<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
For fiscal year ended: December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-18539
EVANS BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 16-1332767
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14-16 NORTH MAIN STREET, ANGOLA, NEW YORK 14006
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE)(716) 549-1000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
None N/A
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.50 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
As of January 31, 1999, the aggregate market value of the registrant's
common stock, $.50 par value, (the "Common Stock") held by nonaffiliates of the
registrant was approximately $59,850,810 based upon the per share sale prices
known to management at which the Company's Common Stock has actually been
transferred in private transactions prior to that date. There is not, and has
never been, an organized public trading market for the registrant's shares.
As of January 31, 1999, 1,697,598 shares of the registrant's Common Stock
were outstanding.
Page 1 of 91
Exhibit Index on Page 38
<PAGE> 2
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement on Form 10, as amended
by Amendment Nos. 1 and 2 (Registration No. 0-18539), the Registrant's
Registration Statement on Form S-4 (Registration No. 33-25321), and the
Registrant's Report on form 10-QSB for the period ended March 31, 1995, and the
Registrant's Report on Form 10-KSB for the period ended December 31, 1995 and
the Registrant's Reports on Form 10-Q for the periods ended June 30, 1996 and
March 31, 1997 and the Registrant's Reports on Form 10-K for the period ended
December 31, 1997 are incorporated by reference in Part IV of this Form 10-K.
Portions of the Registrant's 1998 Annual Report to Shareholders are
incorporated by reference in Part II of this Form 10-K.
<PAGE> 3
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TABLE OF CONTENTS
INDEX
PART I
<TABLE>
<CAPTION>
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...................................13
Sources of Funds - Deposits ...........................15
General.........................................15
Deposits........................................15
Environmental Matters..................................16
Employees .............................................16
Competition ...........................................16
Asset and Liability Management ........................17
Regulation ............................................18
Monetary Policy .......................................20
Item 2. PROPERTIES.............................................20
Item 3. LEGAL PROCEEDINGS......................................20
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS..........................20
</TABLE>
<PAGE> 4
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PART II
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................21
Item 6. SELECTED FINANCIAL DATA....................................22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS.........................23
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................30
Item 8. FINANCIAL STATEMENTS ......................................30
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES....................31
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT.............................................31
Item 11. EXECUTIVE COMPENSATION.....................................34
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT...........................36
Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.......................................38
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K ...................................38
</TABLE>
<PAGE> 5
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ITEM 1. BUSINESS
EVANS BANCORP, INC.
Evans Bancorp, Inc. (the "Company") was organized as a New York business
corporation and incorporated under the laws of the State of New York on October
28, 1988 for the purpose of becoming a bank holding company. The Company is
registered with the Federal Reserve Board as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHCA"), and conducts its
business through its wholly-owned subsidiary, Evans National Bank (the "Bank").
The principal business of the Company, through the Bank, is commercial banking
and consists of, among other things, attracting deposits from the general public
and using these funds to extend credit and to invest in securities. The Bank
offers a variety of loan products to its customers including commercial loans,
commercial and residential mortgage loans, and consumer loans. In addition, the
Bank offers deposit products which include checking and NOW accounts, passbook
and statement savings and certificates of deposit.
The Company has no material assets other than its investment in the
Bank. The Company's sole business, therefore, is the ongoing business of the
Bank.
EVANS NATIONAL BANK
The Bank was established in 1920 as a national banking association and
currently is regulated by the Comptroller of the Currency. Prior to February
1995, the Bank was known as The Evans National Bank of Angola. Its legal
headquarters is located at 14-16 N. Main Street, Angola, New York 14006.
The Bank is a full service commercial bank offering secured and
unsecured commercial loans, consumer loans, educational loans and mortgages. It
also accepts time and demand deposits.
As of December 31, 1998, the Bank had total assets of $174,120,230,
total deposits of $144,083,636 and total stockholders' equity of $18,623,413.
MARKET AREA
The Bank's primary market area is located in southern Erie County,
northern Chautauqua County and northwestern Cattaraugus County, which includes
the towns of Evans, Boston, Hamburg, Eden, Orchard Park, West Seneca and
Hanover. This market area is the primary area where the Bank receives deposits
and makes loans.
AVERAGE BALANCE SHEET INFORMATION
The table on the following page presents the significant categories of
the assets and liabilities of the Company, interest income and interest expense,
and the corresponding yields earned and rates paid for the last two years. The
assets and liabilities are presented as daily averages. The average loan
balances include both performing and nonperforming loans. Interest income on
loans does not include interest on loans for which the Bank has ceased to accrue
interest. Interest and yield are not presented on a tax-equivalent basis.
<PAGE> 6
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<TABLE>
<CAPTION>
1998 1997
---- ----
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 $105,856 $9,336 8.82% $96,511 $8,633 8.95%
Taxable securities 21,696 1,333 6.14% 21,071 1,373 6.52%
Tax-exempt securities 23,982 1,098 4.58% 20,524 945 4.60%
Federal funds sold 1,531 84 5.49% 2,266 123 5.43%
----- -- ----- ----- --- -----
Total interest-earning assets 153,065 11,851 7.74% 140,372 11,074 7.89%
Noninterest-earning assets
Cash and due from banks 5,479 5,407
Premises and equipment, net 3,771 3,830
Other assets 2,668 2,228
----- -----
Total $164,983 $151,837
======== ========
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
NOW accounts $7,275 $71 .98% $6,700 $71 1.06%
Savings deposits 46,925 1,281 2.73% 44,610 1,203 2.70%
Time deposits 63,338 3,399 5.37% 60,257 3,302 5.48%
Fed Funds Purchased & Securities 3,801 196 5.16% 425 12 2.82%
Sold U/A to Repurchase
----- --- ----- --- -- -----
Total interest-bearing liabilities 121,339 4,947 4.08% 111,992 4,588 4.10%
Noninterest-bearing liabilities:
Demand deposits 23,571 21,756
Other 2,308 1,899
----- -----
147,218 135,647
Shareholders' equity 17,765 16,190
------ ------
Total $164,983 $151,837
======== ========
Net interest earnings $6,904 $6,486
====== ======
Net yield on interest earning assets 4.51% 4.62%
</TABLE>
<PAGE> 7
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In 1998, the Company's interest income increased by $778,936 over 1997, compared
to an increase of $1,273,036 in 1997 over 1996. Also, interest expense on
deposits increased by $358,674 in 1998 over 1997 compared to an increase of
$675,295 in 1997 over 1996. The following table segregates these changes for the
past two years into amounts attributable to changes in volume and changes in
rates by major categories of assets and liabilities. The change in interest due
to both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
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 $824 $(120) $704 $1,335 $(83) $1,251
Taxable securities 42 (82) (40) (120) 65 (55)
Tax-exempt securities 158 (5) 153 219 (40) 179
Federal funds sold (39) 1 (38) (83) 4 (79)
Time deposits in other banks 0 0 0 (23) 0 (23)
--- --- --- ----- -- -----
Total interest-earning assets $985 $(206) $779 $1,328 $(54) $1,273
==== ====== ==== ====== ===== ======
Interest paid on:
NOW accounts $6 $(6) $0 $4 $(13) $(9)
Savings deposits 63 15 78 (12) (35) (47)
Time deposits 162 (65) 97 750 (31) 719
Federal Funds Purchased & 166 18 184 12 0 12
Securities Sold U/A Repurch.
--- -- --- -- - --
Total interest-bearing liabilities $397 $(38) $359 $754 $(79) $675
==== ===== ==== ==== ===== ====
</TABLE>
SECURITIES ACTIVITIES
Income from securities represented approximately 20.5% of total interest
income of the Company in 1998 and approximately 20.9% of total interest income
of the Company in 1997. At December 31, 1998, the Bank's securities portfolio of
$50,059,972 consisted primarily of United States ("U.S.") and federal agency
obligations, state and municipal securities, corporate bonds and mortgage-backed
securities by the Government National Mortgage Association, Federal National
Mortgage Association and Federal Home Loan Mortgage Corp.
In 1994, the Bank adopted Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities." As a
result, all securities in the Bank's portfolio are now designated as "held to
maturity" or "available for sale".
<PAGE> 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
($000) ($000)
<S> <C> <C>
Available for Sale:
U.S. Treasury and other U.S. government agencies $22,105 $13,025
States and political subdivisions in the U.S. 22,913 19,867
Other 952 930
--- ---
Total Securities Designated as Available for Sale $45,970 $33,822
======= =======
Held to Maturity:
U.S. Treasury and other U.S. government agencies 47 3,483
States and political subdivisions in the U.S. 4,043 3,095
----- -----
Total Securities Designated as Held to Maturity $4,090 $6,578
====== ======
Total Securities $50,060 $40,400
======= =======
</TABLE>
SECURITIES POLICY. The Bank's asset liability management policy encompasses the
areas of securities, capital, liquidity and interest sensitivity. The primary
objective of the securities portfolio is to provide liquidity while maintaining
safety of principal. Secondary objectives include investment of funds in periods
of decreased loan demand, interest sensitivity considerations, providing
collateral to secure local municipal deposits, supporting local communities
through the purchase of tax-exempt securities and tax planning considerations.
The Board of Directors of the Bank is responsible for establishing overall
policy and reviewing performance.
The Bank's policy provides that acceptable portfolio investments
include: U.S. Government obligations, obligations of Federal agencies, Municipal
obligations (General Obligations, Revenue Obligations, School Districts and
Non-rated Issues from Bank's general market area), Banker's Acceptances,
Certificates of Deposit, Industrial Development Authority Bonds, Public Housing
Authority Bonds, Corporate Bonds (each corporation limited to the Bank's legal
lending limit), and Collateral Mortgage Obligations, Federal Reserve stock and
Federal Home Loan Bank stock.
The Bank's securities policy is that in-state securities must be rated
Moody's BAA (or equivalent) at the time of purchase. Out-of-state issues must be
rated AA (or equivalent) at the time of purchase. Bonds or securities rated
below A will be reviewed periodically to assure their continued credit
worthiness. The purchase of non-rated municipal securities is permitted, but
limited to those bonds issued by municipalities in the Bank's general market
area which, in the Bank's judgment, possess no greater credit risk than BAA (or
equivalent) bonds and the annual budgets of the issuers are reviewed by the
Bank. A credit file of the issuers is kept on each non-rated municipal security
with relevant financial information. In addition, the Bank's loan policy permits
the purchase of notes issued by various states and municipalities which have not
been rated by Moody's or Standard & Poors. The securities portfolio of the Bank
is priced and rated on a monthly basis.
<PAGE> 9
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The following table sets forth the maturities and weighted average interest
yields of the Bank's securities portfolio (yields on tax-exempt obligations have
been computed on a tax equivalent basis) as of December 31, 1998:
<TABLE>
<CAPTION>
MATURING
---------------------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
---------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------------------------------------------------------------------------------
($000) ($000) ($000) ($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASSIFIED AS AVAILABLE FOR
SALE AT FAIR VALUE:
U.S. Treasury and other U.S. $ 0 0% $ 500 6.35% $ 5,235 6.20% $16,370 6.76%
government agencies
States and political subdivisions 1,497 6.39 6,191 6.79 10,198 7.24 5,027 7.40
Other 952 6.63 0 0.00 0 0.00 0 0.00
Total Available for Sale $ 2,449 6.49 $6,691 6.76 $15,433 6.89 $21,397 6.91
CLASSIFIED AS HELD TO MATURITY
AT AMORTIZED COST:
U.S. Treasury and other U.S. 0 0.00 0 0.00 0 0.00 47 0.00
government agencies
States and political subdivisions 3,535 5.94 154 7.92 167 8.30 187 8.84
Total Held to Maturity 3,535 5.94 154 7.92 167 8.30 234 7.07
Total Securities $ 5,984 6.17 $6,845 6.79 $15,600 6.91 $21,631 6.92
</TABLE>
At December 31, 1998, approximately $22,152,000 of the Bank's securities
portfolio were obligations of the U.S. Treasury and other U.S. government
agencies.
LENDING ACTIVITIES
GENERAL. The Bank has a loan policy which is approved by the Board of
Directors on an annual basis. The loan policy addresses the lending authorities
of Bank officers, charge off policies, desired portfolio mix, loan approval
guidelines.
The Bank offers a variety of loan products to its customers including
residential and commercial real estate mortgage loans, commercial loans,
installment loans and student loans. The Bank primarily extends loans to
customers located within the Western New York area. Income on loans represented
approximately 78.8% of the total interest income of the Company in 1998 and
approximately 78.0% of total interest income in 1997. The Bank's loan portfolio
after unearned discounts, loan origination costs and allowances for credit
losses totalled $110,526,449 and $101,627,427 at December 31, 1998 and December
31, 1997, respectively. At December 31, 1998, the Bank had established $729,199
as an allowance for credit losses which is approximately 0.66% of total loans.
This compares with $609,539 at December 31, 1997 which was approximately 0.60%
of total loans. The net loan portfolio represented approximately 63.5% and 64.1%
of the Bank's total assets at December 31, 1998 and December 31, 1997,
respectively.
<PAGE> 10
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REAL ESTATE LOANS. Approximately 87.7% of the Bank's loan portfolio at
December 31, 1998 consisted of real estate loans or loans collateralized by
mortgages on real estate including residential mortgages, commercial mortgages
and other types of real estate loans. The Bank's real estate loan portfolio was
$97,539,555 at December 31, 1998, compared to $88,137,842 at December 31, 1997.
The real estate loan portfolio increased approximately 10.7% in 1998 over 1997
compared to an increase of 10.0% in 1997 over 1996.
The Bank offers fixed rate residential mortgages with terms of ten to
thirty years with up to an 80% loan-to-value ratio. Fixed rate residential
mortgage loans outstanding totalled $20,701,615 at December 31, 1998, which was
approximately 18.6% of total loans outstanding. In 1995, the Bank entered into a
contractual arrangement with the Federal National Mortgage Association ("FNMA")
whereby mortgages can be sold to FNMA and the Bank retains the servicing rights.
In 1998, approximately $2,539,622 of mortgages were sold to FNMA under this
arrangement compared to $1,225,475 of mortgages sold in 1997. The Bank currently
retains the servicing rights on $4.7 million in mortgages sold to FNMA.
Since 1993 the Bank has offered adjustable rate residential mortgages
with terms of up to thirty years. Rates on these mortgages remain fixed for the
first three years and are adjusted annually thereafter. On December 31, 1998,
the Bank's outstanding adjustable rate mortgages were $3,337,768 or 3.0% of
total loans. This balance did not include any construction mortgages.
The Bank also offers commercial mortgages with up to a 75% loan-to-value
ratio for up to fifteen years on a variable and fixed rate basis. Many of these
mortgages either mature or are subject to a rate call after three to five years.
The Bank's outstanding commercial mortgages were $52,627,923 at December 31,
1998, which was approximately 47.3% of total loans outstanding. This balance
included $7,180,209 in fixed rate and $45,447,714 in variable rate loans, which
includes rate calls.
Commercial mortgage loan growth of 18.0% during 1998 reflected a
continued strong market resulting partially from low interest rates which
encouraged real estate acquisition and expansion, compared to an increase of
15.2% experienced in 1997.
The Bank also offers other types of loans collateralized by real estate
such as home equity loans. The Bank offers home equity loans at variable and
fixed interest rates with terms of up to fifteen years and up to a 80%
loan-to-value ratio. At December 31, 1998, the real estate loan portfolio
included $15,725,650 of home equity loans outstanding which represented
approximately 14.1% of its total loans outstanding. This balance included
$7,942,348 in variable rate and $7,783,302 in fixed rate loans.
The Bank also offers residential real estate-construction loans at up to
a 80% loan-to-value ratio at fixed interest rates and multiple maturities. At
December 31, 1998, fixed rate real estate-construction loans outstanding were
$499,098 or 0.45% of the Bank's loan portfolio, and adjustable rate construction
loans outstanding were $4,606,153 or 4.1% of the portfolio.
As of December 31, 1998, approximately $4,031,000 or 4.1% of the Bank's
real estate loans were 30 to 90 days delinquent, $688,000 or 0.71% of the bank's
real estate loans were more than 90 days delinquent and approximately $367,000
or 0.38% of real estate loans were nonaccruing.
COMMERCIAL LOANS. The Bank offers commercial loans on a secured and
unsecured basis including lines of credit and term loans at fixed and variable
interest rates and multiple maturities. The Bank's commercial loan portfolio
totaled $9,835,866 and $8,938,560 at December 31, 1998 and December 31, 1997,
respectively. Commercial loans represented approximately 8.8% and 8.7% of the
Bank's total loans at December 31, 1998 and December 31, 1997, respectively. The
commercial loan portfolio increased $897,306 or 10.0% in 1998.
Commercial lending entails significant additional risk as compared with
real estate loans. These loans typically involve larger loan balances to single
borrowers or groups of related borrowers. Collateral, where applicable, may
consist of inventory, receivables, equipment and other business assets.
Sixty-seven percent of the Bank's commercial loans are variable rate which are
tied to the prime rate. The Bank's ability to lend larger amounts to any one
borrower is subject to regulation by the Comptroller of the Currency. The Bank
continually monitors its loan portfolio to review compliance with new and
existing regulations.
<PAGE> 11
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As of December 31, 1998, approximately $188,000 or 1.9% of the Bank's
commercial loans were 30 to 90 days past due, $6,000 or .06% of its commercial
loans were more than 90 days past due and $387,000 or 3.9% of its commercial
loans were nonaccruing.
INSTALLMENT LOANS. The Bank's installment loan portfolio (which includes
commercial and automobile loans, personal loans and revolving credit card
balances) totaled $2,166,133 and $2,517,892 at December 31, 1998 and December
31, 1997, respectively, representing approximately 1.9% of the Bank's total
loans at December 31, 1998 and 2.5% of the Bank's total loans at December 31,
1997. Traditional installment loans are offered at fixed interest rates with
various maturities up to 60 months, on a secured and unsecured basis. On
December 31, 1998, the installment loan portfolio included $208,212 in fixed
rate card balances at an interest rate of 15.6% and $36,429 in the variable rate
option. As of December 31, 1998, approximately $62,000 or 2.9% of the Bank's
installment loans were 30-90 days past due and approximately $4,000 or .18% of
the Bank's installment loans were more than 90 days past due. None of the Bank's
installment loans were nonaccruing.
STUDENT LOANS. The Bank's student loan portfolio totaled $438,670 at
December 31, 1998 and $1,731,492 at December 31, 1997. Student loans represented
.39% of the Bank's total loans at December 31, 1998 and 1.7% of the Bank's total
loans at December 31, 1997. These loans are guaranteed by the federal government
and the New York State Higher Education Assistance Corporation. The Bank offers
student loans at variable interest rates with terms of up to 10 years. In 1995,
the Bank entered into a contract with the Student Loan Marketing Association.
Under terms of this agreement, SLMA services the Bank's loans to students who
are still in school and subsequently purchases those loans when the student goes
into repayment. The Bank sold $2,267,518 and $1,087,051 of its student loans to
SLMA in 1998 and 1997 respectively. Student loan products have been expanded to
include Federal Plus and HEAL loans.
OTHER LOANS. Other loans totaled $891,669 at December 31, 1998 and
$509,935 at December 31, 1997. Other loans consisted primarily of loans to
municipalities, hospitals, churches and non-profit organizations. These loans
are at fixed or variable interest rates with multiple maturities. Other loans
also include overdrafts.
<PAGE> 12
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The following table summarizes the major classifications of the Bank's
loans (net of deferred origination costs) at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Real Estate $97,539 $88,138
Commercial 9,836 8,939
Installment 2,166 2,518
Student Loans 439 1,731
All Other 891 510
Net deferred loan origination costs 384 401
-------- --------
Total Loans $111,255 $102,237
-------- --------
Allowance for credit losses (729) (610)
-------- --------
Net loans $110,526 $101,627
======== ========
</TABLE>
LOAN MATURITIES. The following table shows the maturities of commercial
and real estate construction loans outstanding as of December 31, 1998 and the
classification of loans due after one year according to sensitivity to changes
in interest rates:
<TABLE>
<CAPTION>
(in thousands)
0-1 YR. 1-5 YRS. OVER 5 YRS. TOTAL
------- -------- ----------- -----
<S> <C> <C> <C> <C>
Commercial $2,934 $2,137 $4,765 $9,836
Real estate construction 4,105 1,000 0 5,105
----- ----- - -----
$7,039 $3,137 $4,765 $14,941
====== ====== ====== =======
Loans maturing after one year with:
Fixed rates $897 $0
Variable rates 2,240 4,765
----- -----
$3,137 $4,765
====== ======
</TABLE>
<PAGE> 13
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CREDIT LOSSES. The following table summarizes the Bank's non-accrual and past
due loans as of December 31, 1998 and December 31, 1997. The Bank had no
restructured loans as of those dates. Any loans classified for regulatory
purposes as loss, doubtful, substandard or special mention that have not been
disclosed do not (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity or capital resources, or (ii) represent material credit about which
management has serious doubts as to the ability of such borrowers to comply with
the loan repayment terms. See also "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations
Provision for Loan Losses."
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Nonaccrual loans $754 $627
Accruing loans past due 90 days or more 698 360
--- ---
Total $1,452 $987
====== ====
</TABLE>
Information with respect to nonaccrual loans at December 31, 1998 and December
31, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Nonaccrual loans $754 $627
Interest income that would have been 71 58
recorded under the original terms
Interest income recorded during the period 0 0
At December 31, 1998 $754,000 of nonaccrual loans are collateralized.
</TABLE>
<PAGE> 14
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The following tables summarize the Bank's allowance for credit losses
and changes in the allowance for credit losses by loan categories:
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 609,539 $ 546,954
CHARGE-OFFS
Commercial, Financial, Agricultural 0 (394)
Real Estate - Mortgages (50,381) (25,000)
Installment Loans (21,077) (21,464)
Overdrafts 0 0
--------- ---------
TOTAL CHARGE-OFFS (71,458) (46,858)
RECOVERIES
Commercial, Financial, Agricultural 6,774 7,381
Real Estate - Mortgages 21,219 32,367
Installment Loans 11,925 8,495
Overdrafts 1,200 1,200
---------
TOTAL RECOVERIES 41,118 49,443
NET (CHARGEOFFS) RECOVERIES (30,340) 2,585
ADDITIONS CHARGED TO OPERATIONS 150,000 60,000
--------- ---------
BALANCE AT END OF YEAR $ 729,199 $ 609,539
========= =========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT PERCENT OF LOANS IN
12/31/98 12/31/97 EACH CATEGORY TO
ATTRIBUTABLE TO: ATTRIBUTABLE TO: TOTAL LOANS:
1998 1997
<S> <C> <C> <C> <C>
Real Estate Loans $456,823 $424,257 88.0% 86.6%
Commercial Loans 77,552 58,306 8.8 8.7
Installment Loans (Includes Credit Cards) 53,322 49,189 2.0 2.5
Student Loans 0 0 0.4 1.7
All Other Loans 0 0 0.8 0.5
Unallocated 141,502 77,787 N/A N/A
------- ------ --- ---
Total $729,199 $609,539 100.0% 100.0%
======== ======== ====== ======
</TABLE>
<PAGE> 15
-15-
SOURCES OF FUNDS - DEPOSITS
GENERAL. Customer deposits represent the major source of the Bank's
funds for lending and other investment purposes. In addition to deposits, other
sources of funds include loan repayments, loan sales on the secondary market,
interest and dividends from investments, matured investments, and borrowings
from the Federal Reserve Bank, Federal Home Loan Bank and First Tennessee Bank.
DEPOSITS. The Bank offers a variety of deposit products including
checking, passbook, statement savings, money market, NOW accounts, certificates
of deposit and jumbo certificates of deposit. Deposits of the Bank are insured
up to the limits provided by the Federal Deposit Insurance Corporation ("FDIC").
At December 31, 1998, the Bank's deposits totalled $144,083,636 consisting of
the following:
<TABLE>
<CAPTION>
<S> <C>
Demand deposits $25,857,037
NOW and Money Market accounts 7,554,104
Regular savings 47,676,615
Time deposits, $100,000 and over 24,208,290
Other time deposits 38,787,590
$144,083,636
</TABLE>
The following table shows daily average deposits and average rates paid on
significant deposit categories by the Bank:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Demand Deposits $ 23,571 ---% $ 21,756 ---%
NOW and Money Market Accounts 7,276 .98% 6,700 1.06%
Regular Savings 46,925 2.74% 44,610 2.66%
Time Deposits 63,337 5.37% 60,256 5.48%
Total $141,109 3.38% $133,322 3.43%
</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.
<PAGE> 16
-16-
FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS. Another source of the Bank's
funds for lending at December 31, 1998, consisted of short term and long term
borrowings from the Federal Home Loan Bank.
Federal funds purchased of $2,225,000 at December 31, 1998 mature within
four days of year-end.
Other Borrowed funds consisted of a $2,000,000 90-day renewable note
with an interest rate of 5.15%, and a $5,000,000 long-term borrowing. The
long-term borrowing consisted of various advances with interest rates ranging
from 4.83% to 5.07%. The maturities of other borrowed funds are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 2,000,000
2000 1,000,000
2001 0
2002 1,000,000
2003 2,000,000
Thereafter 1,000,000
---------
Total $ 7,000,000
=============
</TABLE>
ENVIRONMENTAL MATTERS:
To date, the Bank has not been required to perform any investigation or
clean-up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.
In the course of its business, the Bank has acquired and may acquire in
the future, property securing loans that are in default. There is a risk that
the Bank could be required to investigate and clean-up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Bank, and may be held liable to a governmental entity or third parties for
property damage, personal injury and investigation and clean-up costs incurred
by such parties in connection with such contamination. In addition, the owner or
former owners of contaminated site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from such property.
EMPLOYEES
As of February 28, 1999, the Bank employed 75 persons on a full-time
basis. There were also 14 part-time employees.
COMPETITION
All phases of the Bank's business are highly competitive. The Bank
competes actively with local commercial banks as well as other commercial banks
with branches in the Bank's market area of southern Erie County, northern
Chautauqua County, and northwestern Cattaraugus County, New York. The Bank
considers its major competition to be Marine Midland Bank, and Manufacturers and
Traders Trust Company, both headquartered in Buffalo, New York, and Key Bank,
N.A., and Fleet National Bank of New York, both headquartered in Albany, New
York and also Lockport Savings Bank, headquartered in Lockport, New York. The
Bank is generally competitive with all financial institutions in its service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts, and interest rates charged on loans.
<PAGE> 17
-17-
ASSET AND LIABILITY MANAGEMENT
Like all financial institutions, the Bank must constantly monitor its
exposure to interest rate risk. Proper management of interest sensitive funds is
necessary to help secure the Bank's earnings against extreme changes in interest
rates. In 1995, an Asset/Liability Management Committee ("ALCO") was established
for the purpose of evaluating the Bank's short-range and long-range liquidity
position and the potential impact of a sudden change in interest rates on the
Bank's capital and earnings. Specific minimum guidelines for liquidity and
capital ratios have been established, and maximum guidelines have been set for
the negative impact acceptable on net interest income and the market value of
assets as a result of a shift in interest rates. These guidelines have been
delineated in the Bank's formal Asset/Liability Policy which also includes
guidelines for investment activities and funds management. The ALCO meets
regularly to review the Bank's liquidity, gap, interest rate risk and capital
positions and to formulate its strategy based on current economic conditions,
interest rate forecasts, loan demand, deposit volatility and the Bank's earnings
objectives.
The following table summarizes the interest rate sensitivity analysis
for the Bank as of December 31, 1998 for the periods indicated:
<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 $37.7 $24.2 $65.4 $33.3
Interest-bearing liabilities 41.9 34.9 75.4 1.0
---- ---- ---- ---
Interest sensitivity gap $(4.2) $(10.7) $(10) $32.3
====== ======= ===== =====
</TABLE>
The primary assets and liabilities in the one year maturity range are
securities, commercial loans and time deposits. As of December 31, 1998, the
Bank's cumulative one year gap ratio (rate sensitive assets divided by rate
sensitive liabilities) was .81 as compared to .82 at December 31, 1997 and .83
as of December 31, 1996. The Bank has more liabilities than assets repricing
over the next twelve months. However, since liabilities tend to reprice less
quickly than assets, management believes that earnings will not be significantly
impaired should rates rise.
The following schedule sets forth the maturities of the Bank's time
deposits as of December 31, 1998:
<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>
Time deposits - $100,000 and over $16.2 $4.6 $2.2 $1.2 $24.2
Other time deposits 11.1 11.3 9.3 7.1 38.8
---- ---- --- --- ----
Total time deposits $27.3 $15.9 $11.5 $8.3 $63.0
===== ===== ===== ==== =====
</TABLE>
<PAGE> 18
-18-
REGULATION
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the Federal Deposit Insurance Corporation ("the FDIC"). Bank operations are also
subject to regulations of the Comptroller of the Currency, the Federal Reserve
Board, the FDIC and the New York State Banking Department.
The primary supervisory authority of the Bank is the Comptroller of the
Currency, who regularly examines the Bank. The Comptroller of the Currency has
the authority under the Financial Institutions Supervisory Act to prevent a
national bank from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the loans a bank makes and
collateral it takes, the maximum interest rates a bank may pay on deposits, the
activities of a bank with respect to mergers and consolidations and the
establishment of branches. Branches may be established within the permitted
areas of New York State only after approval by the Comptroller of the Currency.
A subsidiary bank (such as the Bank) of a bank holding company is
subject to certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or its subsidiaries, on
investments in the stock or other securities of the bank holding company or its
subsidiaries and on taking such stock or securities as collateral for loans. The
Federal Reserve Act and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations would affect the terms upon which any person becoming a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank holding
company (such as the Company) without prior notice to certain federal bank
regulators. Control is defined for this purpose as the power, directly, or
indirectly, to direct the management or policies of the bank or bank holding
company or to vote 25% or more of any class of voting securities of the bank
holding company.
In addition to the restrictions imposed upon a bank holding company's
ability to acquire control of additional banks, federal law generally prohibits
a bank holding company from acquiring a direct or indirect interest in, or
control of 5% or more of the outstanding voting shares of any company, and from
engaging directly or indirectly in activities other than that of banking,
managing or controlling banks or furnishing services to subsidiaries, except
that a bank holding company may engage in, and may own shares of companies
engaged in certain activities found by the Federal Reserve Board to be closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
the Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
costs of doing business.
The Depository Institutions Deregulation and Monetary Control Act of
1980 became effective in March 1980. The principal effects of this law are to:
phase in the deregulation of the interest rates paid on personal deposits by
gradually eliminating regulatory ceilings on interest rate differential allowed
thrifts and savings institutions; enable all banks to offer personal interest
bearing checking type accounts; phase in mandatory and uniform reserve
requirements; and override certain usury limits on loan interest rates
established by state laws. On October 1, 1983, the Depository Institutions'
Deregulation Committee, acting under the provisions of this Act, removed all
remaining interest rate ceilings and other regulations on time deposits, except
for early withdrawal penalties.
<PAGE> 19
-19-
Under the Federal Deposit Insurance Act, the Comptroller of the Currency
possesses the power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound banking
practice or would otherwise be in violation of law. Moreover, the Financial
Institutions and Interest Rate Control Act of 1978 ("FIRA") generally expands
the circumstances under which officers or directors of a bank may be removed by
the institution's federal supervisory agency, restricts lending by a bank to its
executive officers, directors, principal shareholders or related interests
thereof, restricts management personnel of a bank from serving as directors or
in other management positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a specified geographic
area, and restricts management personnel from borrowing from another institution
that has a correspondent relationship with their bank.
Additionally, FIRA requires that no person may acquire control of a bank unless
the appropriate federal supervisory agency has been given 60 days prior written
notice and within that time has not disapproved of the acquisition or extended
the period for disapproval.
Under the Community Reinvestment Act of 1977, the Comptroller of the
Currency is required to assess the record of all financial institutions
regulated by it to determine if these institutions are meeting the credit needs
of the community (including low and moderate income neighborhoods) which they
serve and to take this record into account in its evaluation of any application
made by any such institutions for, among other things, approval of a branch or
other deposit facility, office relocation, a merger or an acquisition of bank
shares.
The Company must give prior notice to the Federal Reserve Board of
certain purchases or redemptions of its outstanding equity securities. The
Federal Reserve Board has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those that apply to
the Bank. In January 1989, the Federal Reserve Board adopted new risk-based
capital adequacy guidelines. Under these new guidelines, bank holding companies
with at least $150 million in assets are required to maintain a ratio or
qualifying total capital to weighted risk assets of at least 8% effective
December 31, 1993. For bank holding companies with less than $150 million in
assets, the above-described ratio will not apply on a consolidated basis, but
will apply on a bank-only basis unless (i) the parent holding company is engaged
in non-bank activities involving significant leverage, or (ii) the parent
holding company has a significant amount of outstanding debt held by the general
public. The Federal Reserve Board has the discretionary authority to require
higher capital ratios.
In connection with the risk-based capital framework applicable to bank
holding companies described above, the Federal Reserve Board applies a
risk-based capital framework for Federal Reserve member banks, such as the Bank.
The framework requires banks to maintain minimum capital levels based upon a
weighing of their assets according to risk. Effective December 31, 1992, Federal
Reserve member banks were required to maintain a ratio of qualifying total
capital to risk-weighted assets of a minimum of 8%, and Tier 1 Capital to Assets
ratio of 4%. A minimum leverage ratio of 3% is required for banks with the
highest regulatory examination ratings and not contemplating or experiencing
significant growth or expansion. All other banks are required to maintain a
minimum leverage ratio of at least 1-2% above the stated minimum leverage ratio
of 3%.
A comparison of the Bank's capital ratios as of December 31, 1998 and
December 31, 1997 with these minimum requirements is presented below:
<TABLE>
<CAPTION>
BANK
-------------------------
Minimum
1998 1997 Requirements
---- ---- ------------
<S> <C> <C> <C>
Total Risk-based Capital 16.9% 16.9% 8%
Tier 1 Risk-based Capital 16.3% 16.3% 4%
Leverage Ratio 10.5% 10.8% 3-5%
</TABLE>
As of December 31, 1998, the Bank met all three capital requirements.
<PAGE> 20
-20-
Management is not aware of any known trends, events, uncertainties, or
current regulatory recommendations that will have, or that are reasonably
likely, to have a material effect on the Bank's liquidity, capital resources or
operations.
MONETARY POLICY. The earnings of the Company and the Bank are also
affected by the monetary policy of the Federal Reserve Board. An important
function of the Federal Reserve System is to regulate the money supply and
prevailing interest rates. Among the instruments used to implement those
objectives are open market operations in U.S. Government securities and changes
in reserve requirements against member bank deposits. These instruments are used
in varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may also affect interest rates
charged on loans by the Bank or paid on its deposits.
ITEM 2. PROPERTIES
The Bank conducts its business from its main office and six branch
offices. The main office is located at 14- 16 North Main Street in Angola, New
York. The main office facility is 9,344 square feet and is owned by the Bank.
This facility is occupied by the Office of the President as well as the Loan and
Administration Divisions.
The Bank also owns three of its six branch offices. One is a 3,900
square foot facility located at 8599 Erie Road in the Town of Evans. Another is
a 1,530 square foot facility located at 25 Main Street, Forestville, New York
and the third is a 3,650 square foot branch located at 6480 Erie Road, Derby,
New York.
In 1995, the Bank purchased property adjacent to the Derby Office,
providing additional parking facilities for customers and enabling future
expansion. An existing building on the property has been leased to a tenant for
a five year term commencing December 1, 1995. The lease provides for monthly
payments of $5,217 in Year One and increasing annually to $5,445 in Year Five.
The Bank leases branch offices in North Boston, Hamburg and West Seneca.
The 1,280 square foot branch office at 7186 North Boston State Road, Boston, New
York is occupied pursuant to a land lease which provides for monthly payments of
$1,375 through January 1, 2001, with an option to be renewed for an additional
five year term. The 3,000 square foot branch office at 5999 South Park Avenue,
Hamburg, New York, is occupied pursuant to a twenty year lease which provides
for monthly payments of $5,875 for the first five years through October 31,
2000. Thereafter, monthly payments increase annually from $6,162.50 in Year Six
to $7,967.50 in Year Twenty. The 3,196 square foot branch office at 1026-B Union
Road, West Seneca, New York is occupied pursuant to a five year lease which
provides for monthly payments of $2,904.38.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party.
The nature of the Bank's business generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of management of the Bank, there are no proceedings
pending to which the Bank is a party or to which its property is subject, which,
if determined adversely to the Bank, would be material in relation to the Bank's
financial condition, nor are there any proceedings pending other than ordinary
routine litigation incident to the business of the Bank. In addition, no
material proceedings are pending or are known to be threatened or contemplated
against the Bank by governmental authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 21
-21-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) MARKET. There has never been an organized public trading market for
the Company's outstanding Common Stock. The following table represents the
highest and lowest per share prices known to management at which the Company's
Common Stock has actually been transferred in private transactions during the
periods indicated. In each period for which prices are shown, the management has
price information for the transaction(s). The prices for these transactions do
not include any retail markup, markdown or commission.
<TABLE>
<CAPTION>
1998 1997(1)
------ --------
QUARTER HIGH Low HIGH LOW
- ------- ---- ---- ---
<S> <C> <C> <C> <C>
FIRST $40.00 $38.00 $27.20 $27.20
SECOND $43.00 $40.00 $32.00 $27.20
THIRD $45.00 $43.00 $33.00 $32.00
FOURTH $45.00 $45.00 $38.00 $33.00
</TABLE>
(1) Adjusted for five for one stock split which was effective May 1, 1997.
(b) HOLDERS. As of January 31, 1999, 1,697,598 shares of the Company's
Common Stock were outstanding and the number of holders of record of the
Common Stock at that date was 1089.
(c) DIVIDENDS.
CASH DIVIDENDS.
The Company paid a cash dividend of $.30 per share (adjusted for
the five for one stock split) on October 21, 1997 to holders of record
on October 1, 1997.
The Company paid a cash dividend of $.17 per share on March 26,
1998 to holders of record on March 2, 1998.
The Company paid a cash dividend of $.20 per share on October 6,
1998 to holders of record on September 22, 1998.
The Company has declared a cash dividend of $.23 per share
payable on April 1, 1999 to holders of record on February 23, 1999.
The amount, if any, of future dividends will be determined by the
Company's Board of Directors and will depend upon the Company's
earnings, financial conditions and other factors considered by the
Board of Directors to be relevant. Banking regulations limit the
amount of dividends that may be paid without prior approval of the
Comptroller of the Currency. See Footnote 13 to the Consolidated
Financial Statements.
STOCK DIVIDENDS. There was no stock dividend in 1998 or 1997. On April
29, 1997, the shareholders approved a five for one stock split which
was effective May 1, 1997.
<PAGE> 22
-22-
The following table shows consolidated operating and capital ratios for
the Company for the last three years:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Return on Average Assets 1.24% 1.19% 1.20%
Return on Average Equity 11.63% 11.06% 10.75%
Dividend Payout Ratio 30.84% 28.30% 23.58%
Equity to Assets Ratio 10.81% 10.95% 11.37%
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
EVANS BANCORP, INC.
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 1998 1997 1996 1995 1994
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 11,851,787 $ 11,072,851 $ 9,799,815 $ 9,226,500 $ 8,206,596
- ----------------------------------------------------------------------------------------------------------
Interest Expense 4,946,730 4,588,056 3,912,761 3,418,782 2,747,297
- ----------------------------------------------------------------------------------------------------------
Net Interest Income 6,905,057 6,484,795 5,887,054 5,807,718 5,459,299
- ----------------------------------------------------------------------------------------------------------
Non-Interest Income 1,220,194 950,662 930,986 763,054 785,551
- ----------------------------------------------------------------------------------------------------------
Non-Interest Expense 5,196,900 4,849,182 4,555,398 4,228,922 3,981,801
- ----------------------------------------------------------------------------------------------------------
Net Income 2,043,351 1,802,275 1,614,642 1,664,783 1,617,049
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $174,120,230 $158,542,163 $140,898,057 $125,308,204 $114,565,971
- ----------------------------------------------------------------------------------------------------------
Loans - Net 110,526,449 101,627,427 92,087,902 75,468,504 71,998,929
- ----------------------------------------------------------------------------------------------------------
Allowance for Loan Losses 729,199 609,539 546,954 557,961 628,957
- ----------------------------------------------------------------------------------------------------------
Securities 50,059,972 40,400,374 36,054,324 38,954,494 32,341,350
- ----------------------------------------------------------------------------------------------------------
Total Deposits 144,083,636 138,391,327 123,461,379 109,020,551 100,532,031
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity 18,623,413 17,039,300 15,510,083 14,485,510 12,723,940
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income $ 1.20 $ 1.06 $ 0.95 $ 0.97 $ 0.95
- ----------------------------------------------------------------------------------------------------------
Cash Dividend $ .37 $ 0.30 $ 0.22 $ 0.14 $ 0.09
- ----------------------------------------------------------------------------------------------------------
Book Value at Year End $ 10.96 $ 10.03 $ 9.13 $ 8.53 $ 7.49
- ----------------------------------------------------------------------------------------------------------
Market Value $ 45.00 $ 38.00 $ 27.20 $ 22.00 $ 14.00
- ----------------------------------------------------------------------------------------------------------
Weighted Average Shares 1,698,612 1,698,950 1,698,950 1,698,950 1,698,950
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(Retroactively adjusted for stock dividends and stock splits)
CORRECTION: Book Value at Year End For 1995 and Earlier and Market Value For
1996 and Earlier Under PER SHARE DATA Have Been Corrected to
Reflect the Five-For-One Stock Split in 1997.
<PAGE> 23
-23-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is intended to compare the performance of the Company
for the years ended December 31, 1998, 1997 and 1996. The review of the
information presented should be read in conjunction with the consolidated
financial statements and accompanying notes.
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie and
Chautauqua Counties of Western New York. The Bank serves its market through six
banking offices located in Angola, Derby, Evans, Forestville, Hamburg and North
Boston, New York. The Bank's principal source of funding is through deposits
which it reinvests in the community in the form of loans and investments.
Deposits are insured to the applicable limit by the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by
the Office of the Comptroller of the Currency.
The following discussion of financial conditions and results of operations
of the Company and the Bank should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Net income of $2,043,351 in 1998 resulted in earnings per share of $1.20. This
is an increase of 13.4% over net income for 1997 of $1,802,275 or $1.06 per
share. Income in 1997 had improved 11.6% over net income of $1,614,642 or $.95
per share in 1996. The strong earnings performance of the Bank in 1997 and 1998
illustrates the positive income impact of the $2.2 million expansion plan
implemented over 1995 and 1996, which included the addition of the Hamburg and
Evans branch offices.
Net interest income, the difference between interest income and fees on
earning assets, such as loans and securities, and interest expense on deposits,
provides the basis for the Bank's results of operations. These results are also
affected by non-interest income, the provision for credit losses, non-interest
expense, and income taxes.
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 6.5% from
1997 to 1998, compared to an increase of 10.2% from 1996 to 1997. The increase
in net interest income in 1998 is due to an increase in average earning assets
of $12.4 million or 8.8% over 1997. The tax-equivalent yield earned on those
assets decreased 20 basis points, from 8.31% in 1997 to 8.11% in 1998. The
average cost of funds on interest-bearing liabilities, which increased $9.3
million or 8.3% in 1998, decreased only two basis points, from 4.11% in 1997 to
4.09% in 1998. As a result, the Bank's net interest margin narrowed from 4.59%
in 1997 to 4.52% in 1998.
In 1997, the increase of 10.2% in net interest income over 1996 was the
result of an increase in the volume of average earning assets of $15.8 million
and an increase in the yield earned on those assets, 8.31% compared to 8.27% the
previous year. Average interest-bearing liabilities also increased in volume,
$13.3 million or 13.6% in 1997 over 1996, and the average cost of funds
increased from 3.99% in 1996 to 4.11% in 1997. The Bank's net interest margin
was 4.59% in 1997 compared to 4.64% in 1996.
Management believes this reduction in net interest margin in 1998 is due to
several factors. The Federal Reserve Board decreased the federal funds rate
three times between September and December, 1998 for a total of 75 basis points.
These decreases were followed in the marketplace by corresponding decreases in
the prime rate, which immediately impacted the yield earned on variable rate
loans. Despite the fact that these interest rate moves were the first initiated
by the Federal Reserve since late March of 1997 (a 25 basis point increase),
other market rates declined over 1998. Volatility in world financial markets has
encouraged investors to turn to the safety provided by the US bond market,
driving prices up and yields down on financial instruments which are priced
relative to treasury securities. Certain loan pricing was also impacted.
