<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee required)
For fiscal year ended: December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________________
Commission file number: 0-18539
-------
EVANS BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-1332767
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14-16 North Main Street, Angola, New York 14006
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(716) 549-1000
--------------------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- -------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
As of February 28, 1997, the aggregate market value of the registrant's
common stock, $2.50 par value, (the "Common Stock") held by nonaffiliates of the
registrant was approximately $36,102,560 based upon the per share prices known
to management at which the Company's Common Stock has actually been transferred
in private transactions prior to that date. There is not, and has never been, an
organized public trading market for the registrant's shares.
As of February 28, 1997, 339,790 shares of the registrant's Common
Stock were outstanding.
Page 1 of 67
Exhibit Index on Page 35
<PAGE> 2
- 2 -
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement on Form 10, as
amended by Amendment Nos. 1 and 2 (Registration No. 0-18539), the Registrant's
Registration Statement on Form S-4 (Registration No. 33-25321), and the
Registrant's Report on Form 10-KSB for the period ended December 31, 1995 are
incorporated by reference in Part IV of this Form 10-K.
Portions of the Registrant's 1996 Annual Report to Shareholders are
incorporated by reference in Part II of this Form 10-K.
<PAGE> 3
- 3 -
TABLE OF CONTENTS
INDEX
<TABLE>
<CAPTION>
PART I
------
Page
----
<S> <C>
Item 1. BUSINESS...............................................................................................5
--------
Evans Bancorp, Inc. ...................................................................................5
Evans National Bank ...................................................................................5
Market Area ...........................................................................................5
Average Balance Sheet Information..................................................................... 5
Securities Activities................................................................................. 7
Securities Policy.................................................................................. 8
Lending Activities ....................................................................................9
General ............................................................................................9
Real Estate Loans .................................................................................10
Commercial Loans...................................................................................10
Installment Loans..................................................................................11
Student Loans .....................................................................................11
Other Loans .......................................................................................11
Loan Maturities....................................................................................12
Credit Losses......................................................................................12
Sources of Funds - Deposits ..........................................................................14
General............................................................................................14
Deposits...........................................................................................14
Employees ............................................................................................14
Competition ..........................................................................................14
Asset and Liability Management .......................................................................15
Regulation ...........................................................................................15
Item 2. PROPERTIES............................................................................................18
----------
Item 3. LEGAL PROCEEDINGS.....................................................................................18
-----------------
Item 4. SUBMISSION OF MATTERS
---------------------
TO A VOTE OF SECURITY HOLDERS.........................................................................19
-----------------------------
</TABLE>
<PAGE> 4
- 4 -
<TABLE>
<CAPTION>
PART II
-------
Page
----
<S> <C>
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
-------------------------------------
AND RELATED STOCKHOLDER MATTERS....................................................................19
-------------------------------
Item 6. SELECTED FINANCIAL DATA............................................................................20
-----------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS.................................................................21
----------------------------------
Item 8. FINANCIAL STATEMENTS ..............................................................................26
--------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURES............................................................26
---------------------------------------
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
-----------------------------------
THE REGISTRANT.....................................................................................26
--------------
Item 11. EXECUTIVE COMPENSATION.............................................................................30
----------------------
Item 12. SECURITY OWNERSHIP OF CERTAIN
-----------------------------
BENEFICIAL OWNERS AND MANAGEMENT...................................................................32
--------------------------------
Item 13. CERTAIN RELATIONSHIPS AND
-------------------------
RELATED TRANSACTIONS...............................................................................34
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
---------------------------------------
AND REPORTS ON FORM 8-K ...........................................................................35
-----------------------
</TABLE>
<PAGE> 5
- 5 -
ITEM 1. BUSINESS
--------
EVANS BANCORP, INC.
Evans Bancorp, Inc. (the "Company") was organized as a New York business
corporation and incorporated under the laws of the State of New York on October
28, 1988 for the purpose of becoming a bank holding company. The Company is
registered with the Federal Reserve Board as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHCA"), and conducts its
business through its wholly-owned subsidiary, Evans National Bank (the "Bank").
The principal business of the Company, through the Bank, is commercial banking
and consists of, among other things, attracting deposits from the general public
and using these funds in commercial loans, commercial mortgages, business loans,
residential mortgages, home equity loans, consumer loans, and investment
securities.
The Company has no material assets other than its investment in the Bank.
The Company's sole business, therefore, is the ongoing business of the Bank.
EVANS NATIONAL BANK
The Bank was established in 1920 as a national banking association and
currently is regulated by the Comptroller of the Currency. Prior to February
1995, the Bank was known as The Evans National Bank of Angola. Its legal
headquarters is located at 14-16 N. Main Street, Angola, New York 14006.
The Bank is a full service commercial bank offering secured and unsecured
commercial loans, consumer loans, educational loans and mortgages. It also
accepts time and demand deposits.
As of December 31, 1996, the Bank had total assets of $140,898,057, total
deposits of $123,461,379 and total stockholders' equity of $15,510,083.
MARKET AREA
The Bank's primary market area is located in southern Erie County, northern
Chautauqua County and northwestern Cattaraugus County, which includes the towns
of Evans, Boston, Hamburg, Eden, Orchard Park and Hanover. This market area is
the primary area where the Bank receives deposits and makes loans.
AVERAGE BALANCE SHEET INFORMATION
The table on the following page presents the significant categories of the
assets and liabilities of the Company, interest income and interest expense, and
the corresponding yields earned and rates paid for the last two years. The
assets and liabilities are presented as daily averages. The average loan
balances include both performing and nonperforming loans. Interest income on
loans does not include interest on loans for which the Bank has ceased to accrue
interest. Interest and yield are not presented on a tax-equivalent basis.
<PAGE> 6
- 6 -
<TABLE>
<CAPTION>
1996 1995
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets ($000) ($000) ($000) ($000)
Interest-earning assets:
Loans, Net $81,591 $7,382 9.05% $72,425 $6,760 9.34%
Taxable securities 22,837 1,428 6.25% 22,520 1,382 6.14%
Tax-exempt securities 15,676 765 4.88% 15,105 762 5.04%
Federal funds sold 3,791 202 5.33% 4,703 277 5.89%
Time deposits in other banks 428 23 5.37% 753 46 6.11%
------- ------ ------- ------
Total interest-earning assets 124,323 9,800 7.88% 115,506 9,227 7.99%
Noninterest-earning assets
Cash and due from banks 5,531 5,051
Premises and equipment, net 3,362 1,838
Other assets 1,888 1,642
----- -----
Total $135,104 $124,037
======== ========
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
NOW accounts $6,402 $80 1.25% $6,751 $100 1.48%
Savings deposits 45,042 1,250 2.78% 47,407 1,302 2.75%
Time deposits 46,568 2,583 5.55% 36,639 2,017 5.51%
------ ----- ------ -----
Total interest-bearing liabilities 98,012 3,913 3.99% 90,797 3,419 3.77%
Noninterest-bearing liabilities:
Demand deposits 20,360 18,093
Other 1,805 1,583
----- -----
120,177 110,473
Shareholders' equity 14,927 13,564
------ ------
Total $135,104 $124,037
======== ========
Net interest earnings $5,887 $5,808
====== ======
Net yield on interest earning assets 4.67% 5.01%
</TABLE>
<PAGE> 7
- 7 -
In 1996, the Company's interest income increased by $573,315 over 1995, compared
to an increase of $1,019,904 in 1995 over 1994. Also, interest expense on
deposits increased by $493,979 in 1996 over 1995 compared to an increase of
$671,485 in 1995 over 1994. The following table segregates these changes for the
past two years into amounts attributable to changes in volume and changes in
rates by major categories of assets and liabilities. The change in interest due
to both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------------- ----------------------------------------
(thousands)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $820 $(198) $622 $184 $515 $699
Taxable securities 20 26 46 75 118 193
Tax-exempt securities 20 (17) 3 12 6 18
Federal funds sold (50) (25) (75) 55 90 145
Time deposits in other banks (18) (5) (23) (57) 23 (34)
---- --- ---- ---- -- ----
Total interest-earning assets $792 $(219) $573 $269 $752 $1,021
==== ====== ==== ==== ==== ======
Interest paid on:
NOW accounts $(5) $(15) $(20) $(12) $(10) $(22)
Savings deposits (59) 7 (52) (229) 30 (199)
Time deposits 551 15 566 534 359 893
--- -- --- --- --- ---
Total interest-bearing liabilities $487 $7 $494 $293 $379 $672
==== == ==== ==== ==== ====
</TABLE>
SECURITIES ACTIVITIES
Income from securities represented approximately 22.4% of total interest
income of the Company in 1996 and approximately 23.2% of total interest income
of the Company in 1995. At December 31, 1996, the Bank's securities portfolio of
$36,054,324 consisted primarily of United States ("U.S.") and federal agency
obligations, state and municipal securities, corporate bonds and mortgage-backed
securities by the Government National Mortgage Association, Federal National
Mortgage Association and Federal Home Loan Mortgage Corp.
In 1994, the Bank adopted Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities." As a
result, all securities in the Bank's portfolio are now designated as "held to
maturity" or "available for sale".
<PAGE> 8
- 8 -
The following table summarizes the Bank's securities with those designated
as available for sale at fair value and securities designated as held to
maturity valued at amortized cost as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
($000) ($000)
<S> <C> <C>
Available for Sale:
U.S. Treasury and other U.S. government agencies $ 14,570 $ 17,498
States and political subdivisions in the U.S. 14,808 14,583
Other 823 732
-------- --------
Total Securities Designated as Available for Sale $ 30,201 $ 32,813
======== ========
Held to Maturity:
U.S. Treasury and other U.S. government agencies 3,948 4,072
States and political subdivisions in the U.S. 1,905 2,069
-------- --------
Total Securities Designated as Held to Maturity $ 5,853 $ 6,141
======== ========
Total Securities $ 36,054 $ 38,954
======== ========
</TABLE>
SECURITIES POLICY. The Bank considers its securities portfolio as part of its
overall asset liability management policy encompassing the areas of securities,
capital, liquidity and interest sensitivity. The primary objective of the
securities portfolio is to provide liquidity while maintaining safety of
principal. Secondary objectives include investment of funds in periods of
decreased loan demand, interest sensitivity considerations, providing collateral
to secure local municipal deposits, supporting local communities through the
purchase of tax-exempt securities and tax planning considerations. The Board of
Directors is responsible for establishing overall policy and reviewing
performance.
The Bank's policy provides that acceptable portfolio investments include:
U.S. Government obligations, obligations of Federal agencies, Municipal
obligations (General Obligations, Revenue Obligations, School Districts and
Non-rated Issues from Bank's general market area), Banker's Acceptances,
Certificates of Deposit, Industrial Development Authority Bonds, Public Housing
Authority Bonds, Corporate Bonds (each corporation limited to the Bank's legal
lending limit), and Collateral Mortgage Obligations, Federal Reserve stock and
Federal Home Loan Bank stock.
The Bank's securities policy is that in-state securities must be rated
Moody's BAA (or equivalent) at the time of purchase. Out-of-state issues must be
rated AA (or equivalent) at the time of purchase. Bonds or securities rated
below A will be reviewed periodically to assure their continued credit
worthiness. The purchase of non-rated municipal securities is permitted, but
limited to those bonds issued by municipalities in the Bank's general market
area which, in the Bank's judgment, possess no greater credit risk than BAA (or
equivalent) bonds and the annual budgets of the issuers are reviewed by the
Bank. A credit file of the issuers is kept on each non-rated municipal security
with relevant financial information. In addition, the Bank's loan policy permits
the purchase of notes issued by various states and municipalities which have not
been rated by Moody's or Standard & Poors. The securities portfolio of the Bank
is priced and rated on a monthly basis.
<PAGE> 9
- 9 -
The following table sets forth the maturities and weighted average interest
yields of the Bank's securities portfolio (yields on tax-exempt obligations have
not been computed on a tax equivalent basis) as of December 31, 1996:
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Within Ten Years Ten Years
---------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------ ----- ------ ------ ------ ------
($000) ($000) ($000) ($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASSIFIED AS AVAILABLE FOR
SALE AT FAIR VALUE:
U.S. Treasury and other U.S. $ 150 6.13% $ 6,688 5.99% $ 5,239 6.99% $2,494 7.97%
government agencies
States and political subdivisions 1,029 5.95 4,729 5.48 9,049 4.72 0 0.00
Other 823 6.29 0 0.00 0 0.00 0 0.00
--- - - -
Total Available for Sale $2,002 6.11 $11,417 5.78 $14,288 5.56 $2,494 7.97
CLASSIFIED AS HELD TO MATURITY
AT AMORTIZED COST:
U.S. Treasury and other U.S. 0 0.00 0 0.00 0 0.00 3,948 6.38
government agencies
States and political subdivisions 1,267 4.02 428 5.23 63 5.70 147 6.22
----- --- -- ---
Total Held to Maturity 1,267 4.02 428 5.23 63 5.70 4,095 6.38
----- --- -- ------
Total Securities $3,269 5.30 $11,845 5.76 $14,351 5.56 $6,589 6.99
====== ======= ======= ======
</TABLE>
At December 31, 1996, approximately $18,519,000 of the Bank's securities
portfolio were obligations of the U.S. Treasury and other U.S. government
agencies. Additionally, at December 31, 1996, the Bank had $1,450,000 in Federal
Funds Sold.
LENDING ACTIVITIES
GENERAL. The Bank has a loan policy which is approved by the Board of
Directors on an annual basis. The loan policy addresses the lending authorities
of Bank officers, charge off policies, desired portfolio mix, loan approval
guidelines and loan pricing.
The Bank offers a variety of loan products to its customers including
residential and commercial real estate mortgage loans, commercial loans,
installment loans and student loans. The Bank primarily extends loans to
customers located within the Western New York area. Income on loans represented
approximately 75.3% of the total interest income of the Company in 1996 and
approximately 73.3% of total interest income in 1995. The Bank's loan portfolio
after unearned discounts, loan origination costs and allowances for credit
losses totalled $92,087,902 and $75,468,504 at December 31, 1996 and December
31, 1995, respectively. At December 31, 1996, the Bank had established $546,954
as an allowance for credit losses which is approximately 0.59% of total loans.
This compares with $557,961 at December 31, 1995 which was approximately 0.74%
of total loans. The net loan portfolio represented approximately 65.4% and 60.2%
of the Bank's total assets at December 31, 1996 and December 31, 1995,
respectively.
<PAGE> 10
- 10 -
REAL ESTATE LOANS. Approximately 86.9% of the Bank's loan portfolio at
December 31, 1996 consisted of real estate loans or loans collateralized by
mortgages on real estate including residential mortgages, commercial mortgages
and other types of real estate loans. The Bank's real estate loan portfolio was
$80,110,342 at December 31, 1996, compared to $62,510,966 at December 31, 1995.
The real estate loan portfolio increased approximately 28.2% in 1996 over 1995
compared to an increase of 10.6% in 1995 over 1994.
Growth in the Bank's commercial real estate loans during 1996 resulted
partially from declining rates in December 1995 and January 1996, which
encouraged real estate acquisition and expansion. Only modest growth was
realized in the residential real estate portfolio, as the Bank sold an
increasing number of mortgages to The Federal National Mortgage Association
("FNMA"), while retaining servicing rights. This arrangement allows the Bank to
offer long term fixed rate mortgages, without undue rate risk, while retaining
customer relationships.
The Bank offers fixed rate residential mortgages with terms of ten to thirty
years with up to an 80% loan-to-value ratio. Fixed rate residential mortgages
loans outstanding totalled $21,432,804 at December 31, 1996, which was
approximately 23.1% of total loans outstanding. In 1995, the Bank entered into a
contractual arrangement with the Federal National Mortgage Association ("FNMA")
whereby mortgages can be sold to FNMA and the Bank retains the servicing rights.
In 1996, approximately $1,316,180 of mortgages were sold to FNMA under this
arrangement compared to $355,000 of mortgages sold in 1995.
The Bank also offers commercial mortgages with up to a 75% loan-to-value
ratio for up to fifteen years on a variable and fixed rate basis. Many of these
mortgages either mature or are subject to a rate call after three to five years.
The Bank's outstanding commercial mortgages were $38,721,554 at December 31,
1996, which was approximately 41.8% of total loans outstanding. This balance
included $7,238,467 in fixed rate and $31,483,087 in variable rate loans.
The Bank also offers other types of loans collateralized by real estate such
as home equity loans. The Bank offers home equity loans at variable and fixed
interest rates with terms of up to fifteen years and up to a 75% loan-to-value
ratio. At December 31, 1996, the real estate loan portfolio included $12,830,503
of home equity loans outstanding which represented approximately 13.9% of its
total loans outstanding. This balance included $6,937,480 in variable rate and
$5,893,024 in fixed rate loans.
In 1993, the Bank began offering adjustable rate residential mortgages with
terms of up to fifteen years. Rates on these mortgages remain fixed for the
first three years and are adjusted annually thereafter. On December 31, 1996,
the Bank's outstanding adjustable rate mortgages were $4,204,218 or 4.5% of
total loans. This balance did not include any construction mortgages.
The Bank also offers real estate-construction loans at up to a 80%
loan-to-value ratio at fixed interest rates and multiple maturities. At December
31, 1996, fixed rate real estate-construction loans outstanding were $783,354 or
0.85% of the Bank's loan portfolio, and adjustable rate construction loans
outstanding were $620,936 or 0.67% of the portfolio.
