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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-18539
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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, 2000, the aggregate market value of the registrant's
common stock, $.50 par value, (the "Common Stock") held by nonaffiliates of the
registrant was approximately $62,802,810 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, 2000, 1,698,950 shares of the registrant's Common
Stock were outstanding.
Page 1 of 75
Exhibit Index on Page 35
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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, March
31, 1997 and September 30, 1999 and the Registrant's Reports on Form 10-K for
the period ended December 31, 1997 and December 31, 1998 are incorporated by
reference in Part IV of this Form 10-K.
Portions of the Registrant's 1999 Annual Report to Shareholders are
incorporated by reference in Part II of this Form 10-K.
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TABLE OF CONTENTS
INDEX
PART I
PAGE
Item 1. BUSINESS.................................................5
Evans Bancorp, Inc. .....................................5
Evans National Bank .....................................5
Market Area .............................................5
Average Balance Sheet Information....................... 5
Securities Activities................................... 7
Securities Policy.................................... 8
Lending Activities ......................................9
General ..............................................9
Real Estate Loans ...................................10
Commercial Loans.....................................10
Installment Loans....................................11
Student Loans .......................................11
Other Loans .........................................11
Loan Maturities......................................12
Loan Losses..........................................12
Sources of Funds - Deposits ............................14
General..............................................14
Deposits.............................................14
Environmental Matters...................................15
Employees ..............................................15
Competition ............................................15
Asset and Liability Management .........................15
Regulation .............................................16
Monetary Policy ........................................18
Item 2. PROPERTIES..............................................18
Item 3. LEGAL PROCEEDINGS.......................................19
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS...........................19
4
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PART II
PAGE
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.............................20
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA........................21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS..........................22
Item 7a. QUANTATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................28
Item 8. CONSOLIDATED FINANCIAL STATEMENTS ..........................28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES.....................28
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT..............................................29
Item 11. EXECUTIVE COMPENSATION......................................32
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS...........................................34
Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS........................................35
PART IV
Item 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K .....................35
5
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ITEM 1. BUSINESS
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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, 1999, the Bank had total assets of $198,788,383, total
deposits of $169,948,899 and total stockholders' equity of $18,284,938.
In October of 1999, the Company announced that it had entered into a letter
of intent to acquire the business and assets of M&W Group, Inc., an insurance
agency headquartered in Silver Creek, New York. That transaction is expected to
close within the next quarter.
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.
6
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1999 1998
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS ($000) ($000) ($000) ($000)
Interest-earning assets:
Loans, Net $109,780 $9,295 8.47% $105,856 $9,337 8.82%
Taxable securities 27,596 1,762 6.38% 21,696 1,333 6.14%
Tax-exempt securities 29,812 1,318 4.42% 23,982 1,098 4.58%
Federal funds sold 3,648 180 4.93% 1,531 84 5.49%
-------- ------- ----- --------- ------ -----
Total interest-earning assets 170,836 12,555 7.35% 153,065 11,852 7.74%
Noninterest-earning assets
Cash and due from banks 6,422 5,479
Premises and equipment, net 3,764 3,771
Other assets 3,119 2,668
-------- --------
Total $184,141 $164,983
======== ========
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
NOW accounts $7,721 $76 .98% $7,275 $71 .98%
Savings deposits 55,308 1,437 2.60% 46,925 1,281 2.73%
Time deposits 64,754 3,209 4.96% 63,338 3,399 5.37%
Fed Funds Purchased & Securities 7,251 321 4.43% 3,801 196 5.16%
Sold U/A to Repurchase -------- ------- ----- --------- ------ -----
Total interest-bearing liabilities 135,034 5,043 3.73% 121,339 4,947 4.08%
Noninterest-bearing liabilities:
Demand deposits 28,273 23,571
Other 2,136 2,308
-------- --------
Total liabilities 165,443 147,218
Shareholders' equity 18,698 17,765
-------- --------
Total $184,141 $164,983
======== ========
Net interest earnings $7,512 $6,905
====== ======
Net yield on interest earning assets 4.40% 4.51%
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In 1999, the Company's interest income increased by $703,056 over 1998, compared
to an increase of $778,936 in 1998 over 1997. Also, interest expense on deposits
increased by $96,586 in 1999 over 1998 compared to an increase of $358,674 in
1998 over 1997. 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.
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------------- ----------------------------------------------
(thousands)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earned on:
Loans $462 $(502) $(40) $824 $(120) $704
Taxable securities 375 54 429 42 (82) (40)
Tax-exempt securities 256 (36) 220 158 (5) 153
Federal funds sold 101 (7) 94 (39) 1 (38)
Time deposits in other banks 0 0 0 0 0 0
- - - - - -
Total interest-earning assets $1,194 $(491) $703 $985 $(206) $779
====== ====== ==== ==== ====== ====
Interest paid on:
NOW accounts $4 $1 $5 $6 $(6) $0
Savings deposits 213 (57) 156 63 15 78
Time deposits 78 (268) (190) 162 (65) 97
Federal Funds Purchased & 148 (23) 125 166 18 184
--- ---- --- --- -- ---
Securities Sold U/A Repurch.
Total interest-bearing liabilities $443 $(347) $96 $397 $(38) $359
==== ====== === ==== ===== ====
SECURITIES ACTIVITIES
Income from securities represented approximately 24.5% of total interest
income of the Company in 1999 and approximately 20.5% of total interest income
of the Company in 1998. At December 31, 1999, the Bank's securities portfolio of
$62,999,678 consisted primarily of United States ("U.S.") and federal agency
obligations, state and municipal securities, corporate bonds and mortgage-backed
securities issued 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".
8
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The following table summarizes the Bank's securities with those designated
as available for sale at fair value and securities designated as held to
maturity valued at amortized cost as of December 31, 1999 and 1998:
1999 1998
---- ----
($000) ($000)
Available for Sale:
U.S. Treasury and other U.S. government agencies $29,299 $22,105
States and political subdivisions in the U.S. 29,077 22,913
Other 1,175 952
----- ---
Total Securities Designated as Available for Sale $59,551 $45,970
======= =======
Held to Maturity:
U.S. Treasury and other U.S. government agencies 44 47
States and political subdivisions in the U.S. 3,405 4,043
----- -----
Total Securities Designated as Held to Maturity $3,449 $4,090
====== ======
Total Securities $63,000 $50,060
======= =======
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. The annual budgets of the issuers are reviewed by the Bank
and a credit file of the issuers is kept on each non-rated municipal security
with relevant financial information. In addition, the Bank's loan policy permits
the purchase of notes issued by various states and municipalities which have not
been rated by Moody's or Standard & Poors. The securities portfolio of the Bank
is priced and rated on a monthly basis.
