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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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number: 0-18539
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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. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of The Act). Yes [ ] No [X]
As of January 31, 2003, the aggregate market value of the
registrant's common stock, $.50 par value, (the "Common Stock") held by
nonaffiliates of the registrant was approximately $44.2 million based upon the
per share price as quoted by the Nasdaq National Market.
As of January 31, 2003, 2,333,862 shares of the registrant's Common
Stock were outstanding.
Page 1 of 113
Exhibit Index on Page 44
-2-
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement on Form 10, as amended
by Amendment Nos. 1 and 2 (Registration No. 0-18539), the Registrant's
Registration Statement on Form S-4 (Registration No. 33-25321), and the
Registrant's Report on form 10-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, September 30, 1999, March 31, 2000 and June 30, 2001 and the
Registrant's Reports on Form 10-K for the periods ended December 31, 1997,
December 31, 1998 and December 31, 2000 are incorporated by reference in Part IV
of this Form 10-K.
Portions of the Registrant's 2002 Annual Report to Shareholders are
incorporated by reference in Part II of this Form 10-K.
-3-
TABLE OF CONTENTS
INDEX
PART I
Page
----
Item 1. BUSINESS...........................................................5
Evans Bancorp, Inc. ...............................................5
Evans National Bank ...............................................5
Forward Looking Statements ........................................6
Market Area....................................................... 6
Average Balance Sheet Information..................................7
Securities Activities..............................................8
Investment Policy.............................................8
Lending Activities ................................................9
General...................................................... 9
Real Estate Loans ...........................................10
Commercial Loans.............................................10
Installment Loans............................................11
Student Loans ...............................................11
Other Loans..................................................11
Direct Financing Lease Loans ................................11
Loan Maturities..............................................12
Loan Losses..................................................12
Sources of Funds - Deposits ......................................14
General......................................................14
Deposits.....................................................14
Federal Funds Purchased & Other Borrowed Funds...............15
Securities Sold Under Agreements to Repurchase...............15
Asset and Liability Management ...................................15
Monetary Policy...................................................16
Environmental Matters.............................................16
Competition.......................................................16
Regulation........................................................16
Subsidiaries of the Bank .........................................18
M&W Agency, Inc .............................................18
ENB Associates Inc...........................................19
Evans National Holding Corp..................................19
Employees.........................................................19
Item 2. PROPERTIES........................................................19
Item 3. LEGAL PROCEEDINGS.................................................20
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS.....................................20
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PART II
Page
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...................................21
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA..............................23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................24
Item 7a. QUANTATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................37
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .........37
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES...........................38
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT....................................................38
Item 11. EXECUTIVE COMPENSATION............................................40
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS...................................42
Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS..............................................43
PART IV
Item 14. CONTROLS AND PROCEDURES...........................................44
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K ..........................................44
SIGNATURES........................................................48
CERTIFICATIONS....................................................49
-5-
ITEM 1. BUSINESS
EVANS BANCORP, INC.
Evans Bancorp, Inc. (the "Company") was organized as a New York business
corporation and incorporated under the laws of the State of New York on October
28, 1988 for the purpose of becoming a bank holding company. The Company is
registered with the Federal Reserve Board as a bank holding company under the
Bank Holding Company Act of 1956, as amended, and conducts its business through
its wholly-owned subsidiary, Evans National Bank (the "Bank"), and the Bank's
subsidiaries, ENB Associates Inc. ("ENB"), M&W Agency, Inc. ("M&W"), and Evans
National Holding Corp. ("ENHC"). The Bank is a nationally chartered bank founded
in 1920 as a national banking association and is currently regulated by the
Office of 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 North Main Street, Angola, New York 14006. The Bank's principal business
is to provide a full range of banking services to consumer and commercial
customers in Erie, Chautauqua and Cattaraugus Counties of Western New York.
The Bank serves its market through eight banking offices located in
Amherst, 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. The
Bank offers deposit products which include checking and NOW accounts, passbook
and statement savings and certificates of deposit. Deposits are insured to the
applicable limit by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC"). The Bank offers a variety of loan products to
its customers including commercial loans, commercial and residential mortgage
loans, and consumer loans. The Bank is regulated by the Office of the
Comptroller of the Currency.
On March 11, 2000 ENB, a wholly-owned subsidiary of the Bank, began the
activity of providing non-deposit investment products, such as annuities and
mutual funds, to bank customers.
Effective September 1, 2000, the Company completed the acquisition of the
assets, business and certain liabilities of M&W Group, Inc., a retail property
and casualty insurance agency headquartered in Silver Creek, New York. The
insurance agency acquired is operated as M&W Agency, Inc., a wholly-owned
subsidiary of the Bank. M&W Agency, Inc. sells various premium-based insurance
policies on a commission basis. M&W has offices located in Angola, Colden,
Derby, Eden, North Collins, South Dayton, Cattaraugus, Randolph, and West
Seneca, New York.