As of December 31, 1996, approximately $1,140,000 or 1.4% of the Bank's real
estate loans were 30 to 90 days delinquent, $33,000 or 0.05% of the bank's real
estate loans were more than 90 days delinquent and approximately $164,000 or
0.21% of real estate loans were nonaccruing.
COMMERCIAL LOANS. The Bank offers commercial loans on a secured and
unsecured basis including lines of credit and term loans at fixed and variable
interest rates and multiple maturities. The Bank's commercial loan portfolio
totaled $6,993,852 and $7,709,115 at December 31, 1996 and December 31, 1995,
respectively. Commercial loans represented approximately 7.6% and 10.1% of the
Bank's total loans at December 31, 1996 and December 31, 1995, respectively. The
commercial loan portfolio decreased $715,263 or 9.3% in 1996.
Commercial lending entails significant additional risk as compared with real
estate loans. These loans typically involve larger loan balances to single
borrowers or groups of related borrowers. Collateral, where applicable, may
consist of inventory, receivables, equipment and other business assets.
Ninety-two percent of the Bank's commercial loans are variable rate which are
tied to the prime rate.
<PAGE> 11
- 11 -
The Bank's ability to lend larger amounts to any one borrower is subject to
regulation by the Comptroller of Currency. The Bank continually monitors its
loan portfolio to review compliance with new and existing regulations.
As of December 31, 1996, approximately $75,000 or 1.1% of the Bank's
commercial loans were 30 to 90 days past due, approximately $45,000 or 0.7% of
its commercial loans were more than 90 days past due and none of its commercial
loans were nonaccruing.
INSTALLMENT LOANS. The Bank's installment loan portfolio (which includes
automobile loans, personal loans and revolving credit card balances) totaled
$2,646,246 and $2,731,891 at December 31, 1996 and December 31, 1995,
respectively, representing approximately 2.9% of the Bank's total loans at
December 31, 1996 and 3.6% of the Bank's total loans at December 31, 1995.
Traditional installment loans are offered at fixed interest rates with various
maturities up to 60 months, on a secured and unsecured basis. In 1993, the Bank
began offering a variable rate credit card in addition to the fixed rate card
previously offered. On December 31, 1996, the installment loan portfolio
included $246,621 in fixed rate card balances at an interest rate of 15.60% and
$36,033 in the variable rate option. As of December 31, 1996, approximately
$64,000 or 2.4% of the Bank's installment loans were 30-90 days past due and
approximately $18,000 or 0.7% of the Bank's installment loans were more than 90
days past due. None of the Bank's installment loans were nonaccruing.
STUDENT LOANS. The Bank's student loan portfolio totaled $1,692,334 at
December 31, 1996 and $1,919,549 at December 31, 1995. Student loans represented
1.8% of the total loan portfolio in 1996 and 2.5% of the total loan portfolio in
1995. These loans are guaranteed by the federal government and the New York
State Higher Education Assistance Corporation. The Bank offers student loans at
variable interest rates with terms of up to 10 years. In 1995, the Bank entered
into a contract with the Student Loan Marketing Association. Under terms of this
agreement, SLMA services the Bank's loans to students who are still in school
and subsequently purchases those loans when the student goes into repayment. The
Bank sold $1,242,276 and $3,749,930 of its student loans to SLMA in 1996 and
1995 respectively. Student loan products have been expanded to include Federal
Plus and HEAL loans.
OTHER LOANS. Other loans totaled $769,322 at December 31, 1996 and $711,902
at December 31, 1995. Other loans consisted primarily of loans to
municipalities, hospitals, churches and non-profit organizations. These loans
are at fixed or variable interest rates with multiple maturities. Other loans
also include overdrafts.
The following table summarizes the major classifications of the Bank's loans
(net of deferred origination costs) at December 31, 1996, and 1995:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Real Estate $80,111 $62,511
Commercial 6,994 7,709
Installment 2,646 2,732
Student Loans 1,692 1,920
All Other 769 712
Net deferred loan origination costs 423 443
--- ---
Total Loans $92,635 $76,027
------- -------
Allowance for credit losses (547) (558)
----- -----
Net loans $92,088 $75,469
======= =======
</TABLE>
<PAGE> 12
-12-
LOAN MATURITIES. The following table shows the maturities of commercial and
real estate construction loans outstanding as of December 31, 1996 and the
classification of loans due after one year according to sensitivity to changes
in interest rates:
<TABLE>
<CAPTION>
(in thousands)
0-1 Yr. 1-5 Yrs. Over 5 Yrs. Total
------- -------- ----------- -----
<S> <C> <C> <C> <C>
Commercial $1,714 $1,877 $3,403 $6,994
Real estate construction 454 275 675 1,404
--- --- --- -----
$2,168 $2,152 $4,078 $8,398
====== ====== ====== ======
Loans maturing after one year with:
Fixed rates $738 $404
Variable rates 1,414 3,674
----- -----
$2,152 $4,078
====== ======
</TABLE>
CREDIT LOSSES.
The following table summarizes the Bank's non-accrual and past due loans as
of December 31, 1996 and December 31, 1995. The Bank had no restructured loans
as of those dates and none of the Bank's other loans were classified as
restricted or potential problem loans as December 31, 1996 or December 31, 1995.
Any loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that have not been disclosed do not (i) represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources, or (ii)
represent material credit about which management has serious doubts as to the
ability of such borrowers to comply with the loan repayment terms. See also
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations - Provision for Credit Losses."
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Nonaccrual loans $180 $220
Accruing loans past due 90 days or more 96 156
---- ----
Total $276 $376
==== ====
</TABLE>
Information with respect to nonaccrual loans at December 31, 1996 and December
31, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Nonaccrual loans $180 $220
Interest income that would have been 19 29
recorded under the original terms
Interest income recorded during the period 0 0
</TABLE>
At December 31, 1996, $180,000 of nonaccrual loans are collateralized.
<PAGE> 13
- 13 -
The following tables summarize the Bank's allowance for credit losses and
changes in the allowance for credit losses by loan categories:
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 557,961 $ 628,957
CHARGE-OFFS
Commercial, Financial, Agricultural (33,741) (1,733)
Real Estate - Mortgages 0 (2,521)
Installment Loans (42,863) (7,592)
Overdrafts 0 4,502
--------- ---------
TOTAL CHARGE-OFFS (76,604) (7,344)
RECOVERIES
Commercial, Financial, Agricultural 538 16,760
Real Estate - Mortgages 0 650
Installment Loans 3,859 4,671
Overdrafts 1,200 1,200
--------- ----------
TOTAL RECOVERIES 5,597 23,281
NET (CHARGEOFFS) RECOVERIES (71,007) 15,937
ADDITIONS (REDUCTIONS) CHARGED TO OPERATIONS 60,000 (86,933)
--------- ---------
BALANCE AT END OF YEAR $ 546,954 $ 557,961
========= =========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Balance at Balance at Percent of Loans in
12/31/96 12/31/95 Each Category to
Attributable to: Attributable to: Total Loans:
---------------- ---------------- ------------
1996 1995
---- ----
<S> <C> <C> <C> <C>
Real Estate Loans $259,102 $304,034 86.9% 82.7%
Commercial Loans 118,461 219,766 7.6 10.2
Installment Loans (Includes Credit Cards) 45,231 27,917 2.9 3.6
Student Loans 0 0 1.8 2.5
All Other Loans 0 0 0.8 1.0
Unallocated 124,160 6,244 n/a n/a
------- ----- --- ---
Total $546,954 $557,961 100.0% 100.0%
======== ======== ====== ======
</TABLE>
<PAGE> 14
- 14 -
SOURCES OF FUNDS - DEPOSITS
GENERAL. Customer deposits represent the major source of the Bank's funds
for lending and other investment purposes. In addition to deposits, other
sources of funds include loan repayments, loan sales, interest and dividends
from investments, matured investments, and borrowings from the Federal Reserve
Bank, Federal Home Loan Bank, Manufacturers and Traders Trust Company and First
Tennessee Bank.
DEPOSITS. The Bank offers a variety of deposit products including checking,
passbook, statement savings, money market, NOW accounts, certificates of deposit
and jumbo certificates of deposit. Deposits of the Bank are insured up to the
limits provided by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1996, the Bank's deposits totalled $123,461,379 consisting of the
following:
<TABLE>
<S> <C>
Demand deposits $20,149,152
NOW and Money Market accounts 6,437,613
Regular savings 42,136,290
Time deposits, $100,000 and over 14,096,821
Other time deposits 40,641,503
----------
$123,461,379
============
</TABLE>
The following table shows daily average deposits and average rates paid on
significant deposit categories by the Bank:
<TABLE>
<CAPTION>
1996 1995
------ ------
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
(in thousands) (in thousands)
<S> <C> <C>
Demand Deposits $ 20,122 ---% $18,093 ---%
NOW and Money Market Accounts 6,402 1.25% 6,751 1.48%
Regular Savings 45,280 2.76% 47,408 2.74%
Time Deposits 46,568 5.55% 36,639 5.51%
-------- ------
Total $118,372 3.30% $108,891 3.14%
======== ========
</TABLE>
The Bank has a very stable deposit base and no material amount of deposits
is obtained from a single depositor or group of depositors (including federal,
state and local governments). The Bank has not experienced any significant
seasonal fluctuations in the amount of its deposits.
EMPLOYEES
As of February 28, 1997, the Bank employed 72 persons on a full-time basis.
There were also 10 part-time employees.
COMPETITION
All phases of the Bank's business are highly competitive. The Bank competes
actively with local commercial banks as well as other commercial banks with
branches in the Bank's market area of southern Erie County, northern Chautauqua
County, and northwestern Cattaraugus County, New York. The Bank considers its
major competition to be Marine Midland Bank, Manufacturers and Traders Trust
Company, and Key Bank of Western New York, N.A., all headquartered in Buffalo,
New York. The Bank is generally competitive with all financial institutions in
its service area with respect to interest rates paid on time and savings
deposits, service charges on deposit accounts, and interest rates charged on
loans.
<PAGE> 15
- 15 -
ASSET AND LIABILITY MANAGEMENT
Like all financial institutions, the Bank must constantly monitor its
exposure to interest rate risk. Proper management of interest sensitive funds is
necessary to help secure the Bank's earnings against extreme changes in interest
rates. In 1995, an Asset/Liability Management Committee ("ALCO") was established
for the purpose of evaluating the Bank's short-range and long-range liquidity
position and the potential impact of a sudden change in interest rates on the
Bank's capital and earnings. Specific minimum guidelines for liquidity and
capital ratios have been established, and maximum guidelines have been set for
the negative impact acceptable on net interest income and the market value of
assets as a result of a shift in interest rates. These guidelines have been
delineated in the Bank's formal Asset/Liability Policy which also includes
guidelines for investment activities and funds management. The ALCO meets
regularly to review the Bank's liquidity, gap, interest rate risk and capital
positions and to formulate its strategy based on current economic conditions,
interest rate forecasts, loan demand, deposit volatility and the Bank's earnings
objectives.
The following table summarizes the interest rate sensitivity analysis for
the Bank as of December 31, 1996 for the periods indicated:
<TABLE>
<CAPTION>
0 to 3 4 to 12 One to Five Over Five
Months Months Years Years
------ ------ ----- -----
(in millions)
<S> <C> <C> <C> <C>
Interest-earning assets $27.9 $17.9 $51.4 $32.4
Interest-bearing liabilities 31.2 23.8 68.4 0
---- ---- ---- -
Interest sensitivity gap $59.1 $41.7 $119.8 $32.4
===== ===== ====== =====
</TABLE>
The primary assets and liabilities in the one year maturity range are
securities, commercial loans and time deposits. As of December 31, 1996, the
Bank's cumulative one year gap ratio (rate sensitive assets divided by rate
sensitive liabilities) was .83 as compared to .88 at December 31, 1995 and 1.07
as of December 31, 1994. The Bank has more liabilities than assets repricing
over the next twelve months. However, since liabilities tend to reprice less
quickly than assets, management believes that earnings will not be significantly
impaired should rates rise.
The following schedule sets forth the maturities of the Bank's time deposits
as of December 31, 1996:
<TABLE>
<CAPTION>
Time Deposit Maturity Schedule
(in millions)
0-3 3-6 6-12 Over
Mos. Mos. Mos. 12 Mos. Total
<S> <C> <C> <C> <C> <C> <C>
Time deposits - $100,000 and over $8.2 $2.8 $0.7 $2.4 $14.1
Other time deposits 10.3 5.1 6.0 19.3 40.7
---- --- --- ---- ----
Total time deposits $18.5 $7.9 $6.7 $21.7 $54.8
===== ==== ==== ===== =====
</TABLE>
REGULATION
The operations of the bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the Federal Deposit Insurance Corporation ("the FDIC"). Bank operations are also
subject to regulations of the Comptroller of the Currency, the Federal Reserve
Board, the FDIC and the New York State Banking Department.
<PAGE> 16
- 16 -
The primary supervisory authority of the Bank is the Comptroller of the
Currency, who regularly examines the Bank. The Comptroller of the Currency has
the authority under the Financial Institutions Supervisory Act to prevent a
national bank from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, the loans a bank makes and collateral it
takes, the maximum interest rates a bank must pay on deposits, the activities of
a bank with respect to mergers and consolidations and the establishment of
branches. Branches may be established within the permitted areas of New York
State only after approval by the Comptroller of the Currency.
A subsidiary bank (such as the Bank) of a bank holding company is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries and on
taking such stock or securities as collateral for loans. The Federal Reserve Act
and Federal Reserve Board regulations also place certain limitations and
reporting requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such legislation and
regulations would affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank holding company
(such as the Company) without prior notice to certain federal bank regulators.
Control is defined for this purpose as the power, directly, or indirectly, to
direct the management or policies of the bank or bank holding company or to vote
25% or more of any class of voting securities of the bank holding company.
In addition to the restrictions imposed upon a bank holding company's
ability to acquire control of additional banks, federal law generally prohibits
a bank holding company from acquiring a direct or indirect interest in, or
control of 5% or more of the outstanding voting shares of any company, and from
engaging directly or indirectly in activities other than that of banking,
managing or controlling banks or furnishing services to subsidiaries, except
that a bank holding company may engage in, and may own shares of companies
engaged in certain activities found by the Federal Reserve Board to be closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
From time to time, various types of federal and state legislation has been
proposed that could result in additional regulation of, and restrictions on, the
business of the Bank. It cannot be predicted whether any such legislation will
be adopted or how such legislation would affect the business of the Bank. As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Bank's business is particularly susceptible to being affected
by federal legislation and regulations that may increase the costs of doing
business.
The Depository Institutions Deregulation and Monetary Control Act of 1980
became effective in March 1980. The principal effects of this law are to: phase
in the deregulation of the interest rates paid on personal deposits by gradually
eliminating regulatory ceilings on interest rate differential allowed thrifts
and savings institutions; enable all banks to offer personal interest bearing
checking type accounts; phase in mandatory and uniform reserve requirements; and
override certain usury limits on loan interest rates established by state laws.
On October 1, 1983, the Depository Institutions' Deregulation Committee, acting
under the provisions of this Act, removed all remaining interest rate ceilings
and other regulations on time deposits, except for early withdrawal penalties.
Under the Federal Deposit Insurance Act, the Comptroller of the Currency
possesses the power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound banking
practice or would otherwise be in violation of law. Moreover, the Financial
Institutions and Interest Rate Control Act of 1978 ("FIRA") generally expands
the circumstances under which officers or directors of a bank may be removed by
the institution's federal supervisory agency, restricts lending by a bank to its
executive officers, directors, principal shareholders or related interests
thereof, restricts management personnel of a bank from serving as directors or
in other management positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a specified geographic
area, and restricts management personnel from borrowing from another institution
that has a correspondent relationship with their bank.
<PAGE> 17
- 17 -
Additionally, FIRA requires that no person may acquire control of a bank unless
the appropriate federal supervisory agency has been given 60 days prior written
notice and within that time has not disapproved of the acquisition or extended
the period for disapproval.
Under the Community Reinvestment Act of 1977, the Comptroller of the
Currency is required to assess the record of all financial institutions
regulated by it to determine if these institutions are meeting the credit needs
of the community (including low and moderate income neighborhoods) which they
serve and to take this record into account in its evaluation of any application
made by any such institutions for, among other things, approval of a branch of
other deposit facility, office relocation, a merger or an acquisition of bank
shares.
The Company must give prior notice to the Federal Reserve Board of certain
purchases or redemptions of its outstanding equity securities. The Federal
Reserve Board has adopted capital adequacy guidelines for bank holding companies
(on a consolidated basis) substantially similar to those that apply to the Bank.
In January 1989, the Federal Reserve Board adopted new risk-based capital
adequacy guidelines. Under these new guidelines, bank holding companies with at
least $150 million in assets are required to maintain a ratio or qualifying
total capital to weighted risk assets of at least 8% effective December 31,
1993. For bank holding companies with less than $150 million in assets, the
above-described ratio will not apply on a consolidated basis, but will apply on
a bank-only basis unless (i) the parent holding company is engaged in non-bank
activities involving significant leverage, or (ii) the parent holding company
has a significant amount of outstanding debt held by the general public. The
Federal Reserve Board has the discretionary authority to require higher capital
ratios.
In connection with the risk-based capital framework applicable to bank
holding companies described above, the Federal Reserve Board applies a
risk-based capital framework for Federal Reserve member banks, such as the Bank.