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The following table sets forth the maturities and weighted average interest
yields of the Bank's securities portfolio (yields on tax-exempt obligations have
been computed on a tax-equivalent basis) as of December 31, 1999:
Maturing
-----------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------------------------- ---------------------- ------------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
($000) ($000) ($000) ($000)
CLASSIFIED AS AVAILABLE FOR SALE
- --------------------------------
AT FAIR VALUE:
- -------------
U.S. Treasury and other U.S. $ 0 0% $ 3,136 6.16% $ 7,273 7.30% $18,890 6.90%
government agencies
States and political subdivisions 788 5.10 11,689 6.58 10,343 7.12 6,257 7.61
Other 1,175 6.52 0 0.00 0 0.00 0 0.00
------ ------ ------ ------
Total Available for Sale $ 1,963 5.95 $14,825 6.50 $17,616 7.20 $25,147 7.08
CLASSIFIED AS HELD TO MATURITY
- ------------------------------
AT AMORTIZED COST:
- -----------------
U.S. Treasury and other U.S. 0 0.00 0 0.00 0 0.00 44 0.00
government agencies
States and political subdivisions 2,872 5.37 172 7.04 197 7.94 164 8.74
----- ------ ------- -------
Total Held to Maturity 2,872 5.37 172 7.04 197 7.94 208 6.89
----- ------ ------- -------
Total Securities $ 4,835 5.61 $14,997 6.51 $17,813 7.21 $25,355 7.08
======= ======= ======= =======
At December 31, 1999, approximately $29,343,000 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 74.0% of the total interest income of the Company in 1999 and
approximately 78.8% of total interest income in 1998. The Bank's loan portfolio
after unearned discounts, loan origination costs and allowances for credit
losses totalled $116,433,438 and $110,526,449 at December 31, 1999 and December
31, 1998, respectively. At December 31, 1999, the Bank had established $838,167
as an allowance for credit losses which is approximately 0.72% of total loans.
This compares with $729,199 at December 31, 1998 which was approximately 0.66%
of total loans. The net loan portfolio represented approximately 58.6% and 63.5%
of the Bank's total assets at December 31, 1999 and December 31, 1998,
respectively.
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REAL ESTATE LOANS. Approximately 84.3% of the Bank's loan portfolio at
December 31, 1999 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
$98,868,125 at December 31, 1999, compared to $97,539,555 at December 31, 1998.
The real estate loan portfolio increased approximately 1.4% in 1999 over 1998
compared to an increase of 10.7% in 1998 over 1997.
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 totaled $20,145,075 at December 31, 1999, which was
approximately 17.2% 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 1999, approximately $4,354,561 of mortgages were sold to FNMA under this
arrangement compared to $2,539,622 of mortgages sold in 1998. The Bank currently
retains the servicing rights on $8.7 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, 1999, the
Bank's outstanding adjustable rate mortgages were $2,379,811 or 2.0% 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 $52,815,342 at December 31,
1999, which was approximately 45.0% of total loans outstanding. This balance
included $6,571,261 in fixed rate and $46,244,081 in variable rate loans, which
includes rate calls.
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, 1999, the real estate loan portfolio
included $18,710,313 of home equity loans outstanding which represented
approximately 16.0% of its total loans outstanding. This balance included
$8,512,346 in variable rate and $10,197,967 in fixed rate loans.
The Bank also offers both residential and commercial real
estate-construction loans at up to a 80% loan-to-value ratio at fixed interest
or adjustable interest rates and multiple maturities. At December 31, 1999,
fixed rate real estate-construction loans outstanding were $215,173 or 0.18% of
the Bank's loan portfolio, and adjustable rate construction loans outstanding
were $3,322,906 or 2.8% of the portfolio.
As of December 31, 1999, approximately $3,726,000 or 3.8% of the Bank's real
estate loans were 30 to 90 days delinquent, $45,000 or 0.04% of the bank's real
estate loans were more than 90 days delinquent and approximately $1,523,000 or
1.5% 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 $14,173,095 and $9,835,866 at December 31, 1999 and December 31, 1998,
respectively. Commercial loans represented approximately 12.1% and 8.8% of the
Bank's total loans at December 31, 1999 and December 31, 1998, respectively. The
commercial loan portfolio increased $4,337,229 in 1999, as a result of
additional credit extensions to both new and existing commercial relationships.
As of December 31, 1999, approximately $52,000 or 0.4% of the Bank's commercial
loans were 30 to 90 days past due and $202,000 or 1.4% of its commercial loans
were nonaccruing.
Commercial lending entails significant additional risk as compared with real
estate loans. Collateral, where applicable, may consist of inventory,
receivables, equipment and other business assets. Sixty-four percent of the
Bank's commercial loans are variable rate which are tied to the prime rate.
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INSTALLMENT LOANS. The Bank's installment loan portfolio (which includes
commercial and automobile loans, personal loans and revolving credit card
balances) totaled $2,356,914 and $2,166,133 at December 31, 1999 and December
31, 1998, respectively, representing approximately 2.0% of the Bank's total
loans at December 31, 1999 and 1.9% of the Bank's total loans at December 31,
1998. 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, 1999, the installment loan portfolio included $220,447 in fixed
rate card balances at an interest rate of 15.6% and $33,141 in the variable rate
option. As of December 31, 1999, approximately $14,000 or 0.6% of the Bank's
installment loans were 30-90 days past due and approximately $7,000 or 0.3% of
the Bank's installment loans were more than 90 days past due.
STUDENT LOANS. The Bank's student loan portfolio totaled $371,453 at
December 31, 1999 and $438,670 at December 31, 1998. Student loans represented
0.3% of the Bank's total loans at December 31, 1999 and 0.4% of the Bank's total
loans at December 31, 1998. 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 $873,257 and $2,267,518 of its student loans to
SLMA in 1999 and 1998 respectively. Student loan products include Federal Plus
and HEAL loans.
OTHER LOANS. Other loans totaled $1,101,391 at December 31, 1999 and
$891,669 at December 31, 1998. Other loans consisted primarily of loans to
municipalities, hospitals, churches and non-profit organizations. These loans
are at fixed or variable interest rates with multiple maturities. Other loans
also include overdrafts.
The 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.
The following table summarizes the major classifications of the Bank's loans
(net of deferred origination costs) at December 31, 1999, and 1998:
December 31,
------------------------------
1999 1998
---- ----
(in thousands)
Real Estate $98,868 $97,539
Commercial 14,173 9,836
Installment 2,357 2,166
Student Loans 371 439
All Other 1,101 891
Net deferred loan origination costs 401 384
-------- --------
Total Loans $117,271 $111,255
-------- --------
Allowance for credit losses (838) (729)
-------- --------
Net loans $116,433 $110,526
======== ========
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LOAN MATURITIES. The following table shows the maturities of commercial and
real estate construction loans outstanding as of December 31, 1999 and the
classification of loans due after one year according to sensitivity to changes
in interest rates:
(in thousands)
0-1 Yr. 1-5 Yrs. Over 5 Yrs. Total
------- -------- ----------- -----
Commercial $4,511 $4,074 $5,588 $14,173
Real estate construction 2,762 776 0 3,538
------- ------ ------ -------
$7,273 $4,850 $5,588 $17,711
====== ====== ====== =======
Loans maturing after one year with:
Fixed rates $2,608 $ 0
Variable rates 2,242 5,588
------ ------
$4,850 $5,588
====== ======
LOAN LOSSES. The following table summarizes the Bank's non-accrual and past due
loans as of December 31, 1999 and December 31, 1998. 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."