ENHC was incorporated in February 2002, as a subsidiary of the Bank. EHNC
is operated as a real estate investment trust (REIT) which provides additional
flexibility and planning opportunities for the business of the Bank.
Commencing in 2000, the Company operates in two reportable segments-banking
and insurance.
At December 31, 2002, the Bank had total assets of $288.7 million, total
deposits of $239.5 million and total stockholders' equity of $30.9 million.
-6-
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Company or the Company's management and are subject to a
number of risks and uncertainties, including but not limited to economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report filed by the Company with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control and difficult to predict. Forward-looking statements speak
only as of the date they are made. The Company undertakes no obligation, to
publicly update or revise forward-looking information, whether as a result of
new, updated information, future events or otherwise.
MARKET AREA
The Bank's primary market area is located in Erie County, northern
Chautauqua County and northwestern Cattaraugus County, which includes the towns
of Amherst, 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.
-7-
AVERAGE BALANCE SHEET INFORMATION
The table presents the significant categories of the assets and liabilities
of the Bank, interest income and interest expense, and the corresponding yields
earned and rates paid in 2002 and 2001. 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.
2002 2001
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS ($000) ($000) ($000) ($000)
Interest-earning assets:
Loans, Net $145,676 $ 10,593 7.27% $135,436 $ 11,051 8.16%
Taxable securities 48,902 2,554 5.22% 46,001 2,892 6.29%
Tax-exempt securities 43,656 1,987 4.55% 33,040 1,571 4.75%
Time deposits-other banks 146 5 3.34% 0 0 0.00%
Federal funds sold 5,148 73 1.44% 3,214 133 4.14%
-------- -------- ---- -------- -------- ----
Total interest-earning assets 243,528 15,212 6.25% 217,691 15,647 7.19%
Non interest-earning assets
Cash and due from banks 8,967 7,492
Premises and equipment, net 4,463 3,779
Other assets 8,315 8,130
-------- --------
Total $265,273 $237,092
======== ========
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
NOW accounts $ 9,678 44 0.45% $ 8,510 76 0.89%
Savings deposits 75,741 841 1.11% 63,953 1,415 2.21%
Time deposits 90,890 3,397 3.74% 86,005 4,516 5.25%
Fed Funds Purchased & Securities
Sold U/A to repurchase 3,989 67 1.69% 4,057 125 3.07%
FHLB advances 8,627 447 5.18% 7,386 377 5.11%
M&W note 451 21 4.61% 363 28 7.73%
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 189,376 4,817 2.54% 170,274 6,537 3.84%
Noninterest-bearing liabilities:
Demand deposits 42,165 36,133
Other 4,889 4,437
-------- --------
Total liabilities 236,430 210,844
Shareholders' equity 28,843 26,248
-------- --------
Total $265,273 $237,092
======== ========
Net interest earnings $ 10,395 $ 9,110
======== ========
Net yield on interest earning assets 4.27% 4.18%
-8-
In 2002, the Bank's interest income decreased by $0.4 million from 2001,
compared to an increase of $0.6 million in 2001 over 2000. Interest expense
decreased by $1.7 million in 2002 from 2001 compared to an increase of $46,000
in 2001 over 2000.
SECURITIES ACTIVITIES
Income from securities represented approximately 29.8% of total interest
income of the Company in 2002 as compared to 28.5% in 2001. At December 31,
2002, the Bank's securities portfolio of $106.7 million consisted primarily of
United States ("U.S.") and federal agency obligations, state and municipal
securities and mortgage-backed securities issued by the Government National
Mortgage Association, Federal National Mortgage Association and Federal Home
Loan Mortgage Corp.
Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" promulgates accounting
treatment for investments in securities. All securities in the Bank's portfolio
are either designated as "held to maturity" or "available for sale".
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, 2002 and 2001:
2002 2001
---- ----
($000) ($000)
Available for Sale:
U.S. Treasury and other U.S. government agencies $54,543 $42,665
States and political subdivisions in the U.S. 47,240 37,817
Other 1,248 1,253
----- -----
Total Securities Designated as Available for Sale $103,031 $81,735
======== =======
Held to Maturity:
U.S. Treasury and other U.S. government agencies $37 $40
States and political subdivisions in the U.S. 3,604 2,290
----- -----
Total Securities Designated as Held to Maturity $3,641 $2,330
====== ======
Total Securities $106,672 $84,065
======== =======
Investment Policy 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.
-9-
The Bank's investment 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 of non-rated securities 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.