The framework requires banks to maintain minimum capital levels based upon a
weighing of their assets according to risk. Effective December 31, 1992, Federal
Reserve member banks were required to maintain a ratio of qualifying total
capital to risk-weighted assets of a minimum of 8.00%, and Tier 1 Capital to
Assets ratio of 4.00%. A minimum leverage ratio of 3.00% is required for banks
with the highest regulatory examination ratings and not contemplating or
experiencing significant growth or expansion. All other banks are required to
maintain a minimum leverage ratio of at least 1-2% above the stated minimum.
A comparison of the Bank's capital as of December 31, 1996 and December 31,
1995 with these minimum requirements is presented below:
<TABLE>
<CAPTION>
Bank
---------------------
Minimum
1996 1995 Requirements
---- ---- ------------
<S> <C> <C> <C>
Total Risk-based Capital 17.7% 19.6% 8%
Tier 1 Risk-based Capital 17.1% 18.9% 4%
Leverage Ratio 11.1% 11.4% 3-5%
</TABLE>
As of December 31, 1996, the Bank met all three capital requirements.
Management is not aware of any known trends, events, uncertainties, or
current regulatory recommendations that will have, or that are reasonably
likely, to have a material effect on the Bank's liquidity, capital resources or
operations.
MONETARY POLICY. The earnings of the Company and the Bank are also affected
by the monetary policy of the Federal Reserve Board. An important function of
the Federal Reserve System is to regulate the money supply and prevailing
interest rates. Among the instruments used to implement those objectives are
open market operations in U.S. Government securities and changes in reserve
requirements against member bank deposits. These instruments are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans by the Bank or paid on its deposits.
<PAGE> 18
- 18 -
ITEM 2. PROPERTIES
----------
The Bank operates out of its main office and five branch offices. The Bank's
main office is located at 14-16 North Main Street in Angola, New York. The main
office is 9,344 square feet and is owned by the Bank. A newly-constructed 3,900
square foot retail facility located in the Town of Evans, New York, opened in
May, 1996. In addition to housing the Loan Division, the main office continues
to serve as an operations center, and a small retail facility is maintained at
the site.
In addition, the Bank owns and operates a 3,650 square foot branch office at
6480 Erie Road, Derby, New York. In 1995, the Bank purchased property adjacent
to this office, providing additional parking facilities for customers and
enabling future expansion. An existing building on the property has been leased
to a tenant for a five year term commencing December 1, 1995. The lease provides
for monthly payments of $5,217 in Year One and increasing annually to $5,445 in
Year Five.
The Bank owns and operates a 1,530 square foot branch office at 25 Main
Street, Forestville, New York, and leases branch offices in North Boston and
Hamburg. The 1,280 square foot branch office at 7186 North Boston State Road,
Boston, New York is occupied pursuant to a land lease which provides for monthly
payments of $1,375 through the year 2000, with an option to be renewed for an
additional five year term. The 3,000 square foot branch office at 5999 South
Park Avenue, Hamburg, New York, is occupied pursuant to a twenty year lease
which provides for monthly payments of $5,875 for the first five years through
October 31, 2000. Thereafter, monthly payments increase annually from $6,162.50
in Year Six to $7,967.50 in Year Twenty.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no legal proceedings to which the Company is a party.
The nature of the Bank's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. However, in the
opinion of management of the Bank, there are no proceedings pending to which the
Bank is a party or to which its property is subject, which, if determined
adversely to the Bank, would be material in relation to the Bank's financial
condition, nor are there any proceedings pending other than ordinary routine
litigation incident to the business of the Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Bank by governmental authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
<PAGE> 19
- 19 -
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
(a) MARKET. There has never been an organized public trading market for the
Company's outstanding Common Stock. The following table represents the highest
and lowest per share prices known to management at which the Company's Common
Stock has actually been transferred in private transactions during the periods
indicated. In each period for which prices are shown, the management has price
information for the transaction(s). The prices for these transactions do not
include any retail markup, markdown or commission.
<TABLE>
<CAPTION>
1996 1995
------ -----
QUARTER High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
FIRST $115.00 $110.00 $ 80.00 $ 70.00
SECOND $135.00 $115.00 $ 83.00 $ 80.00
THIRD $136.00 $135.00 $100.00 $ 83.00
FOURTH $136.00 $136.00 $110.00 $100.00
</TABLE>
(b) HOLDERS. As of January 31, 1997, 339,790 shares of the Company's Common
Stock were outstanding and the number of holders of record of the Common Stock
at that date was 785.
(c) DIVIDENDS.
CASH DIVIDENDS. In the years ended December 31, 1996 and 1995, the
Company declared cash dividends of $1.12 and $.75, respectively, per
share of Common Stock. The $1.12 per share in 1997 was the combined
total of a $.62 per share dividend paid on October 1, 1996 and $.50
per share payable on February 1, 1997 to holders of record on
November 26, 1996. The amount, if any, of future dividends will be
determined by the Company's Board of Directors and will depend upon
the Company's future earnings, financial condition and requirements,
and other factors considered by the Board of Directors to be
relevant. Banking regulations limit the amount of dividends that may
be paid without prior approval of the Comptroller of the Currency.
See Footnote 11 to the Financial Statements.
STOCK DIVIDENDS. For both years ending December 31, 1996 and December
31, 1995 the Company's stock dividend was 7.14%. This amounted to one
share for every 14 shares in 1996 and 1995.
The following table shows consolidated operating and capital ratios for the
Company for the last three years:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Return on Average Assets 1.20% 1.34% 1.37%
Return on Average Equity 10.75% 11.59% 12.61%
Dividend Payout Ratio 23.58% 15.31% 10.50%
Equity to Assets Ratio 11.37% 11.85% 10.26%
</TABLE>
<PAGE> 20
- 20 -
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
For the year ended December 31 1996 1995 1994 1993 1992
RESULTS OF OPERATIONS
- ---------------------
<S> <C> <C> <C> <C> <C>
Interest Income $9,799,815 $9,226,500 $8,206,596 $7,989,392 $8,282,555
Interest Expense 3,912,761 3,418,782 2,747,297 2,680,003 3,366,960
Net Interest Income 5,887,054 5,807,718 5,459,299 5,309,389 4,915,595
Non-Interest Income 930,986 763,054 785,551 672,015 588,206
Non-Interest Expense 4,555,398 4,228,922 3,981,801 3,581,929 3,395,906
Net Income 1,614,642 1,664,783 1,617,049 1,612,392 1,432,489
BALANCE SHEET DATA
- ------------------
Total Assets $140,898,057 $125,308,204 $114,565,971 $112,465,797 $108,158,334
Loans - Net 92,087,902 75,468,504 71,998,929 67,754,002 59,466,817
Allowance for Loan Losses 546,954 557,961 628,957 612,921 478,775
Securities 36,054,324 38,954,494 32,341,350 33,371,944 38,013,829
Total Deposits 123,461,379 109,020,551 100,532,031 99,860,851 96,859,418
Stockholders' Equity 15,510,083 14,485,510 12,723,940 11,489,412 10,018,622
PER SHARE DATA
- --------------
Net Income $4.75 $4.90 $4.76 $4.75 $4.22
Cash Dividend $0.62 $0.75 $0.50 $0.45 $0.40
Stock Dividend 7.14% 7.14% 7.14% 7.14% 7.14%
Book Value at Year End $45.65 $45.63 $42.90 $41.45 $38.68
Market Value $136.00 $110.00 $70.00 $65.50 $50.00
Shares Outstanding 339,790 317,481 296,613 277,170 258,992
Weighted Average Shares 339,790 339,790 339,790 339,790 339,790
(Retroactively adjusted for stock dividends)
</TABLE>
<PAGE> 21
- 21 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS
-------
This MD & A of Evans Bancorp, Inc. ("The Company") is intended to compare
the performance of the Company for the years ended December 31, 1996, 1995 and
1994. The review of the information presented should be read in conjunction with
the consolidated financial statements and accompanying notes.
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie and
Chautauqua Counties of Western New York. The Bank serves it market through six
banking offices located in Angola, Derby, Evans, Forestville, Hamburg and
North Boston, New York. The Bank's principal source of funding is through
deposits which it reinvests in the community in the form of loans and
investments. Deposits are insured to the applicable limit by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is regulated by the Office of the Comptroller of the Currency.
The following discussion of financial conditions and results of operations of
the Company and the Bank should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Net income in 1996 of $1,614,642 resulted in earnings per share of $4.75,
which compares with net income of $1,664,783, or $4.90 per share, in 1995 and
$1,617,049, or $4.76 per share, in 1994. The decrease in net income of 3% in
1996 from 1995 reflects the impact on annual earnings of the $2.2 million
expansion plan implemented over the last two years. Non-interest expense
increased 7.7% in 1996 over 1995, largely due to increases in salary expense,
occupancy expense and advertising expense. These costs have risen as a result
of the opening of the newly-constructed branch office in Evans, NY in May,
1996, the operation of a branch office in Hamburg, NY, which opened for
business in October, 1995, and the recently completed renovation of the Angola
office in Angola, NY, which currently serves as the Bank's operations center,
in addition to housing the Bank's loan department and a small retail facility.
Net interest income, the difference between interest income and fees on
earning assets, such as loans and securities, and interest expense on
deposits, provides the basis for the Bank's results of operations. These
results are also affected by non-interest income, the provision for credit
losses, non-interest expense, and income taxes.
NET INCOME
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 1.4%
from 1995 to 1996, compared to an increase of 6.4% from 1994 to 1995. Although
average earning assets increased 7.7% in 1996, the tax-equivalent yield on
those assets was 8.27%, compared to 8.28% in 1995. The increase in income on
earning assets was largely offset by a volume increase in average
interest-bearing liabilities of 8.22% and an increase in the average cost of
funds from 3.77% in 1995 to 3.99% in 1996. In 1996, the Bank's net interest
margin was 4.64% compared to 4.99% in 1995.
The increase of 6.4% in net interest income in 1995 over 1994 was the combined
result of a volume increase of 3.2% in average earning assets in 1995 and an
increase in the tax-equivalent yield on those assets to 8.28% from 7.68% in
1994. This increase was offset in part by a volume increase in
interest-bearing liabilities of 1.6% and an increase in the average cost of
funds from 3.08% in 1994 to 3.77% in 1995. The net interest margin increased
from 4.60% in 1994 to 4.99% in 1995.
Rates remained fairly stable throughout most of 1996. The federal funds rate
and the discount rate were reduced a quarter of a percent at the January 31,
1996 meeting of the Federal Reserve Board. Despite indications of strong
economic growth, the Federal Reserve Bank failed to raise rates at later
meetings. This was a marked contrast to the
NET INTEREST INCOME
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
<PAGE> 22
- 22 -
volatility experienced over the period from February 1994 through February
1995 when the Federal Reserve Board raised short-term rates seven times in its
efforts to control inflation.
The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. In 1995, the Bank established an
Asset/ Liability Management Committee ("ALCO") for the purpose of evaluating
the Bank's short-range and long-range liquidity position and the potential
impact on capital and earnings as a result of sudden changes in interest
rates. The Bank adopted an asset/liability policy which specifies minimum
limits for liquidity and capital ratios. Maximum limits have been set for the
negative impact acceptable on net interest income and the market value of
assets as a result of a shift in interest rates. The asset/liability policy
also includes guidelines for investment activities and funds management. The
ALCO meets monthly to review the Bank's status and formulate its strategy
based on current economic conditions, interest rate forecasts, loan demand,
deposit volatility, and the Bank's earning objectives.
PROVISION FOR CREDIT LOSSES
Credit losses represent the amount charged against earnings to establish a
reserve of allowance sufficient to absorb expected loan losses based on
management's evaluation of the loan portfolio. In 1996, $60,000 was charged
against earnings for credit losses. In 1995, the Bank updated the methodology
it uses to calculate the reserve amount for credit losses. After considering
loan concentrations, charge-off history, delinquent loan percentages and
general economic conditions, the Bank reversed $86,933 of its provision for
credit losses in 1995. In 1994, $16,000 was charged against earnings for
credit losses. The following table summarizes the Bank's actual credit losses,
total of non-performing loans and total allowance for credit losses for 1996,
1995 and 1994, both in dollars and as a percentage of total loans outstanding:
NON-PERFORMING LOANS TO TOTAL LOANS
[PERCENTAGE]
'92 '93 '94 '95 '96
? ? ? ? ?
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Actual Credit
Losses $ 77,000 0.08% $ 11,000 0.014% $ 13,000 0.020%
Non-Performing
Loans $230,000 0.20% $312,000 0.470% $854,000 0.700%
Allowance for
Credit Losses $546,954 0.59% $557,961 0.730% $628,957 0.870%
</TABLE>
NON-INTEREST INCOME
Total non-interest income increased approximately $168,000 in 1996 from 1995
compared with a decrease of approximately $22,000 in 1995 from 1994. In 1996,
service charge income of $668,000 increased approximately $106,000 over 1995,
and approximately $167,000 over 1994. The additional income reflects the
impact of increases in service charges implemented in September of 1995 as
well as increased account activity and deposit volume.
Other non-interest income increased nearly $106,000 in 1996. This was
attributable, in part, to an increase of $45,000 in the cash surrender value
of life insurance policies carried on certain bank officers. Other
contributing factors included an overall increase in loan-related income as a
result of a high level of loan activity in 1996, and the receipt of $15,000 in
state and federal tax refunds for the 1994 tax year. Non-interest income had
declined approximately $84,000 from 1994 to 1995. In 1994, the Bank received a
life insurance payment of $97,128 that resulted in an unusually high level of
non-interest income that particular year.
Gains realized on the sale of assets decreased $44,000 in 1996 from 1995. In
1996, the Bank experienced a loss of $61,000 on a residual bond that was
called for redemption in full. This loss was offset by net gains on planned
sales of securities of $38,000, premiums on sales of student loans to the
Student Loan Marketing Association ("SLMA") of $28,000 and premiums of $6,000
received on sales of mortgages to the Federal National Mortgage Association
("FNMA"). The Bank became affiliated with SLMA in 1995, and the initial sales
volume in student loans resulted in $48,000 in premiums received in 1995. The
Bank did not anticipate that the volume of future sales would repeat 1995
levels. The Bank became a member of the Federal National Mortgage Association
in late 1995, realizing only about $1,000 in premiums that year.
NON-INTEREST EXPENSE
In 1996, the ratio of non-interest expense to average assets was 3.37%
compared to 3.40% in 1995 and 3.34% in 1994. The non-interest expense category
includes
<PAGE> 23
- 23 -
salaries, occupancy expenses, repairs and maintenance, advertising and
professional services. All of these categories have been affected by the Town
of Evans office expansion and the Angola office renovation. Additional
staffing requirements have contributed to increases in salary and benefit
expenses of 8.9% from 1995 to 1996 and 13.5% from 1994 to 1995. Another factor
was the funding of a supplemental employee retirement plan for certain bank
officers. Occupancy expenses have grown due to the operation of the additional
branch locations, costs associated with the tenant-occupied property adjacent
to the Derby, NY office, and additional depreciation costs resulting from the
purchases of additional automated teller machines (ATMs) and newly upgraded
check processing equipment. An increase of 36% in advertising expense in 1996
over 1995 was due to the expansion of the Bank's trade area as well as the
continuing promotion of the home equity product and the marketing of a
15-month certificate of deposit special in the last quarter of 1996.
In 1996, the Bank's FDIC insurance assessment dropped to $2,000 from $120,231
in 1995 and $232,840 in 1994. The reductions over the past two years occurred
when the FDIC decreased premiums as a result of the full funding of the Bank
Insurance Fund. In 1995, the premium was reduced from $.23 per $100 of
deposits to $.04 per $100 of deposits. In 1996, the rate was reduced to zero
with a minimum charge of $500 per quarter for well capitalized banks. The Bank
was assessed at the minimum rate, as it remains well above the regulatory
minimums for the key measures of capital adequacies as disclosed in note 11 of
the financial statements.
STOCKHOLDERS' EQUITY
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
TAXES
The provision for taxes in 1996 of $588,000 reflects an effective tax rate of
27%. This compares to $764,000 and 32% in 1995 and $630,000 and 28% in 1994.
In 1996, there was a change in the composition of the deferred tax
calculation, resulting in an overall decrease in the effective tax rate. In
addition to income on tax-exempt securities, other non-taxable income items
included tax refunds and income resulting from the increase in the cash
surrender value of life insurance policies. Life insurance proceeds received
in 1994 were also exempt from taxation, resulting in a lower effective tax
rate in that year.
FINANCIAL CONDITION
The Bank had total assets of $140.9 million at December 31, 1996, increasing
$15.6 million or 12.4% over December 31, 1995. Loan balances increased $16.6
million or 22% in 1996 over 1995. This loan growth was funded by an increase
in deposits of 13.3% and by a reduction in the securities portfolio of 7.5%.
Capital increased 7.1%, basically due to the retention of earnings.
LOANS
Loans comprised 66% of the Bank's total average earning assets in 1996. The
increase of 22% in actual year-end balances in 1996 over 1995 compares to an
increase of 4.8% in 1995 over 1994. Loan demand was soft throughout 1994 and
the first three quarters of 1995. The Federal Reserve Board lowered rates in
July and December of 1995, and loan activity increased as a result. This
increase in loan activity was bolstered by a 25 basis point decrease in rates
on January 31, 1996. The Bank continues to focus its lending on commercial and
residential mortgages, small commercial loans and home equity loans.
Commercial mortgages make up the largest segment of the portfolio at 42.0%.
Residential mortgages comprise 27.8% of the portfolio and commercial loans
total 11.2%. Home equity loans make up 13.9% of total loans.
