average Interest Rate 8.01% 8.56% 8.72% 8.62% 8.47% 9.64%
- ---------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Adj. Rate 18,961 3,375 4,340 3,465 3,365 34,494 68,000 68,000
Average Interest Rate 8.75% 9.10% 8.87% 8.93% 8.90% 8.64%
- ---------------------------------------------------------------------------------------------------------------------------
Investments 15,659 7,427 3,130 3,424 4,484 15,935 50,059 50,059
Average Interest Rate 6.38% 6.54% 6.85% 6.89% 7.18% 7.23%
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES ($000S)
- ---------------------------------------------------------------------------------------------------------------------------
Deposits 66,534 18,002 12,731 12,327 8,633 0 118,227 118,746
Average Interest Rate 4.55% 3.19% 2.39% 2.30% 2.52% 0.00%
- ---------------------------------------------------------------------------------------------------------------------------
Borrowed Funds 4,225 1,000 0 1,000 2,000 1,000 9,225 9,211
Average Interest Rate 5.01% 4.83% 0.00% 4.91% 4.90% 5.07%
- ---------------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments at December 31, 1998 included
$7,077,000 in undisbursed lines of credit at an average interest rate of 9.02%,
$2,622,000 in fixed rate loan origination commitments at 8.60%, $12,203,000 in
adjustable rate loan origination commitments at 9.41%, and $1,007,000 in
adjustable rate letters of credit at an average rate of 9.75%.
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
28
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be acceptable. At year end, the impact to equity as a result of marking
available for sale securities to market was an unrealized gain of $443,308. On a
quarterly basis, the available for sale portfolio is shocked for immediate rate
increases of 100 and 200 basis points. At December 31, 1998, the Bank determined
that it would take an immediate increase in excess of 200 basis points to
eliminate the current capital cushion. The Bank 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
Anticipated large capital expenditures during 1999 include approximately
$400,000 for leasehold improvements and equipment purchases necessary in
establishing a branch office in West Seneca, New York. This additional office is
scheduled to open February 1, 1999. Some existing equipment at the Bank's other
locations is scheduled to be replaced, and expenses will be incurred as a result
of the Bank's Year 2000 initiative. There will also be additional expenditures
related to the ongoing Channel Management project which encompasses the
technology necessary to provide Eas-E Line telephone and PC banking. Also in
1999, the first stages will be taken to implement Internet banking. This will
provide customers with the ability to pay bills via personal computer 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.
THE NEW MILLENNIUM
The Company has long been aware of the complexity and significance of the issues
associated with the arrival of the Millennium (Year 2000). The "Year 2000"
problem centers around the world's computer systems and a common programming
practice that condenses a century date to just two digits, i.e. "98" to
represent 1998, to conserve storage space. As a result, these systems may
interpret "00" as 1900 rather than 2000, causing potential data corruption,
misinterpretation, or system failure. The Company, with the support and
direction of its Board of Directors and Senior Management, has dedicated
financial and human resources to formally adopt strategies and work towards
resolving all potential Year 2000 issues.
In the third quarter of 1997, the Company began formalizing its strategy to
address the data processing and business impacts we anticipated to be associated
with Year 2000 issues. Our ultimate approach was to adopt the five-phase format
recommended by the Federal Financial Institutions Examination Council, and
follow guidance provided us by our regulatory authorities who periodically
monitor and evaluate our progress. These phases, and our activities, are
described as follows:
AWARENESS PHASE
While this can be considered an ongoing phase relating to education of
employees, customers, and vendors, our primary activities defined the Year 2000
problem; obtained Board of Director and Executive level support; established a
project team to include the Senior Vice President of Administration, the Bank
Auditor, Manager of Data Processing, Manager of Systems Development,
representatives from each functional area of the Bank, legal counsel, and the
principal of our main-frame software vendor. This committee was responsible for
development and implementation of an overall strategy to identify and resolve
issues associated with the year 2000.
ASSESSMENT PHASE
Implementing this phase provided an assessment of the size and complexity,
identifying affected areas of our business, identified the required resources,
and enabled us to develop a comprehensive plan. An inventory of all hardware and
software was completed to establish a specific Year 2000 status, i.e. "already
deemed compliant", "requiring replacement or renovation", or "becoming
obsolete". Priorities were then determined. Certain systems were identified as
mission critical. Non-information technology systems were also addressed. Key
vendors, such as providers of power, heating, and telephone services, among
others, were contacted regarding their Year 2000 readiness. The Bank has
received letters certifying Year 2000 compliance from those suppliers whose
services are deemed critical to Bank operations. However, in the event of an
infra-structure failure, i.e. lack of power, etc., a Bank committee has
developed a contingency plan so that business can continue with minimal
interruption. The Bank also performed a customer risk assessment in the last
quarter of 1998.
RENOVATION PHASE
The Company does not write or create computer code or perform programming
activities. We are reliant on vendors and software suppliers to furnish
enhancements in a timely manner. Renovation of our core processing system was
completed in early 1998 in conjunction with a plan developed by the vendor,
other user financial institutions, and our Company. These renovations were
29
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successfully tested in collaboration with all user institutions at our back-up
site. The renovated system was successfully installed in June 1998. Additional
in-house testing was conducted throughout the remainder of the year.
VALIDATION PHASE
This is probably the most critical and intensive phase of the entire project. It
is in this phase that we validate, through a variety of testing methods, that
each system can process after the turn of the century, with particular emphasis
on those identified as "mission critical". As stated above, renovation to our
core processing systems was successfully tested, and all testing of mission
critical systems was successfully completed by year end 1998. In each case, we
followed a comprehensive written test plan involving user representation to
validate test results. All systems, including those designated mission critical,
have been renovated and successfully tested as of December 31, 1998. Two
non-critical systems warranted as "Year 2000 compliant" by the vendor will be
tested in the first quarter of 1999. Additionally, fully integrated testing will
be performed again within the first and second quarter of 1999.
IMPLEMENTATION PHASE
The Company's Year 2000 ready systems are in place and presently functioning. As
part of implementation, we plan continued testing in 1999, along with fully
integrated tests. Quality reviews will be conducted throughout 1999 and the year
2000 to ensure proper functioning of our systems. The implementation phase
involves contingency planning. The Company maintains a formal Business
Resumption Plan, and is in the process of supplementing that plan with a
contingency plan relevant to Year 2000 issues. The contingency planning process
was well under way by year end 1998, and is expected to be completed by March
31, 1999 and validated by June 30, 1999.
The Company believes, however, that due to the widespread nature of
potential Year 2000 issues, the contingency planning process is an ongoing one
which will require further modifications as the company obtains additional
information, specifically regarding third party Year 2000 readiness.
The Company has identified significant (large) commercial depositors and
performed an assessment of their efforts towards Year 2000 readiness. Should
these depositors be unable to function financially as a result of their own Year
2000 issues, or significantly reduce their deposit levels, there could be an
impact on the Bank's own cash flow. Our initial assessment evaluates this risk
as minimal, and all customers identified in this risk assessment are aware of
the Year 2000 issues and are planning Year 2000 readiness efforts.
A risk assessment of large commercial borrowers was also completed
representing approximately 70 commercial customers, or 74% of commercial loan
outstandings. Based on survey results, all are rated as moderate to low risk. We
plan to selectively monitor the progress of certain moderate risk borrowers
throughout 1999. New commercial loans exceeding our borrowing threshold for risk
ratings will be measured to assure information technology utilized by the
borrower will be Year 2000 ready.
Management continues to quantify expenses related to Year 2000 readiness.
The Company has not been required to provide additional staff for the express
purpose of Year 2000 readiness, but rather has utilized existing internal staff.
Our budgeted expenses approximate $45,000, of which $15,000 will be allocated
for renovation of core processing software. Expenses associated with Year 2000
preparedness are not expected to have a material impact on the financial
condition of the Company.
The Company's objective is to migrate to the Year 2000 with minimal impact
on customers, and be prepared for January 1, 2000. We believe that the manner in
which we have addressed this issue underscores our strengths. The Company has
the resources and the technological expertise to address such new issues, but is
small enough to enable us to make adjustments to internal programs and systems
without affecting the ability to service our customers. The Company cannot
provide assurance that failure of third parties to adequately address the Year
2000 issue will not have an adverse impact. To minimize uncertainty, we will
assess critical suppliers and customers to determine their readiness. The
Company is confident that with the implementation of the Year 2000 initiatives
as scheduled, the possibility of significant interruptions to normal operations
should be reduced.
The preceding "Year 2000" discussion contains various statements which
represent the Company's beliefs or expectations regarding future events. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected results.