The following table sets forth the contractual 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,
2002:
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. government agencies $ 254 2.76% $ 8,313 4.59% $12,622 5.00% $33,354 5.91%
States and political subdivisions 2,538 6.11 4,743 6.04 16,647 7.14 23,312 7.13
Other 1,248 5.65 0 0.00 0 0.00 0 0.00
----- - - -
Total Available for Sale 4,040 5.75% 13,056 5.11% 29,269 6.25% 56,666 6.41%
CLASSIFIED AS HELD TO MATURITY AT AMORTIZED
COST:
U.S. Treasury and other U.S. government agencies 0 0.00 0 0.00 0 0.00 37 0.00
States and political subdivisions 2,773 3.94 610 6.43 221 8.41 0 0.00
----- --- --- -
Total Held to Maturity 2,773 3.94 610 6.43 221 8.41 37 0.00
----- --- --- --
Total Securities $ 6,813 5.01% $13,666 5.17% $29,490 6.27% $56,703 6.41%
======= ======= ======= =======
At December 31, 2002, approximately $54.5 million 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 its Board of
Directors on an annual basis. The loan policy addresses the lending authorities
of Bank officers, charge off policies, desired portfolio mix, and 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 69.6% of the total interest income of the Company in 2002 and
approximately 70.6% of total interest income in 2001. The Bank's loan
-10-
portfolio after unearned discounts, loan origination costs and allowances for
credit losses totaled $149.0 million and $142.5 million at December 31, 2002 and
December 31, 2001, respectively. At December 31, 2002, the Bank had established
approximately $2.1 million as an allowance for loan losses which is
approximately 1.42% of total loans. This compares with approximately $1.8
million at December 31, 2001 which was approximately 1.24% of total loans. The
increase to the provision for loan losses reflects management's assessment of
the portfolio composition, of which commercial loans have been an increasing
component, and its assessment of the New York State and local economy. The net
loan portfolio represented approximately 51.6% and 57.3% of the Bank's total
assets at December 31, 2002 and December 31, 2001, respectively.
Real Estate Loans. Approximately 84.4% of the Bank's loan portfolio at
December 31, 2002 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
$127.5 million at December 31, 2002, compared to $122.3 million at December 31,
2001. The real estate loan portfolio increased approximately 4.3% in 2002 over
2001 compared to an increase of 12.0% in 2001 over 2000.
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 $16.6 million at December 31, 2002, which was
approximately 11.0% 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 2002, approximately $11.6 million of mortgages were sold to FNMA under this
arrangement compared to $8.5 million of mortgages sold in 2001. The Bank
currently retains the servicing rights on $24.0 million in mortgages sold to
FNMA. The Company has recorded no net servicing asset for such loans.
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, 2002, the
Bank's outstanding adjustable rate mortgages were $3.0 million 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 $80.4 million at December 31,
2002, which was approximately 53.2% of total loans outstanding. This balance
included $11.0 million in fixed rate and $69.4 million in variable rate loans,
which include 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 an 80%
loan-to-value ratio. At December 31, 2002, the real estate loan portfolio
included $23.1 million of home equity loans outstanding which represented
approximately 15.3% of its total loans outstanding. This balance included $13.8
million in variable rate and $9.3 million in fixed rate loans.
The Bank also offers both residential and commercial real
estate-construction loans at up to an 80% loan-to-value ratio at fixed interest
or adjustable interest rates and multiple maturities. At December 31, 2002,
fixed rate real estate-construction loans outstanding were $0.02 million or
0.01% of the Bank's loan portfolio, and adjustable rate construction loans
outstanding were $2.2 million or 1.4% of the portfolio.
As of December 31, 2002, approximately $1.1 million or 0.9% of the Bank's
real estate loans were 30 to 90 days delinquent, and approximately $1.1 million
or 0.9% 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 $20.5 million and $16.3 million at December 31, 2002 and December 31,
2001, respectively. Commercial loans represented approximately 13.5% and 11.3%
of the Bank's total loans at December 31, 2002 and December 31, 2001,
respectively.
As of December 31, 2002, approximately $0.03 million or 0.1% of the Bank's
commercial loans were 30 to 90 days past due and $0.07 million or 0.4% of its
commercial loans were nonaccruing.
-11-
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. Approximately seventy-six
percent of the Bank's commercial loans are variable rate which are tied to the
prime rate.
Installment Loans. The Bank's installment loan portfolio (which includes
commercial and automobile loans, personal loans and revolving credit card
balances) totaled $2.4 million and $2.9 million at December 31, 2002 and
December 31, 2001, respectively, representing approximately 1.6% of the Bank's
total loans at December 31, 2002 and 2.0% of the Bank's total loans at December
31, 2001. 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, 2002, the installment loan portfolio included $0.2 million in fixed
rate credit card balances at an interest rate of 15.6% and $0.05 million in the
variable rate option. As of December 31, 2002, approximately $0.02 million or
0.8% of the Bank's installment loans were 30-90 days past due.
Student Loans. During 2002, the Bank completed the sale of all direct
student loans and entered into an agreement whereby it facilitates the
submission of student loan applications to the Student Loan Marketing
Association ("SLMA") for a fee. The loans are then originated and subsequently
serviced by SLMA. This change was made in order to enhance application response
time, as well as Bank profitability.
Other Loans. