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EXHIBIT 13.1
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Exhibit 13.1
Profile
Evans Bancorp, Inc. is a bank holding company headquartered in Angola, New York
and conducts its business through its wholly-owned subsidiary, Evans National
Bank. The Bank is a FDIC full-service commercial bank and as of December 31,
1998 had total assets of $174,120,230, total deposits of $144,083,636 and total
stockholders' equity of $18,623,413. The Bank's primary market area is located
in Western New York State and specifically in southern Erie County, northern
Chautauqua County and northwestern Cattaraugus County.
The principal business of the Bank is commercial banking and consists of,
among other things, attracting deposits from the general public and using these
funds to extend credit and to invest in securities. The Bank offers a variety of
loan products to its customers including commercial loans, commercial and
residential mortgage loans, and consumer loans. In addition, the Bank offers
deposit products to include checking and NOW accounts, passbook and statement
savings, and certificates of deposit.
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President's Message
With the key components of the financial statements - net income, loans,
deposits, and stockholders' equity - at record levels, I am pleased to report
that 1998 was another excellent year for Evans Bancorp, Inc. and its subsidiary,
Evans National Bank.
Net income in 1998 was $2,043,351, an increase of $241,076, or 13.3% over
1997 net income of $1,802,275. Earnings per share increased $.14, or 13.2%, to
$1.20 per share from $1.06 per share in 1997. The Board of Directors declared a
cash dividend of $.37 per share during 1998, which compares to $.30 per share in
1997. This is the seventeenth consecutive year there has been an increase in the
cash dividend. Other key performance ratios which improved in 1998 include
return on average assets of 1.24% as compared to 1.19% in 1997, and 11.63%
return on average equity as compared to 11.06% the previous year. Total assets
also reached a record high of $174,120,230 at December 31, 1998, which is an
increase of $15,578,067, or 9.8%, over last year's total assets of $158,542,163.
Net loans increased by $8,899,022 in 1998 to $110,526,449, an 8.7% increase
over 1997's $101,627,427. The quality of the portfolio, as measured by
charge-offs, continues to remain at a high level. Actual I charge-offs totaled
$71,458 for 1998, which equated to .06% of outstanding loans, as compared to
$46,858 in 1997, or .05%. Deposits increased to $144,083,636, or 4.1%, from
$138,391,327 for an increase of $5,692,309. Stockholders' Equity increased by
$1,584,113, or 9.3%, to $18,623,413 from $17,039,300.
The Bank's Tier I capital ratio of 16.3%, total capital ratio of 16.9% and
leverage ratio of 10.5% substantially exceeded the regulatory requirements of
4.0%, 8.0%, and 4.0%, respectively.
In order to meet the challenges of our competitive environment and
successfully accommodate the needs of our customers for electronic banking
services, the Bank initiated a technology project in 1998 which we refer to as
"channel management".
The first phase of the channel management project was a conversion to
Cartel, a new ATM network provider established locally to better serve the
electronic banking needs of community banks. This further development of the ATM
network allows us to drive our own ATMs through an independent service bureau
and provide on-line information to our customers. In the fall of 1998, as part
of channel management, the Bank introduced a telephone and PC (personal
computer) banking service called Eas-E-Line, which has won wide acceptance from
our customers. Eas-E-Line provides convenient customer access to account
information, with transfer capabilities from any telephone or personal computer.
Future channel management phases will include the introduction of Eas-E-Check, a
debit card that works like a check, and Internet access, providing a bill-paying
service for both businesses and individuals.
Over the past year, the Company has devoted considerable time and planning
to be prepared for January 1, 2000 and the much-publicized, anticipated computer
and system deficiencies in distinguishing between the years
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1900 and 2000. As the new millennium approaches, the Company's objective is to
migrate to the Year 2000 with minimal impact on customers.
We initiated our Year 2000 preparation efforts in 1996; however, our most
significant activities were accomplished during 1998. Guided by a five-phase
approach recommended by the Federal Financial Institutions Examination Council
(FFIEC) and our regulatory authority, the Office of the Comptroller of the
Currency (OCC), we first developed a comprehensive plan for becoming Year 2000
compliant. Working closely with our core processing software vendor, we
successfully tested for Year 2000 readiness all systems which we identified as
mission critical. A renovated version of our core processing software was
installed in the second quarter of 1998, and we continued to test for compliance
through the remainder of the year.
In order to satisfactorily determine the Year 2000 readiness of the Bank's
vendors, each was contacted during the course of the year. Additionally, a
customer-awareness program was developed to inform customers of the Bank's
readiness efforts, which included a public information seminar and readiness
notices being sent to each of the Bank's customers. A customer risk assessment
was also conducted to assess the Year 2000 efforts of customers we considered
significant borrowers and depositors.
Well ahead of schedule, we have entered into the final phase of our Year
2000 plan, which is the Implementation Phase. The Bank's Year 2000-ready systems
are currently in place and functioning. We plan to continue testing in 1999, and
quality reviews will be conducted throughout 1999 and the year 2000 to ensure
proper functioning of our systems.
Although we believe that our systems are ready for the Year 2000, the Bank
is also developing contingency plans to minimize significant interruption of
normal operation in the event of failure. The contingency planning process
commenced during the fourth quarter of 1998, was well under way by year end, and
will be completed during the first quarter of 1999. This ongoing planning
process will require modification, as we obtain additional information
specifically regarding third party readiness. With the support and direction of
the Board of Directors and senior management, we will continue to dedicate the
necessary resources and strategies to resolve all potential Year 2000 issues.
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 dedication and efforts of our employees is one of the most important
factors in our continuing success. To further enhance the capabilities of our
employees, we initiated training programs during the past year. We are confident
that these programs in computer, customer service, and sales training will
strengthen and enhance individual performance and productivity.
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The following employees were recognized during 1998 for their years of
service as noted: Barbara H. Harris and Jeffrey L. White (20 years); Patricia R.