Factors that cause the differences include, but are not limited to, the actions
of governmental agencies or other third parties with respect to Year 2000
problems.
30
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under item 7 MDA "Interest Rate Risk and Market Risk"
ITEM 8. FINANCIAL STATEMENTS
See Part IV, Item 14, "Exhibits, Financial Statements, Schedules and
Reports on Form 8-K"
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Directors and Executive Officers of the Company.
INFORMATION REGARDING DIRECTORS
-------------------------------
NAME
----- TERM
NOMINEES FOR DIRECTORS: AGE POSITION EXPIRES
- ----------------------- --- -------- -------
Robert W. Allen 73 Secretary, Director 1999
William F. Barrett 57 Director 1999
David C. Koch 63 Director 1999
DIRECTORS:
----------
Phillip Brothman 60 Director 2001
Richard M. Craig 61 Chairman of Board, President, 2000
CEO, Director
LaVerne G. Hall 61 Director 2000
Richard C. Stevenson 90 Director 2000
David M. Taylor 48 Director 2001
Thomas H. Waring, Jr. 41 Director 2001
Each Director is elected to hold office for a three year term and until
his successor is elected and qualified.
Mr. Allen has been a Director since 1960. He was the Executive Vice
President of the Bank until his retirement in 1988.
Mr. Barrett has been a Director since 1971. He is currently self employed
as a property and investment manager and the former President of Carl E.
Barrett, Ltd., an insurance agency.
Mr. Koch has been a Director since 1979 and is Chairman and Chief
Executive Officer of New Era Cap Co., Inc.
Mr. Brothman has been a Director since 1976 and is a partner in the law
firm of Hurst, Brothman & Yusick.
Mr. Craig joined Evans National Bank (the "Bank") in 1987 and has served
as President and Director since 1988. In 1989 he was appointed Chief Executive
Officer, and was, in January 1998, also elected Chairman of the Board.
Previously, he was the Administrative Vice President of M&T Bank.
Mr. Hall has been a Director since 1981. He is the former Chairman of the
Board of L.G. Hall Building Contractors, Inc.
Mr. Stevenson has been a Director since 1958 and is President of
Stevenson Realtors and Chairman of the
32
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Board of Evans Land Corp.
Mr. Taylor has been a Director since 1986 and is President of Concord
Nurseries, Inc.
Mr. Waring has been a Director since 1998. He is the principal of Waring
Financial Group, an insurance and financial services firm.
The committees of the Board of Directors, which are nominated by the Chairman of
the Board and approved by the Board of Directors, are as follows:
LOAN COMMITTEE:
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
David C. Koch Thomas H. Waring, Jr.
The Loan Committee met eleven times during 1998. Its purpose is to review
and approve loans exceeding $300,000 or loans that are non-conventional.
INVESTMENT COMMITTEE:
Richard M. Craig, Chairman Robert W. Allen David M. Taylor
The Investment Committee met once in 1998. The Investment Committee meets
a minimum of once a year to review the liquidity of the investment portfolio and
discuss investment strategies.
PLANNING COMMITTEE:
LaVerne G. Hall, Chairman William F. Barrett Richard M. Craig
David C. Koch Thomas H. Waring, Jr.
The Planning Committee met three times in 1998. The Planning Committee is
responsible for reviewing the strategic plan of the Bank and actions taken to
obtain those objectives.
LOAN REVIEW COMMITTEE:
Phillip Brothman, Chairman Richard M. Craig LaVerne G. Hall
David M. Taylor
The Loan Review Committee met four times during 1998. Its purpose is to
insure the Bank's provision and reserve for credit losses are adequate. The Loan
Review Committee meets quarterly with the Bank's Loan Review Officer, who
independently conducts the loan review. As a result of her recommendations,
loans are graded based upon payment history, credit strength of borrower and
other factors. This information is then aggregated to determine the overall
adequacy of the credit loss reserve.
AUDIT COMMITTEE:
Phillip Brothman, Chairman Richard M. Craig David C. Koch
David M. Taylor
The Audit Committee met five times in 1998. The members of the Audit
Committee receive from the internal auditor a quarterly report which describes
findings for the prior quarter. The function of the Audit Committee
33
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is to insure that the Bank's activities are being conducted in accordance with
law, banking rules and regulations, other regulatory and supervisory
authorities, and the Bank's internal policies. In addition, the Audit Committee
recommends to the Board of Directors the services of a reputable certified
public accounting firm. The Committee receives and reviews the reports of the
certified public accounting firm and presents them to the Board of Directors
with comments and recommendations.
INSURANCE COMMITTEE:
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
Richard C. Stevenson
The Insurance Committee met once during 1998. This committee reviews the
coverage of insurance policies of the Bank and monitors costs.
HUMAN RESOURCE COMMITTEE:
LaVerne G. Hall, Chairman William F. Barrett Richard M. Craig
David C. Koch Richard C. Stevenson Thomas H. Waring, Jr.
The Human Resource Committee met twice during 1998. Its purpose is to
review management's recommendation as it relates to job classification, salary
ranges and annual merit increases. The committee also reviews fringe benefits.
The Human Resource Committee also establishes the compensation of the Executive
Officers of the Company. See "Human Resource Committee Report on Executive
Compensation".
The Board of Directors of the Company met twelve times during 1998. Each
incumbent director of the Company, except for Mr. Koch and Mr. Waring, attended
at least 75% of the aggregate of all the meetings of the Board of Directors and
the Committees of which they were members.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's stock, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. Executive officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that during 1998 all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with by such persons.
34
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
For the year 1998, members of the Board of Directors were compensated at
the rate of $750 per meeting, with the Secretary receiving $800 per meeting.
Total directors' fees during 1998 amounted to $140,145 (including committee fees
and $36,915 of deferred compensation).
EXECUTIVE COMPENSATION
There is shown below information concerning the annual and long-term
compensation for service in all capacities to the Company for the years 1998,
1997, and 1996 of the Chief Executive Officer, the Senior Vice President of
Administration, and the Senior Vice President of the Loan Division. No other
executive officer earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ----------------------------------------
AWARDS PAYOUTS
NAME OF AND STOCK LONG-TERM
PRINCIPAL OPTION INCENTIVE ALL OTHER
POSITION YEAR SALARY BONUS OTHER(1) (SHARES) PAYOUTS COMPENSATION
- -------- ---- ------ ----- -------- -------- ------- ------------
Richard M. Craig 1998 $160,308 $20,000 $3,206 -0- -0- -0-
President & CEO 1997 $151,308 $14,013 $3,026 -0- -0- -0-
1996 $142,385 $13,840 $2,848 -0- -0- -0-
James Tilley 1998 $109,335 $14,000 $2,187 -0- -0- -0-
Senior Vice 1997 $103,059 $9,991 $2,061 -0- -0- -0-
President 1996 $97,095 $9,875 $1,942 -0- -0- -0-
William R. Glass 1998 $102,945 $14,000 $2,059 -0- -0- -0-
Senior Vice 1997 $96,630 $9,868 $1,933 -0- -0- -0-
President 1996 $90,235 $9,743 $1,805 -0- -0- -0-
(1) Includes the Bank's contribution to the Employee Savings Plan made for the
benefit of Mr. Craig of $3,206 in 1998, $3,026 in 1997, and $2,848 in 1996;
for the benefit of Mr. Tilley of $2,187 in 1998, $2,061 in 1997, and $1,942
in 1996; and for the benefit of Mr. Glass of $2,059 in 1998, $1,933 in 1997,
and $1,805 in 1996. See "EMPLOYEE SAVINGS PLAN". Does not include personal
benefits which did not exceed 10% of Mr. Craig's, Mr. Tilley's, or
Mr. Glass' salary and bonus in any year.
EMPLOYMENT AGREEMENTS
Mr. Richard Craig, Mr. James Tilley, and Mr. William Glass have each
entered into an Employment Agreement with the Bank which runs through
December 31, 2002. Each Employment Agreement provides that salary will be set
annually by the Board of Directors. If the Bank terminates the Employment
Agreement without cause, the Bank is obligated to continue to pay base salary
for the longer of three months or the remainder of the term of the Employment
Agreement.
PENSION PLAN
The Bank maintains a defined benefit pension plan for all eligible
employees. An employee becomes vested in a pension benefit after five years of
service. Upon retirement at age 65, vested participants are entitled to receive
a monthly benefit. Prior to a May 1, 1994 amendment to the plan, the monthly
benefit under the pension plan was 3% of average monthly compensation multiplied
by years of service up to a maximum of fifteen years of service. In 1994, the
pension plan was amended to change the benefit to 1% of average monthly
compensation multiplied by years of service up to a maximum of thirty years of
service. However, the benefits already accrued by employees prior to this
amendment were not reduced by the amendment. Mr. Craig, Mr. Tilley, and Mr.
Glass are participants in the pension plan, and as of December 31, 1998, Mr.
Craig had ten years of credited service and $13,264 of average monthly
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compensation; Mr. Tilley had nine years of credited service and $8,949 of
average monthly compensation; and Mr. Glass had five years of credited service
and $8,375 of average monthly compensation.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
In 1995, the Bank entered into non-qualified Supplemental Executive
Retirement Plans ("SERPs") with both Mr. Craig and Mr. Tilley to provide
retirement benefits to supplement their benefits under the Bank's pension plan
and replace the benefits reduced by the 1994 amendment to the Pension Plan. See
"PENSION PLAN". In 1998, Mr. Craig's SERP was amended and the benefits
increased. In 1999, the Bank amended Mr. Tilley's agreement increasing his
benefit, and also entered into an agreement with Mr. Glass. Under the SERPs, as
amended, Mr. Craig, Mr. Tilley, and Mr. Glass are entitled to additional annual
pension payments of $92,766, $66,943, and $30,000, respectively, for 20 years
after retirement at age 65, unless their employment is terminated earlier. The
SERPs also provide death benefits in the same annual amounts in the event the
executive dies prior to age 65, which are payable over 10 years. The Bank has
purchased a life insurance policy on both Mr. Craig and Mr. Tilley to assist in
recovering the amounts of any benefits paid in the future under the SERPs.
EMPLOYEE SAVINGS PLAN
The Bank also maintains a 401(k) salary deferral plan to assist employees
in saving for retirement.
All employees are eligible to participate on the first of the month
following one year of service, provided they have completed 1,000 hours of
service. Eligible employees can contribute up to a maximum of 15% of their base
pay. An automatic 1% of base pay contribution is made by the Bank and in
addition, the Bank makes a matching contribution at a rate of 25% of the first
4% contributed by a participant. Participants are always 100% vested in their
own contributions and the Bank's matching contribution is also 100% vested.
Individual account earnings will depend on the performance of the
investment funds in which the participant invests. Specific guidelines govern
adjustments to contribution levels, investment decisions and withdrawals from
the plan. The benefit is paid as an annuity unless the employee elects one of
the optional forms of payment available under the plan. See "Summary
Compensation Table" for a summary of the amounts contributed by the Bank to this
Plan for the benefit of Mr. Craig, Mr. Tilley, and Mr. Glass.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 31, 1999, the number
(rounded to the nearest whole share) of outstanding shares of Common Stock
beneficially owned by (i) each shareholder known by the Company to beneficially
own more than 5% of the Company's Common Stock, (ii) all directors and nominees
of the Company individually, and (iii) by all executive officers and directors
as a group:
Nature and Amount of Percent of
Name Beneficial Ownership Class
- ---- -------------------- -----
Robert W. Allen (1) 29,944 1.8%
William F. Barrett (2) 161,345 9.5%
Phillip Brothman (3) 23,810 1.4%
Richard M. Craig (4) 8,123 .5%
LaVerne G. Hall (5) 54,380 3.2%
David C. Koch (6) 25,793 1.5%
Richard C. Stevenson (7) 55,324 3.3%
David M. Taylor (8) 6,840 .4%
Thomas H. Waring, Jr. 509 .03%
Directors and Officers
as a Group (11 persons)
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10) 367,580 21.6%
(1) Includes 2,764 shares owned by Mr. Allen's wife.
(2) Includes 12,850 shares owned by Mr. Barrett's wife, 30,940 shares owned
jointly by Mr. Barrett and his wife and 6,345 shares held for Mr. Barrett's
son, as to which he disclaims beneficial ownership.
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(3) Includes 1,480 shares owned by Mr. Brothman's wife and 2,713 shares held by
a pension plan of which Mr. Brothman is a trustee and a participant.
(4) Includes 5,415 shares owned jointly by Mr. Craig and his wife and 168
shares owned by Mr. Craig's daughter, as to which he disclaims beneficial
ownership.
(5) Includes 23,230 shares owned by Mr. Hall's wife.
(6) Includes 1,485 shares owned jointly by Mr. Koch and his wife, and 775
shares owned by Mr. Koch's son, as to which he disclaims beneficial
ownership.