<PAGE> 24
-24-
The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. The Bank's Asset/Liability Management
Committee ("ALCO") meets monthly for the purpose of evaluating the Bank's
short-range and long-range liquidity position and the potential impact on
capital and earnings as a result of sudden changes in interest rates. The Bank
has adopted an asset/liability policy which specifies minimum limits for
liquidity and capital ratios. Maximum limits have been set for the negative
impact acceptable on net interest income and the market value of assets as a
result of a shift in interest rates. The asset/liability policy also includes
guidelines for investment activities and funds management. At its monthly
meeting, the ALCO reviews the Bank's status and formulates its strategy based on
current economic conditions, interest rate forecasts, loan demand, deposit
volatility, and the Bank's earnings objectives.
PROVISION FOR LOAN LOSSES
Loan losses represent the amount charged against earnings to establish a reserve
of allowance sufficient to absorb expected loan losses based on management's
evaluation of the loan portfolio. Factors considered include loan
concentrations, charge-off history, delinquent loan percentages and general
economic conditions. In 1998, the Bank increased the amount charged against
earnings for loan losses to $150,000 from $60,000 charged against earnings in
each of the years 1996 and 1997. Substantial sustained growth in loan volume
over the past three years warranted such an increase.
The following table summarizes the Bank's actual loan losses, total of
non-performing loans and total allowance for loan losses for 1998, 1997 and
1996, both in dollars and as a percentage of total loans outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Actual Loan Losses $ 71,458 0.06% $ 46,858 0.05% $ 76,604 0.08%
- ---------------------------------------------------------------------------------------------------------------------------
Non-Performing Loans $1,452,000 1.32% $ 987,000 0.96% $ 230,000 0.20%
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses $ 729,199 0.66% $ 609,539 0.59% $ 546,954 0.59%
</TABLE>
Although, during 1998, non-performing loans increased over the prior year,
all loans in this category are considered well-collateralized and in the process
of collection. As a result, no significant losses are anticipated.
NON-INTEREST INCOME
Total non-interest income increased approximately $270,000 in 1998 over 1997
which compares to an increase of approximately $20,000 in 1997 from 1996.
Several factors contributed to the increase in 1998, such as an increase in the
Bank's service charges implemented June 1, 1998 and fees earned through the
merchant VISA program which began in late 1997. Comparatively low rates
encouraged consumers to apply for new loans or pursue refinancing, contributing
to an increase in loan-related fee income.
Non-interest income also included approximately $165,000 for the cash
surrender value of life insurance policies held on certain bank officers. This
compares to $64,000 in 1997. The 1998 figure includes a one-time gain of
approximately $97,000 which resulted when the original policies were surrendered
due to a change of insurer.
Gains realized on the sale of loans and securities totaled $66,208 in 1998
versus $33,809 in 1997. Planned sales of securities had resulted in net losses
of $4,450, but these losses were offset by a gain of $14,513 which was realized
when one of the Bank's residual bonds was called for full redemption in
December. In 1997, net losses on securities transactions were approximately
$2,000. Premiums received on sales of student loans to the Student Loan
Marketing Association ("SLMA") were approximately $43,000 in 1998 as compared to
$28,000 in 1997.
<PAGE> 25
-25-
Premiums in 1998 included approximately $28,000 received when the Bank sold the
majority of its remaining student loan portfolio to SLMA. The Bank also had an
increase in premiums received on sales of mortgages to the Federal National
Mortgage Association ("FNMA"). These premiums were approximately $12,800 in 1998
as compared to $8,000 in 1997. The Bank has been affiliated with both SLMA and
FNMA since 1995.
NON-INTEREST EXPENSE
In 1998, the ratio of non-interest expense to average assets was 3.14% compared
to 3.18% in 1997 and 3.37% in 1996. Non-interest expense categories include
salaries, occupancy expense, repairs and maintenance, advertising and
professional services , among others. Occupancy expenses remained stable in
1998, and there was little change in the Bank's FDIC insurance assessment.
Advertising costs decreased 7.2% and professional services decreased 5.8%.
Salary and benefit expense increased 8.3% in 1998, due to additional staffing,
merit/promotional increases and costs related to the supplemental employee
retirement plan ("SERP"). Miscellaneous other expenses in 1998 included costs
related to maintaining foreclosed properties and premiums paid for life
insurance policies held on certain bank officers.
TAXES
The provision for taxes in 1998 of $735,000 reflects an effective tax rate of
27%. This compares to $724,000 and 28% in 1997 and $588,000 and 26% in 1996. The
Bank maintains a substantial investment in tax-advantaged municipal bonds which
contributes to its favorable tax position. In addition, in 1998, the Bank
received $97,000 in non-taxable income as the result of surrendering life
insurance policies held on certain bank officers due to a change in insurer.
FINANCIAL CONDITION
The Bank had total assets of $174.1 million at December 31, 1998, increasing
$15.6 million or 9.8% over December 31, 1997. Net loans of $110.5 million
reflected an increase $8.9 million or 8.8% over the prior year. Securities
increased $9.7 million or 23.9%. Cash and cash equivalents decreased $3.0
million, or 29.3%. Deposits grew by $5.7 million or 4.1% and capital increased
$1.6 million or 9.3%.
LOANS
Loans comprised 69.3% of the Bank's total average earning assets in 1998. Actual
year end balances increased 8.8% compared to an increase of 10.4% at December
31, 1997 and 22% at December 31, 1996. The relatively low rates available on
most types of loans over the past three years has fueled both new loan activity
and refinancing. Expansion of the Bank's trade area has also contributed to the
significant loan growth over that time period.
The Bank continues to focus its lending on commercial and residential
mortgages, small commercial loans and home equity loans. Commercial mortgages
continue to make up the largest segment of the portfolio at 47.7%. Residential
mortgages comprise 22.0% of the portfolio and commercial loans total 13.3%. Home
equity loans make up 14.2% of total loans. At December 31, 1998, the Bank had a
loan-to-deposit ratio of 77.22%. This compares to a loan-to-deposit ratio of
73.9% at December 31, 1997.
The Bank currently retains the servicing rights to $5.0 million in
long-term mortgages sold to the Federal National Mortgage Association ("FNMA")
since becoming a member in 1995. This arrangement allows the Bank to offer
long-term mortgages without exposure to the associated interest rate risks,
while retaining customer account relationships.
The Bank continues its contractual arrangement with the Student Loan
Marketing Association ("SLMA") whereby SLMA services the Bank's loans to
students who are still in school and subsequently purchases those loans. In
December, 1998, the Bank sold approximately $1.2 million in student loans to
SLMA. As a result, student loan balances decreased nearly 75% in 1998. This
compares to growth of 2.3% in 1997 over 1996 and a decrease of 13.4% in 1996
from 1995.
SECURITIES
Securities made up the remaining 30.7% of the Bank's earning assets at December
31, 1998. In previous years, the size of the investment portfolio was determined
by the relationship of deposit growth to loan growth. When excess deposits were
not needed to fund loans, the investment
<PAGE> 26
-26-
portfolio was increased. When deposit growth was not sufficient to fund loan
demand, maturing investments were not replaced, Federal Funds sold balances were
reduced, and when necessary, bonds were sold. In 1998, even though loan growth
exceeded deposit growth, there was an increase in the securities portfolio. This
was possible through the use of the Federal Home Loan Bank ("FHLB") as an
alternative funding source. By utilizing the fixed rate advance program at the
FHLB, the Bank was able to borrow $5 million to fund the purchase of
government-guaranteed securities with a similar average life, achieving a
favorable earnings spread.
The Bank's investments remain concentrated in US government and US
government agency securities and tax-advantaged municipal bonds of varied
maturity. The tax-equivalent yield on the Bank's investments in federal funds
sold and securities was 6.48%, declining from 6.57% in 1997. The yield in 1996
was 6.51%.
In 1994, the Bank adopted Financial Accounting Standard No. 115 which
outlines accounting and reporting procedures for investment securities. At that
time, all securities in the Bank's portfolio were designated as either "held to
maturity" or "available for sale", as were all subsequent purchases. Securities
which the Bank designates as held to maturity are stated on the balance sheet at
amortized cost, and those designated as available for sale are reported at fair
market value. The unrealized gains and losses on available for sale securities
are recorded, net of taxes, as a separate component of shareholders' equity.
Transferring a security from one category to another results in certain
accounting consequences. In 1995, the Financial Accounting Standards Board
allowed a one-time reclassification of securities without penalty. As a result
of this one-time window of opportunity, the Bank reclassified the majority of
its bonds in the held to maturity category as available for sale. On October 1,
1998 the Bank adopted Financial Accounting Standard No. 133 which provided a
second opportunity to reclassify securities without penalty. The Bank
reclassified approximately $3 million in collateralized mortgage obligations as
available for sale. The majority of bonds remaining in the held to maturity
category represent the Bank's investment in the local communities which it
serves.
DEPOSITS
Total deposits increased $5.7 million in 1998 over 1997. All major categories of
deposits increased, with the exception of time deposits of less than $100,000.
Demand deposits increased 19.3% over the prior year. Growth in regular savings
balances of 7.7% was bolstered by the positive response of customers to the
tiered rate Premium Savings product introduced in May of 1997. Time deposits
over $100,000 increased 5.8%. Such deposits are obtained from local
municipalities through the competitive bidding process and from commercial and
retail customers looking for the safety of an insured deposit.
Competition for time deposits under $100,000 has intensified as informed
consumers shop for the best return available. Aggressive promotional efforts by
other banks offering above the market rates have had an impact on the Bank's
certificate of deposit balances, as evidenced in the 8.7% decline in this
category since 1997. Alternative savings instruments, such as 401K plans and
mutual funds, among others, now attract dollars that at one time would have been
deposited into a certificate of deposit or savings account.
The Bank's competitive edge comes from providing value through outstanding
customer service. In 1998, the Bank provided customer service training to its
entire staff and adopted written customer service standards. In addition, Eas-E
Line telephone and personal computer banking was introduced in November, 1998.
This service provides customers with access to their accounts during banking and
non-banking hours, either by telephone or personal computer.
LIQUIDITY
The Bank seeks to manage its liquidity so that it is able to meet day to day
loan demand and deposit fluctuations, while attempting to maximize the amount of
net interest income on earning assets. Traditionally, the Bank has utilized its
federal funds balances and cash flows from the investment portfolio to fulfill
its liquidity requirements. As a member and shareholder of the Federal Home Loan
Bank ("FHLB") the Bank also has many borrowing options. The FHLB will make cash
advances of various terms at competitive rates to its members. Advances of up to
$8.1 million can be drawn on the FHLB, via the Overnight Line of Credit
Agreement, and an amount equal to 25% of the Bank's total assets could be
borrowed through the advance programs under certain qualifying circumstances.
The Bank also has the option to purchase up to $4,000,000 in federal funds from
one of its correspondents.
<PAGE> 27
-27-
The cash flows from the investment portfolio are laddered to provide funds
from principal and interest payments at such times as liquidity needs may arise.
Contractual maturities are also laddered, with consideration as to the
volatility of market prices to ensure that a sufficient amount of securities are
available that could be sold without incurring significant losses. At December
31, 1998, approximately 12% of the Bank's securities had contractual maturities
of one year or less and approximately 26% had maturity dates of five years or
less. At December 31, 1998 the Bank had net short-term liquidity of $4.0 million
as compared to $5.9 million at December 31, 1997. Available assets of $48.1
million less public and purchased funds of $37.5 million resulted in a long-term
liquidity ratio of 128% compared to 149% at December 31, 1997.
Liquidity needs can also be met by aggressively pursuing municipal
deposits, which are normally awarded on the basis of competitive bidding. The
Bank maintains a sufficient amount of US government and government agency
securities and New York State municipal bonds that can be pledged as collateral
for these deposits.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. The
Bank's ALCO analyzes the gap position on a monthly basis to determine the Bank's
exposure to interest rate risk. The gap position is the difference between the
total of the Bank's rate sensitive assets and rate sensitive liabilities
maturing or repricing during a given time frame. A "positive" gap results when
more assets than liabilities reprice and a "negative" gap results when more
liabilities than assets reprice in a given time period. Because assets
historically reprice faster than liabilities, a slightly negative gap position
is considered preferable. At December 31, 1998, the Bank was in a negative gap
position, with $14.9 million more in rate-sensitive liabilities repricing over
the next year than in rate sensitive assets. The Bank's asset/liability limit,
as defined in its asset/liability policy, is a difference of +/-15% of the
Bank's total assets which amounted to +/-$26.1 million at December 31, 1998.
Therefore, the Bank's negative gap position was well within its policy limits.
The gap ratio (rate sensitive assets/rate sensitive liabilities) at that date
was 81%.
The following table provides information about the Bank's on-balance sheet
instruments that are sensitive to changes in interest rates. Expected maturity
date values for interest-earning assets were calculated by adjusting the
contractual maturity date for expectations of prepayments. Expected maturity
date values for interest-bearing core deposits were calculated based upon
estimates of the period over which the deposits would be outstanding.
<TABLE>
<CAPTION>
Expected maturity date -
year ended December 31, 1999 2000 2001 2002 2003 There-after Total Fair Value
INTEREST-EARNING
ASSETS ($000S)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Receivable, Fixed Rate 9,632 5,976 4,146 3,726 3,775 16,001 43,256 42,805
Average Interest Rate 8.01% 8.56% 8.72% 8.62% 8.47% 9.64%
- ---------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Adj. Rate 18,961 3,375 4,340 3,465 3,365 34,494 68,000 68,000
Average Interest Rate 8.75% 9.10% 8.87% 8.93% 8.90% 8.64%
- ---------------------------------------------------------------------------------------------------------------------------
Investments 15,659 7,427 3,130 3,424 4,484 15,935 50,059 50,059
Average Interest Rate 6.38% 6.54% 6.85% 6.89% 7.18% 7.23%
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES ($000S)
- ---------------------------------------------------------------------------------------------------------------------------
Deposits 66,534 18,002 12,731 12,327 8,633 0 118,227 118,746
Average Interest Rate 4.55% 3.19% 2.39% 2.30% 2.52% 0.00%
- ---------------------------------------------------------------------------------------------------------------------------
Borrowed Funds 4,225 1,000 0 1,000 2,000 1,000 9,225 9,211
Average Interest Rate 5.01% 4.83% 0.00% 4.91% 4.90% 5.07%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Off-balance sheet financial instruments at December 31, 1998 included
$7,077,000 in undisbursed lines of credit at an average interest rate of 9.02%,
$2,622,000 in fixed rate loan origination commitments at 8.60%, $12,203,000 in
adjustable rate loan origination commitments at 9.41%, and $1,007,000 in
adjustable rate letters of credit at an average rate of 9.75%.
MARKET RISK
When rates rise or fall, the market value of the Bank's assets and liabilities
will increase or decrease. As part of the Bank's asset/liability policy, the
Bank has set limitations on the negative impact to the market value of its
balance sheet that would be accepted. The Bank's securities portfolio is priced
monthly and adjustments are made on the balance sheet to reflect the market
value of the available for sale portfolio per Financial Accounting Standard No.
115. A limitation of a negative ten percent of total capital before FAS 115
(after tax) has been set forth in the asset/liability policy as the maximum
impact to equity that would
<PAGE> 28
-28-
be acceptable. At year end, the impact to equity as a result of marking
available for sale securities to market was an unrealized gain of $443,308. On a
quarterly basis, the available for sale portfolio is shocked for immediate rate
increases of 100 and 200 basis points. At December 31, 1998, the Bank determined
that it would take an immediate increase in excess of 200 basis points to
eliminate the current capital cushion. The Bank also reviews the Bank's capital
ratios on a quarterly basis. Unrealized gains or losses on available for sale
securities are not included in the calculation of these ratios.
CAPITAL EXPENDITURES
Anticipated large capital expenditures during 1999 include approximately
$400,000 for leasehold improvements and equipment purchases necessary in
establishing a branch office in West Seneca, New York. This additional office is
scheduled to open February 1, 1999. Some existing equipment at the Bank's other
locations is scheduled to be replaced, and expenses will be incurred as a result
of the Bank's Year 2000 initiative. There will also be additional expenditures
related to the ongoing Channel Management project which encompasses the
technology necessary to provide Eas-E Line telephone and PC banking. Also in
1999, the first stages will be taken to implement Internet banking. This will
provide customers with the ability to pay bills via personal computer The Bank
believes that it has a sufficiently strong capital base to support these capital
expenditures with current assets and retained earnings.
IMPACT OF INFLATION AND CHANGING PRICES
There will always be economic events, such as changes in the economic policies
of the Federal Reserve Board, that will have an impact on the profitability of
the Company. Inflation may result in impaired asset growth, reduced earnings and
substandard capital ratios. The net interest margin can be adversely impacted by
the volatility of interest rates throughout the year. Since these factors are
unknown, management attempts to structure the balance sheet and the repricing
frequency of its interest-sensitive assets and liabilities to avoid a
significant concentration that could result in a material negative impact on
earnings.
THE NEW MILLENNIUM
The Company has long been aware of the complexity and significance of the issues
associated with the arrival of the Millennium (Year 2000). The "Year 2000"
problem centers around the world's computer systems and a common programming
practice that condenses a century date to just two digits, i.e. "98" to
represent 1998, to conserve storage space. As a result, these systems may
interpret "00" as 1900 rather than 2000, causing potential data corruption,
misinterpretation, or system failure. The Company, with the support and
direction of its Board of Directors and Senior Management, has dedicated
financial and human resources to formally adopt strategies and work towards
resolving all potential Year 2000 issues.
In the third quarter of 1997, the Company began formalizing its strategy to
address the data processing and business impacts we anticipated to be associated
with Year 2000 issues. Our ultimate approach was to adopt the five-phase format
recommended by the Federal Financial Institutions Examination Council, and
follow guidance provided us by our regulatory authorities who periodically
monitor and evaluate our progress. These phases, and our activities, are
described as follows:
AWARENESS PHASE
While this can be considered an ongoing phase relating to education of
employees, customers, and vendors, our primary activities defined the Year 2000
problem; obtained Board of Director and Executive level support; established a
project team to include the Senior Vice President of Administration, the Bank
Auditor, Manager of Data Processing, Manager of Systems Development,
representatives from each functional area of the Bank, legal counsel, and the
principal of our main-frame software vendor. This committee was responsible for
development and implementation of an overall strategy to identify and resolve
issues associated with the year 2000.
ASSESSMENT PHASE
Implementing this phase provided an assessment of the size and complexity,
identifying affected areas of our business, identified the required resources,
and enabled us to develop a comprehensive plan. An inventory of all hardware and
software was completed to establish a specific Year 2000 status, i.e. "already
deemed compliant", "requiring replacement or renovation", or "becoming
obsolete". Priorities were then determined. Certain systems were identified as
mission critical. Non-information technology systems were also addressed. Key
vendors, such as providers of power, heating, and telephone services, among
others, were contacted regarding their Year 2000 readiness. The Bank has
received letters certifying Year 2000 compliance from those suppliers whose
services are deemed critical to Bank operations. However, in the event of an
infra-structure failure, i.e. lack of power, etc., a Bank committee has
developed a contingency plan so that business can continue with minimal
interruption. The Bank also performed a customer risk assessment in the last
quarter of 1998.
RENOVATION PHASE
The Company does not write or create computer code or perform programming
activities. We are reliant on vendors and software suppliers to furnish
enhancements in a timely manner. Renovation of our core processing system was
completed in early 1998 in conjunction with a plan developed by the vendor,
other user financial institutions, and our Company. These renovations were
<PAGE> 29
-29-
successfully tested in collaboration with all user institutions at our back-up
site. The renovated system was successfully installed in June 1998. Additional
in-house testing was conducted throughout the remainder of the year.
VALIDATION PHASE
This is probably the most critical and intensive phase of the entire project. It
is in this phase that we validate, through a variety of testing methods, that
each system can process after the turn of the century, with particular emphasis
on those identified as "mission critical". As stated above, renovation to our
core processing systems was successfully tested, and all testing of mission
critical systems was successfully completed by year end 1998. In each case, we
followed a comprehensive written test plan involving user representation to
validate test results. All systems, including those designated mission critical,
have been renovated and successfully tested as of December 31, 1998. Two
non-critical systems warranted as "Year 2000 compliant" by the vendor will be
tested in the first quarter of 1999. Additionally, fully integrated testing will
be performed again within the first and second quarter of 1999.
IMPLEMENTATION PHASE
The Company's Year 2000 ready systems are in place and presently functioning. As
part of implementation, we plan continued testing in 1999, along with fully
integrated tests. Quality reviews will be conducted throughout 1999 and the year
2000 to ensure proper functioning of our systems. The implementation phase
involves contingency planning. The Company maintains a formal Business
Resumption Plan, and is in the process of supplementing that plan with a
contingency plan relevant to Year 2000 issues. The contingency planning process
was well under way by year end 1998, and is expected to be completed by March
31, 1999 and validated by June 30, 1999.
The Company believes, however, that due to the widespread nature of
potential Year 2000 issues, the contingency planning process is an ongoing one
which will require further modifications as the company obtains additional
information, specifically regarding third party Year 2000 readiness.
The Company has identified significant (large) commercial depositors and
performed an assessment of their efforts towards Year 2000 readiness. Should
these depositors be unable to function financially as a result of their own Year
2000 issues, or significantly reduce their deposit levels, there could be an
impact on the Bank's own cash flow. Our initial assessment evaluates this risk
as minimal, and all customers identified in this risk assessment are aware of
the Year 2000 issues and are planning Year 2000 readiness efforts.
A risk assessment of large commercial borrowers was also completed
representing approximately 70 commercial customers, or 74% of commercial loan
outstandings. Based on survey results, all are rated as moderate to low risk. We
plan to selectively monitor the progress of certain moderate risk borrowers
throughout 1999. New commercial loans exceeding our borrowing threshold for risk
ratings will be measured to assure information technology utilized by the
borrower will be Year 2000 ready.
Management continues to quantify expenses related to Year 2000 readiness.
The Company has not been required to provide additional staff for the express
purpose of Year 2000 readiness, but rather has utilized existing internal staff.
Our budgeted expenses approximate $45,000, of which $15,000 will be allocated
for renovation of core processing software. Expenses associated with Year 2000
preparedness are not expected to have a material impact on the financial
condition of the Company.
The Company's objective is to migrate to the Year 2000 with minimal impact
on customers, and be prepared for January 1, 2000. We believe that the manner in
which we have addressed this issue underscores our strengths. The Company has
the resources and the technological expertise to address such new issues, but is
small enough to enable us to make adjustments to internal programs and systems
without affecting the ability to service our customers. The Company cannot
provide assurance that failure of third parties to adequately address the Year
2000 issue will not have an adverse impact. To minimize uncertainty, we will
assess critical suppliers and customers to determine their readiness. The
Company is confident that with the implementation of the Year 2000 initiatives
as scheduled, the possibility of significant interruptions to normal operations
should be reduced.
The preceding "Year 2000" discussion contains various statements which
represent the Company's beliefs or expectations regarding future events. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected results.
Factors that cause the differences include, but are not limited to, the actions
of governmental agencies or other third parties with respect to Year 2000
problems.
<PAGE> 30
-30-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under item 7 MDA "Interest Rate Risk and Market Risk"
ITEM 8. FINANCIAL STATEMENTS
See Part IV, Item 14, "Exhibits, Financial Statements, Schedules and
Reports on Form 8-K"
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
<PAGE> 31
-31-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Directors and Executive Officers of the Company.
INFORMATION REGARDING DIRECTORS
-------------------------------
<TABLE>
<CAPTION>
NAME
----- TERM
NOMINEES FOR DIRECTORS: AGE POSITION EXPIRES
- ----------------------- --- -------- -------
<S> <C> <C> <C>
Robert W. Allen 73 Secretary, Director 1999
William F. Barrett 57 Director 1999
David C. Koch 63 Director 1999
DIRECTORS:
----------
Phillip Brothman 60 Director 2001
Richard M. Craig 61 Chairman of Board, President, 2000
CEO, Director
LaVerne G. Hall 61 Director 2000
Richard C. Stevenson 90 Director 2000
David M. Taylor 48 Director 2001
Thomas H. Waring, Jr. 41 Director 2001
</TABLE>
Each Director is elected to hold office for a three year term and until
his successor is elected and qualified.
Mr. Allen has been a Director since 1960. He was the Executive Vice
President of the Bank until his retirement in 1988.
Mr. Barrett has been a Director since 1971. He is currently self employed
as a property and investment manager and the former President of Carl E.
Barrett, Ltd., an insurance agency.
Mr. Koch has been a Director since 1979 and is Chairman and Chief
Executive Officer of New Era Cap Co., Inc.
Mr. Brothman has been a Director since 1976 and is a partner in the law
firm of Hurst, Brothman & Yusick.
Mr. Craig joined Evans National Bank (the "Bank") in 1987 and has served
as President and Director since 1988. In 1989 he was appointed Chief Executive
Officer, and was, in January 1998, also elected Chairman of the Board.
Previously, he was the Administrative Vice President of M&T Bank.
Mr. Hall has been a Director since 1981. He is the former Chairman of the
Board of L.G. Hall Building Contractors, Inc.
Mr. Stevenson has been a Director since 1958 and is President of
Stevenson Realtors and Chairman of the
<PAGE> 32
-32-
Board of Evans Land Corp.
Mr. Taylor has been a Director since 1986 and is President of Concord
Nurseries, Inc.
Mr. Waring has been a Director since 1998. He is the principal of Waring
Financial Group, an insurance and financial services firm.
The committees of the Board of Directors, which are nominated by the Chairman of
the Board and approved by the Board of Directors, are as follows:
LOAN COMMITTEE:
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
David C. Koch Thomas H. Waring, Jr.
The Loan Committee met eleven times during 1998. Its purpose is to review
and approve loans exceeding $300,000 or loans that are non-conventional.
INVESTMENT COMMITTEE:
Richard M. Craig, Chairman Robert W. Allen David M. Taylor
The Investment Committee met once in 1998. The Investment Committee meets
a minimum of once a year to review the liquidity of the investment portfolio and
discuss investment strategies.
PLANNING COMMITTEE:
LaVerne G. Hall, Chairman William F. Barrett Richard M. Craig
David C. Koch Thomas H. Waring, Jr.
The Planning Committee met three times in 1998. The Planning Committee is
responsible for reviewing the strategic plan of the Bank and actions taken to
obtain those objectives.
LOAN REVIEW COMMITTEE:
Phillip Brothman, Chairman Richard M. Craig LaVerne G. Hall
David M. Taylor
The Loan Review Committee met four times during 1998. Its purpose is to
insure the Bank's provision and reserve for credit losses are adequate. The Loan
Review Committee meets quarterly with the Bank's Loan Review Officer, who
independently conducts the loan review. As a result of her recommendations,
loans are graded based upon payment history, credit strength of borrower and
other factors. This information is then aggregated to determine the overall
adequacy of the credit loss reserve.
AUDIT COMMITTEE:
Phillip Brothman, Chairman Richard M. Craig David C. Koch
David M. Taylor
The Audit Committee met five times in 1998. The members of the Audit
Committee receive from the internal auditor a quarterly report which describes
findings for the prior quarter. The function of the Audit Committee
<PAGE> 33
-33-
is to insure that the Bank's activities are being conducted in accordance with
law, banking rules and regulations, other regulatory and supervisory
authorities, and the Bank's internal policies. In addition, the Audit Committee
recommends to the Board of Directors the services of a reputable certified
public accounting firm. The Committee receives and reviews the reports of the
certified public accounting firm and presents them to the Board of Directors
with comments and recommendations.
INSURANCE COMMITTEE:
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
Richard C. Stevenson
The Insurance Committee met once during 1998. This committee reviews the
coverage of insurance policies of the Bank and monitors costs.
HUMAN RESOURCE COMMITTEE:
LaVerne G. Hall, Chairman William F. Barrett Richard M. Craig
David C. Koch Richard C. Stevenson Thomas H. Waring, Jr.
The Human Resource Committee met twice during 1998. Its purpose is to
review management's recommendation as it relates to job classification, salary
ranges and annual merit increases. The committee also reviews fringe benefits.
The Human Resource Committee also establishes the compensation of the Executive
Officers of the Company. See "Human Resource Committee Report on Executive
Compensation".
The Board of Directors of the Company met twelve times during 1998. Each
incumbent director of the Company, except for Mr. Koch and Mr. Waring, attended
at least 75% of the aggregate of all the meetings of the Board of Directors and
the Committees of which they were members.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's stock, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. Executive officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that during 1998 all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with by such persons.
<PAGE> 34
-34-
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
For the year 1998, members of the Board of Directors were compensated at
the rate of $750 per meeting, with the Secretary receiving $800 per meeting.
Total directors' fees during 1998 amounted to $140,145 (including committee fees
and $36,915 of deferred compensation).
EXECUTIVE COMPENSATION
There is shown below information concerning the annual and long-term
compensation for service in all capacities to the Company for the years 1998,
1997, and 1996 of the Chief Executive Officer, the Senior Vice President of
Administration, and the Senior Vice President of the Loan Division. No other
executive officer earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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 1998 $160,308 $20,000 $3,206 -0- -0- -0-
President & CEO 1997 $151,308 $14,013 $3,026 -0- -0- -0-
1996 $142,385 $13,840 $2,848 -0- -0- -0-
James Tilley 1998 $109,335 $14,000 $2,187 -0- -0- -0-
Senior Vice 1997 $103,059 $9,991 $2,061 -0- -0- -0-
President 1996 $97,095 $9,875 $1,942 -0- -0- -0-
William R. Glass 1998 $102,945 $14,000 $2,059 -0- -0- -0-
Senior Vice 1997 $96,630 $9,868 $1,933 -0- -0- -0-
President 1996 $90,235 $9,743 $1,805 -0- -0- -0-
</TABLE>
(1) Includes the Bank's contribution to the Employee Savings Plan made for the
benefit of Mr. Craig of $3,206 in 1998, $3,026 in 1997, and $2,848 in 1996;
for the benefit of Mr. Tilley of $2,187 in 1998, $2,061 in 1997, and $1,942
in 1996; and for the benefit of Mr. Glass of $2,059 in 1998, $1,933 in 1997,
and $1,805 in 1996. See "EMPLOYEE SAVINGS PLAN". Does not include personal
benefits which did not exceed 10% of Mr. Craig's, Mr. Tilley's, or
Mr. Glass' salary and bonus in any year.
EMPLOYMENT AGREEMENTS
Mr. Richard Craig, Mr. James Tilley, and Mr. William Glass have each
entered into an Employment Agreement with the Bank which runs through
December 31, 2002. Each Employment Agreement provides that salary will be set
annually by the Board of Directors. If the Bank terminates the Employment
Agreement without cause, the Bank is obligated to continue to pay base salary
for the longer of three months or the remainder of the term of the Employment
Agreement.
PENSION PLAN
The Bank maintains a defined benefit pension plan for all eligible
employees. An employee becomes vested in a pension benefit after five years of
service. Upon retirement at age 65, vested participants are entitled to receive
a monthly benefit. Prior to a May 1, 1994 amendment to the plan, the monthly
benefit under the pension plan was 3% of average monthly compensation multiplied
by years of service up to a maximum of fifteen years of service. In 1994, the
pension plan was amended to change the benefit to 1% of average monthly
compensation multiplied by years of service up to a maximum of thirty years of
service. However, the benefits already accrued by employees prior to this
amendment were not reduced by the amendment. Mr. Craig, Mr. Tilley, and Mr.
Glass are participants in the pension plan, and as of December 31, 1998, Mr.
Craig had ten years of credited service and $13,264 of average monthly
<PAGE> 35
-35-
compensation; Mr. Tilley had nine years of credited service and $8,949 of
average monthly compensation; and Mr. Glass had five years of credited service
and $8,375 of average monthly compensation.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
In 1995, the Bank entered into non-qualified Supplemental Executive
Retirement Plans ("SERPs") with both Mr. Craig and Mr. Tilley to provide
retirement benefits to supplement their benefits under the Bank's pension plan
and replace the benefits reduced by the 1994 amendment to the Pension Plan. See
"PENSION PLAN". In 1998, Mr. Craig's SERP was amended and the benefits
increased. In 1999, the Bank amended Mr. Tilley's agreement increasing his
benefit, and also entered into an agreement with Mr. Glass. Under the SERPs, as
amended, Mr. Craig, Mr. Tilley, and Mr. Glass are entitled to additional annual
pension payments of $92,766, $66,943, and $30,000, respectively, for 20 years
after retirement at age 65, unless their employment is terminated earlier. The
SERPs also provide death benefits in the same annual amounts in the event the
executive dies prior to age 65, which are payable over 10 years. The Bank has
purchased a life insurance policy on both Mr. Craig and Mr. Tilley to assist in
recovering the amounts of any benefits paid in the future under the SERPs.
EMPLOYEE SAVINGS PLAN
The Bank also maintains a 401(k) salary deferral plan to assist employees
in saving for retirement.
All employees are eligible to participate on the first of the month
following one year of service, provided they have completed 1,000 hours of
service. Eligible employees can contribute up to a maximum of 15% of their base
pay. An automatic 1% of base pay contribution is made by the Bank and in
addition, the Bank makes a matching contribution at a rate of 25% of the first
4% contributed by a participant. Participants are always 100% vested in their
own contributions and the Bank's matching contribution is also 100% vested.
Individual account earnings will depend on the performance of the
investment funds in which the participant invests. Specific guidelines govern
adjustments to contribution levels, investment decisions and withdrawals from
the plan. The benefit is paid as an annuity unless the employee elects one of
the optional forms of payment available under the plan. See "Summary
Compensation Table" for a summary of the amounts contributed by the Bank to this
Plan for the benefit of Mr. Craig, Mr. Tilley, and Mr. Glass.
<PAGE> 36
-36-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 31, 1999, the number
(rounded to the nearest whole share) of outstanding shares of Common Stock
beneficially owned by (i) each shareholder known by the Company to beneficially
own more than 5% of the Company's Common Stock, (ii) all directors and nominees
of the Company individually, and (iii) by all executive officers and directors
as a group:
<TABLE>
<CAPTION>
Nature and Amount of Percent of
Name Beneficial Ownership Class
- ---- -------------------- -----
<S> <C> <C>
Robert W. Allen (1) 29,944 1.8%
William F. Barrett (2) 161,345 9.5%
Phillip Brothman (3) 23,810 1.4%
Richard M. Craig (4) 8,123 .5%
LaVerne G. Hall (5) 54,380 3.2%
David C. Koch (6) 25,793 1.5%
Richard C. Stevenson (7) 55,324 3.3%
David M. Taylor (8) 6,840 .4%
Thomas H. Waring, Jr. 509 .03%
Directors and Officers
as a Group (11 persons)
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10) 367,580 21.6%
</TABLE>
(1) Includes 2,764 shares owned by Mr. Allen's wife.
(2) Includes 12,850 shares owned by Mr. Barrett's wife, 30,940 shares owned
jointly by Mr. Barrett and his wife and 6,345 shares held for Mr. Barrett's
son, as to which he disclaims beneficial ownership.
<PAGE> 37
-37-
(3) Includes 1,480 shares owned by Mr. Brothman's wife and 2,713 shares held by
a pension plan of which Mr. Brothman is a trustee and a participant.
(4) Includes 5,415 shares owned jointly by Mr. Craig and his wife and 168
shares owned by Mr. Craig's daughter, as to which he disclaims beneficial
ownership.
(5) Includes 23,230 shares owned by Mr. Hall's wife.
(6) Includes 1,485 shares owned jointly by Mr. Koch and his wife, and 775
shares owned by Mr. Koch's son, as to which he disclaims beneficial
ownership.
(7) Includes 3,669 shares owned by Mr. Stevenson's wife, and also 12,635 shares
held by Mr. Stevenson as conservator for Evelyn Simonsen and 1,060 shares
held in a trust for F. Evelyn Beardsley as to which he disclaims beneficial
ownership.
(8) Includes 300 shares owned jointly by Mr. Taylor and his wife.
(9) Includes 426 shares owned by Mr. James Tilley, Assistant Secretary of Evans
Bancorp, Inc., 10 shares held by Mr. Tilley in trust for his grandson, and
76 shares owned jointly by Mr. Tilley and his mother.
(10) Includes 1,000 shares owned by Mr. William Glass, Treasurer of Evans
Bancorp, Inc., held jointly with his wife.
<PAGE> 38
-38-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and in the future, expects to have banking and
fiduciary transactions with Directors and Executive Officers of the Company and
some of their affiliates. All such transactions have been in the ordinary course
of business and on substantially the same terms (including interest rates on
loans) as those prevailing at the time for comparable transactions with others.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS,SCHEDULES, AND REPORTS
ON FORM 8-K
The following financial statements and independent auditors' report
thereon are included herein or are incorporated by reference are included from
1998 Annual Report to Shareholders pages 58 through 89 in response to Part II,
Item 7.
(a) Documents filed as a part of this Report:
None
(b) Documents Incorporated by Reference:
1. FINANCIAL STATEMENTS.
Independent Auditors' Report of Deloitte & Touche LLP
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
No NAME No.
<S> <C> <C>
3.1 Certificate of Incorporation (1) n/a
3.2 Certificate of Amendment to
Certificate of Incorporation (3) n/a
3.3 By-Laws (1) n/a
3.4 Amended Section 204 of By-Laws (4) n/a
3.5 Amended Section 203 of By-Laws (6) n/a
4.1 Specimen common stock certificate (3) n/a
</TABLE>
<PAGE> 39
-39-
<TABLE>
<CAPTION>
<S> <C> <C>
10.1 Employment Agreement dated August 19, 1997 n/a
between the Bank and Richard M. Craig (6)
10.2 Employment Agreement dated August 19, 1997 n/a
between the Bank and James Tilley (6)
10.3 Employment Agreement dated August 19, 1997 n/a
between the Bank and William R. Glass (6)
10.4 Specimen 1984 Director Deferred Compensation
Agreement (2) n/a
10.5 Specimen 1989 Director Deferred Compensation
Agreement (2) n/a
10.6 Summary of Provisions of Director Deferred
Compensation Agreements (2) n/a
10.7 Evans National Bank Supplemental Executive
Retirement Plan for Richard M. Craig dated
February 16, 1999 (7)
10.8 Evans National Bank Supplemental Executive
Retirement Plan for James Tilley dated
February 16, 1999 (7)
10.9 Evans National Bank Supplemental Executive
Retirement Plan for William R. Glass dated
February 16, 1999 (7)
13.1 1998 Annual Report to Shareholders (7)
21.1 Subsidiaries of the Registrant (6) n/a
27 Financial Data Schedule (7)
</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 as an Exhibit to the Company's Form 10-Q for the quarter ended
March 31, 1997 (File No. 0-18539) and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Form 10-Q for the quarter ended
June 30, 1996 (File No. 0-18539) and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Form 10-QSB for the quarter ended
March 31, 1995 (File No. 0-18539) and incorporated herein by
reference.
<PAGE> 40
-40-
(6) Filed as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1997 (File No.0-18539) and incorporated herein by
reference.
(7) Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
<PAGE> 41
-41-
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, EVANS BANCORP, INC. has duly caused this Annual Report to be signed
on its behalf by the undersigned thereunto duly authorized:
EVANS BANCORP, INC.
By: /s/Richard M. Craig
Richard M. Craig,
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
Chairman
/s/Richard M. Craig President March 29, 1999
Richard M. Craig (Chief Executive
Officer), Principal
Accounting Officer and
Director
/s/James Tilley Assistant Secretary March 29, 1999
James Tilley
/s/William R. Glass Treasurer March 29, 1999
William R. Glass
/s/Robert W. Allen Director March 29, 1999
Robert W. Allen
/s/Laverne G. Hall Director March 29, 1999
LaVerne G. Hall
/s/Richard C. Stevenson Director March 29, 1999
Richard C. Stevenson
/S/David M. Taylor Director March 29, 1999
David M. Taylor
/S/Thomas H. Waring Director March 29, 1999
Thomas H. Waring
<PAGE> 1
EXHIBIT 10.7
<PAGE> 2
AGREEMENT
This Agreement made this 16th day of February, 1999, by and between,
EVANS NATIONAL BANK, a New York Banking Corporation, with offices located at
14-16 N. Main Street, Angola 14006, hereinafter referred to as "Bank", and,
RICHARD M. CRAIG, an employee of said Bank, hereinafter referred to as
"Participant".
WHEREAS, the parties previously entered into a Supplemental Executive
Retirement Plan (SERP), dated March 29, 1995; and
WHEREAS, the parties now wish to amend said Plan.
NOW, THEREFORE, it is mutually agreed as follows:
1. ARTICLE II "BENEFIT" is hereby amended as follows:
SECTION 2.1 DEFINED CONTRIBUTION EXCESS BENEFIT
(A) The excess benefit has been determined
to be the amount of $92,776.00 paid annually for the
term of twenty (20) years certain.
It shall be payable under conditions
identical as to vesting, conditions and terms of
payment and all other matters, to the benefit payable
by The Evans National Bank Pension Plan, (except the
benefit from this plan will not be paid in the form
of a lump sum and the benefit will not commence prior
to the first day of the month coincident with or next
following the individual's 65th birthday).
(B) In the event the Participant dies prior
to attaining sixty-five (65) years of age, annual
payments will be made to Participant's named
beneficiary in the amount of $92,776.00 for ten (10)
consecutive years commencing thirty (30) days after
the Participant's date of death.
SECTION 2.3 BENEFIT ON TERMINATION BEFORE RETIREMENT AT AGE 65
This paragraph will remain the same, except
that the figure "$63,882.00" will be replaced by the figure
"$92,776.00".
2. ARTICLE III "MISCELLANEOUS" is hereby amended as follows:
SECTION 3.11 ADMINISTRATION IS RENUMBERED SECTION 3.12
<PAGE> 3
NEW SECTION 3.11 "REIMBURSEMENT OF ATTORNEY'S FEES" is added:
In the event the Bank ownership changes and
Participant is denied benefits under this Plan and Participant
is required to retain legal counsel to secure said benefits,
Participant shall be entitled to reimbursement of reasonable
legal fees incurred in the pursuit of said benefits. Bank
shall reimburse Participant no later than five (5) days after
submission of an invoice for said fees from an attorney
admitted to practice Law in the State of New York or such
other state as may be required because of ownership of the
Bank by an out-of-state corporation
2. All terms and conditions of the aforementioned Agreement not
specifically changed herein, shall remain the same and are
hereby ratified and affirmed as if set forth fully herein.
IN WITNESS WHEREOF, the parties have hereunto set their hands the day
and year first above written.
EVANS NATIONAL BANK
BY: /s/Richard M. Craig
-----------------------
RICHARD M. CRAIG, CHAIRMAN
PARTICIPANT:
/s/Richard M. Craig
--------------------------
RICHARD M. CRAIG
Attest:
/s/Robert Allen
- ---------------
Robert Allen, Secretary
<PAGE> 1
EXHIBIT 10.8
<PAGE> 2
AGREEMENT
This Agreement made this 16th day of February, 1999, by and between,
EVANS NATIONAL BANK, a New York Banking Corporation, with offices located at
14-16 N. Main Street, Angola 14006, hereinafter referred to as "Bank", and,
JAMES TILLEY, an employee of said Bank, hereinafter referred to as
"Participant".
WHEREAS, the parties previously entered into a Supplemental Executive
Retirement Plan (SERP), dated March 28, 1995; and
WHEREAS, the parties now wish to amend said Plan.
NOW, THEREFORE, it is mutually agreed as follows:
1. ARTICLE II "BENEFIT" is hereby amended as follows:
SECTION 2.1 DEFINED CONTRIBUTION EXCESS BENEFIT
(A) The excess benefit has been determined
to be the amount of $66,943.00 paid annually for the
term of twenty (20) years certain.
It shall be payable under conditions
identical as to vesting, conditions and terms of
payment and all other matters, to the benefit payable
by The Evans National Bank Pension Plan, (except the
benefit from this plan will not be paid in the form
of a lump sum and the benefit will not commence prior
to the first day of the month coincident with or next
following the individual's 65th birthday).
(B) In the event the Participant dies prior
to attaining sixty-five (65) years of age, annual
payments will be made to Participant's named
beneficiary in the amount of $66,943.00 for ten (10)
consecutive years commencing thirty (30) days after
the Participant's date of death.
SECTION 2.3 BENEFIT ON TERMINATION BEFORE RETIREMENT AT AGE 65
This paragraph will remain the same, except
that the figure "$60,319.00" will be replaced by the figure
"$66,943.00".
2. ARTICLE III "MISCELLANEOUS" is hereby amended as follows:
SECTION 3.11 ADMINISTRATION IS RENUMBERED SECTION 3.12
<PAGE> 3
NEW SECTION 3.11 "REIMBURSEMENT OF ATTORNEY'S FEES" IS ADDED:
In the event the Bank ownership changes and
Participant is denied benefits under this Plan and Participant
is required to retain legal counsel to secure said benefits,
Participant shall be entitled to reimbursement of reasonable
legal fees incurred in the pursuit of said benefits. Bank
shall reimburse Participant no later than five (5) days after
submission of an invoice for said fees from an attorney
admitted to practice Law in the State of New York or such
other state as may be required because of ownership of the
Bank by an out-of-state corporation
2. All terms and conditions of the aforementioned Agreement not
specifically changed herein, shall remain the same and are
hereby ratified and affirmed as if set forth fully herein.
IN WITNESS WHEREOF, the parties have hereunto set their hands the day
and year first above written.
EVANS NATIONAL BANK
BY: /s/RICHARD M. CRAIG
-----------------------
RICHARD M. CRAIG, CHAIRMAN
PARTICIPANT:
/s/JAMES TILLEY
--------------------------
JAMES TILLEY
Attest:
/s/ROBERT ALLEN
- ---------------
Robert Allen, Secretary
<PAGE> 1
EXHIBIT 10.9
<PAGE> 2
EVANS NATIONAL BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WILLIAM R. GLASS
This Plan and Agreement, executed this 16th day of February, 1999, by
and between EVANS NATIONAL BANK, a New York Banking Corporation of 14 - 16 N.
Main Street, Angola, New York 14006 [hereinafter referred to as "Bank"] and
WILLIAM R. GLASS, employee of said Bank [hereinafter referred to as
"Participant"].
W I T N E S S E T H
WHEREAS, the Participant is currently employed by the Bank, as the
Senior Vice President; and
WHEREAS, the Bank believes it is in the best interests of the Bank and
the Participant to establish a plan for the purpose of providing
certain benefits for the Participant; and
WHEREAS, the Bank wishes to offer a Supplemental Employee Retirement
Plan (SERP) inducement to Participant to remain an employee in the
form of additional compensation for services which he has rendered or
will hereafter render; and
WHEREAS, the Participant is willing to continue in said position with
the Bank on the basis stated herein;
NOW, THEREFORE, it is mutually agreed as follows:
<PAGE> 3
ARTICLE I
EMPLOYMENT
SECTION 1.1 The Bank will employ Participant as an employee at such rate
of compensation as may be so determined. The Participant will devote his full
energy, skill and best efforts to the affairs of the Bank as required. It is
contemplated that such employment will continue until the Participant attains
age sixty-five (65) or terminates employment.
ARTICLE II
BENEFIT
SECTION 2.1 DEFINED CONTRIBUTION EXCESS BENEFIT
(A) The excess benefit has been determined to be the amount of
$30,000.00 paid annually for the term of twenty (20) years certain.
It shall be payable under conditions identical as to vesting,
conditions and terms of payment and all other matters, to the benefit payable by
The Evans National Bank Pension Plan, (except the benefit from this plan will
not be paid in the form of a lump sum and the benefit will not commence prior to
the first day of the month coincident with or next following the individual's
65th birthday).
(B) In the event the Participant dies prior to attaining sixty-five
(65) years of age, annual payments will be made to Participant's named
beneficiary in the amount of $30,000.00 for ten (10) consecutive years
commencing thirty (30) days after the Participant's date of death.
SECTION 2.2 DENIAL OF BENEFIT IN CERTAIN EVENTS
(A) There shall be no benefit hereunder if the Participant in question
is discharged for cause.
2
<PAGE> 4
(B) Discharge for Cause" shall mean a termination of employment for
proven embezzlement, intoxication or illegal drug use which materially
interferes with job performance; conflict of interest; gross insubordination, or
conviction of a felony adversely affecting the ability of said Participant to
carry on his normal duties.
SECTION 2.3 BENEFIT ON TERMINATION BEFORE RETIREMENT AT AGE 65
In the event the Participant terminates employment for any reason
except "discharge for cause", the benefit to be paid shall be the accrued
benefit as set forth in Section 2.1(A), $30,0000.00 multiplied by a fraction not
to exceed (1) the numerator of which is the actual number of MONTHS of service
of Participant in the Evans National Bank Pension Plan and (2) the denominator
of which is the number of MONTHS of service in the Evans National Bank Pension
Plan the participant would have completed if the participant had continued until
his normal retirement age (65).
Said amount as so determined shall be payable for a term of twenty (20)
years certain. It will not be paid in a lump sum and the benefit will not
commence prior to the first day of the month coincident with or next following
the Participant's sixty-fifth (65) birthday.
SECTION 2.4 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS:
UNSECURED GENERAL CREDITOR STATUS OF EMPLOYEE
(A) The payments to the Employee, his designated beneficiary or any
other beneficiary hereunder shall be made from assets which shall continue, for
all purposes, to be a part of the general, unrestricted assets of the
Corporations; no person shall have nor acquire any interest in any such assets
by virtue of the provisions of this Agreement. The Corporation's obligation
hereunder shall be an unfunded and unsecured
3
<PAGE> 5
promise to pay money in the future. To the extent that the Employee or any
person acquires a right to receive payments from the Corporation under the
provisions hereof, such right shall be no greater than the right of any
unsecured general creditor of the Corporation; no such person shall have nor
require any legal or equitable right, interest or claim in or to any property or
assets of the Corporation.
(B) In the event that, in its discretion, the Corporation purchases an
insurance policy or policies insuring the life of the Employee (or any other
property) to allow the Corporation to recover the cost of providing the
benefits, in whole, or in part, hereunder, neither the Employee, his designated
beneficiary, any other beneficiary nor any other person shall have nor acquire
any rights whatsoever therein or in the proceeds therefrom. The Corporation
shall be the sole owner and beneficiary of any such policy or policies and, as
such, shall possess and, may exercise all incidents of ownership therein. No
such policy, policies or other property shall be held in any trust for the
Employee or any other person nor as collateral security for any obligation of
the Corporation hereunder.
SECTION 2.5 NO CONTRACT OF EMPLOYMENT
Nothing contained herein shall be construed to be a contract of
employment for any term of years, nor as conferring upon the Employee the right
to continue to be employed by the Corporation, in any capacity. It is expressly
understood by the parties hereto that this Agreement relates exclusively to
additional compensation for the Employee's services, payable after termination
of his employment with the Corporation, and it is not intended to be an
employment contract.
4
<PAGE> 6
SECTION 2.6 DEATH BENEFICIARY
The "death beneficiary" of the Participant shall be the person,
persons, trust, or charitable entity, living or in existence at the time for any
distribution hereunder, which Participant shall have most recently designated as
highest in priority on a form provided for that purpose by the Bank, signed by
the Participant and filed with the Bank. The death or nonexistence of any such
beneficiary, either before or after receipt or any distribution hereunder, shall
terminate the entire interest of such beneficiary in and to the then
undistributed portion of such Participant's account and such undistributed
portion shall thereafter be distributed to or for the benefit of the beneficiary
or beneficiaries designated as next highest in priority by such Participant. If
no such beneficiary be thus designated, or if all of the thus designated
beneficiaries do not survive or are no longer in existence at anytime prior to
the complete distribution of such account, such account, or the then
undistributed balance thereof, shall be distributed by the Bank directly to the
person or persons who are heirs as named in the Participant's Last Will and
Testament, except to the extent to which the specific bequests of such document
are paid by the Participant's other resources; or if there is no such document
then in existence, under the laws of descent and distribution, to those persons
who would be entitled to the Participant's personal property, and in the
proportions to which they would be so entitled, had such Participant died, at
the time for such distribution, intestate and resident of State of New York.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 GOVERNING LAW
This Agreement shall be subject to, and governed by, the laws of the
State of New York irrespective of the fact that one or more of the parties now
is, or may become, a resident of a different state.
5
<PAGE> 7
SECTION 3.2 VOID LANGUAGE
In the event any parts of this Agreement are found to be void, the
remaining provision of this Agreement shall nevertheless be binding with the
same effect as though the void parts were deleted.
SECTION 3.3 RULES OF CONSTRUCTION
Wherever in this Agreement, words, including pronouns, are used in the
masculine, they shall read and be construed in the feminine or neuter whenever
they would so apply, and wherever in this Agreement words, including pronouns,
are used in the singular or plural, they shall be read and construed in the
plural or singular, respectively, wherever they would so apply.
SECTION 3.4 AGREEMENT BINDING
This Agreement shall be binding upon the parties hereto, their heirs,
executors, administrators, successors and assigns. The Bank agrees it will not
be a party to any merger, consolidation or reorganization unless and until its
obligations hereunder shall be expressly assumed by its successor or successors.
SECTION 3.5 DESIGNATION OF NAMED FIDUCIARY
The Bank is hereby designated as the named fiduciary hereunder, and
shall be responsible for the management and control of the operation and
administration of the Plan including any and all decisions pertaining to the
granting or denial of benefit claims and any and all decisions pertaining to the
review of denials of benefit claims.
6
<PAGE> 8
SECTION 3.6 AMENDMENT
The Plan may be amended at any time, and from time to time, by a
written instrument executed by a duly authorized officer of the Bank provided
such amendment is communicated to those Participants participating in this Plan,
and approved by a majority vote of the Board of Directors of the Bank.
SECTION 3.7 NON-ASSIGNABILITY OF BENEFITS
Neither the Employee, his designated beneficiary nor any other
beneficiary under this Agreement shall have any power or right to transfer,
assign, anticipate, hypothecate or otherwise encumber any part or all of the
amounts payable hereunder, which are expressly declared to be unassignable and
non-transferable. Any such attempted assignment or transfer shall be void and
shall terminate this Agreement; the Corporation shall thereupon have no further
liability hereunder. No amount payable hereunder shall, prior to actual payment
thereof, be subject to seizure by any creditor of any such beneficiary for the
payment of any debt, judgment or other obligation, by a proceeding at law or in
equity, not transferable by operation of law in the event of the bankruptcy,
insolvency or death of the Employee, his designated beneficiary or any other
beneficiary hereunder.
SECTION 3.8 CLAIMS FOR BENEFITS
Claims for benefits under the Plan shall be made in writing to the
Bank. If such claim for benefits is wholly or partially denied, the Bank shall,
within a reasonable period of time, but no later than ninety days after receipt
of the claim, notify the claimant of the denial of the claim. Such notice of
denial (i)shall be in writing, (ii) shall be written in a manner calculated to
be understood by the claimant, and (iii) shall contain (a) the specific reason
or reasons for denial of the claim, (b) a specific reference to the pertinent
plan
7
<PAGE> 9
provision upon which the denial is based, (c) a description of any additional
material or information necessary for the claimant to perfect the claim, along
with an explanation why such material or information is necessary, and (d) an
explanation of the Plan's claim review procedure.
SECTION 3.9 REQUEST FOR REVIEW OF DENIAL OF CLAIM
Within one hundred twenty (120) days of the receipt by the claimant of
the written notice of denial of the claim, or such later time as shall be deemed
reasonable taking into account the nature of the benefit subject to the claim
and any other attendant circumstances or if the claim has not been granted
within a reasonable period of time, the claimant may file a written request with
the Bank that it conduct a full and fair review of the denial of the claimant's
claim for benefits, including the conduction of a hearing, if deemed necessary
by the reviewing party. In connection with the claimant's appeal of the denial
of his benefit, the claimant may review pertinent documents and may submit
issues and comments in writing.
SECTION 3.10 DECISION ON REVIEW OF DENIAL OF CLAIMS
The Bank shall deliver to the claimant a written decision on the claim
promptly, but not later than sixty days, after the receipt of the claimant's
request for review, except that if there are special circumstances (such as the
need to hold a hearing) which require an extension of time for processing, the
aforesaid sixty day period shall be extended to one hundred twenty (120) days.
Such decision shall (a) be written in a manner calculated to be understood by
the claimant, (b) include specific reasons for the decision, and (c) contain
specific references to the pertinent Plan provisions upon which the decision is
based.
8
<PAGE> 10
SECTION 3.11 REIMBURSEMENT OF ATTORNEYS FEES
In the event the Bank ownership changes and Participant is denied
benefits under this Plan and Participant is required to retain legal counsel to
secure said benefits, Participant shall be entitled to reimbursement of
reasonable legal fees incurred in the pursuit of said benefits. Bank shall
reimburse Participant no later than five (5) days after submission of an invoice
for said fees from an attorney admitted to practice Law in the State of New York
or such other state as may be required because of ownership of the Bank by an
out-of-state corporation
All terms and conditions of the aforementioned Agreement not
specifically changed herein, shall remain the same and are hereby ratified and
affirmed as if set forth fully herein.
SECTION 3.12 ADMINISTRATION
The Bank Secretary shall maintain a copy of the Plan, and any
amendments thereto.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
the day and year first above written.
EVANS NATIONAL BANK Participant:
BY: /s/Richard M. Craig /s/William R. Glass
------------------- -------------------
Richard M. Craig, President William R. Glass
Attest:
/s/Robert Allen
- ---------------
Robert Allen, Secretary
9
<PAGE> 1
EXHIBIT 13.1
<PAGE> 2
Exhibit 13.1
Profile
Evans Bancorp, Inc. is a bank holding company headquartered in Angola, New York
and conducts its business through its wholly-owned subsidiary, Evans National
Bank. The Bank is a FDIC full-service commercial bank and as of December 31,
1998 had total assets of $174,120,230, total deposits of $144,083,636 and total
stockholders' equity of $18,623,413. The Bank's primary market area is located
in Western New York State and specifically in southern Erie County, northern
Chautauqua County and northwestern Cattaraugus County.
The principal business of the Bank is commercial banking and consists of,
among other things, attracting deposits from the general public and using these
funds to extend credit and to invest in securities. The Bank offers a variety of
loan products to its customers including commercial loans, commercial and
residential mortgage loans, and consumer loans. In addition, the Bank offers
deposit products to include checking and NOW accounts, passbook and statement
savings, and certificates of deposit.
1
<PAGE> 3
President's Message
With the key components of the financial statements - net income, loans,
deposits, and stockholders' equity - at record levels, I am pleased to report
that 1998 was another excellent year for Evans Bancorp, Inc. and its subsidiary,
Evans National Bank.
Net income in 1998 was $2,043,351, an increase of $241,076, or 13.3% over
1997 net income of $1,802,275. Earnings per share increased $.14, or 13.2%, to
$1.20 per share from $1.06 per share in 1997. The Board of Directors declared a
cash dividend of $.37 per share during 1998, which compares to $.30 per share in
1997. This is the seventeenth consecutive year there has been an increase in the
cash dividend. Other key performance ratios which improved in 1998 include
return on average assets of 1.24% as compared to 1.19% in 1997, and 11.63%
return on average equity as compared to 11.06% the previous year. Total assets
also reached a record high of $174,120,230 at December 31, 1998, which is an
increase of $15,578,067, or 9.8%, over last year's total assets of $158,542,163.
Net loans increased by $8,899,022 in 1998 to $110,526,449, an 8.7% increase
over 1997's $101,627,427. The quality of the portfolio, as measured by
charge-offs, continues to remain at a high level. Actual I charge-offs totaled
$71,458 for 1998, which equated to .06% of outstanding loans, as compared to
$46,858 in 1997, or .05%. Deposits increased to $144,083,636, or 4.1%, from
$138,391,327 for an increase of $5,692,309. Stockholders' Equity increased by
$1,584,113, or 9.3%, to $18,623,413 from $17,039,300.
The Bank's Tier I capital ratio of 16.3%, total capital ratio of 16.9% and
leverage ratio of 10.5% substantially exceeded the regulatory requirements of
4.0%, 8.0%, and 4.0%, respectively.
In order to meet the challenges of our competitive environment and
successfully accommodate the needs of our customers for electronic banking
services, the Bank initiated a technology project in 1998 which we refer to as
"channel management".
The first phase of the channel management project was a conversion to
Cartel, a new ATM network provider established locally to better serve the
electronic banking needs of community banks. This further development of the ATM
network allows us to drive our own ATMs through an independent service bureau
and provide on-line information to our customers. In the fall of 1998, as part
of channel management, the Bank introduced a telephone and PC (personal
computer) banking service called Eas-E-Line, which has won wide acceptance from
our customers. Eas-E-Line provides convenient customer access to account
information, with transfer capabilities from any telephone or personal computer.
Future channel management phases will include the introduction of Eas-E-Check, a
debit card that works like a check, and Internet access, providing a bill-paying
service for both businesses and individuals.
Over the past year, the Company has devoted considerable time and planning
to be prepared for January 1, 2000 and the much-publicized, anticipated computer
and system deficiencies in distinguishing between the years
2
<PAGE> 4
1900 and 2000. As the new millennium approaches, the Company's objective is to
migrate to the Year 2000 with minimal impact on customers.
We initiated our Year 2000 preparation efforts in 1996; however, our most
significant activities were accomplished during 1998. Guided by a five-phase
approach recommended by the Federal Financial Institutions Examination Council
(FFIEC) and our regulatory authority, the Office of the Comptroller of the
Currency (OCC), we first developed a comprehensive plan for becoming Year 2000
compliant. Working closely with our core processing software vendor, we
successfully tested for Year 2000 readiness all systems which we identified as
mission critical. A renovated version of our core processing software was
installed in the second quarter of 1998, and we continued to test for compliance
through the remainder of the year.
In order to satisfactorily determine the Year 2000 readiness of the Bank's
vendors, each was contacted during the course of the year. Additionally, a
customer-awareness program was developed to inform customers of the Bank's
readiness efforts, which included a public information seminar and readiness
notices being sent to each of the Bank's customers. A customer risk assessment
was also conducted to assess the Year 2000 efforts of customers we considered
significant borrowers and depositors.
Well ahead of schedule, we have entered into the final phase of our Year
2000 plan, which is the Implementation Phase. The Bank's Year 2000-ready systems
are currently in place and functioning. We plan to continue testing in 1999, and
quality reviews will be conducted throughout 1999 and the year 2000 to ensure
proper functioning of our systems.
Although we believe that our systems are ready for the Year 2000, the Bank
is also developing contingency plans to minimize significant interruption of
normal operation in the event of failure. The contingency planning process
commenced during the fourth quarter of 1998, was well under way by year end, and
will be completed during the first quarter of 1999. This ongoing planning
process will require modification, as we obtain additional information
specifically regarding third party readiness. With the support and direction of
the Board of Directors and senior management, we will continue to dedicate the
necessary resources and strategies to resolve all potential Year 2000 issues.
We believe that the manner in which we have addressed this issue
underscores our strengths. The Company has the resources and the technological
expertise to address such new issues, but is small enough to enable us to make
adjustments to internal programs and systems without affecting the ability to
service our customers.
The dedication and efforts of our employees is one of the most important
factors in our continuing success. To further enhance the capabilities of our
employees, we initiated training programs during the past year. We are confident
that these programs in computer, customer service, and sales training will
strengthen and enhance individual performance and productivity.
3
<PAGE> 5
The following employees were recognized during 1998 for their years of
service as noted: Barbara H. Harris and Jeffrey L. White (20 years); Patricia R.
Grise, Carol A. Mahoney, and David G. Scheffer (15 years); Pamela L. Catalano,
William J. Gray, Marlene A. Kwiatkowski, Howard M. Martin, Jr., Rose M. Radecki,
and James Tilley (10 years); William R. Glass, Cynthia A. Gracon, and Kim M.
Heimburg (5 years).
Evidencing our firm commitment to the betterment of our communities, Evans
National Bank's management and employees continue to volunteer and serve in many
capacities for a variety of local organizations.
In January of 1998, Thomas H. Waring, Jr. was appointed to the Board of
Directors and was elected for a full term at the Stockholders meeting in April,
1998. He has been a valuable and important contributor, and has brought new
talents to our Board.
In September of 1998, I concluded my term as President of the Independent
Bankers Association of New York State. My tenure further convinced me of the
inherent value in the community banking philosophy; that of using local customer
deposits to support business and consumer loans which, in turn, increases the
quality of life in our communities. I believe that this will continue to be
unique to community banks and, along with the delivery of individualized
customer service, ensure our industry's continued strength and prosperity.
I am happy to announce that on February 1, 1999, we opened our seventh
branch office, located in the Southgate Plaza in West Seneca, New York. Timothy
F. Jachlewski was appointed Vice President and Manager of this new facility. Tim
comes to us with an extensive background in banking, and is well known to the
West Seneca community, having been involved in many local activities and
organizations. We believe the addition of this office is a logical extension of
our market area, and will provide new opportunities for future growth.
We are proud of the goals realized in 1998, which include strong earnings,
and the Bank's positioning for the future. I would like to recognize and thank
our employees, the Board of Directors, the stockholders, and our customers for
their continued support. We look forward to an exciting year in 1999, and
continued success as we enter the new millennium.
Richard M. Craig
Chairman of the Board, President and Chief Executive Officer
4
<PAGE> 6
<TABLE>
<CAPTION>
EVANS BANCORP, INC.