Grise, Carol A. Mahoney, and David G. Scheffer (15 years); Pamela L. Catalano,
William J. Gray, Marlene A. Kwiatkowski, Howard M. Martin, Jr., Rose M. Radecki,
and James Tilley (10 years); William R. Glass, Cynthia A. Gracon, and Kim M.
Heimburg (5 years).
Evidencing our firm commitment to the betterment of our communities, Evans
National Bank's management and employees continue to volunteer and serve in many
capacities for a variety of local organizations.
In January of 1998, Thomas H. Waring, Jr. was appointed to the Board of
Directors and was elected for a full term at the Stockholders meeting in April,
1998. He has been a valuable and important contributor, and has brought new
talents to our Board.
In September of 1998, I concluded my term as President of the Independent
Bankers Association of New York State. My tenure further convinced me of the
inherent value in the community banking philosophy; that of using local customer
deposits to support business and consumer loans which, in turn, increases the
quality of life in our communities. I believe that this will continue to be
unique to community banks and, along with the delivery of individualized
customer service, ensure our industry's continued strength and prosperity.
I am happy to announce that on February 1, 1999, we opened our seventh
branch office, located in the Southgate Plaza in West Seneca, New York. Timothy
F. Jachlewski was appointed Vice President and Manager of this new facility. Tim
comes to us with an extensive background in banking, and is well known to the
West Seneca community, having been involved in many local activities and
organizations. We believe the addition of this office is a logical extension of
our market area, and will provide new opportunities for future growth.
We are proud of the goals realized in 1998, which include strong earnings,
and the Bank's positioning for the future. I would like to recognize and thank
our employees, the Board of Directors, the stockholders, and our customers for
their continued support. We look forward to an exciting year in 1999, and
continued success as we enter the new millennium.
Richard M. Craig
Chairman of the Board, President and Chief Executive Officer
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EVANS BANCORP, INC.
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 1998 1997 1996 1995 1994
RESULTS OF OPERATIONS
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Interest Income $ 11,851,787 $ 11,072,851 $ 9,799,815 $ 9,226,500 $ 8,206,596
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Interest Expense 4,946,730 4,588,056 3,912,761 3,418,782 2,747,297
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Net Interest Income 6,905,057 6,484,795 5,887,054 5,807,718 5,459,299
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Non-Interest Income 1,220,194 950,662 930,986 763,054 785,551
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Non-Interest Expense 5,196,900 4,849,182 4,555,398 4,228,922 3,981,801
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Net Income 2,043,351 1,802,275 1,614,642 1,664,783 1,617,049
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BALANCE SHEET DATA
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Total Assets $174,120,230 $158,542,163 $140,898,057 $125,308,204 $114,565,971
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Loans - Net 110,526,449 101,627,427 92,087,902 75,468,504 71,998,929
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Allowance for Loan Losses 729,199 609,539 546,954 557,961 628,957
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Securities 50,059,972 40,400,374 36,054,324 38,954,494 32,341,350
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Total Deposits 144,083,636 138,391,327 123,461,379 109,020,551 100,532,031
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Stockholders' Equity 18,623,413 17,039,300 15,510,083 14,485,510 12,723,940
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PER SHARE DATA
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Net Income $ 1.20 $ 1.06 $ 0.95 $ 0.97 $ 0.95
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Cash Dividend $ .37 $ 0.30 $ 0.22 $ 0.14 $ 0.09
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Book Value at Year End $ 10.96 $ 10.03 $ 9.13 $ 8.53 $ 7.49
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Market Value $ 45.00 $ 38.00 $ 27.20 $ 22.00 $ 14.00
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Weighted Average Shares 1,698,612 1,698,950 1,698,950 1,698,950 1,698,950
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(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.
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MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie and
Chautauqua Counties of Western New York. The Bank serves 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.
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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
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Actual Loan Losses $ 71,458 0.06% $ 46,858 0.05% $ 76,604 0.08%
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Non-Performing Loans $1,452,000 1.32% $ 987,000 0.96% $ 230,000 0.20%
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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.
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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
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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.
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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)
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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%
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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%
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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%
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INTEREST-BEARING
LIABILITIES ($000S)
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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
10
12
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
11
13
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.
12
14
Independent Auditors' Report
TO THE BOARD OF DIRECTORS
Evans Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Evans
Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and 1997
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Buffalo, New York
January 29, 1999
13
15
Evans Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1998 and 1997 1998 1997
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 7,300,780 $ 5,821,532
Federal funds sold 0 4,515,000
Total cash and cash equivalents 7,300,780 10,336,532
--------- ----------
Securities:
Available for sale 45,969,587 33,822,334
Held to maturity 4,090,385 6,578,040
Loans receivable, net of allowance for loan losses of
$729,199 and $609,539, respectively 110,526,449 101,627,427
Properties and equipment, net 3,696,658 3,827,672
Other assets 2,536,371 2,350,158
--------- ---------
TOTAL ASSETS $174,120,230 $158,542,163
============ ============
LIABILITIES AND STOCKHOLDERS' Equity
LIABILITIES:
Deposits:
Demand $ 25,857,037 $ 21,680,839
NOW and money market 7,554,104 7,093,959
Regular savings 47,676,615 44,264,697
Time 62,995,880 65,351,832
---------- ----------
Total deposits 144,083,636 138,391,327
Federal funds purchased 2,225,000 0
Other borrowed funds 7,000,000 0
Other liabilities 2,188,181 3,111,536
--------- ---------
Total liabilities 155,496,817 141,502,863
----------- -----------
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized;
1,698,950 shares issued 849,475 849,475
Capital surplus 10,990,720 10,990,720
Accumulated other comprehensive income (net of tax) 443,308 213,856
Retained earnings 6,400,764 4,985,249
--------- ---------
18,684,267 17,039,300
Less: Treasury stock, at cost (1,352 shares) (60,854) 0
------- ---------
Total stockholders' equity 18,623,413 17,039,300
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $174,120,230 $158,542,163
============ ============
See notes to consolidated financial statements.
14
16
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
INTEREST INCOME
Loans $ 9,336,407 $ 8,632,716 $ 7,381,871
Federal funds sold 84,316 122,516 201,831
Securities:
Taxable 1,333,268 1,372,883 1,427,890
Non-taxable 1,097,796 944,736 765,123
Deposits with banks 0 0 23,100
--------- ---------- ------
Total interest income 11,851,787 11,072,851 9,799,815
INTEREST EXPENSE ON DEPOSITS AND BORROWINGS 4,946,730 4,588,056 3,912,761
--------- ---------- ------
NET INTEREST INCOME 6,905,057 6,484,795 5,887,054
PROVISION FOR LOAN LOSSES 150,000 60,000 60,000
------- ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,755,057 6,424,795 5,827,054
NON-INTEREST INCOME
Service charges 708,482 670,366 667,839
Gains on sales of assets, net 66,208 33,809 11,103
Other 445,504 246,487 252,044
------- ------- -------
Total non-interest income 1,220,194 950,662 930,986
--------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,807,223 2,592,120 2,602,752
Occupancy 762,380 761,383 637,007
Supplies 115,588 101,534 118,740
Repairs and maintenance 186,772 163,189 147,383
Advertising and public relations 118,021 127,127 131,753
Professional services 290,858 308,617 212,601
FDIC assessments 16,395 15,328 2,000
Other 899,663 779,884 703,162
------- ------- -------
Total non-interest expense 5,196,900 4,849,182 4,555,398
--------- --------- ---------
INCOME BEFORE INCOME TAXES 2,778,351 2,526,275 2,202,642
INCOME TAXES 735,000 724,000 588,000
------- ------- -------
NET INCOME $ 2,043,351 $ 1,802,275 $ 1,614,642
============ ============ ============
Net income per common share - basic $ 1.20 $ 1.06 $ 0.95
============ ============ ============
Weighted average number of common shares 1,698,612 1,698,950 1,698,950
========= ========= =========
See notes to consolidated financial statements.
15
17
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Years ended December 31, Accumulated
1998, 1997 and 1996 Other
Common Capital Retained Treasury Comprehensive
Stock Surplus Earnings Stock Income Total
Balance, January 1, 1996 $ 793,703 $ 8,592,502 $ 4,953,075 $ $ 146,230 $ 14,485,510
Comprehensive income:
1996 net income 1,614,642 1,614,642
Unrealized (loss) gain on
available for sale securities,
net of deferred taxes
of $120,000 (169,001) (169,001)
------------
Total comprehensive
income 1,445,641
------------
Stock dividends, with
fractional shares
redeemed for cash 55,772 2,398,218 (2,494,493) (40,503)
Cash dividends ($.22 per
common share) (380,565) (380,565)
---------- ------------ ----------- ----------- ----------- ------------
Balance, December 31, 1996 849,475 10,990,720 3,692,659 (22,771) 15,510,083
Comprehensive income:
1997 net income 1,802,275 1,802,275
Unrealized gain (loss) on
available for sale securities,
net of deferred taxes
of $100,638 236,627 236,627
------------
Total comprehensive
income 2,038,902
------------
Five-for-one stock split
Purchase of 3,966 shares
for treasury (130,878) (130,878)
Cash dividends ($.30 per
common share) (509,685) (509,685)
Sale of 3,966 shares
from treasury 130,878 130,878
---------- ------------ ----------- ----------- ----------- ------------
Balance, December 31, 1997 849,475 10,990,720 4,985,249 213,856 17,039,300
Comprehensive income:
1998 net income 2,043,351 2,043,351
Unrealized gain (loss) on
available for sale securities,
net of deferred taxes
of $107,977 229,452 229,452
------------
Total comprehensive
income 2,272,803
------------
Cash dividends ($.37 per
common share) (627,836) (627,836)
Purchase of 3,881 shares
for treasury (174,645) (174,645)
Sale of 2,529 shares
from treasury 113,791 113,791
---------- ------------ ----------- ----------- ----------- ------------
Balance, December 31, 199 8 $ 849,475 $ 10,990,720 $ 6,400,764 $ (60,854) $ 443,308 $ 18,623,413
========== ============ =========== =========== =========== ============
See notes to consolidated financial statements.
16
18
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
OPERATING ACTIVITIES:
Interest received $ 11,805,241 $ 11,027,381 $ 10,047,637
Fees received 1,136,626 968,072 1,025,437
Interest paid (4.952,879) (4,543,895) (3,847,407)
Cash paid to employees and suppliers (4,944,895) (4,680,322) (4,443,431)
Income taxes paid (863,365) (786,000) (743,444)
------------ ------------ ------------
Net cash provided by operating activities 2,180,728 1,985,236 2,038,792
------------ ------------ ------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (35,657,818) (26,075,499) (16,562,178)
Proceeds from sales 19,652,675 22,306,088 14,414,736
Proceeds from maturities 7,686,003 686,306 4,597,881
Held to maturity securities:
Purchases (3,722,629) (2,618,319) (1,177,002)
Proceeds from maturities 2,790,562 1,736,862 1,314,873
Additions to properties and equipment (414,541) (466,472) (1,482,935)
Increase in loans, net of repayments (13,857,709) (12,236,511) (19,258,136)
Proceeds from sales of loans 4,863,285 2,597,162 2,593,290
Proceeds from sale of other real estate owned 49,070 0 0
Proceeds from life insurance polices surrendered 224,009 0 0
------------ ------------ ------------
Net cash used in investing activities (18,387,093) (14,070,383) (15,559,471)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowing 8,165,920 1,059,080 0
Increase in deposits 5,693,383 14,929,948 14,440,828
Dividends paid (627,836) (679,580) (251,173)
Purchase of treasury stock (174,645) (130,878) 0
Sale of treasury stock 113,791 130,878 0
------------ ------------ ------------
Net cash provided by financing activities 13,170,613 15,309,448 14,189,655
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,035,752) 3,224,301 668,976
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 10,336,532 7,112,231 6,443,255
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,300,780 $ 10,336,532 $ 7,112,231
============ ============ ============
(Continued)
17
19
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 2,043,351 $ 1,802,275 $ 1,614,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 381,115 356,663 344,086
Provision for loan losses 150,000 60,000 60,000
Gains on sales of assets (66,208) (33,809) (11,103)
Gains on life insurance policies surrendered (97,580) 0 0
Changes in assets and liabilities affecting cash flow:
Other assets (225,835) ( 367,243) 96,609
Other liabilities (4,115) 167,350 (65,442)
------ ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,180,728 $ 1,985,236 $ 2,038,792
============ ============ ============
(Concluded)
See notes to consolidated financial statements.