1999 1998
---- ----
(in thousands)
Nonaccrual loans $1,725 $754
Accruing loans past due 90 days or more 47 698
-- ---
Total $1,772 $1,452
====== ======
Information with respect to nonaccrual loans at December 31, 1999 and December
31, 1998 is as follows:
1999 1998
---- ----
(in thousands)
Nonaccrual loans $1,725 $754
Interest income that would have been 76 71
recorded under the original terms
Interest income recorded during the period 43 0
At December 31, 1999 $1,725,000 of nonaccrual loans are collateralized.
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The following tables summarize the Bank's allowance for loan losses and
changes in the allowance for credit losses by loan categories:
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
1999 1998
---- ----
BALANCE AT BEGINNING OF YEAR $729,199 $609,539
CHARGE-OFFS
Commercial, Financial, Agricultural (26,130) 0
Real Estate - Mortgages (25,447) (50,381)
Installment Loans (18,966) (21,077)
Overdrafts 0 0
-------- --------
TOTAL CHARGE-OFFS (70,543) (71,458)
RECOVERIES
Commercial, Financial, Agricultural 500 6,774
Real Estate - Mortgages 384 21,219
Installment Loans 8,138 11,925
Overdrafts 489 1,200
-------- --------
TOTAL RECOVERIES 9,511 41,118
NET (CHARGEOFFS) RECOVERIES (61,032) (30,340)
ADDITIONS CHARGED TO OPERATIONS 170,000 150,000
------- -------
BALANCE AT END OF YEAR $838,167 $729,199
======== ========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Balance at Balance at Percent of Loans in
12/31/99 12/31/98 Each Category to
Attributable To: Attributable To: Total Loans:
--------------- --------------- -------------------
1999 1998
------- ------
Real Estate Loans $716,035 $456,823 84.7% 88.0%
Commercial Loans 50,297 77,552 12.1 8.8
Installment Loans (Includes Credit Cards) 56,203 53,322 2.0 2.0
Student Loans 0 0 0.3 0.4
All Other Loans 0 0 0.9 0.8
Unallocated 15,632 141,502 N/A N/A
------ ------- --- ---
Total $838,167 $729,199 100.0% 100.0%
======== ======== ====== ======
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SOURCES OF FUNDS - DEPOSITS
GENERAL. Customer deposits represent the major source of the Bank's funds
for lending and other investment purposes. In addition to deposits, other
sources of funds include loan repayments, loan sales on the secondary market,
interest and dividends from investments, matured investments, and borrowings
from the Federal Reserve Bank, Federal Home Loan Bank and First Tennessee Bank.
DEPOSITS. The Bank offers a variety of deposit products including checking,
passbook, statement savings, money market, NOW accounts, certificates of deposit
and jumbo certificates of deposit. Deposits of the Bank are insured up to the
limits provided by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1999, the Bank's deposits totalled $169,948,899 consisting of the
following:
Demand deposits $29,683,357
NOW and Money Market accounts 8,048,455
Regular savings 58,819,156
Time deposits, $100,000 and over 28,856,320
Other time deposits 44,541,611
------------
$169,948,899
============
The following table shows daily average deposits and average rates paid on
significant deposit categories by the Bank:
1999 1998
-------------------------- ----------------------------
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
(in thousands) (in thousands)
Demand Deposits $ 28,273 ---% $ 23,571 ---%
NOW and Money Market Accounts 7,721 .98% 7,276 .98%
Regular Savings 55,308 2.60% 46,925 2.74%
Time Deposits 64,754 4.96% 63,337 5.37%
------ ------
Total $156,056 3.03% $141,109 3.38%
======== ========
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.
FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS. Another source of the Bank's
funds for lending at December 31, 1999, consisted of long term borrowings from
the Federal Home Loan Bank.
Other borrowed funds consisted of 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:
2000 ................................ 1,000,000
2001 ............................ 0
2002 ................................ 1,000,000
2003 ................................ 2,000,000
2004 ............................... 1,000,000
----------
Total ................................. $5,000,000
==========
15
- 15 -
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 29, 2000, the Bank employed 83 persons on a full-time basis.
There were also 11 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 HSBC Bank USA (formerly 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 First Niagara Bank (formerly Lockport
Savings Bank), headquartered in Lockport, New York. Additional competition
includes Charter One Bank, headquartered in Cleveland, Ohio and Citibank, NA,
headquartered in Rochester, 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.
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, 1999 for the periods indicated:
0 to 3 4 to 12 One to Five Over Five
Months Months Years Years
------ ------ ----- -----
(in millions)
Interest-sensitivity assets $40.6 $20.9 $74.3 $47.1
Interest-sensitivity liabilities 43.8 42.0 81.3 11.5
---- ---- ---- ----
Interest sensitivity gap $(3.2) $(21.1) $(7.0) $35.6
====== ======= ====== =====
16
-16-
The primary assets and liabilities in the one year maturity range are
securities, commercial loans and time deposits. As of December 31, 1999, the
Bank's cumulative one year gap ratio (rate sensitive assets divided by rate
sensitive liabilities) was .72 as compared to .81 at December 31, 1998 and .82
as of December 31, 1997. 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, 1999:
Time Deposit Maturity Schedule
(in millions)
0-3 3-6 6-12 Over
Mos. Mos. Mos. 12 Mos. Total
Time deposits - $100,000 and over $21.0 $2.5 $4.5 $0.8 $28.8
Other time deposits 9.1 5.5 21.1 8.8 44.5
--- --- ---- --- ----
Total time deposits $30.1 $8.0 $25.6 $9.6 $73.3
===== ==== ===== ==== =====
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.
17
- 17 -
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.
The Gramm-Leach-Bliley Act of 1999 modernizes the laws governing the
financial services industry whereby the powers of banks and bank holding
companies to sell financial products and services are expanded significantly.
The Act authorizes operating subsidiaries of national banks to sell financial
products without geographic limitation, reforms the Federal Home Loan Bank
system to increase access to loan funding, protects banks from certain state
insurance regulation considered discriminatory and includes new provision in the
area of privacy and customer information.
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.
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.
Under guidelines adopted in January 1989, bank holding companies with at least
$150 million in assets are required to maintain a ratio of 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.
18
- 18 -
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. Since December 31, 1992, Federal
Reserve member banks have been 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, 1999 and
December 31, 1998 with these minimum requirements is presented below:
Bank
-----------------------------
Minimum
1999 1998 Requirements
---- ---- ------------
Total Risk-based Capital 16.6% 16.9% 8%
Tier 1 Risk-based Capital 15.9% 16.3% 4%
Leverage Ratio 10.1% 10.5% 3-5%
As of December 31, 1999, the Bank met all three capital requirements.
Management is not aware of any known trends, events, uncertainties, or
current regulatory recommendations that will have, or that are reasonably
likely, to have a material effect on the Bank's liquidity, capital resources or
operations.
MONETARY POLICY
The earnings of the Company and the Bank are also affected by the monetary
policy of the Federal Reserve Board. An important function of the Federal
Reserve System is to regulate the money supply and prevailing interest rates.