The Bank currently retains the servicing rights to $1.7 million in long-term
mortgages sold to the Federal National Mortgage Association ("FNMA"), since
becoming a member in 1995. This arrangement allows the Bank to offer long-term
mortgages without exposure to the associated risks, while retaining customer
account relationships.
The Bank continues its contractual arrangement with the Student Loan Marketing
Association ("SLMA") whereby SLMA services the Bank's loans to students who
are still in school and subsequently purchases those loans when the student
goes into repayment. As a result of this arrange-
NET LOANS
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
<PAGE> 24
- 24 -
ment, student loan balances decreased 13.4% in 1996 from 1995 levels and
decreased 60% in 1995 from 1994 levels.
At December 31, 1996, the Bank had a loan-to-deposit ratio of 74.6%, and
estimated its unloaned core deposits at $9.5 million. The Bank monitors the
level of its unloaned core deposits to ensure that it is sufficient to fund
anticipated loan growth as it expands its market area and develops new
products.
SECURITIES
Securities and federal funds sold made up the remaining 34% of the Bank's
earning assets at December 31, 1996. Since deposit growth was insufficient to
fund the high level of loan demand experienced in 1996, securities that
matured or were sold were utilized as an additional funding source, thereby
reducing investment balances by $2.9 million from 1995. In 1995, when deposit
growth exceeded loan growth, $6 million in excess funds had been directed into
the securities portfolio. The portfolio remains concentrated in US government
and government agency securities and tax-exempt municipal bonds of varied
maturity.
In 1994, the Bank adopted Financial Accounting Standard No. 115 which outlines
accounting and reporting procedures for investment securities. At that time,
all securities in the Bank's portfolio were designated as either "held to
maturity" or "available for sale", as were all subsequent purchases.
Securities which the Bank designates as held to maturity are stated on the
balance sheet at amortized cost, and those designated as available for sale
are reported at fair market value. The unrealized gains and losses on
available for sale securities are recorded, net of taxes, as a separate
component of shareholders' equity. Transferring a security from one category
to another results in certain accounting consequences. In 1995, the Financial
Accounting Standards Board allowed a one-time reclassification of securities
without penalty. As a result of this one-time window of opportunity, the Bank
reclassified the majority of its bonds in the held to maturity category as
available for sale. This reclassification was made after careful consideration
of the Bank's anticipated liquidity needs and the present and future impact of
such a transfer on the Bank's earnings and capital.
SECURITIES
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
DEPOSITS
Total deposits increased $14.4 million in 1996 over 1995. Slight decreases
occurred in NOW and regular savings balances, while significant increases
occurred in demand deposit and time account balances. The actual 1996 year-end
balances of $20.1 million in demand deposits reflect an increase of 13.3% over
1995. Much of this growth can be attributed to the Bank's new presence in the
Hamburg, NY market. In addition to the expansion of the Bank's trade area,
municipal deposit activity contributed to growth of $7.7 million or 119% in
time accounts of $100,000 or more. Other time deposits increased $5.7 million
or 16.2% in 1996 over 1995. Most of this increase occurred in the fourth
quarter when the Bank promoted a special 15 month certificate of deposit.
The Bank continues to evaluate ways to improve its existing deposit products
to meet customer needs, as well as to develop new products which will keep the
Bank competitive in the marketplace.
TOTAL DEPOSITS
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
LIQUIDITY
The Bank seeks to manage its liquidity so that it is able to meet day to day
loan demand and deposit fluctuations, while attempting to maximize the amount
of net interest income on earning assets. Traditionally, the Bank has utilized
its federal funds balances and cash flows from the investment portfolio to
fulfill its liquidity requirements. In 1996, overnight federal funds sold
balances averaged $3.8 million. The maturities of the Bank's investments are
laddered in such a way as to provide runoff at times that a liquidity need may
arise. At December 31, 1996, approximately 9.1% of the Bank's securities had
contractual maturities of one year or less and 42.0% had maturity dates of
five years or less. At December 31, 1996, the Bank had net short-term
liquidity of $8.1 million compared to $8.6 million at December 31, 1995.
Available assets of $38.3 million less public and purchased liabilities
<PAGE> 25
- 25 -
of $18.8 million resulted in a long-term liquidity ratio of 204%, compared to
298% at December 31, 1995. Although the Bank believes it has sufficient
resources in its securities portfolio to meet its short-term and long-term
liquidity needs, the Bank also has the option to borrow $1 million each from
two different correspondent banks.
The Bank is a member and shareholder of the Federal Home Loan Bank ("FHLB"),
which will make cash advances of various terms at competitive rates to its
members. Advances of up to $10 million can be drawn on the FHLB, via the
Overnight Line of Credit Agreement, and another $5 million could be borrowed
based on the collateral provided by the Bank's FHLB capital stock holdings.
Liquidity needs can also be met by aggressively pursuing municipal deposits,
which are normally awarded on the basis of competitive bidding. The Bank
maintains a sufficient amount of US government and US government agency
securities and New York State municipal bonds that can be pledged as
collateral for these deposits.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. The
Bank's ALCO analyzes the gap position on a monthly basis to determine the
Bank's exposure to interest rate risk. The gap position is the difference
between the total of the Bank's rate sensitive assets and rate sensitive
liabilities maturing or repricing during a given time frame. A "positive" gap
results when more assets than liabilities reprice and a "negative" gap results
when more liabilities than assets reprice in a given time period. Because
assets historically reprice faster than liabilities, a slightly negative gap
position is considered preferable. At December 31, 1996, the Bank was in a
negative gap position, with $9.2 million more in rate sensitive liabilities
repricing over the next year than in rate sensitive assets. The Bank's asset
liability limit, as defined in its asset liability policy, is a difference of
+/-15% of the Bank's total assets which amounted to +/-$21.1 million at
December 31, 1996. Therefore, the Bank's negative gap position at December 31,
1996 was well within its own policy limit. The gap ratio (rate sensitive
assets/rate sensitive liabilities) at that date was 83%.
MARKET RISK
When rates rise or fall, the market value of the Bank's assets and liabilities
will increase or decrease. As part of the Bank's asset/liability policy, the
Bank has set limitations on the negative impact to the market value of its
balance sheet that would be accepted. The Bank's securities portfolio is
priced monthly and adjustments are made on the balance sheet to reflect the
market value of the available for sale portfolio per Financial Accounting
Standard No. 115. A limitation of a negative ten percent of total capital
before FAS 115 (after tax) has been set forth in the asset liability policy as
the maximum impact to equity that would be acceptable. At year end, the impact
to equity as a result of marking available for sale securities to market was
an unrealized loss of $23,000. On a quarterly basis, the available for sale
portfolio is shocked for immediate increases of 100 and 200 basis points. At
December 31, 1996, the Bank determined that it would take an immediate
increase in excess of 200 basis points to eliminate the current capital
cushion. The Asset/Liability Committee also reviews the Bank's capital ratios
on a quarterly basis. Unrealized gains or losses on available for sale
securities are not included in the calculation of these ratios.
CAPITAL EXPENDITURES
In order to keep pace with check and statement processing volume, and to
provide the continual high level of customer service, the Bank plans to
purchase statement imaging equipment and upgraded mainframe computer operating
and archiving systems in 1997. The cost of the statement imaging equipment is
estimated at $200,000 and the mainframe upgrades will total approximately
$150,000. The Bank believes that it has a sufficiently strong capital base to
support these capital expenditures with current assets and retained earnings.
IMPACT OF INFLATION AND CHANGING PRICES
There will always be economic events, such as changes in the economic policies
of the Federal Reserve Board, that will have an impact on the profitability of
the Company. Inflation may result in impaired asset growth, reduced earnings
and substandard capital ratios. The net interest margin can be adversely
impacted by the volatility of interest rates throughout the year. Since these
factors are unknown, management attempts to structure the balance sheet and
the repricing frequency of its interest-sensitive assets and liabilities to
avoid a significant concentration that could result in a material negative
impact on earnings.
<PAGE> 26
- 26 -
ITEM 8. FINANCIAL STATEMENTS
--------------------
See Part IV, Item 14, "Exhibits, Financial Statements Schedules and Reports
on Form 8-K"
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth the names, ages and positions of the
Directors and Executive Officers of the Company.
<TABLE>
<CAPTION>
Term
Name Age Position Expires
---- --- -------- -------
Nominees for Directors:
-----------------------
<S> <C> <C> <C>
Richard M. Craig 59 President, CEO, Director 1997
LaVerne G. Hall 59 Director 1997
Richard C. Stevenson 88 Director 1997
Directors:
----------
Robert W. Allen 70 Secretary, Director 1999
William F. Barrett 55 Director 1999
Philip Brothman 58 Director 1998
David C. Koch 61 Director 1999
David M. Taylor 46 Director 1998
Carl F. Ulmer 70 Chairman of Board, Director 1998
</TABLE>
Each Director is elected to hold office for a three year term and until
his successor is elected and qualified.
Mr. Craig joined the Bank in 1987 and has served as President and
Director since 1988. In 1989 he was also appointed Chief Executive Officer.
Previously, he was the Administrative Vice President of M&T Bank.
<PAGE> 27
- 27 -
Mr. Hall has been a Director since 1981 and is Chairman of the Board of
L. G. Hall Building Contractors, Inc.
Mr. Stevenson has been a Director since 1958 and is President of
Metro-Stevenson Realtors and Chairman of the Board of Evans Land Corp.
Mr. Allen has been a Director since 1960. He was the Executive Vice
President of the Bank until his retirement in 1988.
Mr. Barrett has been a Director since 1971. He is currently self
employed as a property and investment manager and the former President of Carl
E. Barrett, Ltd., an insurance agency.
Mr. Brothman has been a Director since 1976 and is a partner in the law
firm of Hurst, Brothman & Yusick.
Mr. Koch has been a Director since 1979 and is Chairman and Chief
Executive Officer of New Era Cap Co., Inc..
Mr. Taylor has been a Director since 1986 and is President of Concord
Nurseries, Inc.
Mr. Ulmer has been a Director since 1967. He was President of the Bank
from 1967 to 1988 and also Chief Executive Officer from 1967 until his
retirement in 1989. He has been Chairman of the Board of Directors since 1975.
The committees of the Board of Directors are appointed by the members of the
Board of Directors and are as follows:
Loan Committee:
---------------
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
David C. Koch Carl F. Ulmer
The Loan Committee met eleven times during 1996. Its purpose is to
review and approve loans exceeding $250,000 or loans that are non-conventional.
Investment Committee:
---------------------
Carl F. Ulmer, Chairman Richard M. Craig
David M. Taylor
The Investment Committee met once in 1996. The Investment Committee
meets a minimum of once a year to review the liquidity of the investment
portfolio and discuss investment strategies.
Planning Committee:
-------------------
LaVerne G. Hall, Chairman William F. Barrett Richard M. Craig
David C. Koch Carl F. Ulmer
The Planning Committee met once in 1996. The Planning Committee is
responsible for reviewing the strategic plan of the Bank and actions taken to
obtain those objectives.
<PAGE> 28
- 28 -
Loan Review Committee:
----------------------
Phillip Brothman, Chairman Richard M. Craig LaVerne G. Hall
David M. Taylor
The Loan Review Committee met four times during 1996. Its purpose is to
insure the Bank's provision and reserve for credit losses are adequate. The Loan
Review Committee meets quarterly with a retired bank examiner, who independently
conducts the Bank's Loan Review. As a result of his recommendations, loans are
graded based upon payment history, credit strength of borrower and other
factors. This information is then aggregated to determine the overall adequacy
of the credit loss reserve.
Audit Committee:
----------------
Phillip Brothman, Chairman Robert W. Allen Richard M. Craig
David C. Koch David M. Taylor
The Audit Committee met four times in 1996. The members of the Audit
Committee receive from the internal auditor a quarterly report which describes
findings for the prior quarter. The function of the Audit Committee is to insure
that the Bank's activities are being conducted in accordance with law, banking
rules and regulations, other regulatory and supervisory authorities, and the
Bank's internal policies. In addition, the Audit Committee recommends to the
Board of Directors the services of a reputable certified public accounting firm.
The Committee receives and reviews the reports of the certified public
accounting firm and presents them to the Board of Directors with comments and
recommendations.
Insurance Committee:
--------------------
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
Carl F. Ulmer
The Insurance Committee met once during 1996. This committee reviews
the coverage of insurance policies of the Bank and monitors costs.
Human Resource Committee:
Richard C. Stevenson, Chairman William F. Barrett Richard M. Craig
LaVerne G. Hall David C. Koch Carl F. Ulmer
The Human Resource Committee met once during 1996. Its purpose is to
review management's recommendation as it relates to job classification, salary
ranges and annual merit increases. The committee also reviews fringe benefits.
The Human Resource Committee also establishes the compensation of the Executive
Officers of the Company. See "Human Resource Committee Report on Executive
Compensation".
The Board of Directors of the Company met twelve times during 1996.
Each incumbent director of the Company, except for Mr. Koch, Mr. Taylor and Mr.
Ulmer, attended at least 75% of the aggregate of all the meetings of the Board
of Directors and the Committees of which they were members.
COMPENSATION OF DIRECTORS
-------------------------
For the year 1996, members of the Board of Directors were compensated
at the rate of $700 per meeting, with the Secretary receiving $750 per meeting.
Total directors' fees during 1996 amounted to $133,941 (including committee fees
and $36,915 of deferred compensation).
<PAGE> 29
- 29 -
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's stock, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. Executive officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that during 1996 all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with by such persons.
<PAGE> 30
- 30 -
ITEM 11. EXECUTIVE COMPENSATION
----------------------
EXECUTIVE COMPENSATION
----------------------
There is shown below information concerning the annual and long-term
compensation for service in all capacities to the Company for the years 1996,
1995 and 1994 of the Chief Executive Officer and the Senior Vice President. No
other executive officer earned in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
============================================== =================================================
AWARDS PAYOUTS
NAME OF AND STOCK LONG-TERM
PRINCIPAL OPTION INCENTIVE ALL OTHER
POSITION YEAR SALARY BONUS OTHER(1) (SHARES) PAYOUTS COMPENSATION
- -------- ---- ------ ----- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard M. Craig 1996 $142,385 $13,840 $2,848 -0- -0- -0-
President & CEO 1995 $135,631 $12,596 $2,692 -0- -0- -0-
1994 $124,962 $13,412 $2,499
James Tilley 1996 $97,095 $ 9,875 $1,942
Senior Vice 1995 $93,146 $ 9,464 $1,836 -0- -0- -0-
President 1994 $86,557 $10,708 $1,732 -0- -0- -0-
<FN>
- ------------------------
(1) Includes the Bank's contribution to the Employee Savings Plan made for the benefit of Mr. Craig of
$2,848 in 1996, $2,692 in 1995 and $2,499 in 1994 and for the benefit of Mr. Tilley of $1,942 in 1996,
$1,836 in 1995 and $1,732 in 1994. See "EMPLOYEE SAVINGS PLAN". Does not include personal benefits
which did not exceed 10% of Mr. Craig's or Mr. Tilley's salary and bonus in any year.
</TABLE>
Employment Agreements
---------------------
Mr. Richard Craig and Mr. James Tilley have each entered into an
Employment Agreement with the Bank which runs through June 30, 2001 and January
31, 2001 respectively. Each Employment Agreement provides that salary will be
set annually by the Board of Directors. If the Bank terminates the Employment
Agreement without cause, the Bank is obligated to continue to pay base salary
for the longer of three months or the remainder of the term of the Employment
Agreement.
Pension Plan
------------
The Bank maintains a defined benefit pension plan for all eligible
employees. An employee becomes vested in a pension benefit after five years of
service. Upon retirement at age 65, vested participants are entitled to receive
a monthly benefit. Prior to a May 1, 1994 amendment to the plan, the monthly
benefit under the pension plan was 3% of average monthly compensation multiplied
by years of service up to a maximum of fifteen years of service. In 1994, the
pension plan was amended to change the benefit to 1% of average monthly
compensation multiplied by years of service up to a maximum of thirty years of
service. However, the benefits already accrued by employees prior to this
amendment were not reduced by the amendment. Mr. Craig and Mr. Tilley are both
participants in the pension plan and as of December 31, 1996, Mr. Craig had nine
years of credited service and $11,512 of average monthly compensation; and Mr.
Tilley had eight years of credited service and $7,813 of average monthly
compensation.
<PAGE> 31
- 31 -
Supplemental Executive Retirement Plans
---------------------------------------
In 1995, the Bank entered into nonqualified Supplemental Executive
Retirement Plans ("SERP's") with both Mr. Craig and Mr. Tilley to provide
retirement benefits to supplement their benefits under the Bank's Pension Plan
and replace the benefits reduced by the 1994 amendment to the Pension Plan. See
"PENSION PLAN". Under the SERP's Mr. Craig and Mr. Tilley are entitled to
additional annual pension payments of $63,882 and $60,319, respectively, for 20
years after retirement at age 65, unless their employment is terminated earlier.
The SERP's also provide death benefits in the event the executive dies prior to
age 65 which are payable over 10 years. As of December 31, 1996, the annual
death benefit amounts for Mr. Craig and Mr. Tilley were $62,454 and $43,176,
respectively. The Bank has purchased a life insurance policy on both Mr. Craig
and Mr. Tilley to assist in funding its obligations under the SERP's.
Employee Savings Plan
---------------------
The Bank also maintains a 401(k) salary deferral plan to assist
employees in saving for retirement.