(7) Includes 3,669 shares owned by Mr. Stevenson's wife, and also 12,635 shares
held by Mr. Stevenson as conservator for Evelyn Simonsen and 1,060 shares
held in a trust for F. Evelyn Beardsley as to which he disclaims beneficial
ownership.
(8) Includes 300 shares owned jointly by Mr. Taylor and his wife.
(9) Includes 426 shares owned by Mr. James Tilley, Assistant Secretary of Evans
Bancorp, Inc., 10 shares held by Mr. Tilley in trust for his grandson, and
76 shares owned jointly by Mr. Tilley and his mother.
(10) Includes 1,000 shares owned by Mr. William Glass, Treasurer of Evans
Bancorp, Inc., held jointly with his wife.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and in the future, expects to have banking and
fiduciary transactions with Directors and Executive Officers of the Company and
some of their affiliates. All such transactions have been in the ordinary course
of business and on substantially the same terms (including interest rates on
loans) as those prevailing at the time for comparable transactions with others.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS,SCHEDULES, AND REPORTS
ON FORM 8-K
The following financial statements and independent auditors' report
thereon are included herein or are incorporated by reference are included from
1998 Annual Report to Shareholders pages 58 through 89 in response to Part II,
Item 7.
(a) Documents filed as a part of this Report:
None
(b) Documents Incorporated by Reference:
1. FINANCIAL STATEMENTS.
Independent Auditors' Report of Deloitte & Touche LLP
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. EXHIBITS
Exhibit Page
No NAME No.
3.1 Certificate of Incorporation (1) n/a
3.2 Certificate of Amendment to
Certificate of Incorporation (3) n/a
3.3 By-Laws (1) n/a
3.4 Amended Section 204 of By-Laws (4) n/a
3.5 Amended Section 203 of By-Laws (6) n/a
4.1 Specimen common stock certificate (3) n/a
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10.1 Employment Agreement dated August 19, 1997 n/a
between the Bank and Richard M. Craig (6)
10.2 Employment Agreement dated August 19, 1997 n/a
between the Bank and James Tilley (6)
10.3 Employment Agreement dated August 19, 1997 n/a
between the Bank and William R. Glass (6)
10.4 Specimen 1984 Director Deferred Compensation
Agreement (2) n/a
10.5 Specimen 1989 Director Deferred Compensation
Agreement (2) n/a
10.6 Summary of Provisions of Director Deferred
Compensation Agreements (2) n/a
10.7 Evans National Bank Supplemental Executive
Retirement Plan for Richard M. Craig dated
February 16, 1999 (7)
10.8 Evans National Bank Supplemental Executive
Retirement Plan for James Tilley dated
February 16, 1999 (7)
10.9 Evans National Bank Supplemental Executive
Retirement Plan for William R. Glass dated
February 16, 1999 (7)
13.1 1998 Annual Report to Shareholders (7)
21.1 Subsidiaries of the Registrant (6) n/a
27 Financial Data Schedule (7)
FOOTNOTES
(1) Filed as Exhibits to the Company's Registration Statement on Form S-4
(Registration No. 33-25321) and incorporated herein by reference.
(2) Filed as Exhibits to the original Form 10 (Registration No. 0-18539)
and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Form 10-Q for the quarter ended
March 31, 1997 (File No. 0-18539) and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Form 10-Q for the quarter ended
June 30, 1996 (File No. 0-18539) and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Form 10-QSB for the quarter ended
March 31, 1995 (File No. 0-18539) and incorporated herein by
reference.
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(6) Filed as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1997 (File No.0-18539) and incorporated herein by
reference.
(7) Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
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Pursuant to the requirements of Section 13 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/Richard M. Craig
Richard M. Craig,
Chairman
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 in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
Chairman
/s/Richard M. Craig President March 29, 1999
Richard M. Craig (Chief Executive
Officer), Principal
Accounting Officer and
Director
/s/James Tilley Assistant Secretary March 29, 1999
James Tilley
/s/William R. Glass Treasurer March 29, 1999
William R. Glass
/s/Robert W. Allen Director March 29, 1999
Robert W. Allen
/s/Laverne G. Hall Director March 29, 1999
LaVerne G. Hall
/s/Richard C. Stevenson Director March 29, 1999
Richard C. Stevenson
/S/David M. Taylor Director March 29, 1999
David M. Taylor
/S/Thomas H. Waring Director March 29, 1999
Thomas H. Waring