Among the instruments used to implement those objectives are open market
operations in U.S. Government securities and changes in reserve requirements
against member bank deposits.
These instruments are used in varying combinations to influence overall growth
and distribution of bank loans, investments and deposits, and their use may also
affect interest rates charged on loans by the Bank or paid on its deposits.
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.
19
- 19 -
The Bank leases branch offices in North Boston, Hamburg and West Seneca. The
1,280 square foot branch office at 7186 Boston State Road, North 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. This lease has been extended through January 1, 2002 and
provides for monthly payments of $1,583.33 during the extended period. 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. In September 1999, the Bank relocated its West Seneca branch office to
3864 square feet of space at 938 Union Road, West Seneca, N.Y. 14224, in the
Southgate Plaza. In addition the Bank leases 726 square feet for a drive-thru
facility. The term of the lease is five years extending through August 31, 2004
with an option provided of an additional five years. Monthly payments during the
initial term of the lease are $4250.40 per month for the branch office space and
an additional $399.30 per month for the drive-thru facility. Monthly payments
during the option period equal $4590.44 and $439.23 respectively.
The Bank has located a cash dispensing style ATM at Bauer Service Inc.
4298 South Buffalo Road, Orchard Park, N.Y. 14127. There are no lease payments
required.
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.
20
- 20 -
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, management has price
information for the transaction(s). The prices for these transactions do not
include any retail markup, markdown or commission.
1999 1998
------ -----
QUARTER HIGH Low HIGH LOW
- ------- ---- ---- ---
FIRST $45.00 $45.00 $40.00 $38.00
SECOND $46.00 $45.00 $43.00 $40.00
THIRD $47.00 $46.00 $45.00 $43.00
FOURTH $47.00 $47.00 $45.00 $45.00
(b) HOLDERS. As of January 31, 2000, 1,698,950 shares of the Company's
Common Stock were outstanding and the number of holders of record of the
Common Stock at that date was 1193.
(c) DIVIDENDS.
CASH DIVIDENDS.
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 paid a cash dividend of $.23 per share on April 1,
1999 to holders of record on February 23, 1999.
The Company paid a cash dividend of $.24 per share on October
8, 1999 to holders of record on September 21, 1999.
The Company has declared a cash dividend of $.25 per share
payable on April 5, 2000 to holders of record on February 15, 2000.
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 15 to the Consolidated
Financial Statements.
STOCK DIVIDENDS. There was no stock dividend in 1999 or 1998. On
April 29, 1997, the shareholders approved a five for one stock split
which was effective May 1, 1997.
21
- 21 -
The following table shows consolidated operating and capital ratios for the
Company for the last three years:
1999 1998 1997
Return on Average Assets 1.10% 1.24% 1.19%
Return on Average Equity 10.72% 11.63% 11.06%
Dividend Payout Ratio 39.50% 30.84% 28.30%
Equity to Assets Ratio 10.17% 10.81% 10.95%
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
For the Year Ended December 31, 1999 1998 1997 1996 1995
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
Interest Income $ 12,554,843 $ 11,851,787 $ 11,072,851 $ 9,799,815 $ 9,226,500
- ----------------------------------------------------------------------------------------------------------------------
Interest Expense 5,043,316 4,946,730 4,588,056 3,912,761 3,418,782
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income 7,511,527 6,905,057 6,484,795 5,887,054 5,807,718
- ----------------------------------------------------------------------------------------------------------------------
Non-Interest Income 1,342,918 1,220,194 950,662 930,986 763,054
- ----------------------------------------------------------------------------------------------------------------------
Non-Interest Expense 6,050,175 5,196,900 4,849,182 4,555,398 4,228,922
- ----------------------------------------------------------------------------------------------------------------------
Net Income 2,027,270 2,043,351 1,802,275 1,614,642 1,664,783
- ----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $198,788,383 $174,120,230 $158,542,163 $140,898,057 $125,308,204
- ----------------------------------------------------------------------------------------------------------------------
Loans - Net 116,433,438 110,526,449 101,627,427 92,087,902 75,468,504
- ----------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses 838,167 729,199 609,539 546,954 557,961
- ----------------------------------------------------------------------------------------------------------------------
Securities 62,999,678 50,059,972 40,400,374 36,054,324 38,954,494
- ----------------------------------------------------------------------------------------------------------------------
Total Deposits 169,948,899 144,083,636 138,391,327 123,461,379 109,020,551
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 18,284,938 18,623,413 17,039,300 15,510,083 14,485,510
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 1.19 $ 1.20 $ 1.06 $ 0.95 $ 0.97
- ----------------------------------------------------------------------------------------------------------------------
Cash Dividend $ .47 $ .37 $ 0.30 $ 0.22 $ 0.14
- ----------------------------------------------------------------------------------------------------------------------
Book Value at Year End $ 10.76 $ 10.96 $ 10.03 $ 9.13 $ 8.53
Market Value $ 47.00 $ 45.00 $ 38.00 $ 27.20* $ 22.00*
- ----------------------------------------------------------------------------------------------------------------------
Weighted Average Shares 1,698,523 1,698,612 1,698,950 1,698,950 1,698,950
- ----------------------------------------------------------------------------------------------------------------------
* Retroactively adjusted for stock dividends and stock splits
22
-22-
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, 1999, 1998 and 1997. 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, Chautauqua
and Cattaraugus Counties of Western New York. The Bank serves its market through
seven banking offices located in Angola, Derby, Evans, Forestville, Hamburg,
North Boston and West Seneca, 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 interest income, the difference between interest income and fee income 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
impacted by non-interest income, the provision for credit losses, non-interest
expense and income taxes. Net income of $2,027,270 or $1.19 per share in 1999 is
down slightly compared to net income of $2,043,351 or $1.20 per share for 1998.
The startup costs associated with the opening of the Bank's seventh location in
West Seneca, NY on February 1, 1999 offset the growth in earnings for the Bank's
existing branch system in 1999. This is similar to the decline in income in 1996
when the Bank added the Evans, NY and Hamburg, NY branch offices.
NET INTEREST INCOME
Net interest income, before the provision for credit losses, increased 8.8% from
1998 to 1999, compared to an increase of 6.5% from 1997 to 1998. Average earning
assets increased $18.5 million in 1999 versus an increase of $13.6 million in
average interest-bearing liabilities. The tax-equivalent yield on earning assets
decreased 40 basis points from 8.11% in 1998 to 7.71% in 1999. The cost of
funds, however, decreased only 34 basis points, from 4.09% in 1998 to 3.75% in
1999. As a result, the Bank's net interest margin narrowed from 4.52% at
December 31, 1998 to 4.43% at December 31, 1999.
In 1998, the increase in net interest income of 6.5% was due to an increase
of $12.4 million in earning assets over 1997. The tax-equivalent yield earned on
those assets dropped 20 basis points from the prior year, to 8.11% from 8.31%.
The average cost of funds on interest-bearing liabilities decreased only two
basis points over that time period, from 4.11% in 1997 to 4.09% in 1998. The
volume of interest-bearing liabilities increased 8.3% in 1998 over 1997 or $9.3
million. The Bank's net interest margin narrowed from 4.59% in 1997 to 4.52% in
1998.
Management believes there are two main factors contributing to the
decreasing net interest margin. One factor is the impact of the interest rate
policy of the Federal Reserve. In its efforts to keep the economy from
overheating and to keep inflation at bay, the Federal Reserve Board decreased
short-term interest rates three times for a total of 75 basis points in 1998.
These moves immediately led to decreases of the prime rate in the marketplace,
impacting the yield earned on most variable rate loans. These moves also
impacted the offering rates on new investment securities, which provide a source
of income as well as liquidity for the Bank.
23
-23-
Although these rate movements also have an effect on the cost of funds,
decreases in the rates paid on most interest-bearing liabilities take longer to
have an impact, since many of these funds are in time deposits which remain at
the higher rates until maturity.
The Federal Reserve gave back the 75 basis points in 1999, increasing rates
25 basis points on three occasions beginning in June. These moves led to
increases in the prime rate. Interest rates on new securities issues have
increased as well. However, much of the Bank's deposit growth traditionally
occurs earlier in the year and available funds from these deposits were invested
in a less favorable rate environment.
The second factor is competition. Banks are not only competing with each
other for available business, but with other providers of loan and investment
products, such as credit unions and insurance companies. A wealth of information
is easily obtained by consumers via the Internet, from television and through
print media. Competitors exist beyond the geographic trade area and to continue
to be successful, banks have increased business volumes by offering higher
deposit rates and lower loan rates, looking to other potential sources of
income, such as fees and service charges, to increase earnings.
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 that 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 investments 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
The provision for loan losses represents the amount charged against the Bank's
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 1999, the Bank increased the
amount charged against earnings for loan losses to $170,000 from $150,000 in
1998. In 1997, $60,000 was charged against earnings for this purpose.
The following table summarizes the Bank's actual loan losses, total of
non-performing loans and total allowance for loan losses for 1999, 1998 and
1997, both in dollars and as a percentage of total loans outstanding:
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Actual Loan Losses $ 70,543 0.06% $ 71,458 0.06% $ 46,858 0.05%
- --------------------------------------------------------------------------------------------------------------------
Non-Performing Loans $1,771,625 1.52% $1,452,000 1.32% $ 987,000 0.96%
- --------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses $ 838,167 0.72% $ 729,199 0.66% $ 609,539 0.59%
- --------------------------------------------------------------------------------------------------------------------
In 1999, non-performing loans increased approximately $320,000 over 1998
and were $738,000 over 1997. All of the above loans are well-secured by real
estate with no loss anticipated.
24
-24-
Although actual loan losses were similar over the past two years, the
increase in the reserve is warranted based on the increase in the size of the
portfolio and the results of the evaluation process described above.
NON-INTEREST INCOME
Total non-interest income increased approximately $123,000 or 10.1% in 1999 over
1998. This compares to an increase of approximately $270,000 from 1997 to 1998.
In 1999, the Bank received a full year of benefit from the service charge
increases instituted in June 1998. Income from the merchant VISA program, which
began in late 1997, more than doubled as did servicing fees on loans sold to the
Federal National Mortgage Association ("FNMA"). Other loan-related income
increased in 1999. This included prepayment penalties collected on loans and
dividends received as a result of the Bank's participation in the New York State
Bankers Group Insurance Trust. The Bank also received income from properties it
owns as a result of foreclosure.
Non-interest income for 1999 included approximately $158,000 for an
increase in the cash surrender value of life insurance policies held on certain
bank officers. This compares to approximately $165,000 in 1998. The 1998 figure
included a one-time gain of $97,000 that resulted when the original policies
were surrendered due to a change of insurer.
Gains realized on the sale of assets totaled approximately $16,000 in 1999
versus approximately $66,000 in 1998. In 1999, planned sales of securities
resulted in net losses of less than $1,000. In 1998, a gain of $14,513 was
realized when one of the Bank's residual bonds was called for redemption. This
offset losses of $4,450 on planned sales that year.
Premiums received on the sale of student loans to the Student Loan
Marketing Association (`SLMA") were approximately $6,400. In 1998, gains on
sales to SLMA of $43,000 included $28,000 received when the Bank sold the
majority of its remaining student loan portfolio to SLMA. About $7,800 in
premiums were received on mortgages sold to the Federal National Mortgage
Association ("FNMA") in 1999. This compares to $12,800 received in 1998. The
Bank has been affiliated with both SLMA and FNMA since 1995. In addition to the
sales of loans and securities in 1999, the Bank sold two properties which it
owned as a result of foreclosure experiencing a total gain on the sales of
$2,700.
NON-INTEREST EXPENSE
In 1999, the ratio of non-interest expense to average assets was 3.24% compared
to 3.14% in 1998 and 3.18% in 1997. Non-interest expense categories include
those most impacted by branch expansion - salaries, occupancy, advertising, and
supplies, among others. Salary and benefit expense increased 14.5% in 1999. Of
the $406,606 increase, approximately $214,430 is attributable to staffing the
West Seneca office. A full-time position was added in the Loan Division, which
also contributed to the increase over the prior year. The remainder of the
increase included merit/promotional increases, other additional staffing and
expenses related to the Bank's retirement plans. Occupancy expenses increased
$146,924 or 19.3%. The cost of leasing the West Seneca facility and related
expenditures contributed $100,726 to this increase. Advertising costs were up
$42,459 or 36.0%. About 75% of the increase in advertising expense can be
attributed to the promotion of the new branch. The remaining 25% of that amount
was spent on promoting the Bank's PC and telephone banking services.
Approximately $58,000 in increased expense for supplies not only included
purchases totaling $20,674 related to the West Seneca, NY branch, but also
materials purchased as a result of the Bank's Year 2000 initiative. This
included informational material distributed to customers regarding the Bank's
readiness for the Year 2000 event, as well as the forms and envelopes used to
provide each customer with a bank statement as of December 31, 1999 in addition
to their regularly scheduled statement.
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Miscellaneous other expenses increased 22.1% in 1999. These expenses
include costs relating to the maintenance of foreclosed properties. The premiums
paid for life insurance policies held on certain bank officers and directors are
also included in this category. Expenses associated with originating loans,
telephone costs, postal costs and correspondent bank service charges also fall
under miscellaneous expenses. All of these categories increased in 1999.
TAXES
The provision for income taxes in 1999 of $607,000 reflects an effective tax
rate of 23%. This compares to $735,000 or 27% in 1998 and $724,000 or 28% in
1997. The Bank maintains a substantial investment in tax-advantaged municipal
bonds which contributes to its favorable tax position. Additionally, the Bank
recorded a total of approximately $170,000 in non-taxable income in 1999 due to
the increase in the cash surrender value of life insurance policies held on
certain bank officers and directors.
FINANCIAL CONDITION
The Bank had total assets of $198.8 million at December 31, 1999, an increase of
$24.7 million or 14.1% over $174.1 million at December 31, 1998. Net loans of
$116.4 million increased 5.3% or $5.9 million over the previous year. Securities
increased $12.9 million or 25.9% and cash and cash equivalents increased $4.7
million or 64.1%. Deposits grew by $25.9 million or 18%. Shareholders' equity,
however, decreased approximately $338,000 or 1.8%, due to unrealized losses of
$1,185,096 on investment securities held by the Bank. See "Securities and
Federal Funds Sold" below.
LOANS
Loans comprised 64.2% of the Bank's total average earning assets in 1999. Actual
year-end balances increased 5.3%, slowing somewhat from an increase of 8.8% in
1998 and 10.4% in 1997. The Bank continues to focus its lending on commercial
and residential mortgages, commercial loans and home equity loans. Commercial
mortgages make up the largest segment of the portfolio at 45.1% of total loans.
Residential mortgages comprise 19.6% of the portfolio and commercial loans
account for 16.4% of outstanding loans. Sixteen percent are home equity loans.
At December 31, 1999, the Bank had a loan/deposit ratio of 69.0%. This
compares to a loan/deposit ratio of 77.22% at December 31, 1998.
The Bank currently retains the servicing rights to $8.7 million in
long-term mortgages sold to the Federal National Mortgage Association ("FNMA")
since becoming a member in 1995. This arrangement allows the Bank to offer
long-term mortgages without exposure to the associated 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
borrowers who are still in school and subsequently purchases those loans.
Approximately $873,000 in student loans were sold to SLMA in 1999. Student loans
presently make up 0.32% of total loans. In December 1998, the Bank sold $1.2
million in student loans to SLMA, which contributed to a 75% decrease in
balances that year. Growth of 2.3% occurred from 1996 to 1997.
SECURITIES AND FEDERAL FUNDS SOLD
Securities and federal funds sold made up the remaining 35.8% of the Bank's
total average earning assets at December 31, 1999. Since deposit growth outpaced
loan growth during 1999, excess funding was channeled into securities and
federal funds sold, providing the Bank with additional sources of liquidity and
interest income. At year-end 1999, the portfolio was made up of tax-advantaged
municipal bonds, which comprised 52.2% of the portfolio, US
government-guaranteed mortgage-backed securities which constituted 24.0% of the
portfolio, and US government-sponsored agency bonds of various types, which made
up 24.6% of the total. As a
26
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member of the Federal Reserve System and as a member of the Federal Home Loan
Bank, the Bank is required to hold stock in those entities. These investments
made up 1.9% of the portfolio at December 31, 1999.
As part of its Year 2000 liquidity contingency plan, the Bank maintained
higher balances in federal funds sold in 1999. These balances made up 2.1 % of
total average earning assets in 1999 compared to 1.00% in 1998.
The tax-equivalent yield earned on securities and federal funds sold was
6.33% in 1999, down fifteen basis points from the 1998 level of 6.48%. The yield
in 1997 was 6.57%. The decline in 1999 is due to the large volume of investments
made in the first half of 1999, prior to the increases in market rates that
occurred after Federal Reserve Board rate hikes later in the year. Another
reason for the decline was the Bank's increased investment in federal funds
sold, which yielded 4.94% in 1999 versus 5.51 % in 1998.
Financial Accounting Standard No. 115 outlines accounting and reporting
requirements for investment securities. All securities are designated at the
time of purchase as either "held to maturity" or "available for sale".
Securities designated as held to maturity are stated on the balance sheet at
amortized cost. Those designated as available for sale are reported at fair
market value. At December 31, 1999, the Bank had designated $3.4 million of its
securities as held to maturity. The majority of these bonds represent the Bank's
investment in local municipalities.
Bonds designated as available for sale totaled $59.6 million, or
approximately 95% of the Bank's portfolio. Net unrealized gains and losses on
available for sale securities resulted in an unrealized loss of $1.7 million at
December 31, 1999. Due to the increases in market rates at the end of 1999, all
fixed income bonds held in the portfolio decreased in value. Unrealized gains
and losses on available for sale securities are reported, net of taxes, as a
separate component of shareholders' equity. At December 31, 1999, the impact to
equity was a net unrealized loss of $1.2 million. Actual sales from the
portfolio totaled $3,122,225 in 1999 for a net loss of less than $1,000. These
sales were negotiated for portfolio restructuring purposes.
DEPOSITS
Total deposits increased $25.9 million or 18% in 1999 over 1998. The Bank was
especially successful in attracting additional core deposits. Demand deposits
increased 14.8% over the course of the year. Regular savings increased 23.4%.
Balances in the tiered rate Premium Savings product introduced in May 1997
continue to grow. Average balances in this product increased from $7.5 million
in 1998 to $13.8 million in 1999. At year-end, $17.0 million was on deposit in
Premium accounts. NOW account balances increased 6.5% in 1999 over 1998 and time
deposits increased 16.5% overall. Growth occurred in time deposits over $100,000
that are generally obtained from local municipalities through the competitive
bidding process and from commercial and retail customers looking for the safety
of an FDIC-insured deposit. Certificates of less than $100,000 also increased in
1999, after a decline the previous year. Although the Bank's products are priced
comparatively to those of other banks in the marketplace, other providers of
financial services are also aggressively pursuing available funds, intensifying
the level of competition.
Providing excellent customer service remains a key focus for the Bank.
Eas-E Line telephone and personal computer banking was introduced in late 1998
to provide customers with access to their accounts during banking and
non-banking hours. The Bank also introduced Eas-E Check in late 1999. This is a
debit card that works like a check. With the addition of Eas-E Net Internet
Banking in 2000, customers will have the added convenience of bill-paying via
personal computer. In 1999, the Bank began a process that will be concluded in
2000 to add two subsidiaries, M&W Agency, Inc., an insurance agency specializing
in property and casualty insurance, and Evans Associates, Inc., which will sell
mutual funds and annuities.
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
$9.2 million can be drawn on the FHLB, via the Overnight Line of Credit
Agreement. An amount equal to 25% of the Bank's total assets could be borrowed
through the advance programs under certain qualifying circumstances. As part of
the Year 2000 liquidity contingency plan, the Bank obtained a Guaranteed
Liquidity Line of $5 million at the FHLB, which was not in use at December 31,
1999. This line will expire March 31, 2000. The Bank also has the ability to
purchase up to $4,000,000 in federal funds from one of its correspondents.
Borrowing at the Federal Reserve Discount Window is another option for
liquidity. At December 31, 1999, the Bank had approximately $7 million in
securities in safekeeping at the Federal Reserve Bank that could be used as
collateral for discount window borrowing.
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The cash flows from the investment portfolio are laddered to provide funds
from principal and interest payments at such times as liquidity needs may arise.
Contractual maturities are also laddered, with consideration as to the
volatility of market prices to ensure that a sufficient amount of securities is
available that could be sold without incurring significant losses. At December
31, 1999, approximately 8% of the Bank's securities had maturities of one year
or less and approximately 32% had maturity dates of five years or less. At
December 31, 1999 the Bank had net short-term liquidity of $7.9 million as
compared to $4.0 million at December 31, 1998. Available assets of $67.3 million
less public and purchased funds of $45.2 million resulted in a long-term
liquidity ratio of 149% compared to 128% at December 31, 1998.