18
20
Evans Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General - Evans Bancorp, Inc. (the "Company") was organized in
October 1988, under the Business Corporation Law of the State of New York as a
bank holding company. In January 1989, the shareholders of the Evans National
Bank (the "Bank") approved an Agreement and Plan of Reorganization (the
"Reorganization") whereby the Bank effectively became a wholly-owned subsidiary
of the Company. The Bank is in the commercial banking business, attracting
deposits from and making loans to the general public in its immediate
geographical area. The Bank's main office is located in Angola, New York and it
has branches in Derby, Evans, Forestville, Hamburg and North Boston.
Regulatory Requirements - The Bank is subject to the rules, regulations, and
reporting requirements of various regulatory bodies, including the Federal
Reserve Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), and
the Office of the Comptroller of the Currency ("OCC").
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the Bank. All material intercompany accounts and
transactions are eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities - Securities for which the Bank has the positive intent and ability
to hold to maturity are stated at cost, adjusted for discounts and premiums that
are recognized in interest income over the period to the earlier of call date or
maturity using a method that approximates level yield. Securities held to
maturity have been designated as unavailable to be sold as part of the Bank's
asset-liability management activities.
Securities classified as available for sale are stated at fair value, with
unrealized gains and losses excluded from earnings and reported, net of deferred
income taxes, in stockholders' equity. Gains and losses on sales of securities
are computed using the specific identification method.
Securities which have experienced an other than temporary decline in fair value
are written down to a new cost basis with the amount of the writedown included
in earnings as a realized loss. The new cost basis is not changed for subsequent
recoveries in fair value. Factors which management considers in determining
whether an impairment in value of an investment is other than temporary include
the issuer's financial performance and near term prospects, the financial
condition and prospects for the issuer's geographic region and industry, and
recoveries in fair value subsequent to the balance sheet date.
The Bank does not engage in securities trading activities.
Allowance for Loan Losses - The allowance for loan losses is established through
a provision for loan losses. Recoveries on loans previously charged off are
credited directly to the allowance for loan losses. The allowance is an amount
that management believes adequate to absorb losses on existing loans that may
become uncollectible. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan-loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral, and current
economic conditions.
In addition, various regulatory agencies, as part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Foreclosed Real Estate - Foreclosed real estate is initially recorded at the
lower of book or fair value (net of costs of disposal) at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expenses.
Valuations are periodically performed by management, and an allowance for
potential
21
additional losses is established by a charge to operations if the carrying value
of a property exceeds fair value. Foreclosed real estate is classified as other
assets on the consolidated balance sheets.
Properties and Equipment - Properties and equipment are stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets which range from 3 to 31
years.
The Bank regularly assesses all of its long-lived assets for impairment and
recognizes a loss when the carrying value of an asset exceeds its fair value.
The Bank determined that no impairment loss needs to be recognized for
applicable assets in 1998 or 1997.
Interest Income on Loans - Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed and any cash received is
credited to the outstanding principal balance. Such loans are returned to
accrual status when they are made current and, in the opinion of management, the
borrower has the ability to continue making timely payments. Loan origination
and commitment fees and certain direct loan origination costs are deferred and
recognized over the lives of the related assets as an adjustment of the loans'
yields using the level yield method.
Income Taxes - Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the tax rate expected to be in effect when the taxes are
actually paid or recovered.
Net Income per Common Share - Net income per common share is based on the
weighted average number of shares outstanding during each year, retroactively
adjusted for stock dividends and splits. Only basic earnings per share is
disclosed because the Company does not have any dilutive securities or other
contracts to issue common stock or convert to common stock.
Dividend Reinvestment Plan - The Company has a Dividend Reinvestment Plan (the
"Plan") which provides each holder of record of the Bank's common stock the
opportunity to reinvest automatically the cash dividends they receive on shares
of the Bank's common stock. Stockholders who do not wish to participate in the
Plan will continue to receive cash dividends, as declared, in the usual manner.
Fifth Third Bank Corporate Trust Services is the administrator of the Plan.
Shares purchased under the Plan are held in safekeeping by the Agent until the
stockholder terminates his/her participation in the Plan. The Agent also acts as
transfer agent and registrar for the Bank's common stock.
Employee Benefits and Deferred Compensation Plan - Costs are charged to salaries
and employee benefits expense in the periods in which the services are rendered.
Pension costs are funded on a current basis in compliance with the Employee
Retirement Income Security Act and are accounted for in compliance with SFAS No.
87, "Employers' Accounting for Pensions".
Off Balance Sheet Financial Instruments - In the ordinary course of business the
Bank has entered into off balance sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when the transactions are
executed.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, interest bearing deposits in other
banks and federal funds sold. Generally, federal funds sold are purchased for
one-day periods.
Cash and due from banks includes reserve balances that the Bank is required to
maintain with Federal Reserve Banks. The required reserves are based upon
deposits outstanding and were approximately $720,000 and $657,000 at December
31, 1998 and 1997, respectively.
New Accounting Standards Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, which became effective for the Company in
1998. SFAS No. 130 establishes standards for reporting and disclosure of
comprehensive income and its components in financial statement format.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. Items considered comprehensive income including foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. The Company has
elected to display comprehensive income in the statements of stockholders'
equity, net of reclassification adjustments. Reclassification adjustments are
made to avoid double counting in comprehensive income items that are displayed
as part of net income for a period that also had been displayed as part of other
comprehensive income in that period or earlier periods. The reclassification
adjustments, net of tax, for the years ended December 31, 1998, 1997, and 1996
amounted to $(25,596), $1,357 and $3,026, respectively.
20
22
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information was issued in 1997 by the Financial Accounting Standards Board. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
Management has determined that the Bank is the Company's only operating segment.
As such additional disclosures are not considered necessary.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. The Company adopted the provisions of SFAS No. 133
effective October 1, 1998. Because the Company does not use derivatives, the
adoption of SFAS No. 133 did not impact the Company's earnings or financial
position. As allowed by SFAS No. 133 the Company transferred approximately
$2,900,000 of certain securities from held to maturity to the available for sale
classification. The realized and unrealized gains on the securities transferred
were not material to the Company.
2. SECURITIES
The amortized cost of securities and their approximate fair value at December 31
were as follows:
1998
----------------------------------------------------------
Unrealized
----------
Amortized Fair
Cost Gains Losses Value
Available for Sale:
U.S. Government and Agency Securities $ 9,648,523 $ 27,031 $ (13,104) $ 9,662,450
Mortgage Backed Securities 12,534,756 0 (92,511) 12,442,245
State and Municipal Securities 22,182,635 730,507 0 22,913,142
Other Securities 951,750 0 0 951,750
------------ ------------ ------------ ------------
Total $ 45,317,664 $ 757,538 $ (105,615) $ 45,969,587
============ ============ ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 47,565 $ 0 $ 0 $ 47,565
State and Municipal Securities 4,042,820 0 0 4,042,820
------------ ------------ ------------ ------------
Total $ 4,090,385 $ 0 $ 0 $ 4,090,385
============ ============ ============ ============
1997
----------------------------------------------------------
Unrealized
----------
Amortized Fair
Available for Sale:
U.S. Government and Agency Securities $ 11,618,094 $ 23,843 $ (67,225) $ 11,574,712
Mortgage Backed Securities 1,419,658 30,799 0 1,450,457
State and Municipal Securities 19,477,751 402,202 (13,238) 19,866,715
Other Securities 930,450 0 0 930,450
------------ ------------ ------------ ------------
Total $ 33,445,953 $ 456,844 $ (80,463) $ 33,822,334
============ ============ ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 3,483,199 $ 36,333 $ 0 $ 3,519,532
State and Municipal Securities 3,094,841 0 (4) 3,094,837
------------ ------------ ------------ ------------
Total $ 6,578,040 $ 36,333 $ (4) $ 6,614,369
============ ============ ============ ============
Available for sale securities with a total fair value of $29,445,508 at December
31, 1998 were pledged as collateral to secure public deposits and for other
purposes required or permitted by law.
23
The scheduled maturities of debt securities at December 31, 1998 are summarized
below. Actual maturities may differ from contractual maturities because certain
issuers have the right to call or prepay obligations with or without call
premiums.
Available for Held to Maturity
Sale Securities Securities
--------------- ----------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 2,441,286 $ 2,448,661 $ 3,535,294 $ 3,535,294
Due after year one through five years 6,533,918 6,691,046 153,364 153,364
Due after five years through ten years 14,990,783 15,432,486 167,330 167,330
Due after ten years 21,351,677 21,397,394 234,397 234,397
------------ ------------ ------------ ------------
Total $ 45,317,664 $ 45,969,587 $ 4,090,385 $ 4,090,385
============ ============ ============ ============
Realized gains and losses from sales of securities for the years ended December
31, 1998 , 1997 and 1996 are summarized as follows:
1998 1997 1996
Gross gains $ 55,727 $ 65,150 $ 103,865
Gross losses (45,664) (67,145) (127,595)
------------ ------------ ------------
Net gain (loss) $ 10,063 $ (1,995) $ (23,730)
============ =========== ============
On December 1, 1998, a residual bond classified as held to maturity was called
prior to the date of maturity. The amortized cost at the call date was $16,627
and the resulting gain was $14,513.
3. LOANS RECEIVABLE, NET
Major categories of loans at December 31, 1998 and 1997 are summarized as
follows:
1998 1997
Real estate - mortgages $ 92,434,304 $ 85,367,123
Real estate - construction 5,105,251 2,770,719
Commercial 9,835,866 8,938,560
Installment 2,166,133 2,517,892
Student loans 438,670 1,731,492
Other 891,669 509,935
Net deferred loan origination costs 383,755 401,245
------------ ------------
111,255,648 102,236,966
Allowance for loan losses (729,199) (609,539)
Loans, net $110,526,449 $101,627,427
============ ============
Changes in the allowance for loan losses for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
Balance, beginning of year $ 609,539 $ 546,954 $ 557,961
Provision for loan losses 150,000 60,000 60,000
Recoveries 41,118 49,443 5,597
Loans charged off (71,458) (46,858) (76,604)
------------ ----------- ------------
Balance, end of year $ 729,199 $ 609,539 $ 546,954
============ ============ ============
24
Loans evaluated for impairment, for which an allowance for loan impairment was
not required under SFAS No. 114 due to the adequacy of related collateral values
totaled approximately $754,000 and $627,000 at December 31, 1998 and 1997,
respectively. The average recorded investment in these loans during 1998, 1997,
and 1996 was approximately $690,500, $403,500, and $199,750, respectively. If
such loans had been in an accruing status, the Bank would have recorded
additional interest income of approximately $71,000, $58,000 and $19,000 in
1998, 1997 and 1996, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 1998.
As of December 31, 1998 and 1997, the Bank had no other loans which were
impaired as defined by SFAS No. 114.
4. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
1998 1997
Land $ 268,485 $ 268,485
Buildings and improvements 3,362,419 3,313,404
Equipment 2,753,351 2,828,996
--------- ---------
6,384,255 6,410,885
Less accumulated depreciation (2,687,597) (2,583,213)
---------- ----------
Properties and equipment, net $ 3,696,658 $ 3,827,672
============ ============
Depreciation expense totaled $428,020 in 1998, $423,564 in 1997, and $348,671 in
1996.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities - For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Receivable - The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities, net of the appropriate portion of the allowance for loan
losses. For variable rate loans, the carrying amount is a reasonable estimate of
fair value.