All employees are eligible to participate on the first of the month
following one year of service, provided they have completed 1,000 hours of
service. Eligible employees can contribute up to a maximum of 15% of their base
pay. An automatic 1% of base pay contribution is made by the Bank and in
addition, the Bank makes a matching contribution at a rate of 25% of the first
4% contributed by a participant. Participants are always 100% vested in their
own contributions and the Bank's matching contribution is also 100% vested.
Individual account earnings will depend on the performance of the
investment funds in which the participant invests. Specific guidelines govern
adjustments to contribution levels, investment decisions and withdrawals from
the plan. The benefit is paid as an annuity unless the employee elects one of
the optional forms of payment available under the plan. See "Summary
Compensation Table" for a summary of the amounts contributed by the Bank to this
Plan for the benefit of Mr. Craig and Mr. Tilley.
COMPENSATION COMMITTEE INTERLOCKS
---------------------------------
AND INSIDER PARTICIPATION
-------------------------
The Human Resources Committee of the Board of Directors serves as the
Compensation Committee of the Company. The members of the Human Resource
Committee are: Richard C. Stevenson, William F. Barrett, Richard M. Craig,
LaVerne G. Hall, David C. Koch and Carl F. Ulmer. Mr. Craig is the President and
CEO of the Company and the Bank. Mr. Ulmer is the Chairman of the Board of
Directors of the Company and served as a past President and CEO of the Bank. Mr.
Hall is Chairman of the Board of L.G. Hall Building Contractors, Inc. which has
performed construction work for the Company. See "Certain Transactions".
There are no Compensation Committee Interlocks required to be disclosed
in this Proxy Statement.
<PAGE> 32
- 32 -
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
-------------------------------------------------------
OWNERS
------
The following table sets forth, as of January 31, 1997, the
number of outstanding shares of Common Stock beneficially owned by (i) each
shareholder known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) all directors and nominees of the Company
individually, and (iii) by all executive officers and directors as a group:
<TABLE>
<CAPTION>
Nature and Amount of Percent of
Name Beneficial Ownership Class
- ---- -------------------- -----
<S> <C> <C>
Robert W. Allen (1) 5,915 1.7%
William F. Barrett (2) 31,193 9.2%
Phillip Brothman (3) 4,512 1.3%
Richard M. Craig (4) 1,545 0.5%
LaVerne G. Hall (5) 10,376 3.1%
David C. Koch (6) 5,076 1.5%
Richard C. Stevenson (7) 10,951 3.2%
David M. Taylor (8) 1,368 0.4%
Carl F. Ulmer (9) 3,104 0.9%
Directors and Officers as a Group 74,318 21.8%
(11 persons)
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
</TABLE>
<PAGE> 33
- 34 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Bank has had, and in the future, expects to have banking and fiduciary
transactions with Directors and Executive Officers of the Company and some of
their affiliates. All such transactions have been in the ordinary course of
business and on substantially the same terms (including interest rates on loans)
as those prevailing at the time for comparable transactions with others.
<PAGE> 34
- 33 -
- ------------
(1) Includes 538 shares owned by Mr. Allen's wife.
(2) Includes 1,494 shares owned by Mr. Barrett's wife, 6,188 shares owned
jointly by Mr. Barrett and his wife and 1,269 shares held for Mr.
Barrett's son, as to which he disclaims beneficial ownership.
(3) Includes 292 shares owned by Mr. Brothman's wife and 309 shares held by
a pension plan of which Mr. Brothman is a trustee and a participant.
(4) Includes 1,014 shares owned jointly by Mr. Craig and his wife and 32
shares owned by Mr. Craig's daughter, as to which he disclaims
beneficial ownership.
(5) Includes 4,646 shares owned by Mr. Hall's wife.
(6) Includes 297 shares owned jointly by Mr. Koch and his wife, and 155
shares owned by Mr. Koch's son, as to which he disclaims beneficial
ownership.
(7) Includes 620 shares owned by Mr. Stevenson's wife, also includes 2,527
shares held by Mr. Stevenson as conservator for Evelyn Simonsen and 212
shares held in a trust for F. Evelyn Beardsley as to which he disclaims
beneficial ownership.
(8) Includes 60 shares owned by Mr. Taylor and his wife.
(9) Includes 1,552 shares owned by Mr. Ulmer's wife.
(10) Includes 76 shares owned by Mr. James Tilley, Assistant Secretary of
Evans Bancorp, Inc., and 2 shares held by Mr. Tilley in trust for his
grandson.
(11) Includes 200 shares owned by Mr. William Glass, Treasurer of Evans
Bancorp, Inc., held jointly with Mr. Glass's wife.
<PAGE> 35
- 35 -
PART IV
-------
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
--------------------------------------
The following financial statements and independent auditors' report thereon
are included herein or are incorporated by reference are included from 1996
Annual Report to Shareholders pages 39 through 67 in response to Part II,
Item 7.
(a) Documents filed as a part of this Report:
None
(b) Documents Incorporated by Reference:
1. Financial Statements.
---------------------
Independent Auditors' Report of Deloitte & Touche LLP
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statement
2. All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
--------
<TABLE>
<CAPTION>
Exhibit Page
No Name No.
------- ---- ----
<S> <C> <C>
3.1 Certificate of Incorporation (1) n/a
3.2 By-Laws (1) n/a
4.1 Specimen common stock certificate (2) n/a
10.1 Employment Agreement dated July 1, 1987
between the Bank and Richard M. Craig (1) n/a
10.3 Employment Agreement dated April 1, 1988
between the Bank and James Tilley (1) n/a
10.4 Specimen 1984 Director Deferred Compensation
Agreement (2) n/a
10.5 Specimen 1989 Director Deferred Compensation
Agreement (2) n/a
10.6 Summary of Provisions of Director Deferred
Compensation Agreements (2) n/a
</TABLE>
<PAGE> 36
- 36 -
<TABLE>
<S> <C> <C>
10.7 Evans National Bank Supplemental Executive
Retirement Plan for Richard M. Craig dated
March 29, 1995 (3) n/a
10.8 Evans National Bank Supplemental Executive
Retirement Plan for James Tilley dated
March 28, 1995 (3) n/a
13.1 1996 Annual Report to Shareholders (3) 32
21.1 Subsidiaries of the Registrant (3) 69
</TABLE>
Footnotes
- ---------
(1) Filed as Exhibits to the Company's Registration Statement on Form S-4
(Registration No. 33-25321) and incorporated herein by reference.
(2) Filed as Exhibits to the original Form 10 (Registration No. 0-18539)
and incorporated herein by reference.
(3) Filed herewith.
(b) Reports on Form 8-K.
--------------------
None.
<PAGE> 37
- 37 -
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, EVANS BANCORP, INC. has duly caused this Annual Report to be signed on its
behalf by the undersigned thereunto duly authorized:
EVANS BANCORP, INC.
By: s/Richard M. Craig
------------------
Richard M. Craig,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
s/Richard M. Craig President March 28, 1997
- ------------------ (Chief Executive
Richard M. Craig Officer), Principal
Accounting Officer and
Director
s/James Tilley Assistant Secretary March 28, 1997
- --------------
James Tilley
s/William R. Glass Treasurer March 28, 1997
- ------------------
William R. Glass
s/Robert W. Allen Director March 28, 1997
- -----------------
Robert W. Allen
s/LaVerne G. Hall Director March 28, 1997
- -----------------
LaVerne G. Hall
s/Richard C. Stevenson Director March 28, 1997
- ----------------------
Richard C. Stevenson
s/David M. Taylor Director March 28, 1997
- -----------------
David M. Taylor
s/Carl F. Ulmer Director March 28, 1997
- ---------------
Carl F. Ulmer
</TABLE>
<PAGE> 1
- 38 -
EXHIBIT 13.1
<PAGE> 2
- 39 -
CONTENTS
PROFILE
........... 1 ............
PRESIDENT'S MESSAGE
........... 2 ............
SELECTED
FINANCIAL INFORMATION
........... 4 ............
MANAGEMENT
DISCUSSION AND ANALYSIS
........... 5 ............
INDEPENDENT
AUDITOR'S REPORT
........... 10 ............
CONSOLIDATED
FINANCIAL STATEMENTS
........... 11 ............
CORPORATE INFORMATION
........... 28 ............
<PAGE> 3
- 40 -
PROFILE
EVANS BANCORP, INC.
is a bank holding company headquartered in Angola, New York and conducts its
business through its wholly-owned subsidiary, Evans National Bank. The Bank is
a FDIC full-service commercial bank and as of December 31, 1996 had total
assets of $140,898,057, total deposits of $123,461,379 and total stockholders'
equity of $15,510,083. The Bank's primary market area is located in Western
New York State and specifically in southern Erie County, northern Chautauqua
County and northwestern Cattaraugus County.
The principal business of the Bank is commercial banking and consists of,
among other things, attracting deposits from the general public and using
these funds to extend credit and to invest in securities. The Bank offers a
variety of loan products to its customers including commercial loans,
commercial and residential mortgage loans, and consumer loans. In addition,
the Bank offers deposit products to include checking and NOW accounts,
passbook and statement savings, and certificates of deposits.
1
<PAGE> 4
- 41 -
PRESIDENT'S MESSAGE
[Graphic "The Key Factor in the Growth of Assets was the Significant increase
in Loans."]
I am pleased to announce that 1996 was a year of record growth at
Evans National Bank. Total assets increased by 12.44%, to $140.9 million from
$125.3 million, the largest one-year increase in the history of the Bank. I
believe that this unprecedented growth in the balance sheet sets the framework
for future improvement in other key performance measures such as net income,
return on assets and return on equity. In order to sustain our philosophy of
controlled growth and dedication to customer service, the Bank in 1996
undertook several strategic initiatives, which included significant
investments in technology and in the branch system. These strategic
initiatives, among others, will enable Evans National Bank to continue to
provide quality products and quality services to our customers.
In order to achieve our long term objectives of growth, continued dedication
to our customers, the community, and our shareholders, it is necessary to
incur and absorb the costs that are associated with such a plan. As a result,
our current year performance measures were down slightly from those of a year
ago. Net income for the year was $1.61 million, down slightly from prior year
net income of $1.66 million, and accordingly, net income per share was down as
well, from $4.90 in 1995 to $4.75 in 1996. Return on average assets was 1.20%
in 1996 compared to 1.34% in 1995, while return on average equity was 10.75%
in 1996 compared to 11.59% in 1995. However, given the various initiatives
undertaken in 1996, as well as their associated costs, our performance was
above our projections for 1996 due to a large increase in the loan portfolio,
related interest income and effective cost management strategies.
The key factor in the growth of assets was the significant increase in loans.
Loans increased from $75.5 million to $92.1 million. This increase of $16.6
million represents growth of 22% over the prior year. Total deposits increased
to $123.5 million from $109.0 million, an increase of $14.5 million, or 13%.
The majority of the growth in deposits was comprised of higher yielding
certificates of deposit, with a slight increase in our core deposit base.
As previously mentioned, the Bank concluded various strategic initiatives
during 1996, which had both balance sheet and income statement implications.
The Evans Office was opened in May of 1996, allowing for increased customer
service capabilities. The newly renovated Angola Office subsequently became
our Operations Center and the site of the majority of our technological
investments. During 1996, we replaced our check processing equipment with a
modern item processing system which will include check imaging. Early in 1997,
we plan to replace our mainframe computer and
2
<PAGE> 5
- 42 -
upgrade to a Unix-based operating system. In conjunction with this effort, a
state-of-the-art optical disk archival system will be installed providing a
highly efficient record storage and retrieval network.
During the second quarter of 1997, we plan to complete the final installation
phase of our new check processing technology, at which time our customers will
begin receiving laser-printed images of their cancelled checks. This
improvement will provide our customers with easier record keeping and check
storage capabilities, while allowing the Bank to reduce paper work, postage
costs, and improve our record storage and research methods. Although this
strategy represents a significant investment for the Bank, the projected
savings will enable the Bank to recoup its investment in approximately three
years, while improving our service and communication to customers. In
addition, the bank is investigating a new service allowing customers to access
account information through automated voice response or by a personal
computer.
Although expansion of operating and retail delivery capacity has increased our
fixed cost structure in the short term, we feel that we have implemented a
strategy to enhance customer service and commitment to the community, while
simultaneously increasing shareholder value.
In February 1996, the Board of Directors declared a stock dividend of 7.14%,
and in October 1996, paid a sixty-two cent per share cash dividend. A special
cash dividend of fifty cents per share was also declared in November 1996,
payable February 1, 1997. At December 31, 1996, shares of stock were selling
at $136 per share, which represents an increase of $26 per share, or 23.6%
over the December 31, 1995 price of $110 per share. The Board of Directors has
recommended a five for one stock split, which will be submitted to the
shareholders for approval at the annual meeting.
Evans National Bank has recently appointed American Stock Transfer and Trust
Company as its stock transfer agent and registrar. American Stock Transfer and
Trust Company will assume the responsibility for maintaining shareholder
records, processing, dividend distributions and similar functions. As the
number of shareholders of Evans Bancorp Inc. has increased over the past
years, the work required to maintain our shareholder records has also
increased. We believe this change will provide better service to you, our
shareholders, at less cost to the Company. We will be evaluating a dividend
reinvestment program through our transfer agent and will report the status to
you at our annual meeting.
During 1996, Evans National Bank continued its long-standing commitment to the
community by participating in various educational, charitable, and community
service functions. Additionally, employees and directors continue to be
involved in numerous organizations in an effort to assist the Bank in
identifying the needs of the community.
During the year, we recognized the following personnel for significant years
of service: Susan Herold and Elizabeth Mac with 20 years of service, Ramon
Gallardo and Mary Nytz with 10 years of service, and Julie Clark and Delana
Gage with 5 years of service. Additionally, the following promotions were
appointed by the Board of Directors: Mary Doeing, Thomas McDonnell, and
Jeffrey White to Vice President, and Michelle Bress, Mary Jane Gonzalez and
Howard Martin to Banking Officer.
In conclusion, I would like to thank our employees, the Board of Directors,
our shareholders, and customers for their support during 1996. We look forward
to the future with its challenges and opportunities.
/s/ Richard M. Craig
Richard M. Craig / President and Chief Executive Officer
3
<PAGE> 6
- 43 -
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
For the year ended December 31 1996 1995 1994 1993 1992
RESULTS OF OPERATIONS
- ---------------------
<S> <C> <C> <C> <C> <C>
Interest Income $9,799,815 $9,226,500 $8,206,596 $7,989,392 $8,282,555
Interest Expense 3,912,761 3,418,782 2,747,297 2,680,003 3,366,960
Net Interest Income 5,887,054 5,807,718 5,459,299 5,309,389 4,915,595
Non-Interest Income 930,986 763,054 785,551 672,015 588,206
Non-Interest Expense 4,555,398 4,228,922 3,981,801 3,581,929 3,395,906
Net Income 1,614,642 1,664,783 1,617,049 1,612,392 1,432,489
BALANCE SHEET DATA
- ------------------
Total Assets $140,898,057 $125,308,204 $114,565,971 $112,465,797 $108,158,334
Loans - Net 92,087,902 75,468,504 71,998,929 67,754,002 59,466,817
Allowance for Loan Losses 546,954 557,961 628,957 612,921 478,775
Securities 36,054,324 38,954,494 32,341,350 33,371,944 38,013,829
Total Deposits 123,461,379 109,020,551 100,532,031 99,860,851 96,859,418
Stockholders' Equity 15,510,083 14,485,510 12,723,940 11,489,412 10,018,622
PER SHARE DATA
- --------------
Net Income $4.75 $4.90 $4.76 $4.75 $4.22
Cash Dividend $0.62 $0.75 $0.50 $0.45 $0.40
Stock Dividend 7.14% 7.14% 7.14% 7.14% 7.14%
Book Value at Year End $45.65 $45.63 $42.90 $41.45 $38.68
Market Value $136.00 $110.00 $70.00 $65.50 $50.00
Shares Outstanding 339,790 317,481 296,613 277,170 258,992
Weighted Average Shares 339,790 339,790 339,790 339,790 339,790
(Retroactively adjusted for stock dividends)
</TABLE>
4
<PAGE> 7
- 44 -
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie and
Chautauqua Counties of Western New York. The Bank serves it market through six
banking offices located in Angola, Derby, Evans, Forestville, Hamburg and
North Boston, New York. The Bank's principal source of funding is through
deposits which it reinvests in the community in the form of loans and
investments. Deposits are insured to the applicable limit by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is regulated by the Office of the Comptroller of the Currency.
The following discussion of financial conditions and results of operations of
the Company and the Bank should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Net income in 1996 of $1,614,642 resulted in earnings per share of $4.75,
which compares with net income of $1,664,783, or $4.90 per share, in 1995 and
$1,617,049, or $4.76 per share, in 1994. The decrease in net income of 3% in
1996 from 1995 reflects the impact on annual earnings of the $2.2 million
expansion plan implemented over the last two years. Non-interest expense
increased 7.7% in 1996 over 1995, largely due to increases in salary expense,
occupancy expense and advertising expense. These costs have risen as a result
of the opening of the newly-constructed branch office in Evans, NY in May,
1996, the operation of a branch office in Hamburg, NY, which opened for
business in October, 1995, and the recently completed renovation of the Angola
office in Angola, NY, which currently serves as the Bank's operations center,
in addition to housing the Bank's loan department and a small retail facility.
Net interest income, the difference between interest income and fees on
earning assets, such as loans and securities, and interest expense on
deposits, provides the basis for the Bank's results of operations. These
results are also affected by non-interest income, the provision for credit
losses, non-interest expense, and income taxes.
NET INCOME
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 1.4%
from 1995 to 1996, compared to an increase of 6.4% from 1994 to 1995. Although
average earning assets increased 7.7% in 1996, the tax-equivalent yield on
those assets was 8.27%, compared to 8.28% in 1995. The increase in income on
earning assets was largely offset by a volume increase in average
interest-bearing liabilities of 8.22% and an increase in the average cost of
funds from 3.77% in 1995 to 3.99% in 1996. In 1996, the Bank's net interest
margin was 4.64% compared to 4.99% in 1995.
The increase of 6.4% in net interest income in 1995 over 1994 was the combined
result of a volume increase of 3.2% in average earning assets in 1995 and an
increase in the tax-equivalent yield on those assets to 8.28% from 7.68% in
1994. This increase was offset in part by a volume increase in
interest-bearing liabilities of 1.6% and an increase in the average cost of
funds from 3.08% in 1994 to 3.77% in 1995. The net interest margin increased
from 4.60% in 1994 to 4.99% in 1995.
Rates remained fairly stable throughout most of 1996. The federal funds rate
and the discount rate were reduced a quarter of a percent at the January 31,
1996 meeting of the Federal Reserve Board. Despite indications of strong
economic growth, the Federal Reserve Bank failed to raise rates at later
meetings. This was a marked contrast to the
NET INTEREST INCOME
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
5
<PAGE> 8
- 45 -
volatility experienced over the period from February 1994 through February
1995 when the Federal Reserve Board raised short-term rates seven times in its
efforts to control inflation.
The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. In 1995, the Bank established an
Asset/ Liability Management Committee ("ALCO") for the purpose of evaluating
the Bank's short-range and long-range liquidity position and the potential
impact on capital and earnings as a result of sudden changes in interest
rates. The Bank adopted an asset/liability policy which specifies minimum
limits for liquidity and capital ratios. Maximum limits have been set for the
negative impact acceptable on net interest income and the market value of
assets as a result of a shift in interest rates. The asset/liability policy
also includes guidelines for investment activities and funds management. The
ALCO meets monthly to review the Bank's status and formulate its strategy
based on current economic conditions, interest rate forecasts, loan demand,
deposit volatility, and the Bank's earning objectives.
PROVISION FOR CREDIT LOSSES
Credit losses represent the amount charged against earnings to establish a
reserve of allowance sufficient to absorb expected loan losses based on
management's evaluation of the loan portfolio. In 1996, $60,000 was charged
against earnings for credit losses. In 1995, the Bank updated the methodology
it uses to calculate the reserve amount for credit losses. After considering
loan concentrations, charge-off history, delinquent loan percentages and
general economic conditions, the Bank reversed $86,933 of its provision for
credit losses in 1995. In 1994, $16,000 was charged against earnings for
credit losses. The following table summarizes the Bank's actual credit losses,
total of non-performing loans and total allowance for credit losses for 1996,
1995 and 1994, both in dollars and as a percentage of total loans outstanding:
NON-PERFORMING LOANS TO TOTAL LOANS
[PERCENTAGE]
'92 '93 '94 '95 '96
? ? ? ? ?
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Actual Credit
Losses $ 77,000 0.08% $ 11,000 0.014% $ 13,000 0.020%
Non-Performing
Loans $230,000 0.20% $312,000 0.470% $854,000 0.700%
Allowance for
Credit Losses $546,954 0.59% $557,961 0.730% $628,957 0.870%
</TABLE>
NON-INTEREST INCOME
Total non-interest income increased approximately $168,000 in 1996 from 1995
compared with a decrease of approximately $22,000 in 1995 from 1994. In 1996,
service charge income of $668,000 increased approximately $106,000 over 1995,
and approximately $167,000 over 1994. The additional income reflects the
impact of increases in service charges implemented in September of 1995 as
well as increased account activity and deposit volume.
Other non-interest income increased nearly $106,000 in 1996. This was
attributable, in part, to an increase of $45,000 in the cash surrender value
of life insurance policies carried on certain bank officers. Other
contributing factors included an overall increase in loan-related income as a
result of a high level of loan activity in 1996, and the receipt of $15,000 in
state and federal tax refunds for the 1994 tax year. Non-interest income had
declined approximately $84,000 from 1994 to 1995. In 1994, the Bank received a
life insurance payment of $97,128 that resulted in an unusually high level of
non-interest income that particular year.
Gains realized on the sale of assets decreased $44,000 in 1996 from 1995. In
1996, the Bank experienced a loss of $61,000 on a residual bond that was
called for redemption in full. This loss was offset by net gains on planned
sales of securities of $38,000, premiums on sales of student loans to the
Student Loan Marketing Association ("SLMA") of $28,000 and premiums of $6,000
received on sales of mortgages to the Federal National Mortgage Association
("FNMA"). The Bank became affiliated with SLMA in 1995, and the initial sales
volume in student loans resulted in $48,000 in premiums received in 1995. The
Bank did not anticipate that the volume of future sales would repeat 1995
levels. The Bank became a member of the Federal National Mortgage Association
in late 1995, realizing only about $1,000 in premiums that year.
NON-INTEREST EXPENSE
In 1996, the ratio of non-interest expense to average assets was 3.37%
compared to 3.40% in 1995 and 3.34% in 1994. The non-interest expense category
includes
6
<PAGE> 9
- 46 -
salaries, occupancy expenses, repairs and maintenance, advertising and
professional services. All of these categories have been affected by the Town
of Evans office expansion and the Angola office renovation. Additional
staffing requirements have contributed to increases in salary and benefit
expenses of 8.9% from 1995 to 1996 and 13.5% from 1994 to 1995. Another factor
was the funding of a supplemental employee retirement plan for certain bank
officers. Occupancy expenses have grown due to the operation of the additional
branch locations, costs associated with the tenant-occupied property adjacent
to the Derby, NY office, and additional depreciation costs resulting from the
purchases of additional automated teller machines (ATMs) and newly upgraded
check processing equipment. An increase of 36% in advertising expense in 1996
over 1995 was due to the expansion of the Bank's trade area as well as the
continuing promotion of the home equity product and the marketing of a
15-month certificate of deposit special in the last quarter of 1996.
In 1996, the Bank's FDIC insurance assessment dropped to $2,000 from $120,231
in 1995 and $232,840 in 1994. The reductions over the past two years occurred
when the FDIC decreased premiums as a result of the full funding of the Bank
Insurance Fund. In 1995, the premium was reduced from $.23 per $100 of
deposits to $.04 per $100 of deposits. In 1996, the rate was reduced to zero
with a minimum charge of $500 per quarter for well capitalized banks. The Bank
was assessed at the minimum rate, as it remains well above the regulatory
minimums for the key measures of capital adequacies as disclosed in note 11 of
the financial statements.
STOCKHOLDERS' EQUITY
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
TAXES
The provision for taxes in 1996 of $588,000 reflects an effective tax rate of
27%. This compares to $764,000 and 32% in 1995 and $630,000 and 28% in 1994.
In 1996, there was a change in the composition of the deferred tax
calculation, resulting in an overall decrease in the effective tax rate. In
addition to income on tax-exempt securities, other non-taxable income items
included tax refunds and income resulting from the increase in the cash
surrender value of life insurance policies. Life insurance proceeds received
in 1994 were also exempt from taxation, resulting in a lower effective tax
rate in that year.
FINANCIAL CONDITION
The Bank had total assets of $140.9 million at December 31, 1996, increasing
$15.6 million or 12.4% over December 31, 1995. Loan balances increased $16.6
million or 22% in 1996 over 1995. This loan growth was funded by an increase
in deposits of 13.3% and by a reduction in the securities portfolio of 7.5%.
Capital increased 7.1%, basically due to the retention of earnings.
LOANS
Loans comprised 66% of the Bank's total average earning assets in 1996. The
increase of 22% in actual year-end balances in 1996 over 1995 compares to an
increase of 4.8% in 1995 over 1994. Loan demand was soft throughout 1994 and
the first three quarters of 1995. The Federal Reserve Board lowered rates in
July and December of 1995, and loan activity increased as a result. This
increase in loan activity was bolstered by a 25 basis point decrease in rates
on January 31, 1996. The Bank continues to focus its lending on commercial and
residential mortgages, small commercial loans and home equity loans.
Commercial mortgages make up the largest segment of the portfolio at 42.0%.
Residential mortgages comprise 27.8% of the portfolio and commercial loans
total 11.2%. Home equity loans make up 13.9% of total loans.
The Bank currently retains the servicing rights to $1.7 million in long-term
mortgages sold to the Federal National Mortgage Association ("FNMA"), since
becoming a member in 1995. This arrangement allows the Bank to offer long-term
mortgages without exposure to the associated risks, while retaining customer
account relationships.
The Bank continues its contractual arrangement with the Student Loan Marketing
Association ("SLMA") whereby SLMA services the Bank's loans to students who
are still in school and subsequently purchases those loans when the student
goes into repayment. As a result of this arrange-
NET LOANS
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
7
<PAGE> 10
- 47 -
ment, student loan balances decreased 13.4% in 1996 from 1995 levels and
decreased 60% in 1995 from 1994 levels.
At December 31, 1996, the Bank had a loan-to-deposit ratio of 74.6%, and
estimated its unloaned core deposits at $9.5 million. The Bank monitors the
level of its unloaned core deposits to ensure that it is sufficient to fund
anticipated loan growth as it expands its market area and develops new
products.
SECURITIES
Securities and federal funds sold made up the remaining 34% of the Bank's
earning assets at December 31, 1996. Since deposit growth was insufficient to
fund the high level of loan demand experienced in 1996, securities that
matured or were sold were utilized as an additional funding source, thereby
reducing investment balances by $2.9 million from 1995. In 1995, when deposit
growth exceeded loan growth, $6 million in excess funds had been directed into
the securities portfolio. The portfolio remains concentrated in US government
and government agency securities and tax-exempt municipal bonds of varied
maturity.
In 1994, the Bank adopted Financial Accounting Standard No. 115 which outlines
accounting and reporting procedures for investment securities. At that time,
all securities in the Bank's portfolio were designated as either "held to
maturity" or "available for sale", as were all subsequent purchases.
Securities which the Bank designates as held to maturity are stated on the
balance sheet at amortized cost, and those designated as available for sale
are reported at fair market value. The unrealized gains and losses on
available for sale securities are recorded, net of taxes, as a separate
component of shareholders' equity. Transferring a security from one category
to another results in certain accounting consequences. In 1995, the Financial
Accounting Standards Board allowed a one-time reclassification of securities
without penalty. As a result of this one-time window of opportunity, the Bank
reclassified the majority of its bonds in the held to maturity category as
available for sale. This reclassification was made after careful consideration
of the Bank's anticipated liquidity needs and the present and future impact of
such a transfer on the Bank's earnings and capital.
SECURITIES
($ MILLIONS)
'92 '93 `94 `95 `96
? ? ? ? ?
DEPOSITS
Total deposits increased $14.4 million in 1996 over 1995. Slight decreases
occurred in NOW and regular savings balances, while significant increases
occurred in demand deposit and time account balances. The actual 1996 year-end
balances of $20.1 million in demand deposits reflect an increase of 13.3% over
1995. Much of this growth can be attributed to the Bank's new presence in the
Hamburg, NY market. In addition to the expansion of the Bank's trade area,
municipal deposit activity contributed to growth of $7.7 million or 119% in
time accounts of $100,000 or more. Other time deposits increased $5.7 million
or 16.2% in 1996 over 1995. Most of this increase occurred in the fourth
quarter when the Bank promoted a special 15 month certificate of deposit.
The Bank continues to evaluate ways to improve its existing deposit products
to meet customer needs, as well as to develop new products which will keep the
Bank competitive in the marketplace.
TOTAL DEPOSITS
($ MILLIONS)
'92 '93 '94 '95 '96
? ? ? ? ?
LIQUIDITY
The Bank seeks to manage its liquidity so that it is able to meet day to day
loan demand and deposit fluctuations, while attempting to maximize the amount
of net interest income on earning assets. Traditionally, the Bank has utilized
its federal funds balances and cash flows from the investment portfolio to
fulfill its liquidity requirements. In 1996, overnight federal funds sold
balances averaged $3.8 million. The maturities of the Bank's investments are
laddered in such a way as to provide runoff at times that a liquidity need may
arise. At December 31, 1996, approximately 9.1% of the Bank's securities had
contractual maturities of one year or less and 42.0% had maturity dates of
five years or less. At December 31, 1996, the Bank had net short-term
liquidity of $8.1 million compared to $8.6 million at December 31, 1995.
Available assets of $38.3 million less public and purchased liabilities
8
<PAGE> 11
- 48 -
of $18.8 million resulted in a long-term liquidity ratio of 204%, compared to
298% at December 31, 1995. Although the Bank believes it has sufficient
resources in its securities portfolio to meet its short-term and long-term
liquidity needs, the Bank also has the option to borrow $1 million each from
two different correspondent banks.
The Bank is a member and shareholder of the Federal Home Loan Bank ("FHLB"),
which will make cash advances of various terms at competitive rates to its
members. Advances of up to $10 million can be drawn on the FHLB, via the
Overnight Line of Credit Agreement, and another $5 million could be borrowed
based on the collateral provided by the Bank's FHLB capital stock holdings.
Liquidity needs can also be met by aggressively pursuing municipal deposits,
which are normally awarded on the basis of competitive bidding. The Bank
maintains a sufficient amount of US government and US government agency
securities and New York State municipal bonds that can be pledged as
collateral for these deposits.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. The
Bank's ALCO analyzes the gap position on a monthly basis to determine the
Bank's exposure to interest rate risk. The gap position is the difference
between the total of the Bank's rate sensitive assets and rate sensitive
liabilities maturing or repricing during a given time frame. A "positive" gap
results when more assets than liabilities reprice and a "negative" gap results
when more liabilities than assets reprice in a given time period. Because
assets historically reprice faster than liabilities, a slightly negative gap
position is considered preferable. At December 31, 1996, the Bank was in a
negative gap position, with $9.2 million more in rate sensitive liabilities
repricing over the next year than in rate sensitive assets. The Bank's asset
liability limit, as defined in its asset liability policy, is a difference of
+/-15% of the Bank's total assets which amounted to +/-$21.1 million at
December 31, 1996. Therefore, the Bank's negative gap position at December 31,
1996 was well within its own policy limit. The gap ratio (rate sensitive
assets/rate sensitive liabilities) at that date was 83%.
MARKET RISK
When rates rise or fall, the market value of the Bank's assets and liabilities
will increase or decrease. As part of the Bank's asset/liability policy, the
Bank has set limitations on the negative impact to the market value of its
balance sheet that would be accepted. The Bank's securities portfolio is
priced monthly and adjustments are made on the balance sheet to reflect the
market value of the available for sale portfolio per Financial Accounting
Standard No. 115. A limitation of a negative ten percent of total capital
before FAS 115 (after tax) has been set forth in the asset liability policy as
the maximum impact to equity that would be acceptable. At year end, the impact
to equity as a result of marking available for sale securities to market was
an unrealized loss of $23,000. On a quarterly basis, the available for sale
portfolio is shocked for immediate increases of 100 and 200 basis points. At
December 31, 1996, the Bank determined that it would take an immediate
increase in excess of 200 basis points to eliminate the current capital
cushion. The Asset/Liability Committee also reviews the Bank's capital ratios
on a quarterly basis. Unrealized gains or losses on available for sale
securities are not included in the calculation of these ratios.
CAPITAL EXPENDITURES
In order to keep pace with check and statement processing volume, and to
provide the continual high level of customer service, the Bank plans to
purchase statement imaging equipment and upgraded mainframe computer operating
and archiving systems in 1997. The cost of the statement imaging equipment is
estimated at $200,000 and the mainframe upgrades will total approximately
$150,000. The Bank believes that it has a sufficiently strong capital base to
support these capital expenditures with current assets and retained earnings.
IMPACT OF INFLATION AND CHANGING PRICES
There will always be economic events, such as changes in the economic policies
of the Federal Reserve Board, that will have an impact on the profitability of
the Company. Inflation may result in impaired asset growth, reduced earnings
and substandard capital ratios. The net interest margin can be adversely
impacted by the volatility of interest rates throughout the year. Since these
factors are unknown, management attempts to structure the balance sheet and
the repricing frequency of its interest-sensitive assets and liabilities to
avoid a significant concentration that could result in a material negative
impact on earnings.
9
<PAGE> 12
- 49 -
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
EVANS BANCORP, INC.
We have audited the accompanying consolidated balance sheets of
Evans Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1996 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Buffalo, New York
January 24, 1997
10
<PAGE> 13
- 50 -
<TABLE>
<CAPTION>
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995 1996 1995
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 5,662,231 $ 5,693,255
Interest bearing deposits with banks 0 250,000
Federal funds sold 1,450,000 500,000
-------------- --------------
Cash and cash equivalents 7,112,231 6,443,255
Securities:
Available for sale, at fair value 30,201,120 32,813,099
Held to maturity, at amortized cost 5,853,204 6,141,395
Loans, net of allowance for loan losses of $546,954 and $557,961, respectively 92,087,902 75,468,504
Properties and equipment, net 3,748,663 2,614,399
Other assets 1,894,937 1,827,552
-------------- --------------
TOTAL ASSETS $140,898,057 $125,308,204
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Demand $ 20,149,152 $ 17,790,113
NOW and money market 6,437,613 6,777,826
Regular savings 42,136,290 43,033,338
Time ($100,000 and over) 14,096,821 6,432,749
Other time 40,641,503 34,986,525
-------------- --------------
Total Deposits 123,461,379 109,020,551
Other liabilities 1,926,595 1,802,143
-------------- --------------
Total Liabilities 125,387,974 110,822,694
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $2.50 par value, 1,000,000 shares authorized;
339,790 and 317,481 shares issued and outstanding, respectively 849,475 793,703
Capital surplus 10,990,720 8,592,502
Retained earnings 3,692,659 4,953,075
Unrealized (loss) gain on available for sale securities, net
of deferred taxes of $11,000 and $109,000, respectively (22,771) 146,230
-------------- --------------
Total 15,510,083 14,485,510
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $140,898,057 $125,308,204
============== ==============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 14
- 51 -
<TABLE>
<CAPTION>
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994
INTEREST INCOME
- ---------------
<S> <C> <C> <C>
Loans $7,381,871 $6,760,511 $6,061,650
Federal funds sold 201,831 276,698 132,087
Securities:
Taxable 1,427,890 1,381,740 1,189,244
Non-taxable 765,123 761,741 743,985
Deposits with banks 23,100 45,810 79,630
------------- ------------- -------------
TOTAL INTEREST INCOME 9,799,815 9,226,500 8,206,596
INTEREST EXPENSE ON DEPOSITS AND BORROWINGS 3,912,761 3,418,782 2,747,297
------------- ------------- -------------
NET INTEREST INCOME 5,887,054 5,807,718 5,459,299
PROVISION FOR LOAN LOSSES 60,000 (86,933) 16,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,827,054 5,894,651 5,443,299
NON-INTEREST INCOME
- -------------------
Service charges 667,839 561,525 501,025
Gains on sales of assets 11,103 55,477 8,422
Other 252,044 146,052 276,104
------------- ------------- -------------
TOTAL NON-INTEREST INCOME 930,986 763,054 785,551
NON-INTEREST EXPENSE
- --------------------
Salaries and employee benefits 2,602,752 2,389,838 2,105,828
Occupancy 637,007 504,648 474,724
Supplies 118,740 109,226 96,351
Repairs and maintenance 147,383 132,620 107,030
Advertising and public relations 131,753 97,116 74,712
Professional services 212,601 224,269 204,431
FDIC assessments 2,000 120,231 232,840
Other 703,162 650,974 685,885
------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE 4,555,398 4,228,922 3,981,801
------------- ------------- -------------
Income before provision for income taxes 2,202,642 2,428,783 2,247,049
PROVISION FOR INCOME TAXES 588,000 764,000 630,000
------------- ------------- -------------
NET INCOME $1,614,642 $1,664,783 $1,617,049
============= ============= =============
Net income per common share $ 4.75 $ 4.90 $ 4.76
------------- ------------- -------------
Weighted average number of common shares 339,790 339,790 339,790
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 15
- 52 -
<TABLE>
<CAPTION>
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, UNREALIZED
1996, 1995 and 1994 COMMON STOCK (LOSS) GAIN
- ------------------------ ------------------------ ON AVAILABLE
NO. OF CAPITAL RETAINED FOR SALE
SHARES AMOUNT SURPLUS EARNINGS SECURITIES, NET TOTAL
------- --------- ----------- ---------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 277,170 $692,925 $ 5,959,003 $4,837,484 $ 0 $11,489,412
1994 Net Income 1,617,049 1,617,049
Stock dividends, with
fractional shares
redeemed for cash 19,443 48,608 1,224,909 (1,296,760) (23,243)
Cash dividends ($.50
per common share) (148,306) (148,306)
Unrealized gain on
available for sale
securities upon
adoption of SFAS
No. 115, net of
deferred taxes of
$332,000 440,694 440,694
Change in unrealized
(loss) gain on
available for sale
securities, net of
deferred taxes of
$489,000 (651,666) (651,666)
----------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1994 296,613 741,533 7,183,912 5,009,467 (210,972) 12,723,940
1995 Net Income 1,664,783 1,664,783
Stock dividends, with
fractional shares
redeemed for cash 20,868 52,170 1,408,590 (1,483,065) (22,305)
Cash dividends ($.75
per common share) (238,110) (238,110)
Change in unrealized
(loss) gain on
available for sale
securities, net of
deferred taxes of
$266,000 357,202 357,202
----------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1995 317,481 793,703 8,592,502 4,953,075 146,230 14,485,510
1996 Net Income 1,614,642 1,614,642
Stock dividends, with
fractional shares
redeemed for cash 22,309 55,772 2,398,218 (2,494,493) (40,503)
Cash dividends ($1.12
per common share) (380,565) (380,565)
Change in unrealized
(loss) gain on
available for sale
securities, net of
deferred taxes of
$120,000 (169,001) (169,001)
----------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1996 339,790 $849,475 $10,990,720 $3,692,659 $(22,771) $15,510,083
=========== =========== ============ =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 16
- 53 -
<TABLE>
<CAPTION>
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994
OPERATING ACTIVITIES
- ---------------------
<S> <C> <C> <C>
Interest received $10,047,637 $9,172,841 $8,308,463
Fees received 1,025,437 856,806 803,611
Interest paid (3,847,407) (3,261,153) (2,718,104)
Cash paid to employees and suppliers (4,443,431) (4,207,102) (3,668,794)
Income taxes paid (743,444) (790,017) (549,602)
------------ ----------- -----------
Net cash provided by operating activities 2,038,792 1,771,375 2,175,574
INVESTING ACTIVITIES
- --------------------
Available for sale securities:
Purchases (16,562,178) (15,256,737) (2,157,309)
Proceeds from sales 14,414,736 4,019,578 7,271,211
Proceeds from maturities 4,597,881 3,090,254 1,659,330
Held to maturity securities:
Purchases (1,177,002) (4,650,173) (7,837,501)
Proceeds from maturities 1,314,873 7,154,605 1,794,335
Additions to properties and equipment (1,482,935) (1,344,741) (380,790)
Increase in loans, net of repayments (19,258,136) (7,671,007) (4,326,106)
Proceeds from sales of loans 2,593,290 4,179,236 0
------------ ----------- -----------
Net cash used in investing activities (15,559,471) (10,478,985) (3,976,830)
FINANCING ACTIVITIES
- --------------------
Increase in deposits 14,440,828 8,488,520 671,179
Dividends paid (251,173) (260,415) (171,551)
------------ ----------- -----------
Net cash provided by financing activities 14,189,655 8,228,105 499,628
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 668,976 (479,505) (1,301,628)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 6,443,255 6,922,760 8,224,388
------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,112,231 $6,443,255 $6,922,760
============ =========== ===========
</TABLE>
(Continued)
14
<PAGE> 17
- 54 -
<TABLE>
<CAPTION>
EVANS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- --------------------------------
<S> <C> <C> <C>
Net income $1,614,642 $1,664,783 $1,617,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 344,086 221,359 283,153
Provision for credit losses 60,000 (86,933) 16,000
Gains on sales of assets (11,103) (55,477) (8,422)
----------- ----------- ----------
Changes in assets and liabilities affecting cash flow:
Other assets 96,609 (177,558) (230,286)
=========== =========== ==========
Other liabilities (65,442) 205,201 498,080
NET CASH PROVIDED BY OPERATING ACTIVITIES $2,038,792 $1,771,375 $2,175,574
</TABLE>
(Concluded)
See notes to consolidated financial statements.
15
<PAGE> 18
- 55 -
EVANS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General - Evans Bancorp, Inc. (the "Company"), was organized
in October 1988, under the Business Corporation Law of the State of New York,
as a bank holding company. In January 1989, the shareholders of the Evans
National Bank (the "Bank") approved an Agreement and Plan of Reorganization
(the "Reorganization") whereby the Bank effectively became a wholly-owned
subsidiary of the Company. The Bank is in the commercial banking business,
attracting deposits from and making loans to the general public in its
immediate geographical area. The Bank's main office is located in Angola, New
York and it has branches in Derby, Evans, Forestville, Hamburg and North
Boston.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and the Bank. All material intercompany accounts
and transactions are eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities - In January 1994, the Bank adopted Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Financial statements
for prior years have not been restated. The unrealized gain on available for
sale securities, net of deferred income taxes, upon adoption of SFAS No. 115
was $440,694. Securities for which the Bank has the positive intent and
ability to hold to maturity are stated at cost, adjusted for discounts and
premiums that are recognized in interest income over the period to the earlier
of call date or maturity using a method that approximates level yield.
Securities held to maturity have been designated as unavailable to be sold as
part of the Bank's asset-liability management activities.
Securities classified as available for sale are stated at fair value, with
unrealized gains and losses excluded from earnings and reported, net of
deferred income taxes, in stockholders' equity. Gains and losses on sales of
securities are computed using the specific identification method.
Securities which have experienced an other than temporary decline in fair
value are written down to a new cost basis with the amount of the writedown
included in earnings as a realized loss. The new cost basis is not changed for
subsequent recoveries in fair value. Factors which management considers in
determining whether an impairment in value of an investment is other than
temporary include the issuer's financial performance and near term prospects,
the financial conditions and prospects of the issuer's geographic region and
industry, and recoveries in market value subsequent to the balance sheet date.
The Bank does not engage in securities trading activities.
Allowance for Loan Losses - The allowance for loan losses is established
through a provision for loan losses. Recoveries on loans previously charged
off are credited directly to the allowance for loan losses. The allowance is
an amount that management believes adequate to absorb losses on existing loans
that may become uncollectible. Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan-loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrowers' ability to repay, estimated value of any underlying collateral,
and current economic conditions.
16
<PAGE> 19
- 56 -
In addition, various regulatory agencies, as part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of their
examination.
Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting By
Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure".
Under the provisions of SFAS No. 114, a loan is defined as impaired when,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. SFAS No. 114 does not apply to large groups of homogenous
loans which are collectively evaluated for impairment. For the Bank, these
loans consist of residential real estate mortgages, installment loans and
student loans. As required, the Bank has applied SFAS No. 114 and SFAS No. 118
prospectively. No previously issued financial statements have been restated.
Properties and Equipment - Properties and equipment are stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets which range from 3 to 31
years.
Effective January 1, 1996, the Bank adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Under the provisions of SFAS No. 121, long-lived assets to be held and used by
the Bank must be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and long-lived assets to be disposed of must be reported at the
lesser of their carrying amount or fair value less cost to sell. As required,
the Bank has applied SFAS No. 121 prospectively. No previously issued
financial statements have been restated.
Interest Income on Loans - Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that
the borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed and any cash received
is credited to the outstanding principal balance. Such loans are returned to
accrual status when they are made current and, in the opinion of management,
the borrower has the ability to continue making timely payments. Loan
origination and commitment fees and certain direct loan origination costs are
deferred and recognized over the lives of the related assets as an adjustment
of the loans' yields using the level yield method.
Income Taxes - Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the tax rate expected to be in effect when the taxes are
actually paid or recovered.
Net Income per Common Share - Net income per common share is based on the
weighted average number of shares outstanding during each year, retroactively
adjusted for stock dividends.
Employee Benefits and Deferred Compensation Plan - Costs are charged to
salaries and employee benefits expense. Pension costs are funded on a current
basis in compliance with the Employee Retirement Income Security Act and are
accounted for in compliance with SFAS No. 87, "Employers' Accounting for
Pensions".
Off Balance Sheet Financial Instruments - In the ordinary course of business
the Bank has entered into off balance sheet financial instruments consisting
of commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when the transaction is
executed.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, interest bearing deposits in
other banks and federal funds sold. Generally, federal funds sold are
purchased for one-day periods.
Cash and due from banks includes reserve balances that the Bank is required to
maintain with Federal Reserve Banks. The required reserves are based upon
deposits outstanding and were approximately $681,000 and $1,148,000 at
December 31, 1996 and 1995, respectively.
17
<PAGE> 20
- 57 -
2. SECURITIES
The amortized cost of securities and their approximate fair value at December
31 were as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
UNREALIZED
-------------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government and Agency Securities $12,976,948 $ 25,450 $(167,765) $12,834,633
Mortgage Backed Securities 1,694,066 41,553 0 1,735,619
State and Municipal Securities 14,638,658 183,826 (14,466) 14,808,018
Other Securities 822,850 0 0 822,850
------------ --------- ---------- -----------
Total $30,132,522 $250,829 $(182,231) $30,201,120
============ ========= ============ ===========
Held to Maturity:
U.S. Government and Agency Securities $ 3,948,322 $ 15,194 $ 0 $ 3,963,516
State and Municipal Securities 1,904,882 0 (12) 1,904,870
------------ --------- ---------- -----------
Total $ 5,853,204 $ 15,194 $ (12) $ 5,868,386
============ ========= ============ ============
<CAPTION>
1995
-----------------------------------------------------------
UNREALIZED
------------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government and Agency Securities $16,229,297 $137,218 $(130,653) $16,235,862
Mortgage Backed Securities 1,215,332 46,365 0 1,261,697
State and Municipal Securities 14,243,934 357,089 (16,583) 14,584,440
Other Securities 731,100 0 0 731,100
------------ --------- ------------- ------------
Total $32,419,663 $540,672 $(147,236) $32,813,099
============ ========= ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 4,072,567 $ 60,170 $ 0 $ 4,132,737
State and Municipal Securities 2,068,828 0 (24) 2,068,804
------------ --------- ------------- ------------
Total $ 6,141,395 $ 60,170 $ (24) $ 6,201,541
============ ========= ============= ============
</TABLE>
On November 30, 1995, in conjunction with adopting the implementation guidance
contained in "A Guide to Implementation of Statement No. 115 on Accounting For
Certain Investments in Debt and Equity Securities", issued by the Financial
Accounting Standards Board, the Company reclassified a portion of its
held-to-maturity securities as available-for-sale. The market value and
amortized cost of these securities at that date totalled $12,192,578 and
$12,365,907, respectively.
During 1994, the Bank transferred certain securities classified as available
for sale when acquired to the held to maturity portfolio. The securities were
transferred at fair value. The unrealized holding loss at the date of transfer
is being amortized over the period to maturity. The unrealized loss, net of
deferred income taxes, remaining in stockholders' equity, for such transferred
securities, at December 31, 1996 was $69,418.
Assets, principally securities, with an amortized cost of $3,473,969 for held
to maturity securities and a fair value of $16,389,064 for available for sale
securities at December 31, 1996 were pledged as collateral to secure public
deposits and for other purposes required or permitted by law.
18
<PAGE> 21
- 58 -
The scheduled maturities of debt securities at December 31, 1996 are
summarized below. Actual maturities may differ from contractual maturities
because certain issuers have the right to call or prepay obligations with or
without call premiums.
<TABLE>
<CAPTION>
AVAILABLE FOR HELD TO MATURITY
SALE SECURITIES SECURITIES
------------------------- --------------------------
FAIR FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 1,991,036 $ 2,001,939 $1,267,202 $1,267,202
Due after year one through five years 11,457,720 11,416,229 427,676 427,664
Due after five years through ten years 14,227,070 14,289,482 63,330 63,330
Due after ten years 2,456,696 2,493,470 4,094,996 4,110,190
----------- ----------- ---------- ----------
Total $30,132,522 $30,201,120 $5,853,204 $5,868,386
=========== =========== ========== ==========
</TABLE>
Gains and losses from sales of securities for the years ended December 31, 1996,
1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Gross gains $ 103,865 $ 22,705 $ 31,226
Gross losses (127,595) (13,266) (22,804)
--------- -------- --------
Net (loss) gain $ (23,730) $ 9,439 $ 8,422
========= ======== ========
</TABLE>
3. LOANS, NET
Major categories of loans at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Real estate - mortgages $78,706,052 $61,009,095
Real estate - construction 1,404,290 1,501,871
Commercial 6,993,852 7,709,115
Installment 2,646,246 2,731,891
Student loans 1,692,334 1,919,549
Other 769,322 711,902
Net deferred loan origination costs 422,760 443,042
----------- -----------
92,634,856 76,026,465
Allowance for loan losses (546,954) (557,961)
----------- -----------
Loans, net $92,087,902 $75,468,504
=========== ===========
</TABLE>
Changes in the allowance for loan losses for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $ 557,961 $ 628,957 $ 612,921
Provision for loan losses 60,000 (86,933) 16,000
Recoveries 5,597 23,281 15,067
Loans charged off (76,604) (7,344) (15,031)
--------- --------- ---------
Balance, end of year $ 546,954 $ 557,961 $ 628,957
========= ========= =========
</TABLE>
19
<PAGE> 22
- 59 -
Non-accrual loans for which interest has been reduced totaled approximately
$180,000 and $220,000 at December 31, 1996 and 1995 respectfully. If such loans
had been in an accruing status, the Bank would have recorded additional interest
income of approximately $19,000, $29,000 and $14,000 in 1996, 1995 and 1994,
respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 1996.
As of December 31, 1996 and 1995, the Bank had no loans which were impaired as
defined by SFAS No. 114.
4. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 268,485 $ 268,485
Buildings and improvements 3,310,902 2,095,704
Equipment 2,365,026 1,756,060
Construction in progress 0 341,229
----------- -----------
5,944,413 4,461,478
Less accumulated depreciation (2,195,750) (1,847,079)
----------- -----------
Properties and equipment, net $ 3,748,663 $ 2,614,399
=========== ===========
</TABLE>
At December 31, 1995, construction in progress consisted of costs accumulated
in connection with the Bank's new branch in Evans. This project was completed
and placed in service in 1996.
Depreciation expense totalled $348,671 in 1996, $271,507 in 1995 and $285,464
in 1994.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities - For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Receivable - The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. For variable rate loans, the carrying amount is a
reasonable estimate of fair value.
Deposits - The fair value of demand deposits, NOW and money market accounts
and regular savings accounts is the amount payable on demand at the reporting
date. The fair value of time deposits is estimated using the rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit - As described in
Note 9, the Company was a party to financial instruments with off-balance
sheet risk at December 31, 1996. Such financial instruments consist of
commitments to extend permanent financing and letters of credit. If the
options are exercised by the prospective borrowers, these financial
instruments will become interest-earning assets of the Company. If the options
expire, the Company retains any fees paid by the counterparty in order to
obtain the commitment or guarantee. The fair value of commitments is estimated
based upon fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate commitments, the fair
value
20
<PAGE> 23
- 60 -
estimation takes into consideration an interest rate risk factor. The fair value
of guarantees and letters of credit is based on fees currently charged for
similar agreements. The fair value of these off-balance sheet items at December
31, 1996 approximates the recorded amounts of the related fees, which are not
material.
At December 31, 1996, the estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 7,112,231 $ 7,112,231
============= =============
Securities $ 36,054,324 $ 36,069,506
============= =============
Loans $ 92,634,856
Less: allowance for loan losses (546,954)
-------------
Loans, net $ 92,087,902 $ 92,056,134
============= =============
Financial Liabilities:
Deposits $ 123,461,379 $ 123,863,439
============= =============
</TABLE>
6. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLAN
The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees'
compensation and years of service. The Bank uses an actuarial method of
amortizing prior service cost and unrecognized net gains or losses which result
from actual experience and assumptions being different than those that are
projected. The amortization method the Bank is using recognizes the prior
service cost and net gains or losses over the average remaining service period
of active employees which exceeds the required amortization. The amount charged
to expense for this plan totaled $35,335 in 1996, $52,201 in 1995 and $169,776
in 1994. The components of the pension cost charged to expense for 1996, 1995
and 1994 consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost $ 44,615 $ 46,891 $ 149,752
Interest cost on projected benefit obligation 94,565 85,948 96,325
Actual return on plan assets (87,676) (67,352) (60,132)
Net amortization and deferral (16,169) (13,286) (16,169)
--------- --------- ---------
Total $ 35,335 $ 52,201 $ 169,776
========= ========= =========
</TABLE>
The following table sets forth the Plan's funded status as of October 1, 1996
and 1995, and the amounts recognized in the accompanying consolidated
financial statements as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Vested benefits $ 1,002,977 $ 897,290
=========== ===========
Accumulated benefit obligation $ 1,012,721 $ 910,228
=========== ===========
Projected benefit obligation $ 1,354,390 $ 1,217,964
Plan assets available for benefits at fair value 1,373,109 1,114,459
----------- -----------
Plan assets in excess (deficient) of projected benefit obligations 18,719 (103,505)
Unrecognized net loss 71,556 110,260
Unrecognized net obligation (17,543) (19,005)
Unrecognized prior service cost (271,231) (285,938)
----------- -----------
Amount included in other liabilities $ (198,499) $ (298,188)
=========== ===========
</TABLE>
21
<PAGE> 24
- 61 -
The Plan's assets are primarily invested in a money market fund, stocks, and
bonds. Valuations of the pension plan as shown above were conducted as of
October 1, 1996 and 1995. Assumptions used by the Bank in both years in the
determination of pension plan information consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
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 %
</TABLE>
During the year ended December 31, 1995, the Bank adopted nonqualified
supplemental executive retirement plans covering certain members of senior
management. The plans provide a fixed benefit which is specific to the
participant. The obligations related to these plans are indirectly funded by
life insurance contracts (naming the Bank as beneficiary) with aggregate cash
surrender values of approximately $45,000 and $0 at December 31, 1996 and 1995,
respectively. The face values of these policies at both dates was approximately
$1,650,000. The Bank uses an actuarial method of amortizing unrecognized net
gains or losses which result from actual experience and assumptions being
different than those that are projected. The amortization method the Bank is
using recognizes the net gains or losses over the average remaining service
period of active employees which exceeds the required amortization. The amount
charged to expense for these plans totaled $97,633 and $87,058 in 1996 and 1995,
respectively. The components of the pension cost charged to expense consisted of
the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Service cost $50,138 44,562
Interest cost on projected benefit obligation 25,280 20,281
Net amortization and deferral 22,215 22,215
------- -------
Total $97,633 $87,058
======= =======
</TABLE>
The following table sets forth the Plans' funded status as of October 1, 1996
and 1995, and the amount recognized in the accompanying consolidated financial
statements as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Vested benefits $ 356,685 $ 286,925
========= =========
Accumulated benefit obligation $ 356,685 $ 286,925
========= =========
Projected benefit obligation $ 356,685 $ 286,925
Plan assets available for benefits at fair value 0 0
--------- ---------
Projected benefit obligation in excess of plan assets (356,685) (286,925)
Unrecognized net gain (9,432) (3,774)
Unrecognized net obligation 181,426 203,641
--------- ---------
Accrued pension cost (184,691) (87,058)
Adjustment required to recognize minimum liability (171,994) (199,867)
--------- ---------
Amount included in other liabilities $(356,685) $(286,925)
========= =========
</TABLE>
Valuations of the pension plans as shown above were conducted as of October 1,
1996 and 1995. Assumptions used by the Bank in both years in the determination
of pension plan information consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Weighted-average discount rate 7.50 %
Expected long-term rate of return on plan assets 7.50 %
</TABLE>
22
<PAGE> 25
- 62 -
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $64,000, $64,000
and $123,000 in 1996, 1995 and 1994, respectively. The estimated present value
of the benefit obligation, included in other liabilities, was $671,000 and
$643,000 at December 31, 1996 and 1995, respectively. This obligation is
indirectly funded by life insurance contracts (naming the Bank as beneficiary)
with aggregate cash surrender values of approximately $130,000 and $116,000 at
December 31, 1996 and 1995, respectively. The face values of these policies at
both dates was approximately $1,036,000. Premiums on the aforementioned life
insurance contracts were paid by the Bank in lieu of payment of directors'
fees.
The Bank also has a deferred contribution Retirement and Thrift 401(k) Plan
for its employees who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute between
1% and 15% of their annual salary, with a matching contribution by the Bank
equal to 25% of the employees contribution up to 4% of their annual salary.
The Bank can also make discretionary contributions to the Plan. The Bank's
expense under this Plan was $34,209, $47,701 and $42,026 for the years ended
December 31, 1996, 1995 and 1994, respectively.
7. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income taxes currently payable $ 728,000 $ 741,000 $ 745,000
Deferred (benefit) income taxes (140,000) 23,000 (115,000)
--------- --------- ---------
Net provision $ 588,000 $ 764,000 $ 630,000
========= ========= =========
</TABLE>
At December 31, 1996 and 1995 the components of the net deferred tax asset
were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets:
Allowance for credit losses $148,000 $128,000
Pension premiums 153,000 128,000
Deferred compensation 268,000 260,000
SFAS No. 115 11,000 0
Other 22,000 26,000
-------- --------
Gross deferred tax assets 602,000 542,000
Deferred Tax Liabilities:
Depreciation 25,000 25,000
Prepaid expenses 169,000 260,000
SFAS No. 115 0 109,000
-------- --------
Gross deferred tax liabilities 194,000 394,000
-------- --------
Net deferred tax assets $408,000 $148,000
======== ========
</TABLE>
The net deferred tax asset at December 31, 1996 and 1995 was included in other
assets in the accompanying consolidated financial statements.
23
<PAGE> 26
- 63 -
The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes.
A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at
statutory rate $ 749,000 34 % $ 826,000 34 % $ 764,000 34 %
Increase (decrease) in
taxes resulting from:
Tax-exempt income (260,000) (12) (259,000) (11) (299,000) (13)
State taxes, net of
federal benefit 110,000 5 154,000 6 129,000 6
Other items, net (11,000) (1) 43,000 2 36,000 1
--------- ------ --------- ------ --------- -------
Provision for
income taxes $ 588,000 26 % $ 764,000 31 % $ 630,000 28 %
========= ====== ========= ====== ========= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with its directors, significant
shareholders and their affiliates (related parties). The aggregate amount of
loans to such related parties at December 31, 1996 was $2,247,931. During
1996, new loans to such related parties amounted to $746,980 and repayments
amounted to $1,867,538.
9. CONTINGENT LIABILITIES AND COMMITMENTS
The consolidated financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of the Bank's commitments and contingent
liabilities at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Commitments to extend credit $15,115,000
Standby letters of credit 515,000
-----------
Total $15,630,000
===========
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer.
The Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extensions of credit that are recorded on
the consolidated balance sheets. Because these instruments have fixed maturity
dates, and because they may expire without being drawn upon, they do not
necessarily represent cash requirements to the Bank. The Bank has not incurred
any losses on its commitments during the past three years.
10. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have been
granted to customers in the Bank's market area. Investments in state and
municipal securities also involve governmental entities within the Bank's
market area. The concentrations of credit by type of loan are set forth in
Note 3. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of policy, does not
extend credit to any single borrower or group in excess of 15% of capital.
24
<PAGE> 27
- 64 -
11. REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the Comptroller
of the Currency. Under such restrictions, the Bank may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess of
the sum of the current year's earnings (as defined) plus the retained earnings
(as defined) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from its regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios were as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------- ------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $16,063,000 17.7 % $7,250,000 8.0 % $9,065,000 10.0 %
=========== ==== ========== === ========== ====
Tier I Capital (to Risk
Weighted Assets) $15,516,000 17.1 % $3,625,000 4.0 % $5,438,000 6.0 %
=========== ==== ========== === ========== ====
Tier I Capital
(to Average Assets) $15,516,000 11.1 % $5,581,000 4.0 % $6,976,000 5.0 %
=========== ==== ========== === ========== ====
<CAPTION>
1995
--------------------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------ ---------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $14,919,000 19.6 % $6,078,000 8.0 % $7,598,000 10.0 %
=========== ==== ========== === ========== ====
Tier I Capital (to Risk
Weighted Assets) $14,361,000 18.9 % $3,039,000 4.0 % $4,559,000 6.0 %
=========== ==== ========== === ========== ====
Tier I Capital
(to Average Assets) $14,361,000 11.4 % $5,027,000 4.0 % $6,283,000 5.0 %
=========== ==== ========== === ========== ====
</TABLE>
25
<PAGE> 28
- 65 -
12. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as
follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
- ------------------------
December 31, 1996 and 1995 1996 1995
ASSETS
<S> <C> <C>
Cash $ 6,897 $ 37,728
Dividends receivable 169,895 0
Investment in subsidiary 15,503,186 14,447,782
------------ ------------
Total assets $ 15,679,978 $ 14,485,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Dividends payable $ 169,895 $ 0
Stockholders' Equity:
Common stock 849,475 793,703
Capital Surplus 10,990,720 8,592,502
Retained earnings 3,692,659 4,953,075
Unrealized (loss) gain on available for sale securities, net (22,771) 146,230
------------ ------------
Total stockholders' equity 15,510,083 14,485,510
------------ ------------
Total liabilities and stockholders' equity $ 15,679,978 $ 14,485,510
============ ============
CONDENSED STATEMENTS OF INCOME
- ------------------------------
Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994
<S> <C> <C> <C>
Dividends from subsidiary $ 421,068 $ 260,415 $ 171,549
Expenses (30,831) (17,542) (18,103)
------------ ------------ ------------
Income before equity in undistributed earnings of subsidiary 390,237 242,873 153,446
Equity in undistributed earnings of subsidiary 1,224,405 1,421,910 1,463,603
------------ ------------ ------------
Net income $ 1,614,642 $ 1,664,783 $ 1,617,049
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,614,642 $ 1,664,783 $ 1,617,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary (1,224,405) (1,421,910) (1,463,603)
Increase in dividends receivable (169,895) 0 0
------------ ------------ ------------
Net cash provided by operating activities 220,342 242,873 153,446
Financing Activities - Cash dividends paid (251,173) (260,415) (171,549)
------------ ------------ ------------
Net decrease in cash (30,831) (17,542) (18,103)
Cash, beginning 37,728 55,270 73,373
------------ ------------ ------------
Cash, ending $ 6,897 $ 37,728 $ 55,270
============ ============ ============
</TABLE>
26
<PAGE> 29
- 66 -
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
EVANS BANCORP, INC. AND EVANS NATIONAL BANK
<S> <C> <C>
[PHOTO] [PHOTO] [PHOTO]
Carl F. Ulmer Phillip Brothman David C. Koch
Chairman Partner - Hurst, Brothman & Yusick Chairman and CEO
Retired New Era Cap Co., Inc.
[PHOTO] [PHOTO] [PHOTO]
Robert W. Allen Richard M. Craig Richard C. Stevenson
Secretary President and CEO Evans National Bank President - Metro Stevenson Realty
Retired
[PHOTO] [PHOTO] [PHOTO]
William F. Barrett LaVerne G. Hall David M. Taylor
Property and Investment Manager Chairman - L.G. Hall Building President - Concord Nurseries, Inc.
Contractors, Inc.
- -------------------------------- ------------------------------- ------------------------------------
DIRECTORS EMERTI OFFICERS ADVISORY BOARDS
Floyd H. Hurst EVANS BANCORP, INC. DERBY
Joseph LaClair Richard A. Gradl
Carl F. Ulmer Raymond S. Hazard
Chairman
FORESTVILLE
Richard M. Craig Homer Bowker, Jr.
President and CEO
Robert W. Allen
Secretary
James Tilley
Assistant Secretary
William R. Glass
Treasurer
</TABLE>
27
<PAGE> 30
- 67 -
<TABLE>
<CAPTION>
EVANS NATIONAL BANK OFFICERS
<S> <C> <C>
PRESIDENT AND CHIEF John S. Eagleton BANK OFFICER
EXECUTIVE OFFICER William J. Gray Rita A. Boyland
Richard M. Craig Thomas Q. McDonnell Karen M. Blecha
Jeffrey L. White Michelle A. Bress
SENIOR VICE PRESIDENT Nancy A. Ferraro
William R. Glass ASSISTANT VICE PRESIDENT M. Jane Gonzalez
James Tilley Susan J. Herold
Katherine M. Allen Nadine G. Houghton
VICE PRESIDENT Ramon Gallardo, Jr. Howard M. Martin, Jr.
George L. Catalano Rose Marie Hinckley
Mary E. Doeing Elizabeth A. Mac
Cathy E. Rohrich
</TABLE>
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.
<TABLE>
<CAPTION>
1996 1995
----------------------------- --------------------------
QUARTER HIGH LOW HIGH LOW
- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First $ 115.00 $ 110.00 $ 80.00 $ 70.00
Second $ 135.00 $ 115.00 $ 83.00 $ 80.00
Third $ 136.00 $ 135.00 $ 100.00 $ 83.00
Fourth $ 136.00 $ 136.00 $ 110.00 $ 100.00
</TABLE>
As a result of the stock dividend in April, 1996, 22,309 additional shares
were issued which increased total shares outstanding to 339,790 as of December
31, 1996. There were 785 shareholders of record on December 31, 1996.
Upon written request of any shareholder, a copy of the Company's report on
Form 10-K for its fiscal year ended December 31, 1996, including the financial
statements and the schedules thereto, required to be filed with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
may be obtained, without charge, from Richard M. Craig, President and Chief
Executive Officer, Evans Bancorp, Inc., 14-16 N. Main Street, Angola, N.Y.
14006.
THE ANNUAL MEETING
The Annual Meeting of the Shareholders of the Company will be held on Tuesday,
April 29, 1997 at 6:30 p.m. at Romanello's South, 5793 South Park Avenue,
Hamburg, NY.
INQUIRIES
Communications regarding transfer requests, lost certificates, and change of
address should be directed to: AMERICAN STOCK TRANSFER AND TRUST CO., 40 Wall
Street, New York, NY. 10005
28
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVANS
BANCORP INC. BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANICAL STATEMENTS.
</LEGEND>
<CIK> 0000842518
<NAME> EVANS BANCORP INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,662,231
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,450,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,201,120
<INVESTMENTS-CARRYING> 5,853,204
<INVESTMENTS-MARKET> 0
<LOANS> 92,087,902
<ALLOWANCE> (546,954)
<TOTAL-ASSETS> 140,898,057
<DEPOSITS> 123,461,379
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,926,595
<LONG-TERM> 0
0
0
<COMMON> 849,475
<OTHER-SE> 14,660,608
<TOTAL-LIABILITIES-AND-EQUITY> 140,898,057
<INTEREST-LOAN> 7,381,871
<INTEREST-INVEST> 2,216,113
<INTEREST-OTHER> 201,831
<INTEREST-TOTAL> 9,799,815
<INTEREST-DEPOSIT> 3,911,311
<INTEREST-EXPENSE> 3,912,761
<INTEREST-INCOME-NET> 5,887,054
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> (23,731)
<EXPENSE-OTHER> 4,555,398
<INCOME-PRETAX> 2,202,642
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,614,642
<EPS-PRIMARY> 4.75
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.27
<LOANS-NON> 164,084
<LOANS-PAST> 96,199
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 557,961
<CHARGE-OFFS> 76,604
<RECOVERIES> 5,597
<ALLOWANCE-CLOSE> 549,844
<ALLOWANCE-DOMESTIC> 60,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