Liquidity needs may 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 within a given time period. Because assets
historically reprice faster than liabilities, a slightly negative gap position
is considered preferable. At December 31, 1999, the Bank was in a negative gap
position, with $24.3 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 +/-$29.8 million at December 31, 1999.
The gap ratio (rate-sensitive assets /rate-sensitive liabilities) at that date
was 72%.
The following table provides information about the Bank's on-balance sheet
instruments that are sensitive to changes in interest rates. Expected maturity
date values for interest-earning assets were calculated by adjusting the
contractual maturity date for expectations of prepayments. Expected maturity
date values for interest-bearing core deposits were calculated based upon
estimates of the period over which the deposits would be outstanding.
Expected maturity date -
year ended December 31, 2000 2001 2002 2003 2004 There-after Total Fair Value
INTEREST-EARNING
ASSETS ($000S)
- ----------------------------------------------------------------------------------------------------------------------
Loans Receivable, Fixed Rate 10,380 5,693 4,602 4,564 3,202 17,131 45,572 39,996
Average Interest Rate 8.62% 8.48% 8.60% 8.45% 8.30% 8.00%
- ----------------------------------------------------------------------------------------------------------------------
Loans Receivable, Adj. Rate 22,140 3,498 3,864 3,593 1,819 35,847 70,761 70,761
Average Interest Rate 9.27% 9.24% 9.15% 9.09% 9.15% 8.30%
- ----------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 3,450
Average Interest Rate 4.43%
- ----------------------------------------------------------------------------------------------------------------------
Investments 8,379 6,390 5,485 6,020 8,295 28,431 63,000 63,000
Average Interest Rate 5.95% 6.52% 6.58% 6.94% 7.00% 7.17%
- ----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES ($000S)
- ----------------------------------------------------------------------------------------------------------------------
Deposits 75,445 19,488 12,876 12,322 11,291 8,843 140,265 140,334
Average Interest Rate 4.73% 3.45% 2.57% 2.48% 2.57% 2.61%
- ----------------------------------------------------------------------------------------------------------------------
Borrowed Funds 4,700 0 1,000 2,000 1,000 8,700 8,700
Average Interest Rate 3.44% 0.00% 4.91% 4.90% 5.07%
- ----------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments at December 31, 1999 included
$7,064,000 in undisbursed lines of credit at an average interest rate of 10.04%,
$2,044,000 in fixed rate loan origination commitments at 11%, $13,489,000 in
adjustable rate loan origination commitments at 9.85% and $1,283,000 in
adjustable rate letters of credit at an average rate of 10.50%.
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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 acceptable. 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 25% of total capital before FAS 115
(after tax) has been established as the maximum impact to equity that would be
acceptable. At year-end, the impact to equity as a result of marking available
for sale securities to market was an unrealized loss of $1,185,096. On a
quarterly basis, the available for sale portfolio is shocked for immediate rate
increases of 100 and 200 basis points. At December 31, 1999, the Bank determined
it would take an immediate increase in excess of 200 basis points to eliminate
the current capital cushion. The Bank's capital ratios are also reviewed on a
quarterly basis. Unrealized gains or losses on available for sale securities are
not included in the calculation of these ratios.
CAPITAL EXPENDITURES
The Eas-E Net Internet Banking product is estimated to cost the Bank
approximately $82,000 in the year 2000. This product will provide customers with
the ability to pay bills via personal computer and will complement Eas-E Line
telephone and PC banking which are already operational. Planned software
purchases include a Windows upgrade of the Bank's mainframe software and an
E-mail program. Miscellaneous equipment is scheduled to be replaced and new
equipment will be purchased, which will include additional ATM purchases.
Repairs and remodeling totaling approximately $234,500 are also planned at the
Bank's various locations. The Bank believes it has a sufficient 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 the 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.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------
See discussion under item 7 MDA "Interest Rate Risk and Market Risk"
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
See Part IV, Item 14, "Exhibits, List and Reports on Form 8-K"
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
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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.
NAME AGE POSITION
---- --- -------- TERM
NOMINEES FOR DIRECTORS: EXPIRES
----------------------- -------
Richard M. Craig 62 Chairman of Board, 2000
President, CEO, Director
LaVerne G. Hall 62 Director 2000
Richard C. Stevenson 91 Director 2000
DIRECTORS:
----------
Robert W. Allen 74 Secretary, Director 2002
William F. Barrett 58 Director 2002
Phillip Brothman 61 Director 2001
David C. Koch 64 Director 2002
David M. Taylor 49 Director 2001
Thomas H. Waring, Jr. 42 Director 2001
Each Director is elected to hold office for a three year term and until
his successor is elected and qualified.
Mr. Allen has been a Director since 1960. He was the Executive Vice
President of the Bank until his retirement in 1988.
Mr. Barrett has been a Director since 1971. He is currently self
employed as a property and investment manager and the former President of Carl
E. Barrett, Ltd., an insurance agency.
Mr. 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 1999, 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.
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Mr. Koch has been a Director since 1979 and is Chairman and Chief
Executive Officer of New Era Cap Co., Inc.
Mr. Stevenson has been a Director since 1958 and is President of
Stevenson Realtors and Chairman of the 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 ten times during 1999. 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 1999. 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 once in 1999. 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 1999. 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.
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AUDIT COMMITTEE:
----------------
Phillip Brothman, Chairman Richard M. Craig David C. Koch
David M. Taylor
The Audit Committee met four times in 1999. The members of the Audit
Committee receive from the internal auditor a quarterly report which describes
findings for the prior quarter. The function of the Audit Committee is to insure
that the Bank's activities are being conducted in accordance with law, banking
rules and regulations, other regulatory and supervisory authorities, and the
Bank's internal policies. In addition, the Audit Committee recommends to the
Board of Directors the services of a reputable certified public accounting firm.
The Committee receives and reviews the reports of the certified public
accounting firm and presents them to the Board of Directors with comments and
recommendations.
INSURANCE COMMITTEE:
--------------------
William F. Barrett, Chairman Robert W. Allen Richard M. Craig
Richard C. Stevenson
It was deemed unnecessary for the Insurance Committee to meet in 1999.
Based on an earlier committee decision, all policy maturity dates were changed
to renew in the month of June, and it was determined that it would be more
appropriate to meet during the year 2000 to coincide with new maturity dates.
This committee reviews the coverage of insurance policies of the Bank and
monitors costs.
HUMAN RESOURCE COMMITTEE:
------------------------
LaVerne G. Hall, Chairman William F. Barrett Phillip Brothman
Richard M. Craig David C. Koch Richard C. Stevenson
Thomas H. Waring, Jr.
The Human Resource Committee met twice during 1999. 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 1999.
Each incumbent director of the Company 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) 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 1999 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.
32
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ITEM 11. 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 1999,
1998 and 1997 of the Chief Executive Officer, the Senior Vice President of
Administration, and the Senior Vice President of the Loan Division. No other
executive officer earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
========================================== =============================================
AWARDS PAYOUTS
NAME OF STOCK LONG-
AND OPTION TERM ALL OTHER
PRINCIPAL YEAR SALARY BONUS OTHER (SHARES) INCENTIVE COMPENSATION
---- ------ ----- ----- -------- ------------
POSITION (1) PAYOUTS
- -------- --- -------
Richard M. 1999 $169,769 $15,000 $3,395 -0- -0- -0-
Craig 1998 $160,308 $20,000 $3,206 -0- -0- -0-
President & 1997 $151,308 $14,013 $3,026 -0- -0- -0-
CEO
James Tilley 1999 $115,820 $10,500 $2,316 -0- -0- -0-
Senior Vice 1998 $109,335 $14,000 $2,187 -0- -0- -0-
President 1997 $103,059 $9,991 $2,061 -0- -0- -0-
William R. 1999 $109,614 $10,500 $2,192 -0- -0- -0-
Glass 1998 $102,945 $14,000 $2,059 -0- -0- -0-
Senior Vice 1997 $96,630 $9,868 $1,933 -0- -0- -0-
President
- --------------
(1) Includes the Bank's contribution to the Employee Savings Plan made for
the benefit of Mr. Craig of $3,395 in 1999, $3,206 in 1998, and $3,026
in 1997; for the benefit of Mr. Tilley of $2,316 in 1999, $2,187 in
1998, and $2,061 in 1997; and for the benefit of Mr. Glass of $2,192 in
1999, $2,059 in 1998, and $1,933 in 1997. 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.
33
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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, 1999, Mr.
Craig had eleven years of credited service and his average monthly compensation
under the plan was $14,052 ; Mr. Tilley had ten years of credited service and
his average monthly compensation under the plan was $9,491; and Mr. Glass had
six years of credited service and his average monthly compensation under the
plan was $8,977.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
In 1995, the Bank entered into non-qualified Supplemental Executive
Retirement Plans ("SERP's") with both Mr. Craig and Mr. Tilley to provide
retirement benefits to supplement their benefits under the Bank's pension plan
and replace the benefits reduced by the 1994 amendment to the Pension Plan. See
"PENSION PLAN". In 1998, Mr. Craig's SERP was amended and the benefits
increased. In 1999, the Bank amended Mr. Tilley's agreement, and also entered
into an agreement with Mr. Glass. Under the SERP's, 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 SERP's 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 funding its
obligations under the SERP's.
EMPLOYEE SAVINGS PLAN
The Bank also maintains a 401(k) salary deferral plan to assist
employees in saving for retirement.
All employees are eligible to participate on the first of the month
following one year of service, provided they have completed 1,000 hours of
service. Eligible employees can contribute up to a maximum of 15% of their base
pay. An automatic 1% of base pay contribution is made by the Bank and in
addition, the Bank makes a matching contribution at a rate of 25% of the first
4% contributed by a participant. Participants are always 100% vested in their
own contributions and the Bank's matching contribution is also 100% vested.
Individual account earnings will depend on the performance of the
investment funds in which the participant invests. Specific guidelines govern
adjustments to contribution levels, investment decisions and withdrawals from
the plan. The benefit is paid as an annuity unless the employee elects one of
the optional forms of payment available under the plan. See "Summary
Compensation Table" for a summary of the amounts contributed by the Bank to this
Plan for the benefit of Mr. Craig, Mr. Tilley, and Mr. Glass.
34
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
The following table sets forth, as of January 31, 2000, the number (rounded to
the nearest whole share) of outstanding shares of Common Stock beneficially
owned by (i) each shareholder known by the Company to beneficially own more than
5% of the Company's Common Stock, (ii) all directors and nominees of the Company
individually, and (iii) by all executive officers and directors as a group:
Nature and Amount of Percent of
Name Beneficial Ownership Class
- ---- -------------------- -----
Robert W. Allen (1) 30,143 1.8%
William F. Barrett (2) 161,345 9.5%
Phillip Brothman (3) 23,544 1.4%
Richard M. Craig (4) 8,206 .5%
LaVerne G. Hall (5) 51,380 3.0%
David C. Koch (6) 26,035 1.5%
Richard C. Stevenson (7) 55,435 3.3%
David M. Taylor (8) 4,290 .3%
Thomas H. Waring, Jr. 514 0.03%
Directors and Officers as a Group 362,720 21.3%
(11 persons)
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)
(1) Includes 2,793 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.
(3) Includes 1,495 shares owned by Mr. Brothman's wife and 2,732 shares
held by a pension plan of which Mr. Brothman is a trustee and a
participant.
(4) Includes 5,470 shares owned jointly by Mr. Craig and his wife and 170
shares owned by Mr. Craig's daughter, as to which he disclaims
beneficial ownership.
(5) Includes 20,230 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 executor for the Estate of 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.
35
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(9) Includes 441 shares owned by Mr. James Tilley, Assistant Secretary of
Evans Bancorp, Inc., 10 shares held by Mr. Tilley in trust for his
grandson, and 77 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 Mr. Glass's wife.
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, LIST AND REPORTS ON FORM 8-K
--------------------------------------
The following financial statements and independent auditors' report
thereon are included herein or are incorporated by reference are included from
1999 Annual Report to Shareholders pages 40 through 73 in response to Part II,
Item 7.
(a) Documents filed as a part of this Report:
None
(b) Documents Incorporated by Reference:
1. CONSOLIDATED FINANCIAL STATEMENTS.
Independent Auditors' Report of Deloitte & Touche LLP
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. EXHIBITS
Exhibit Page
No Name No.
-------- ---- ---
3.1 Certificate of Incorporation (1) n/a
3.2 Certificate of Amendment to
Certificate of Incorporation (3) n/a
36
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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
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 n/a
Retirement Plan for Richard M. Craig dated
February 16, 1999 (7)
10.8 Evans National Bank Supplemental Executive n/a
Retirement Plan for James Tilley dated
February 16, 1999 (7)
10.9 Evans National Bank Supplemental Executive n/a
Retirement Plan for William R. Glass dated
February 16, 1999 (7)
13.1 1999 Annual Report to Shareholders (9)
21.1 Subsidiaries of the Registrant (6) n/a
27 Financial Data Schedule (9)
99 Press Release (8) n/a
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.
37
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(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.
(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 as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1998 (File No. 0-18539) and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1999 (File No. 0-18539) and incorporated herein by
reference.
(9) Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
38
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, EVANS BANCORP, INC. has duly caused this Annual Report to be signed on its
behalf by the undersigned thereunto duly authorized:
EVANS BANCORP, INC.
By:/s/ Richard M. Craig
-----------------------
Richard M. Craig,
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 28, 2000
- -----------------------
Richard M. Craig (Chief Executive
Officer), Principal
Accounting Officer and
Director
/s/ James Tilley Assistant Secretary March 28, 2000
- -----------------------
James Tilley
/s/ William R. Glass Treasurer March 28, 2000
- -----------------------
William R. Glass
/s/ Robert W. Allen Director March 28, 2000
- -----------------------
Robert W. Allen
/s/ Laverne G. Hall Director March 28, 2000
- -----------------------
Laverne G. Hall
/s/ Phillip Brothman Director March 28, 2000
- -----------------------
Phillip Brothman
/s/ David M. Taylor Director March 28, 2000
- -----------------------
David M. Taylor
/s/ David C. Koch Director March 28, 2000
- -----------------------
David C. Koch