Deposits - The fair value of demand deposits, NOW and money market accounts and
regular savings accounts is the amount payable on demand at the reporting date.
The fair value of time deposits is estimated using the rates currently offered
for deposits of similar remaining maturities.
Federal Funds Purchased - The carrying amount of federal funds purchased
approximate their fair values due to their short-term nature.
Other Borrowed Funds - The fair value of the short-term portion of other
borrowed funds approximates its carrying value. The fair value of the long-term
portion of other borrowed funds is estimated using a discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Commitments to extend credit and standby letters of credit - As described in
Note 11, the Company was a party to financial instruments with off-balance sheet
risk at December 31, 1998 and 1997. Such financial instruments consist of
commitments to extend permanent financing and letters of credit. If the options
are exercised by the prospective borrowers, these financial instruments will
become interest-earning assets of the Company. If the options expire, the
Company retains any fees paid by the counterparty in order to obtain the
commitment or guarantee. The fair value of commitments is estimated based upon
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
25
the counterparties. For fixed-rate commitments, the fair value estimation takes
into consideration an interest rate risk factor. The fair value of guarantees
and letters of credit is based on fees currently charged for similar agreements.
The fair value of these off-balance sheet items at December 31, 1998 and 1997
approximates the recorded amounts of the related fees, which are not considered
material.
At December 31, 1998 and 1997, the estimated fair values of the Company's
financial instruments were as follows:
1998 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and cash equivalents $ 7,300,780 $ 7,300,780 $ 10,336,532 $ 10,336,532
============ ============ ============ ============
Securities $ 50,059,972 $ 50,059,972 $ 40,400,374 $ 40,436,703
============ ============ ============ ============
Loans $111,255,648 $102,236,966
Less: allowance for loan losses (729,199) (609,539)
------------ ------------
Loans, net $110,526,449 $110,804,706 $101,627,427 $102,368,624
============ ============ ============ ============
Financial Liabilities:
Deposits $144,083,636 $144,603,189 $138,391,327 $138,734,550
============ ============ ============ ============
Federal funds purchased $ 2,225,000 $ 2,225,000 $ 0 $ 0
============ ============ ============ ============
Other borrowings $ 7,000,000 $ 6,986,000 $ 0 $ 0
============ ============ ============ ============
6. DEPOSITS
Time deposits, with minimum denominations of $100,000 each, totaled $24,208,290
and $22,873,379 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
1999 $ 54,733,991
2000 6,201,593
2001 930,507
2002 526,042
2003 603,747
- ---- ------------
Total $ 62,995,880
============
7. FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS
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
============
26
8. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLAN
The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees'
compensation and years of service. The Bank uses an actuarial method of
amortizing prior service cost and unrecognized net gains or losses which result
from actual experience and assumptions being different than those that are
projected. The amortization method the Bank is using recognizes the prior
service cost and net gains or losses over the average remaining service period
of active employees which exceeds the required amortization.
The following are reconciliations of the benefit obligation and the fair value
of plan assets, the funded status of the plan, the amounts not recognized in the
statements of financial position, and the amounts recognized in the statement of
financial position.
1998 1997
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,518,858 $ 1,354,390
Service cost 62,689 51,817
Interest cost 117,378 104,601
Employer contributions 80,333 85,753
Actuarial gain (45,276) (46,121)
Benefits paid (37,222) (31,582)
------------ -----------
Benefit obligations at end of year 1,696,760 1,518,858
Change in plan assets:
Fair value of plan assets at beginning of year 1,686,230 1,373,109
Actual return on plan assets 99,637 258,950
Employer contributions 80,333 85,753
Benefits paid (37,222) (31,582)
------------ -----------
Fair value of plan assets at end of year 1,828,978 1,686,230
------------ -----------
Funded status 132,218 167,372
Unrecognized net actuarial loss (gain) 7,831 (57,293)
Unrecognized prior service cost (241,817) (256,524)
------------ -----------
Accrued benefit cost $ (101,768) $ (146,445)
============ ===========
The Plan's assets are primarily invested in a money market fund, stocks, and
bonds. Valuations of the pension plan as shown above were conducted as of
October 1, 1998 and 1997. Assumptions used by the Bank in both years in the
determination of pension plan information consisted of the following:
Weighted-average discount rate 7.50 %
Rate of increase in compensation levels 4.75 %
Expected long-term rate of return on plan assets 7.50 %
The components of net periodic benefit cost consisted of the following:
1998 1997 1996
Service cost $ 62,689 $ 51,817 $ 44,615
Interest cost 117,378 104,601 94,565
Expected return on plan assets (128,242) (106,550) (87,676)
Net amortization and deferral (16,169) (16,169) (16,169)
------------ ----------- ------------
Net periodic benefit cost $ 35,656 $ 33,699 $ 35,335
============ ============ ============
During the year ended December 31, 1995, the Bank adopted nonqualified
supplemental executive retirement plans covering certain members of senior
management. The plans provide a fixed benefit which is specific to the
participant. The obligations related to these plans are indirectly funded by
life insurance contracts (naming the Bank as beneficiary) with aggregate cash
surrender values of approximately $61,000 and $72,000 at December 31, 1998 and
1997, respectively. The face values of these policies at both dates was
approximately $1,650,000. The Bank uses an actuarial method of amortizing
unrecognized net gains or losses which result from actual experience and
assumptions being different than those that are projected. The amortization
method the Bank is using recognizes the net gains or losses over the average
remaining service period of active employees which exceeds the required
amortization.
27
The following are reconciliations of the benefit obligation and the fair value
of plan assets, the funded status of the plan, the amounts not recognized in the
statement of financial position, and the amounts recognized in the statement of
financial position.