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 1998 1997 1996 1995 1994
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 11,851,787 $ 11,072,851 $ 9,799,815 $ 9,226,500 $ 8,206,596
- ----------------------------------------------------------------------------------------------------------
Interest Expense 4,946,730 4,588,056 3,912,761 3,418,782 2,747,297
- ----------------------------------------------------------------------------------------------------------
Net Interest Income 6,905,057 6,484,795 5,887,054 5,807,718 5,459,299
- ----------------------------------------------------------------------------------------------------------
Non-Interest Income 1,220,194 950,662 930,986 763,054 785,551
- ----------------------------------------------------------------------------------------------------------
Non-Interest Expense 5,196,900 4,849,182 4,555,398 4,228,922 3,981,801
- ----------------------------------------------------------------------------------------------------------
Net Income 2,043,351 1,802,275 1,614,642 1,664,783 1,617,049
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $174,120,230 $158,542,163 $140,898,057 $125,308,204 $114,565,971
- ----------------------------------------------------------------------------------------------------------
Loans - Net 110,526,449 101,627,427 92,087,902 75,468,504 71,998,929
- ----------------------------------------------------------------------------------------------------------
Allowance for Loan Losses 729,199 609,539 546,954 557,961 628,957
- ----------------------------------------------------------------------------------------------------------
Securities 50,059,972 40,400,374 36,054,324 38,954,494 32,341,350
- ----------------------------------------------------------------------------------------------------------
Total Deposits 144,083,636 138,391,327 123,461,379 109,020,551 100,532,031
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity 18,623,413 17,039,300 15,510,083 14,485,510 12,723,940
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income $ 1.20 $ 1.06 $ 0.95 $ 0.97 $ 0.95
- ----------------------------------------------------------------------------------------------------------
Cash Dividend $ .37 $ 0.30 $ 0.22 $ 0.14 $ 0.09
- ----------------------------------------------------------------------------------------------------------
Book Value at Year End $ 10.96 $ 10.03 $ 9.13 $ 8.53 $ 7.49
- ----------------------------------------------------------------------------------------------------------
Market Value $ 45.00 $ 38.00 $ 27.20 $ 22.00 $ 14.00
- ----------------------------------------------------------------------------------------------------------
Weighted Average Shares 1,698,612 1,698,950 1,698,950 1,698,950 1,698,950
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(Retroactively adjusted for stock dividends and stock splits)
CORRECTION: Book Value at Year End For 1995 and Earlier and Market Value For
1996 and Earlier Under PER SHARE DATA Have Been Corrected to
Reflect the Five-For-One Stock Split in 1997.
5
<PAGE> 7
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evans National Bank (the "Bank"), a wholly-owned subsidiary of Evans Bancorp,
Inc. (the "Company"), is a nationally chartered bank founded in 1920 which is
headquartered in Angola, New York. The Bank's principal business is to provide
full banking services to consumer and commercial customers in Erie and
Chautauqua Counties of Western New York. The Bank serves its market through six
banking offices located in Angola, Derby, Evans, Forestville, Hamburg and North
Boston, New York. The Bank's principal source of funding is through deposits
which it reinvests in the community in the form of loans and investments.
Deposits are insured to the applicable limit by the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by
the Office of the Comptroller of the Currency.
The following discussion of financial conditions and results of operations
of the Company and the Bank should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Net income of $2,043,351 in 1998 resulted in earnings per share of $1.20. This
is an increase of 13.4% over net income for 1997 of $1,802,275 or $1.06 per
share. Income in 1997 had improved 11.6% over net income of $1,614,642 or $.95
per share in 1996. The strong earnings performance of the Bank in 1997 and 1998
illustrates the positive income impact of the $2.2 million expansion plan
implemented over 1995 and 1996, which included the addition of the Hamburg and
Evans branch offices.
Net interest income, the difference between interest income and fees on
earning assets, such as loans and securities, and interest expense on deposits,
provides the basis for the Bank's results of operations. These results are also
affected by non-interest income, the provision for credit losses, non-interest
expense, and income taxes.
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 6.5% from
1997 to 1998, compared to an increase of 10.2% from 1996 to 1997. The increase
in net interest income in 1998 is due to an increase in average earning assets
of $12.4 million or 8.8% over 1997. The tax-equivalent yield earned on those
assets decreased 20 basis points, from 8.31% in 1997 to 8.11% in 1998. The
average cost of funds on interest-bearing liabilities, which increased $9.3
million or 8.3% in 1998, decreased only two basis points, from 4.11% in 1997 to
4.09% in 1998. As a result, the Bank's net interest margin narrowed from 4.59%
in 1997 to 4.52% in 1998.
In 1997, the increase of 10.2% in net interest income over 1996 was the
result of an increase in the volume of average earning assets of $15.8 million
and an increase in the yield earned on those assets, 8.31% compared to 8.27% the
previous year. Average interest-bearing liabilities also increased in volume,
$13.3 million or 13.6% in 1997 over 1996, and the average cost of funds
increased from 3.99% in 1996 to 4.11% in 1997. The Bank's net interest margin
was 4.59% in 1997 compared to 4.64% in 1996.
Management believes this reduction in net interest margin in 1998 is due to
several factors. The Federal Reserve Board decreased the federal funds rate
three times between September and December, 1998 for a total of 75 basis points.
These decreases were followed in the marketplace by corresponding decreases in
the prime rate, which immediately impacted the yield earned on variable rate
loans. Despite the fact that these interest rate moves were the first initiated
by the Federal Reserve since late March of 1997 (a 25 basis point increase),
other market rates declined over 1998. Volatility in world financial markets has
encouraged investors to turn to the safety provided by the US bond market,
driving prices up and yields down on financial instruments which are priced
relative to treasury securities. Certain loan pricing was also impacted.
6
<PAGE> 8
The Bank constantly monitors its exposure to interest rate risk. The proper
management of interest-sensitive funds will help protect the Bank's earnings
against extreme changes in interest rates. The Bank's Asset/Liability Management
Committee ("ALCO") meets monthly for the purpose of evaluating the Bank's
short-range and long-range liquidity position and the potential impact on
capital and earnings as a result of sudden changes in interest rates. The Bank
has adopted an asset/liability policy which specifies minimum limits for
liquidity and capital ratios. Maximum limits have been set for the negative
impact acceptable on net interest income and the market value of assets as a
result of a shift in interest rates. The asset/liability policy also includes
guidelines for investment activities and funds management. At its monthly
meeting, the ALCO reviews the Bank's status and formulates its strategy based on
current economic conditions, interest rate forecasts, loan demand, deposit
volatility, and the Bank's earnings objectives.
PROVISION FOR LOAN LOSSES
Loan losses represent the amount charged against earnings to establish a reserve
of allowance sufficient to absorb expected loan losses based on management's
evaluation of the loan portfolio. Factors considered include loan
concentrations, charge-off history, delinquent loan percentages and general
economic conditions. In 1998, the Bank increased the amount charged against
earnings for loan losses to $150,000 from $60,000 charged against earnings in
each of the years 1996 and 1997. Substantial sustained growth in loan volume
over the past three years warranted such an increase.
The following table summarizes the Bank's actual loan losses, total of
non-performing loans and total allowance for loan losses for 1998, 1997 and
1996, both in dollars and as a percentage of total loans outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Actual Loan Losses $ 71,458 0.06% $ 46,858 0.05% $ 76,604 0.08%
- ---------------------------------------------------------------------------------------------------------------------------
Non-Performing Loans $1,452,000 1.32% $ 987,000 0.96% $ 230,000 0.20%
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses $ 729,199 0.66% $ 609,539 0.59% $ 546,954 0.59%
</TABLE>
Although, during 1998, non-performing loans increased over the prior year,
all loans in this category are considered well-collateralized and in the process
of collection. As a result, no significant losses are anticipated.
NON-INTEREST INCOME
Total non-interest income increased approximately $270,000 in 1998 over 1997
which compares to an increase of approximately $20,000 in 1997 from 1996.
Several factors contributed to the increase in 1998, such as an increase in the
Bank's service charges implemented June 1, 1998 and fees earned through the
merchant VISA program which began in late 1997. Comparatively low rates
encouraged consumers to apply for new loans or pursue refinancing, contributing
to an increase in loan-related fee income.
Non-interest income also included approximately $165,000 for the cash
surrender value of life insurance policies held on certain bank officers. This
compares to $64,000 in 1997. The 1998 figure includes a one-time gain of
approximately $97,000 which resulted when the original policies were surrendered
due to a change of insurer.
Gains realized on the sale of loans and securities totaled $66,208 in 1998
versus $33,809 in 1997. Planned sales of securities had resulted in net losses
of $4,450, but these losses were offset by a gain of $14,513 which was realized
when one of the Bank's residual bonds was called for full redemption in
December. In 1997, net losses on securities transactions were approximately
$2,000. Premiums received on sales of student loans to the Student Loan
Marketing Association ("SLMA") were approximately $43,000 in 1998 as compared to
$28,000 in 1997.
7
<PAGE> 9
Premiums in 1998 included approximately $28,000 received when the Bank sold the
majority of its remaining student loan portfolio to SLMA. The Bank also had an
increase in premiums received on sales of mortgages to the Federal National
Mortgage Association ("FNMA"). These premiums were approximately $12,800 in 1998
as compared to $8,000 in 1997. The Bank has been affiliated with both SLMA and
FNMA since 1995.
NON-INTEREST EXPENSE
In 1998, the ratio of non-interest expense to average assets was 3.14% compared
to 3.18% in 1997 and 3.37% in 1996. Non-interest expense categories include
salaries, occupancy expense, repairs and maintenance, advertising and
professional services , among others. Occupancy expenses remained stable in
1998, and there was little change in the Bank's FDIC insurance assessment.
Advertising costs decreased 7.2% and professional services decreased 5.8%.
Salary and benefit expense increased 8.3% in 1998, due to additional staffing,
merit/promotional increases and costs related to the supplemental employee
retirement plan ("SERP"). Miscellaneous other expenses in 1998 included costs
related to maintaining foreclosed properties and premiums paid for life
insurance policies held on certain bank officers.
TAXES
The provision for taxes in 1998 of $735,000 reflects an effective tax rate of
27%. This compares to $724,000 and 28% in 1997 and $588,000 and 26% in 1996. The
Bank maintains a substantial investment in tax-advantaged municipal bonds which
contributes to its favorable tax position. In addition, in 1998, the Bank
received $97,000 in non-taxable income as the result of surrendering life
insurance policies held on certain bank officers due to a change in insurer.
FINANCIAL CONDITION
The Bank had total assets of $174.1 million at December 31, 1998, increasing
$15.6 million or 9.8% over December 31, 1997. Net loans of $110.5 million
reflected an increase $8.9 million or 8.8% over the prior year. Securities
increased $9.7 million or 23.9%. Cash and cash equivalents decreased $3.0
million, or 29.3%. Deposits grew by $5.7 million or 4.1% and capital increased
$1.6 million or 9.3%.
LOANS
Loans comprised 69.3% of the Bank's total average earning assets in 1998. Actual
year end balances increased 8.8% compared to an increase of 10.4% at December
31, 1997 and 22% at December 31, 1996. The relatively low rates available on
most types of loans over the past three years has fueled both new loan activity
and refinancing. Expansion of the Bank's trade area has also contributed to the
significant loan growth over that time period.
The Bank continues to focus its lending on commercial and residential
mortgages, small commercial loans and home equity loans. Commercial mortgages
continue to make up the largest segment of the portfolio at 47.7%. Residential
mortgages comprise 22.0% of the portfolio and commercial loans total 13.3%. Home
equity loans make up 14.2% of total loans. At December 31, 1998, the Bank had a
loan-to-deposit ratio of 77.22%. This compares to a loan-to-deposit ratio of
73.9% at December 31, 1997.
The Bank currently retains the servicing rights to $5.0 million in
long-term mortgages sold to the Federal National Mortgage Association ("FNMA")
since becoming a member in 1995. This arrangement allows the Bank to offer
long-term mortgages without exposure to the associated interest rate risks,
while retaining customer account relationships.
The Bank continues its contractual arrangement with the Student Loan
Marketing Association ("SLMA") whereby SLMA services the Bank's loans to
students who are still in school and subsequently purchases those loans. In
December, 1998, the Bank sold approximately $1.2 million in student loans to
SLMA. As a result, student loan balances decreased nearly 75% in 1998. This
compares to growth of 2.3% in 1997 over 1996 and a decrease of 13.4% in 1996
from 1995.
SECURITIES
Securities made up the remaining 30.7% of the Bank's earning assets at December
31, 1998. In previous years, the size of the investment portfolio was determined
by the relationship of deposit growth to loan growth. When excess deposits were
not needed to fund loans, the investment
8
<PAGE> 10
portfolio was increased. When deposit growth was not sufficient to fund loan
demand, maturing investments were not replaced, Federal Funds sold balances were
reduced, and when necessary, bonds were sold. In 1998, even though loan growth
exceeded deposit growth, there was an increase in the securities portfolio. This
was possible through the use of the Federal Home Loan Bank ("FHLB") as an
alternative funding source. By utilizing the fixed rate advance program at the
FHLB, the Bank was able to borrow $5 million to fund the purchase of
government-guaranteed securities with a similar average life, achieving a
favorable earnings spread.
The Bank's investments remain concentrated in US government and US
government agency securities and tax-advantaged municipal bonds of varied
maturity. The tax-equivalent yield on the Bank's investments in federal funds
sold and securities was 6.48%, declining from 6.57% in 1997. The yield in 1996
was 6.51%.
In 1994, the Bank adopted Financial Accounting Standard No. 115 which
outlines accounting and reporting procedures for investment securities. At that
time, all securities in the Bank's portfolio were designated as either "held to
maturity" or "available for sale", as were all subsequent purchases. Securities
which the Bank designates as held to maturity are stated on the balance sheet at
amortized cost, and those designated as available for sale are reported at fair
market value. The unrealized gains and losses on available for sale securities
are recorded, net of taxes, as a separate component of shareholders' equity.
Transferring a security from one category to another results in certain
accounting consequences. In 1995, the Financial Accounting Standards Board
allowed a one-time reclassification of securities without penalty. As a result
of this one-time window of opportunity, the Bank reclassified the majority of
its bonds in the held to maturity category as available for sale. On October 1,
1998 the Bank adopted Financial Accounting Standard No. 133 which provided a
second opportunity to reclassify securities without penalty. The Bank
reclassified approximately $3 million in collateralized mortgage obligations as
available for sale. The majority of bonds remaining in the held to maturity
category represent the Bank's investment in the local communities which it
serves.
DEPOSITS
Total deposits increased $5.7 million in 1998 over 1997. All major categories of
deposits increased, with the exception of time deposits of less than $100,000.
Demand deposits increased 19.3% over the prior year. Growth in regular savings
balances of 7.7% was bolstered by the positive response of customers to the
tiered rate Premium Savings product introduced in May of 1997. Time deposits
over $100,000 increased 5.8%. Such deposits are obtained from local
municipalities through the competitive bidding process and from commercial and
retail customers looking for the safety of an insured deposit.
Competition for time deposits under $100,000 has intensified as informed
consumers shop for the best return available. Aggressive promotional efforts by
other banks offering above the market rates have had an impact on the Bank's
certificate of deposit balances, as evidenced in the 8.7% decline in this
category since 1997. Alternative savings instruments, such as 401K plans and
mutual funds, among others, now attract dollars that at one time would have been
deposited into a certificate of deposit or savings account.
The Bank's competitive edge comes from providing value through outstanding
customer service. In 1998, the Bank provided customer service training to its
entire staff and adopted written customer service standards. In addition, Eas-E
Line telephone and personal computer banking was introduced in November, 1998.
This service provides customers with access to their accounts during banking and
non-banking hours, either by telephone or personal computer.
LIQUIDITY
The Bank seeks to manage its liquidity so that it is able to meet day to day
loan demand and deposit fluctuations, while attempting to maximize the amount of
net interest income on earning assets. Traditionally, the Bank has utilized its
federal funds balances and cash flows from the investment portfolio to fulfill
its liquidity requirements. As a member and shareholder of the Federal Home Loan
Bank ("FHLB") the Bank also has many borrowing options. The FHLB will make cash
advances of various terms at competitive rates to its members. Advances of up to
$8.1 million can be drawn on the FHLB, via the Overnight Line of Credit
Agreement, and an amount equal to 25% of the Bank's total assets could be
borrowed through the advance programs under certain qualifying circumstances.
The Bank also has the option to purchase up to $4,000,000 in federal funds from
one of its correspondents.
9
<PAGE> 11
The cash flows from the investment portfolio are laddered to provide funds
from principal and interest payments at such times as liquidity needs may arise.
Contractual maturities are also laddered, with consideration as to the
volatility of market prices to ensure that a sufficient amount of securities are
available that could be sold without incurring significant losses. At December
31, 1998, approximately 12% of the Bank's securities had contractual maturities
of one year or less and approximately 26% had maturity dates of five years or
less. At December 31, 1998 the Bank had net short-term liquidity of $4.0 million
as compared to $5.9 million at December 31, 1997. Available assets of $48.1
million less public and purchased funds of $37.5 million resulted in a long-term
liquidity ratio of 128% compared to 149% at December 31, 1997.
Liquidity needs can also be met by aggressively pursuing municipal
deposits, which are normally awarded on the basis of competitive bidding. The
Bank maintains a sufficient amount of US government and government agency
securities and New York State municipal bonds that can be pledged as collateral
for these deposits.
INTEREST RATE RISK
Interest rate risk occurs when interest-earning assets and interest-bearing
liabilities mature or reprice at different times or on a different basis. The
Bank's ALCO analyzes the gap position on a monthly basis to determine the Bank's
exposure to interest rate risk. The gap position is the difference between the
total of the Bank's rate sensitive assets and rate sensitive liabilities
maturing or repricing during a given time frame. A "positive" gap results when
more assets than liabilities reprice and a "negative" gap results when more
liabilities than assets reprice in a given time period. Because assets
historically reprice faster than liabilities, a slightly negative gap position
is considered preferable. At December 31, 1998, the Bank was in a negative gap
position, with $14.9 million more in rate-sensitive liabilities repricing over
the next year than in rate sensitive assets. The Bank's asset/liability limit,
as defined in its asset/liability policy, is a difference of +/-15% of the
Bank's total assets which amounted to +/-$26.1 million at December 31, 1998.
Therefore, the Bank's negative gap position was well within its policy limits.
The gap ratio (rate sensitive assets/rate sensitive liabilities) at that date
was 81%.
The following table provides information about the Bank's on-balance sheet
instruments that are sensitive to changes in interest rates. Expected maturity
date values for interest-earning assets were calculated by adjusting the
contractual maturity date for expectations of prepayments. Expected maturity
date values for interest-bearing core deposits were calculated based upon
estimates of the period over which the deposits would be outstanding.
<TABLE>
<CAPTION>
Expected maturity date -
year ended December 31, 1999 2000 2001 2002 2003 There-after Total Fair Value
INTEREST-EARNING
ASSETS ($000S)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Receivable, Fixed Rate 9,632 5,976 4,146 3,726 3,775 16,001 43,256 42,805
Average Interest Rate 8.01% 8.56% 8.72% 8.62% 8.47% 9.64%
- ---------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Adj. Rate 18,961 3,375 4,340 3,465 3,365 34,494 68,000 68,000
Average Interest Rate 8.75% 9.10% 8.87% 8.93% 8.90% 8.64%
- ---------------------------------------------------------------------------------------------------------------------------
Investments 15,659 7,427 3,130 3,424 4,484 15,935 50,059 50,059
Average Interest Rate 6.38% 6.54% 6.85% 6.89% 7.18% 7.23%
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES ($000S)
- ---------------------------------------------------------------------------------------------------------------------------
Deposits 66,534 18,002 12,731 12,327 8,633 0 118,227 118,746
Average Interest Rate 4.55% 3.19% 2.39% 2.30% 2.52% 0.00%
- ---------------------------------------------------------------------------------------------------------------------------
Borrowed Funds 4,225 1,000 0 1,000 2,000 1,000 9,225 9,211
Average Interest Rate 5.01% 4.83% 0.00% 4.91% 4.90% 5.07%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Off-balance sheet financial instruments at December 31, 1998 included
$7,077,000 in undisbursed lines of credit at an average interest rate of 9.02%,
$2,622,000 in fixed rate loan origination commitments at 8.60%, $12,203,000 in
adjustable rate loan origination commitments at 9.41%, and $1,007,000 in
adjustable rate letters of credit at an average rate of 9.75%.
MARKET RISK
When rates rise or fall, the market value of the Bank's assets and liabilities
will increase or decrease. As part of the Bank's asset/liability policy, the
Bank has set limitations on the negative impact to the market value of its
balance sheet that would be accepted. The Bank's securities portfolio is priced
monthly and adjustments are made on the balance sheet to reflect the market
value of the available for sale portfolio per Financial Accounting Standard No.
115. A limitation of a negative ten percent of total capital before FAS 115
(after tax) has been set forth in the asset/liability policy as the maximum
impact to equity that would
10
<PAGE> 12
be acceptable. At year end, the impact to equity as a result of marking
available for sale securities to market was an unrealized gain of $443,308. On a
quarterly basis, the available for sale portfolio is shocked for immediate rate
increases of 100 and 200 basis points. At December 31, 1998, the Bank determined
that it would take an immediate increase in excess of 200 basis points to
eliminate the current capital cushion. The Bank also reviews the Bank's capital
ratios on a quarterly basis. Unrealized gains or losses on available for sale
securities are not included in the calculation of these ratios.
CAPITAL EXPENDITURES
Anticipated large capital expenditures during 1999 include approximately
$400,000 for leasehold improvements and equipment purchases necessary in
establishing a branch office in West Seneca, New York. This additional office is
scheduled to open February 1, 1999. Some existing equipment at the Bank's other
locations is scheduled to be replaced, and expenses will be incurred as a result
of the Bank's Year 2000 initiative. There will also be additional expenditures
related to the ongoing Channel Management project which encompasses the
technology necessary to provide Eas-E Line telephone and PC banking. Also in
1999, the first stages will be taken to implement Internet banking. This will
provide customers with the ability to pay bills via personal computer The Bank
believes that it has a sufficiently strong capital base to support these capital
expenditures with current assets and retained earnings.
IMPACT OF INFLATION AND CHANGING PRICES
There will always be economic events, such as changes in the economic policies
of the Federal Reserve Board, that will have an impact on the profitability of
the Company. Inflation may result in impaired asset growth, reduced earnings and
substandard capital ratios. The net interest margin can be adversely impacted by
the volatility of interest rates throughout the year. Since these factors are
unknown, management attempts to structure the balance sheet and the repricing
frequency of its interest-sensitive assets and liabilities to avoid a
significant concentration that could result in a material negative impact on
earnings.
THE NEW MILLENNIUM
The Company has long been aware of the complexity and significance of the issues
associated with the arrival of the Millennium (Year 2000). The "Year 2000"
problem centers around the world's computer systems and a common programming
practice that condenses a century date to just two digits, i.e. "98" to
represent 1998, to conserve storage space. As a result, these systems may
interpret "00" as 1900 rather than 2000, causing potential data corruption,
misinterpretation, or system failure. The Company, with the support and
direction of its Board of Directors and Senior Management, has dedicated
financial and human resources to formally adopt strategies and work towards
resolving all potential Year 2000 issues.
In the third quarter of 1997, the Company began formalizing its strategy to
address the data processing and business impacts we anticipated to be associated
with Year 2000 issues. Our ultimate approach was to adopt the five-phase format
recommended by the Federal Financial Institutions Examination Council, and
follow guidance provided us by our regulatory authorities who periodically
monitor and evaluate our progress. These phases, and our activities, are
described as follows:
AWARENESS PHASE
While this can be considered an ongoing phase relating to education of
employees, customers, and vendors, our primary activities defined the Year 2000
problem; obtained Board of Director and Executive level support; established a
project team to include the Senior Vice President of Administration, the Bank
Auditor, Manager of Data Processing, Manager of Systems Development,
representatives from each functional area of the Bank, legal counsel, and the
principal of our main-frame software vendor. This committee was responsible for
development and implementation of an overall strategy to identify and resolve
issues associated with the year 2000.
ASSESSMENT PHASE
Implementing this phase provided an assessment of the size and complexity,
identifying affected areas of our business, identified the required resources,
and enabled us to develop a comprehensive plan. An inventory of all hardware and
software was completed to establish a specific Year 2000 status, i.e. "already
deemed compliant", "requiring replacement or renovation", or "becoming
obsolete". Priorities were then determined. Certain systems were identified as
mission critical. Non-information technology systems were also addressed. Key
vendors, such as providers of power, heating, and telephone services, among
others, were contacted regarding their Year 2000 readiness. The Bank has
received letters certifying Year 2000 compliance from those suppliers whose
services are deemed critical to Bank operations. However, in the event of an
infra-structure failure, i.e. lack of power, etc., a Bank committee has
developed a contingency plan so that business can continue with minimal
interruption. The Bank also performed a customer risk assessment in the last
quarter of 1998.
RENOVATION PHASE
The Company does not write or create computer code or perform programming
activities. We are reliant on vendors and software suppliers to furnish
enhancements in a timely manner. Renovation of our core processing system was
completed in early 1998 in conjunction with a plan developed by the vendor,
other user financial institutions, and our Company. These renovations were
11
<PAGE> 13
successfully tested in collaboration with all user institutions at our back-up
site. The renovated system was successfully installed in June 1998. Additional
in-house testing was conducted throughout the remainder of the year.
VALIDATION PHASE
This is probably the most critical and intensive phase of the entire project. It
is in this phase that we validate, through a variety of testing methods, that
each system can process after the turn of the century, with particular emphasis
on those identified as "mission critical". As stated above, renovation to our
core processing systems was successfully tested, and all testing of mission
critical systems was successfully completed by year end 1998. In each case, we
followed a comprehensive written test plan involving user representation to
validate test results. All systems, including those designated mission critical,
have been renovated and successfully tested as of December 31, 1998. Two
non-critical systems warranted as "Year 2000 compliant" by the vendor will be
tested in the first quarter of 1999. Additionally, fully integrated testing will
be performed again within the first and second quarter of 1999.
IMPLEMENTATION PHASE
The Company's Year 2000 ready systems are in place and presently functioning. As
part of implementation, we plan continued testing in 1999, along with fully
integrated tests. Quality reviews will be conducted throughout 1999 and the year
2000 to ensure proper functioning of our systems. The implementation phase
involves contingency planning. The Company maintains a formal Business
Resumption Plan, and is in the process of supplementing that plan with a
contingency plan relevant to Year 2000 issues. The contingency planning process
was well under way by year end 1998, and is expected to be completed by March
31, 1999 and validated by June 30, 1999.
The Company believes, however, that due to the widespread nature of
potential Year 2000 issues, the contingency planning process is an ongoing one
which will require further modifications as the company obtains additional
information, specifically regarding third party Year 2000 readiness.
The Company has identified significant (large) commercial depositors and
performed an assessment of their efforts towards Year 2000 readiness. Should
these depositors be unable to function financially as a result of their own Year
2000 issues, or significantly reduce their deposit levels, there could be an
impact on the Bank's own cash flow. Our initial assessment evaluates this risk
as minimal, and all customers identified in this risk assessment are aware of
the Year 2000 issues and are planning Year 2000 readiness efforts.
A risk assessment of large commercial borrowers was also completed
representing approximately 70 commercial customers, or 74% of commercial loan
outstandings. Based on survey results, all are rated as moderate to low risk. We
plan to selectively monitor the progress of certain moderate risk borrowers
throughout 1999. New commercial loans exceeding our borrowing threshold for risk
ratings will be measured to assure information technology utilized by the
borrower will be Year 2000 ready.
Management continues to quantify expenses related to Year 2000 readiness.
The Company has not been required to provide additional staff for the express
purpose of Year 2000 readiness, but rather has utilized existing internal staff.
Our budgeted expenses approximate $45,000, of which $15,000 will be allocated
for renovation of core processing software. Expenses associated with Year 2000
preparedness are not expected to have a material impact on the financial
condition of the Company.
The Company's objective is to migrate to the Year 2000 with minimal impact
on customers, and be prepared for January 1, 2000. We believe that the manner in
which we have addressed this issue underscores our strengths. The Company has
the resources and the technological expertise to address such new issues, but is
small enough to enable us to make adjustments to internal programs and systems
without affecting the ability to service our customers. The Company cannot
provide assurance that failure of third parties to adequately address the Year
2000 issue will not have an adverse impact. To minimize uncertainty, we will
assess critical suppliers and customers to determine their readiness. The
Company is confident that with the implementation of the Year 2000 initiatives
as scheduled, the possibility of significant interruptions to normal operations
should be reduced.
The preceding "Year 2000" discussion contains various statements which
represent the Company's beliefs or expectations regarding future events. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected results.
Factors that cause the differences include, but are not limited to, the actions
of governmental agencies or other third parties with respect to Year 2000
problems.
12
<PAGE> 14
Independent Auditors' Report
TO THE BOARD OF DIRECTORS
Evans Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Evans
Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and 1997
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Buffalo, New York
January 29, 1999
13
<PAGE> 15
Evans Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 and 1997 1998 1997
ASSETS
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks $ 7,300,780 $ 5,821,532
Federal funds sold 0 4,515,000
Total cash and cash equivalents 7,300,780 10,336,532
--------- ----------
Securities:
Available for sale 45,969,587 33,822,334
Held to maturity 4,090,385 6,578,040
Loans receivable, net of allowance for loan losses of
$729,199 and $609,539, respectively 110,526,449 101,627,427
Properties and equipment, net 3,696,658 3,827,672
Other assets 2,536,371 2,350,158
--------- ---------
TOTAL ASSETS $174,120,230 $158,542,163
============ ============
LIABILITIES AND STOCKHOLDERS' Equity
LIABILITIES:
Deposits:
Demand $ 25,857,037 $ 21,680,839
NOW and money market 7,554,104 7,093,959
Regular savings 47,676,615 44,264,697
Time 62,995,880 65,351,832
---------- ----------
Total deposits 144,083,636 138,391,327
Federal funds purchased 2,225,000 0
Other borrowed funds 7,000,000 0
Other liabilities 2,188,181 3,111,536
--------- ---------
Total liabilities 155,496,817 141,502,863
----------- -----------
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized;
1,698,950 shares issued 849,475 849,475
Capital surplus 10,990,720 10,990,720
Accumulated other comprehensive income (net of tax) 443,308 213,856
Retained earnings 6,400,764 4,985,249
--------- ---------
18,684,267 17,039,300
Less: Treasury stock, at cost (1,352 shares) (60,854) 0
------- ---------
Total stockholders' equity 18,623,413 17,039,300
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $174,120,230 $158,542,163
============ ============
See notes to consolidated financial statements.
</TABLE>
14
<PAGE> 16
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
INTEREST INCOME
<S> <C> <C> <C>
Loans $ 9,336,407 $ 8,632,716 $ 7,381,871
Federal funds sold 84,316 122,516 201,831
Securities:
Taxable 1,333,268 1,372,883 1,427,890
Non-taxable 1,097,796 944,736 765,123
Deposits with banks 0 0 23,100
--------- ---------- ------
Total interest income 11,851,787 11,072,851 9,799,815
INTEREST EXPENSE ON DEPOSITS AND BORROWINGS 4,946,730 4,588,056 3,912,761
--------- ---------- ------
NET INTEREST INCOME 6,905,057 6,484,795 5,887,054
PROVISION FOR LOAN LOSSES 150,000 60,000 60,000
------- ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,755,057 6,424,795 5,827,054
NON-INTEREST INCOME
Service charges 708,482 670,366 667,839
Gains on sales of assets, net 66,208 33,809 11,103
Other 445,504 246,487 252,044
------- ------- -------
Total non-interest income 1,220,194 950,662 930,986
--------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,807,223 2,592,120 2,602,752
Occupancy 762,380 761,383 637,007
Supplies 115,588 101,534 118,740
Repairs and maintenance 186,772 163,189 147,383
Advertising and public relations 118,021 127,127 131,753
Professional services 290,858 308,617 212,601
FDIC assessments 16,395 15,328 2,000
Other 899,663 779,884 703,162
------- ------- -------
Total non-interest expense 5,196,900 4,849,182 4,555,398
--------- --------- ---------
INCOME BEFORE INCOME TAXES 2,778,351 2,526,275 2,202,642
INCOME TAXES 735,000 724,000 588,000
------- ------- -------
NET INCOME $ 2,043,351 $ 1,802,275 $ 1,614,642
============ ============ ============
Net income per common share - basic $ 1.20 $ 1.06 $ 0.95
============ ============ ============
Weighted average number of common shares 1,698,612 1,698,950 1,698,950
========= ========= =========
See notes to consolidated financial statements.
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Years ended December 31, Accumulated
1998, 1997 and 1996 Other
Common Capital Retained Treasury Comprehensive
Stock Surplus Earnings Stock Income Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 793,703 $ 8,592,502 $ 4,953,075 $ $ 146,230 $ 14,485,510
Comprehensive income:
1996 net income 1,614,642 1,614,642
Unrealized (loss) gain on
available for sale securities,
net of deferred taxes
of $120,000 (169,001) (169,001)
------------
Total comprehensive
income 1,445,641
------------
Stock dividends, with
fractional shares
redeemed for cash 55,772 2,398,218 (2,494,493) (40,503)
Cash dividends ($.22 per
common share) (380,565) (380,565)
---------- ------------ ----------- ----------- ----------- ------------
Balance, December 31, 1996 849,475 10,990,720 3,692,659 (22,771) 15,510,083
Comprehensive income:
1997 net income 1,802,275 1,802,275
Unrealized gain (loss) on
available for sale securities,
net of deferred taxes
of $100,638 236,627 236,627
------------
Total comprehensive
income 2,038,902
------------
Five-for-one stock split
Purchase of 3,966 shares
for treasury (130,878) (130,878)
Cash dividends ($.30 per
common share) (509,685) (509,685)
Sale of 3,966 shares
from treasury 130,878 130,878
---------- ------------ ----------- ----------- ----------- ------------
Balance, December 31, 1997 849,475 10,990,720 4,985,249 213,856 17,039,300
Comprehensive income:
1998 net income 2,043,351 2,043,351
Unrealized gain (loss) on
available for sale securities,
net of deferred taxes
of $107,977 229,452 229,452
------------
Total comprehensive
income 2,272,803
------------
Cash dividends ($.37 per
common share) (627,836) (627,836)
Purchase of 3,881 shares
for treasury (174,645) (174,645)
Sale of 2,529 shares
from treasury 113,791 113,791
---------- ------------ ----------- ----------- ----------- ------------
Balance, December 31, 199 8 $ 849,475 $ 10,990,720 $ 6,400,764 $ (60,854) $ 443,308 $ 18,623,413
========== ============ =========== =========== =========== ============
See notes to consolidated financial statements.
</TABLE>
16
<PAGE> 18
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Interest received $ 11,805,241 $ 11,027,381 $ 10,047,637
Fees received 1,136,626 968,072 1,025,437
Interest paid (4.952,879) (4,543,895) (3,847,407)
Cash paid to employees and suppliers (4,944,895) (4,680,322) (4,443,431)
Income taxes paid (863,365) (786,000) (743,444)
------------ ------------ ------------
Net cash provided by operating activities 2,180,728 1,985,236 2,038,792
------------ ------------ ------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (35,657,818) (26,075,499) (16,562,178)
Proceeds from sales 19,652,675 22,306,088 14,414,736
Proceeds from maturities 7,686,003 686,306 4,597,881
Held to maturity securities:
Purchases (3,722,629) (2,618,319) (1,177,002)
Proceeds from maturities 2,790,562 1,736,862 1,314,873
Additions to properties and equipment (414,541) (466,472) (1,482,935)
Increase in loans, net of repayments (13,857,709) (12,236,511) (19,258,136)
Proceeds from sales of loans 4,863,285 2,597,162 2,593,290
Proceeds from sale of other real estate owned 49,070 0 0
Proceeds from life insurance polices surrendered 224,009 0 0
------------ ------------ ------------
Net cash used in investing activities (18,387,093) (14,070,383) (15,559,471)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowing 8,165,920 1,059,080 0
Increase in deposits 5,693,383 14,929,948 14,440,828
Dividends paid (627,836) (679,580) (251,173)
Purchase of treasury stock (174,645) (130,878) 0
Sale of treasury stock 113,791 130,878 0
------------ ------------ ------------
Net cash provided by financing activities 13,170,613 15,309,448 14,189,655
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,035,752) 3,224,301 668,976
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 10,336,532 7,112,231 6,443,255
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,300,780 $ 10,336,532 $ 7,112,231
============ ============ ============
</TABLE>
(Continued)
17
<PAGE> 19
Evans Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,043,351 $ 1,802,275 $ 1,614,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 381,115 356,663 344,086
Provision for loan losses 150,000 60,000 60,000
Gains on sales of assets (66,208) (33,809) (11,103)
Gains on life insurance policies surrendered (97,580) 0 0
Changes in assets and liabilities affecting cash flow:
Other assets (225,835) ( 367,243) 96,609
Other liabilities (4,115) 167,350 (65,442)
------ ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,180,728 $ 1,985,236 $ 2,038,792
============ ============ ============
</TABLE>
(Concluded)
See notes to consolidated financial statements.
18
<PAGE> 20
Evans Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General - Evans Bancorp, Inc. (the "Company") was organized in
October 1988, under the Business Corporation Law of the State of New York as a
bank holding company. In January 1989, the shareholders of the Evans National
Bank (the "Bank") approved an Agreement and Plan of Reorganization (the
"Reorganization") whereby the Bank effectively became a wholly-owned subsidiary
of the Company. The Bank is in the commercial banking business, attracting
deposits from and making loans to the general public in its immediate
geographical area. The Bank's main office is located in Angola, New York and it
has branches in Derby, Evans, Forestville, Hamburg and North Boston.
Regulatory Requirements - The Bank is subject to the rules, regulations, and
reporting requirements of various regulatory bodies, including the Federal
Reserve Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), and
the Office of the Comptroller of the Currency ("OCC").
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the Bank. All material intercompany accounts and
transactions are eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities - Securities for which the Bank has the positive intent and ability
to hold to maturity are stated at cost, adjusted for discounts and premiums that
are recognized in interest income over the period to the earlier of call date or
maturity using a method that approximates level yield. Securities held to
maturity have been designated as unavailable to be sold as part of the Bank's
asset-liability management activities.
Securities classified as available for sale are stated at fair value, with
unrealized gains and losses excluded from earnings and reported, net of deferred
income taxes, in stockholders' equity. Gains and losses on sales of securities
are computed using the specific identification method.
Securities which have experienced an other than temporary decline in fair value
are written down to a new cost basis with the amount of the writedown included
in earnings as a realized loss. The new cost basis is not changed for subsequent
recoveries in fair value. Factors which management considers in determining
whether an impairment in value of an investment is other than temporary include
the issuer's financial performance and near term prospects, the financial
condition and prospects for the issuer's geographic region and industry, and
recoveries in fair value subsequent to the balance sheet date.
The Bank does not engage in securities trading activities.
Allowance for Loan Losses - The allowance for loan losses is established through
a provision for loan losses. Recoveries on loans previously charged off are
credited directly to the allowance for loan losses. The allowance is an amount
that management believes adequate to absorb losses on existing loans that may
become uncollectible. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan-loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral, and current
economic conditions.
In addition, various regulatory agencies, as part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Foreclosed Real Estate - Foreclosed real estate is initially recorded at the
lower of book or fair value (net of costs of disposal) at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expenses.
Valuations are periodically performed by management, and an allowance for
potential
<PAGE> 21
additional losses is established by a charge to operations if the carrying value
of a property exceeds fair value. Foreclosed real estate is classified as other
assets on the consolidated balance sheets.
Properties and Equipment - Properties and equipment are stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets which range from 3 to 31
years.
The Bank regularly assesses all of its long-lived assets for impairment and
recognizes a loss when the carrying value of an asset exceeds its fair value.
The Bank determined that no impairment loss needs to be recognized for
applicable assets in 1998 or 1997.
Interest Income on Loans - Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed and any cash received is
credited to the outstanding principal balance. Such loans are returned to
accrual status when they are made current and, in the opinion of management, the
borrower has the ability to continue making timely payments. Loan origination
and commitment fees and certain direct loan origination costs are deferred and
recognized over the lives of the related assets as an adjustment of the loans'
yields using the level yield method.
Income Taxes - Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the tax rate expected to be in effect when the taxes are
actually paid or recovered.
Net Income per Common Share - Net income per common share is based on the
weighted average number of shares outstanding during each year, retroactively
adjusted for stock dividends and splits. Only basic earnings per share is
disclosed because the Company does not have any dilutive securities or other
contracts to issue common stock or convert to common stock.
Dividend Reinvestment Plan - The Company has a Dividend Reinvestment Plan (the
"Plan") which provides each holder of record of the Bank's common stock the
opportunity to reinvest automatically the cash dividends they receive on shares
of the Bank's common stock. Stockholders who do not wish to participate in the
Plan will continue to receive cash dividends, as declared, in the usual manner.
Fifth Third Bank Corporate Trust Services is the administrator of the Plan.
Shares purchased under the Plan are held in safekeeping by the Agent until the
stockholder terminates his/her participation in the Plan. The Agent also acts as
transfer agent and registrar for the Bank's common stock.
Employee Benefits and Deferred Compensation Plan - Costs are charged to salaries
and employee benefits expense in the periods in which the services are rendered.
Pension costs are funded on a current basis in compliance with the Employee
Retirement Income Security Act and are accounted for in compliance with SFAS No.
87, "Employers' Accounting for Pensions".
Off Balance Sheet Financial Instruments - In the ordinary course of business the
Bank has entered into off balance sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when the transactions are
executed.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, interest bearing deposits in other
banks and federal funds sold. Generally, federal funds sold are purchased for
one-day periods.
Cash and due from banks includes reserve balances that the Bank is required to
maintain with Federal Reserve Banks. The required reserves are based upon
deposits outstanding and were approximately $720,000 and $657,000 at December
31, 1998 and 1997, respectively.
New Accounting Standards Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, which became effective for the Company in
1998. SFAS No. 130 establishes standards for reporting and disclosure of
comprehensive income and its components in financial statement format.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. Items considered comprehensive income including foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. The Company has
elected to display comprehensive income in the statements of stockholders'
equity, net of reclassification adjustments. Reclassification adjustments are
made to avoid double counting in comprehensive income items that are displayed
as part of net income for a period that also had been displayed as part of other
comprehensive income in that period or earlier periods. The reclassification
adjustments, net of tax, for the years ended December 31, 1998, 1997, and 1996
amounted to $(25,596), $1,357 and $3,026, respectively.
20
<PAGE> 22
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information was issued in 1997 by the Financial Accounting Standards Board. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
Management has determined that the Bank is the Company's only operating segment.
As such additional disclosures are not considered necessary.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. The Company adopted the provisions of SFAS No. 133
effective October 1, 1998. Because the Company does not use derivatives, the
adoption of SFAS No. 133 did not impact the Company's earnings or financial
position. As allowed by SFAS No. 133 the Company transferred approximately
$2,900,000 of certain securities from held to maturity to the available for sale
classification. The realized and unrealized gains on the securities transferred
were not material to the Company.
2. SECURITIES
The amortized cost of securities and their approximate fair value at December 31
were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Unrealized
----------
Amortized Fair
Cost Gains Losses Value
Available for Sale:
<S> <C> <C> <C> <C>
U.S. Government and Agency Securities $ 9,648,523 $ 27,031 $ (13,104) $ 9,662,450
Mortgage Backed Securities 12,534,756 0 (92,511) 12,442,245
State and Municipal Securities 22,182,635 730,507 0 22,913,142
Other Securities 951,750 0 0 951,750
------------ ------------ ------------ ------------
Total $ 45,317,664 $ 757,538 $ (105,615) $ 45,969,587
============ ============ ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 47,565 $ 0 $ 0 $ 47,565
State and Municipal Securities 4,042,820 0 0 4,042,820
------------ ------------ ------------ ------------
Total $ 4,090,385 $ 0 $ 0 $ 4,090,385
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Unrealized
----------
Amortized Fair
Available for Sale:
<S> <C> <C> <C> <C>
U.S. Government and Agency Securities $ 11,618,094 $ 23,843 $ (67,225) $ 11,574,712
Mortgage Backed Securities 1,419,658 30,799 0 1,450,457
State and Municipal Securities 19,477,751 402,202 (13,238) 19,866,715
Other Securities 930,450 0 0 930,450
------------ ------------ ------------ ------------
Total $ 33,445,953 $ 456,844 $ (80,463) $ 33,822,334
============ ============ ============ ============
Held to Maturity:
U.S. Government and Agency Securities $ 3,483,199 $ 36,333 $ 0 $ 3,519,532
State and Municipal Securities 3,094,841 0 (4) 3,094,837
------------ ------------ ------------ ------------
Total $ 6,578,040 $ 36,333 $ (4) $ 6,614,369
============ ============ ============ ============
</TABLE>
Available for sale securities with a total fair value of $29,445,508 at December
31, 1998 were pledged as collateral to secure public deposits and for other
purposes required or permitted by law.
<PAGE> 23
The scheduled maturities of debt securities at December 31, 1998 are summarized
below. Actual maturities may differ from contractual maturities because certain
issuers have the right to call or prepay obligations with or without call
premiums.
<TABLE>
<CAPTION>
Available for Held to Maturity
Sale Securities Securities
--------------- ----------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 2,441,286 $ 2,448,661 $ 3,535,294 $ 3,535,294
Due after year one through five years 6,533,918 6,691,046 153,364 153,364
Due after five years through ten years 14,990,783 15,432,486 167,330 167,330
Due after ten years 21,351,677 21,397,394 234,397 234,397
------------ ------------ ------------ ------------
Total $ 45,317,664 $ 45,969,587 $ 4,090,385 $ 4,090,385
============ ============ ============ ============
</TABLE>
Realized gains and losses from sales of securities for the years ended December
31, 1998 , 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Gross gains $ 55,727 $ 65,150 $ 103,865
Gross losses (45,664) (67,145) (127,595)
------------ ------------ ------------
Net gain (loss) $ 10,063 $ (1,995) $ (23,730)
============ =========== ============
</TABLE>
On December 1, 1998, a residual bond classified as held to maturity was called
prior to the date of maturity. The amortized cost at the call date was $16,627
and the resulting gain was $14,513.
3. LOANS RECEIVABLE, NET
Major categories of loans at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate - mortgages $ 92,434,304 $ 85,367,123
Real estate - construction 5,105,251 2,770,719
Commercial 9,835,866 8,938,560
Installment 2,166,133 2,517,892
Student loans 438,670 1,731,492
Other 891,669 509,935
Net deferred loan origination costs 383,755 401,245
------------ ------------
111,255,648 102,236,966
Allowance for loan losses (729,199) (609,539)
Loans, net $110,526,449 $101,627,427
============ ============
</TABLE>
Changes in the allowance for loan losses for the years ended December 31, 1998,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 609,539 $ 546,954 $ 557,961
Provision for loan losses 150,000 60,000 60,000
Recoveries 41,118 49,443 5,597
Loans charged off (71,458) (46,858) (76,604)
------------ ----------- ------------
Balance, end of year $ 729,199 $ 609,539 $ 546,954
============ ============ ============
</TABLE>
<PAGE> 24
Loans evaluated for impairment, for which an allowance for loan impairment was
not required under SFAS No. 114 due to the adequacy of related collateral values
totaled approximately $754,000 and $627,000 at December 31, 1998 and 1997,
respectively. The average recorded investment in these loans during 1998, 1997,
and 1996 was approximately $690,500, $403,500, and $199,750, respectively. If
such loans had been in an accruing status, the Bank would have recorded
additional interest income of approximately $71,000, $58,000 and $19,000 in
1998, 1997 and 1996, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December
31, 1998.
As of December 31, 1998 and 1997, the Bank had no other loans which were
impaired as defined by SFAS No. 114.
4. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 268,485 $ 268,485
Buildings and improvements 3,362,419 3,313,404
Equipment 2,753,351 2,828,996
--------- ---------
6,384,255 6,410,885
Less accumulated depreciation (2,687,597) (2,583,213)
---------- ----------
Properties and equipment, net $ 3,696,658 $ 3,827,672
============ ============
</TABLE>
Depreciation expense totaled $428,020 in 1998, $423,564 in 1997, and $348,671 in
1996.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities - For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Receivable - The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities, net of the appropriate portion of the allowance for loan
losses. For variable rate loans, the carrying amount is a reasonable estimate of
fair value.
Deposits - The fair value of demand deposits, NOW and money market accounts and
regular savings accounts is the amount payable on demand at the reporting date.
The fair value of time deposits is estimated using the rates currently offered
for deposits of similar remaining maturities.
Federal Funds Purchased - The carrying amount of federal funds purchased
approximate their fair values due to their short-term nature.
Other Borrowed Funds - The fair value of the short-term portion of other
borrowed funds approximates its carrying value. The fair value of the long-term
portion of other borrowed funds is estimated using a discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Commitments to extend credit and standby letters of credit - As described in
Note 11, the Company was a party to financial instruments with off-balance sheet
risk at December 31, 1998 and 1997. Such financial instruments consist of
commitments to extend permanent financing and letters of credit. If the options
are exercised by the prospective borrowers, these financial instruments will
become interest-earning assets of the Company. If the options expire, the
Company retains any fees paid by the counterparty in order to obtain the
commitment or guarantee. The fair value of commitments is estimated based upon
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
<PAGE> 25
the counterparties. For fixed-rate commitments, the fair value estimation takes
into consideration an interest rate risk factor. The fair value of guarantees
and letters of credit is based on fees currently charged for similar agreements.
The fair value of these off-balance sheet items at December 31, 1998 and 1997
approximates the recorded amounts of the related fees, which are not considered
material.
At December 31, 1998 and 1997, the estimated fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,300,780 $ 7,300,780 $ 10,336,532 $ 10,336,532
============ ============ ============ ============
Securities $ 50,059,972 $ 50,059,972 $ 40,400,374 $ 40,436,703
============ ============ ============ ============
Loans $111,255,648 $102,236,966
Less: allowance for loan losses (729,199) (609,539)
------------ ------------
Loans, net $110,526,449 $110,804,706 $101,627,427 $102,368,624
============ ============ ============ ============
Financial Liabilities:
Deposits $144,083,636 $144,603,189 $138,391,327 $138,734,550
============ ============ ============ ============
Federal funds purchased $ 2,225,000 $ 2,225,000 $ 0 $ 0
============ ============ ============ ============
Other borrowings $ 7,000,000 $ 6,986,000 $ 0 $ 0
============ ============ ============ ============
</TABLE>
6. DEPOSITS
Time deposits, with minimum denominations of $100,000 each, totaled $24,208,290
and $22,873,379 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
1999 $ 54,733,991
2000 6,201,593
2001 930,507
2002 526,042
2003 603,747
- ---- ------------
Total $ 62,995,880
============
7. FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS
Federal funds purchased of $2,225,000 at December 31, 1998 mature within four
days of year-end.
Other borrowed funds consisted of a $2,000,000 90-day renewable note with an
interest rate of 5.15%, and a $5,000,000 long-term borrowing. The long-term
borrowing consisted of various advances with interest rates ranging from 4.83%
to 5.07%. The maturities of other borrowed funds are as follows:
1999 $ 2,000,000
2000 1,000,000
2001 0
2002 1,000,000
2003 2,000,000
Thereafter 1,000,000
------------
Total $ 7,000,000
============
<PAGE> 26
8. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLAN
The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees'
compensation and years of service. The Bank uses an actuarial method of
amortizing prior service cost and unrecognized net gains or losses which result
from actual experience and assumptions being different than those that are
projected. The amortization method the Bank is using recognizes the prior
service cost and net gains or losses over the average remaining service period
of active employees which exceeds the required amortization.
The following are reconciliations of the benefit obligation and the fair value
of plan assets, the funded status of the plan, the amounts not recognized in the
statements of financial position, and the amounts recognized in the statement of
financial position.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,518,858 $ 1,354,390
Service cost 62,689 51,817
Interest cost 117,378 104,601
Employer contributions 80,333 85,753
Actuarial gain (45,276) (46,121)
Benefits paid (37,222) (31,582)
------------ -----------
Benefit obligations at end of year 1,696,760 1,518,858
Change in plan assets:
Fair value of plan assets at beginning of year 1,686,230 1,373,109
Actual return on plan assets 99,637 258,950
Employer contributions 80,333 85,753
Benefits paid (37,222) (31,582)
------------ -----------
Fair value of plan assets at end of year 1,828,978 1,686,230
------------ -----------
Funded status 132,218 167,372
Unrecognized net actuarial loss (gain) 7,831 (57,293)
Unrecognized prior service cost (241,817) (256,524)
------------ -----------
Accrued benefit cost $ (101,768) $ (146,445)
============ ===========
</TABLE>
The Plan's assets are primarily invested in a money market fund, stocks, and
bonds. Valuations of the pension plan as shown above were conducted as of
October 1, 1998 and 1997. Assumptions used by the Bank in both years in the
determination of pension plan information consisted of the following:
Weighted-average discount rate 7.50 %
Rate of increase in compensation levels 4.75 %
Expected long-term rate of return on plan assets 7.50 %
The components of net periodic benefit cost consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 62,689 $ 51,817 $ 44,615
Interest cost 117,378 104,601 94,565
Expected return on plan assets (128,242) (106,550) (87,676)
Net amortization and deferral (16,169) (16,169) (16,169)
------------ ----------- ------------
Net periodic benefit cost $ 35,656 $ 33,699 $ 35,335
============ ============ ============
</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 $61,000 and $72,000 at December 31, 1998 and
1997, respectively. The face values of these policies at both dates was
approximately $1,650,000. The Bank uses an actuarial method of amortizing
unrecognized net gains or losses which result from actual experience and
assumptions being different than those that are projected. The amortization
method the Bank is using recognizes the net gains or losses over the average
remaining service period of active employees which exceeds the required
amortization.
<PAGE> 27
The following are reconciliations of the benefit obligation and the fair value
of plan assets, the funded status of the plan, the amounts not recognized in the
statement of financial position, and the amounts recognized in the statement of
financial position.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 480,874 $ 356,685
Service cost 56,415 52,064
Interest cost 40,297 34,194
Contributions to the plan 0 0
Actuarial (gain) loss (9,403) 37,931
Benefits paid 0 0
------------ ------------
Benefit obligations at end of year 568,183 480,874
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year 0 0
Actual return on plan assets 0 0
Contributions to the plan 0 0
Benefits paid 0 0
------------ ------------
Fair value of plan assets at end of year 0 0
------------ ------------
Funded status (568,183) (480,874)
Unrecognized net actuarial loss 156,092 187,710
------------ ------------
Accrued benefit cost $ (412,091) $ (293,164)
============ ===========
</TABLE>
Valuations of the nonqualified supplemental executive retirement plans as shown
above were conducted as of October 1, 1998 and 1997. Assumptions used by the
Bank in both years in the determination of pension plan information consisted of
the following:
Expected long-term rate of return on plan assets 7.50 %
The components of net periodic benefit cost consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 56,415 $ 39,900 $ 50,138
Interest cost 40,297 34,194 25,280
Net amortization and deferral 22,215 22,215 22,215
------------ ------------ ------------
Net periodic benefit cost $ 118,927 $ 96,309 $ 97,633
============ ============ ============
</TABLE>
The Bank also maintains a non-qualified deferred compensation plan for certain
directors. Accrued costs under this plan were approximately $70,000, $67,000 and
$64,000 in 1998, 1997 and 1996, respectively. The estimated present value of the
benefit obligation, included in other liabilities, was $734,000 and $700,000 at
December 31, 1998 and 1997, respectively. This obligation is indirectly funded
by life insurance contracts (naming the Bank as beneficiary) with aggregate cash
surrender values of approximately $159,000 and $140,000 at December 31, 1998 and
1997, respectively. The face values of these policies at both dates was
approximately $1,036,000. Premiums on the aforementioned life insurance
contracts were paid by the Bank in lieu of payment of directors' fees.
The Bank also has a deferred contribution Retirement and Thrift 401(k) Plan for
its employees who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute between 1%
and 15% of their annual salary, with a matching contribution by the Bank equal
to 25% of the employees contribution up to 4% of their annual salary. The Bank
can also make discretionary contributions to the Plan. The Bank's expense under
this Plan was approximately $36,000, $35,000 and $34,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
<PAGE> 28
9. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income taxes currently payable $ 839,000 $ 798,000 $ 728,000
Deferred (benefit) income taxes (104,000) (74,000) (140,000)
------------ ------------ ------------
Net provision $ 735,000 $ 724,000 $ 588,000
============ ============ ============
</TABLE>
At December 31, 1998 and 1997 the components of the net deferred tax asset were
as follows:
<TABLE>
<CAPTION>
1998 1997
Deferred Tax Assets:
<S> <C> <C>
Allowance for loan losses $ 208,000 $ 173,000
Pension premiums 205,000 171,000
Deferred compensation 293,000 280,000
Other 32,000 32,000
------------ ------------
Gross deferred tax assets 738,000 656,000
------------ ------------
Deferred Tax Liabilities:
Depreciation 22,000 25,000
Prepaid expenses 153,000 160,000
SFAS No. 115 209,000 101,000
------------ ------------
Gross deferred tax liabilities 384,000 286,000
------------ ------------
Net deferred tax assets $ 354,000 $ 370,000
============ ============
</TABLE>
The net deferred tax asset at December 31, 1998 and 1997 is included in other
assets in the accompanying consolidated financial statements.
The Company's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
------------------------ --------------------------- -----------------------------
Tax provision at
<S> <C> <C> <C> <C> <C> <C>
statutory rate $ 945,000 34% $ 859,000 34% $ 749,000 34%
Increase (decrease) in taxes
resulting from:
Tax-exempt income (373,000) (13) (321,000) (13) (260,000) (12)
State taxes, net of
federal benefit 162,000 6 136,000 5 110,000 5
Other items, net 1,000 0 50,000 2 (11,000) (1)
------------ -- ------------ -- ------------ --
Provision for
income taxes $ 735,000 27% $ 724,000 28% $ 588,000 26%
============ == ============ == ============ ==
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with its directors, significant
shareholders and their affiliates (related parties). The aggregate amount of
loans to such related parties at December 31, 1998 and 1997 was $4,226,739 and
$3,526,206, respectively. During 1998 and 1997, new loans to such related
parties amounted to $6,720,286 and $3,366,701, respectively, and repayments
amounted to $6,019,753 and $2,088,427.
<PAGE> 29
11. CONTINGENT LIABILITIES AND COMMITMENTS
The consolidated financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of the Bank's commitments and contingent
liabilities at December 31, 1998 and 1997 is as follows:
1998 1997
Commitments to extend credit $ 21,902,497 $ 15,770,264
Standby letters of credit 1,007,055 551,218
------------ ------------
Total $ 22,909,552 $ 16,321,482
============ ============
Commitments to extend credit and standby letters of credit all include exposure
to some credit loss in the event of nonperformance of the customer. The Bank's
credit policies and procedures for credit commitments and financial guarantees
are the same as those for extensions of credit that are recorded on the
consolidated balance sheets. Because these instruments have fixed maturity
dates, and because they may expire without being drawn upon, they do not
necessarily represent cash requirements to the Bank. The Bank has not incurred
any losses on its commitments during the past three years.
12. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have been
granted to customers in the Bank's market area. Investments in state and
municipal securities also involve governmental entities within the Bank's market
area. The concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers. The Bank, as a matter of policy, does not extend credit to
any single borrower or group in excess of 15% of capital.
13. REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the Comptroller of
the Currency. Under such restrictions, the Bank may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained earnings (as
defined) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998 and 1997, that
the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 1998 , the most recent notification from its regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
<PAGE> 30
-86-
The Bank's actual capital amounts and ratios were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $ 18,889,000 16.9 % $ 8,926,000 8.0 % $ 11,158,000 10.0 %
============ ==== ============ === ============ ====
Tier I Capital (to Risk
Weighted Assets) $ 18,170,000 16.3 % $ 4,463,000 4.0 % $ 6,695,000 6.0 %
============ ==== ============ === ============ ===
Tier I Capital
(to Average Assets) $ 18,170,000 10.5 % $ 6,599,000 4.0 % $ 8,249,000 5.0 %
============ ==== ============ === ============ ===
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $ 17,422,000 16.9 % $ 8,234,000 8.0 % $ 10,292,000 10.0 %
============ ==== ============ === ============ ====
Tier I Capital (to Risk
Weighted Assets) $ 16,812,000 16.3 % $ 4,117,000 4.0 % $ 6,175,000 6.0 %
============ ==== ============ === ============ ===
Tier I Capital
(to Average Assets) $ 16,812,000 10.8 % $ 6,366,080 4.0 % $ 7,958,000 5.0 %
============ ==== ============ === ============ ===
</TABLE>
<PAGE> 31
-87-
14. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as
follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 and 1997 1998 1997
ASSETS
<S> <C> <C>
Cash $ 38,699 $ 6,648
Investment in subsidiary 18,584,714 17,032,652
------------ ------------
Total assets $ 18,623,413 $ 17,039,300
============ ============
STOCKHOLDERS' EQUITY
Stockholders' Equity:
Common stock $ 849,475 $ 849,475
Capital surplus 10,990,720 10,990,720
Accumulated other comprehensive income 443,308 213,856
Retained earnings 6,400,764 4,985,249
------------ ------------
18,684,267 17,039,300
Less: Treasury stock, at cost (1,352 shares) (60,854) 0
------------ ------------
Total stockholders' equity $ 18,623,413 $ 17,039,300
============ ============
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
<S> <C> <C> <C>
Dividends from subsidiary $ 627,836 $ 509,685 $ 421,068
Other revenue 75,000 50,000 0
Expenses (42,949) (50,249) (30,831)
------------ ------------ ------------
Income before equity in undistributed earnings of subsidiary 659,887 509,436 390,237
Equity in undistributed earnings of subsidiary 1,383,464 1,292,839 1,224,405
------------ ------------ ------------
Net income $ 2,043,351 $ 1,802,275 $ 1,614,642
============ ============ ============
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,043,351 $ 1,802,275 $ 1,614,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiary (1,383,464) (1,292,839) (1,224,405)
Increase in dividends receivable 0 0 (169,895)
------------ ------------ -------------
Net cash provided by operating activities 659,887 509,436 220,342
Financing Activities - Cash dividends paid (627,836) (509,685) (251,173)
------------ ------------ -------------
Net decrease in cash 32,051 (249 (30,831)
Cash, beginning 6,648 6,897 37,728
------------ ------------ -------------
Cash, ending $ 38,699 $ 6,648 $ 6,897
============ ============ =============
</TABLE>
<PAGE> 32
-88-
Board of Directors
Evans Bancorp, Inc. and Evans National Bank
BOARD OF DIRECTORS
(standing)
LaVerne G. Hall
Former Chairman - L.G. Hall Building
Contractors, Inc.
Robert W. Allen
Secretary
Retired
William F. Barrett
Property and Investment Manager
Richard M. Craig
Chairman of the Board
President and CEO -
Evans National Bank
David M. Taylor
President - Concord Nurseries, Inc.
(seated)
David C. Koch
Chairman and CEO -
New Era Cap Co., Inc.
Richard C. Stevenson
Chairman - Evans Land Corp.
Thomas H. Waring, Jr.
Principal - Waring Financial Group
Phillip Brothman
Partner - Hurst, Brothman & Yusick
DIRECTORS EMERITUS
Floyd H. Hurst
Carl F. Ulmer
OFFICERS
Evans Bancorp, Inc.
Richard M. Craig, COB
President and CEO
Robert W. Allen
Secretary
James Tilley
Assistant Secretary
William R. Glass
Treasurer
ADVISORY BOARD
Derby
Richard A. Gradl
Raymond S. Hazard
MANAGEMENT TEAM
(front center)
Richard M. Craig, Chairman of the Board, President and CEO;
(left)
William R. Glass, Senior Vice President - Loan Division;
(right)
James Tilley, Senior Vice President - Administration
31
<PAGE> 33
-89-
Evans National Bank Officers
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
Richard M. Craig
SENIOR VICE PRESIDENT
William R. Glass
James Tilley
VICE PRESIDENT
George L. Catalano
Mary E. Doeing
Timothy F. Jachlewski
William J. Gray
Jeffrey L. White
ASSISTANT VICE PRESIDENT
Katherine M. Allen
Susan J. Herold
Rose Marie Hinckley
Robert A. Hohti
Elizabeth A. Mac
Howard M. Martin, Jr.
Cathy E. Rohrich
BANK OFFICER
Rita A. Boyland
Karen M. Blecha
Michelle A. Bress
M. Jane Gonzalez
Nadine G. Houghton
Mary K. Nytz
Mary D. Philbin
Corporate Information
There has never been an organized public trading market for the Company's
outstanding common stock. The following table represents the highest and lowest
per share prices known to management at which the Company's stock has actually
been transferred in private transactions during the periods indicated. In each
period for which prices are shown, management has price information for the
transaction. The prices do not include any retail markup, markdown or
commission.
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
QUARTER High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $ 40.00 $ 38.00 $ 27.20 $ 27.20
Second $ 43.00 $ 40.00 $ 32.00 $ 27.20*
Third $ 45.00 $ 43.00 $ 33.00 $ 32.00
Fourth $ 45.00 $ 45.00 $ 38.00 $ 33.00
</TABLE>
* Adjusted for five for one stock split
Total shares outstanding were 1,697,598 as of December 31, 1998. There were
1,089 shareholders of record on December 31, 1998.
Upon written request of any shareholder, a copy of the Company's report on Form
10-K for its fiscal year ended December 31, 1998, including the financial
statements and the schedules thereto, required to be filed with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
may be obtained, without charge, from Michelle A. Baumgarden, Evans Bancorp,
Inc., 14-16 N. Main Street, Angola, N.Y. 14006.
THE ANNUAL MEETING
The Annual Meeting of the Shareholders of the Company will be held on Tuesday,
April 27, 1999 at 12:30 p.m. at Romanello's South Restaurant, 5793 South Park
Avenue, Hamburg, NY.
INQUIRIES
For information or assistance regarding individual stock records, transactions,
dividend reinvestment accounts, dividend checks, or stock certificates, contact:
Corporate Trust Services, Fifth Third Bank, 38 Fountain Square Plaza, Mail Drop
1090F5-4129, Cincinnati, OH 45263.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVANS
BANCORP INC BALANCE SHEET AND STATEMENTS OF INCOME (AUDITED) AS OF DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000842518
<NAME> EVANS BANCORP INC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,300,780
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,969,587
<INVESTMENTS-CARRYING> 4,090,385
<INVESTMENTS-MARKET> 0
<LOANS> 110,526,449
<ALLOWANCE> (729,199)
<TOTAL-ASSETS> 174,120,230
<DEPOSITS> 144,083,636
<SHORT-TERM> 2,225,000
<LIABILITIES-OTHER> 2,188,181
<LONG-TERM> 7,000,000
849,475
0
<COMMON> 0
<OTHER-SE> 17,330,630
<TOTAL-LIABILITIES-AND-EQUITY> 174,120,230
<INTEREST-LOAN> 9,336,407
<INTEREST-INVEST> 2,431,064
<INTEREST-OTHER> 84,316
<INTEREST-TOTAL> 11,851,787
<INTEREST-DEPOSIT> 4,750,780
<INTEREST-EXPENSE> 4,946,730
<INTEREST-INCOME-NET> 6,905,057
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 10,063
<EXPENSE-OTHER> 5,196,900
<INCOME-PRETAX> 2,778,351
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,043,351
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.11
<LOANS-NON> 754,171
<LOANS-PAST> 698,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 609,539
<CHARGE-OFFS> 71,458
<RECOVERIES> 41,118
<ALLOWANCE-CLOSE> 729,199
<ALLOWANCE-DOMESTIC> 150,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