1998 1997
Change in benefit obligation:
Benefit obligation at beginning of year $ 480,874 $ 356,685
Service cost 56,415 52,064
Interest cost 40,297 34,194
Contributions to the plan 0 0
Actuarial (gain) loss (9,403) 37,931
Benefits paid 0 0
------------ ------------
Benefit obligations at end of year 568,183 480,874
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year 0 0
Actual return on plan assets 0 0
Contributions to the plan 0 0
Benefits paid 0 0
------------ ------------
Fair value of plan assets at end of year 0 0
------------ ------------
Funded status (568,183) (480,874)
Unrecognized net actuarial loss 156,092 187,710
------------ ------------
Accrued benefit cost $ (412,091) $ (293,164)
============ ===========
Valuations of the nonqualified supplemental executive retirement plans as shown
above were conducted as of October 1, 1998 and 1997. Assumptions used by the
Bank in both years in the determination of pension plan information consisted of
the following:
Expected long-term rate of return on plan assets 7.50 %
The components of net periodic benefit cost consisted of the following:
1998 1997 1996
Service cost $ 56,415 $ 39,900 $ 50,138
Interest cost 40,297 34,194 25,280
Net amortization and deferral 22,215 22,215 22,215
------------ ------------ ------------
Net periodic benefit cost $ 118,927 $ 96,309 $ 97,633
============ ============ ============
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $70,000, $67,000 and
$64,000 in 1998, 1997 and 1996, respectively. The estimated present value of the
benefit obligation, included in other liabilities, was $734,000 and $700,000 at
December 31, 1998 and 1997, respectively. This obligation is indirectly funded
by life insurance contracts (naming the Bank as beneficiary) with aggregate cash
surrender values of approximately $159,000 and $140,000 at December 31, 1998 and
1997, respectively. The face values of these policies at both dates was
approximately $1,036,000. Premiums on the aforementioned life insurance
contracts were paid by the Bank in lieu of payment of directors' fees.
The Bank also has a deferred contribution Retirement and Thrift 401(k) Plan for
its employees who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute between 1%
and 15% of their annual salary, with a matching contribution by the Bank equal
to 25% of the employees contribution up to 4% of their annual salary. The Bank
can also make discretionary contributions to the Plan. The Bank's expense under
this Plan was approximately $36,000, $35,000 and $34,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
28
9. INCOME TAXES
The components of the provision for income taxes were as follows:
1998 1997 1996
Income taxes currently payable $ 839,000 $ 798,000 $ 728,000
Deferred (benefit) income taxes (104,000) (74,000) (140,000)
------------ ------------ ------------
Net provision $ 735,000 $ 724,000 $ 588,000
============ ============ ============
At December 31, 1998 and 1997 the components of the net deferred tax asset were
as follows:
1998 1997
Deferred Tax Assets:
Allowance for loan losses $ 208,000 $ 173,000
Pension premiums 205,000 171,000
Deferred compensation 293,000 280,000
Other 32,000 32,000
------------ ------------
Gross deferred tax assets 738,000 656,000
------------ ------------
Deferred Tax Liabilities:
Depreciation 22,000 25,000
Prepaid expenses 153,000 160,000
SFAS No. 115 209,000 101,000
------------ ------------
Gross deferred tax liabilities 384,000 286,000
------------ ------------
Net deferred tax assets $ 354,000 $ 370,000
============ ============
The net deferred tax asset at December 31, 1998 and 1997 is included in other
assets in the accompanying consolidated financial statements.
The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
December 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
------------------------ --------------------------- -----------------------------
Tax provision at
statutory rate $ 945,000 34% $ 859,000 34% $ 749,000 34%
Increase (decrease) in taxes
resulting from:
Tax-exempt income (373,000) (13) (321,000) (13) (260,000) (12)
State taxes, net of
federal benefit 162,000 6 136,000 5 110,000 5
Other items, net 1,000 0 50,000 2 (11,000) (1)
------------ -- ------------ -- ------------ --
Provision for
income taxes $ 735,000 27% $ 724,000 28% $ 588,000 26%
============ == ============ == ============ ==
10. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with its directors, significant
shareholders and their affiliates (related parties). The aggregate amount of
loans to such related parties at December 31, 1998 and 1997 was $4,226,739 and
$3,526,206, respectively. During 1998 and 1997, new loans to such related
parties amounted to $6,720,286 and $3,366,701, respectively, and repayments
amounted to $6,019,753 and $2,088,427.
29
11. CONTINGENT LIABILITIES AND COMMITMENTS
The consolidated financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of the Bank's commitments and contingent
liabilities at December 31, 1998 and 1997 is as follows:
1998 1997
Commitments to extend credit $ 21,902,497 $ 15,770,264
Standby letters of credit 1,007,055 551,218
------------ ------------
Total $ 22,909,552 $ 16,321,482
============ ============
Commitments to extend credit and standby letters of credit all include exposure
to some credit loss in the event of nonperformance of the customer. The Bank's
credit policies and procedures for credit commitments and financial guarantees
are the same as those for extensions of credit that are recorded on the
consolidated balance sheets. Because these instruments have fixed maturity
dates, and because they may expire without being drawn upon, they do not
necessarily represent cash requirements to the Bank. The Bank has not incurred
any losses on its commitments during the past three years.
12. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have been
granted to customers in the Bank's market area. Investments in state and
municipal securities also involve governmental entities within the Bank's market
area. The concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers. The Bank, as a matter of policy, does not extend credit to
any single borrower or group in excess of 15% of capital.
13. REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the Comptroller of
the Currency. Under such restrictions, the Bank may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained earnings (as
defined) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998 and 1997, that
the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 1998 , the most recent notification from its regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
30
-86-
The Bank's actual capital amounts and ratios were as follows:
1998
----------------------------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
Total Capital (to Risk
Weighted Assets) $ 18,889,000 16.9 % $ 8,926,000 8.0 % $ 11,158,000 10.0 %
============ ==== ============ === ============ ====
Tier I Capital (to Risk
Weighted Assets) $ 18,170,000 16.3 % $ 4,463,000 4.0 % $ 6,695,000 6.0 %
============ ==== ============ === ============ ===
Tier I Capital
(to Average Assets) $ 18,170,000 10.5 % $ 6,599,000 4.0 % $ 8,249,000 5.0 %
============ ==== ============ === ============ ===
1997
----------------------------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
Total Capital (to Risk
Weighted Assets) $ 17,422,000 16.9 % $ 8,234,000 8.0 % $ 10,292,000 10.0 %
============ ==== ============ === ============ ====
Tier I Capital (to Risk
Weighted Assets) $ 16,812,000 16.3 % $ 4,117,000 4.0 % $ 6,175,000 6.0 %
============ ==== ============ === ============ ===
Tier I Capital
(to Average Assets) $ 16,812,000 10.8 % $ 6,366,080 4.0 % $ 7,958,000 5.0 %
============ ==== ============ === ============ ===
31
-87-
14. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as
follows:
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997 1998 1997
ASSETS
Cash $ 38,699 $ 6,648
Investment in subsidiary 18,584,714 17,032,652
------------ ------------
Total assets $ 18,623,413 $ 17,039,300
============ ============
STOCKHOLDERS' EQUITY
Stockholders' Equity:
Common stock $ 849,475 $ 849,475
Capital surplus 10,990,720 10,990,720
Accumulated other comprehensive income 443,308 213,856
Retained earnings 6,400,764 4,985,249
------------ ------------
18,684,267 17,039,300
Less: Treasury stock, at cost (1,352 shares) (60,854) 0
------------ ------------
Total stockholders' equity $ 18,623,413 $ 17,039,300
============ ============
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
Dividends from subsidiary $ 627,836 $ 509,685 $ 421,068
Other revenue 75,000 50,000 0
Expenses (42,949) (50,249) (30,831)
------------ ------------ ------------
Income before equity in undistributed earnings of subsidiary 659,887 509,436 390,237
Equity in undistributed earnings of subsidiary 1,383,464 1,292,839 1,224,405
------------ ------------ ------------
Net income $ 2,043,351 $ 1,802,275 $ 1,614,642
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
Operating Activities:
Net income $ 2,043,351 $ 1,802,275 $ 1,614,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary (1,383,464) (1,292,839) (1,224,405)
Increase in dividends receivable 0 0 (169,895)
------------ ------------ -------------
Net cash provided by operating activities 659,887 509,436 220,342
Financing Activities - Cash dividends paid (627,836) (509,685) (251,173)
------------ ------------ -------------
Net decrease in cash 32,051 (249 (30,831)
Cash, beginning 6,648 6,897 37,728
------------ ------------ -------------
Cash, ending $ 38,699 $ 6,648 $ 6,897
============ ============ =============
32
-88-
Board of Directors
Evans Bancorp, Inc. and Evans National Bank
BOARD OF DIRECTORS
(standing)
LaVerne G. Hall
Former Chairman - L.G. Hall Building
Contractors, Inc.
Robert W. Allen
Secretary
Retired
William F. Barrett
Property and Investment Manager
Richard M. Craig
Chairman of the Board
President and CEO -
Evans National Bank
David M. Taylor
President - Concord Nurseries, Inc.
(seated)
David C. Koch
Chairman and CEO -
New Era Cap Co., Inc.
Richard C. Stevenson
Chairman - Evans Land Corp.
Thomas H. Waring, Jr.
Principal - Waring Financial Group
Phillip Brothman
Partner - Hurst, Brothman & Yusick
DIRECTORS EMERITUS
Floyd H. Hurst
Carl F. Ulmer
OFFICERS
Evans Bancorp, Inc.
Richard M. Craig, COB
President and CEO
Robert W. Allen
Secretary
James Tilley
Assistant Secretary
William R. Glass
Treasurer
ADVISORY BOARD
Derby
Richard A. Gradl
Raymond S. Hazard
MANAGEMENT TEAM
(front center)
Richard M. Craig, Chairman of the Board, President and CEO;
(left)
William R. Glass, Senior Vice President - Loan Division;
(right)
James Tilley, Senior Vice President - Administration
31
33
-89-
Evans National Bank Officers
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
Richard M. Craig
SENIOR VICE PRESIDENT
William R. Glass
James Tilley
VICE PRESIDENT
George L. Catalano
Mary E. Doeing
Timothy F. Jachlewski
William J. Gray
Jeffrey L. White
ASSISTANT VICE PRESIDENT
Katherine M. Allen
Susan J. Herold
Rose Marie Hinckley
Robert A. Hohti
Elizabeth A. Mac
Howard M. Martin, Jr.
Cathy E. Rohrich
BANK OFFICER
Rita A. Boyland
Karen M. Blecha
Michelle A. Bress
M. Jane Gonzalez
Nadine G. Houghton
Mary K. Nytz
Mary D. Philbin
Corporate Information
There has never been an organized public trading market for the Company's
outstanding common stock. The following table represents the highest and lowest
per share prices known to management at which the Company's stock has actually
been transferred in private transactions during the periods indicated. In each
period for which prices are shown, management has price information for the
transaction. The prices do not include any retail markup, markdown or
commission.
1998 1997
-------------------------- -------------------------
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
* Adjusted for five for one stock split
Total shares outstanding were 1,697,598 as of December 31, 1998. There were
1,089 shareholders of record on December 31, 1998.
Upon written request of any shareholder, a copy of the Company's report on Form
10-K for its fiscal year ended December 31, 1998, including the financial
statements and the schedules thereto, required to be filed with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
may be obtained, without charge, from Michelle A. Baumgarden, Evans Bancorp,
Inc., 14-16 N. Main Street, Angola, N.Y. 14006.
THE ANNUAL MEETING
The Annual Meeting of the Shareholders of the Company will be held on Tuesday,
April 27, 1999 at 12:30 p.m. at Romanello's South Restaurant, 5793 South Park
Avenue, Hamburg, NY.
INQUIRIES
For information or assistance regarding individual stock records, transactions,
dividend reinvestment accounts, dividend checks, or stock certificates, contact:
Corporate Trust Services, Fifth Third Bank, 38 Fountain Square Plaza, Mail Drop
1090F5-4129, Cincinnati, OH 45263.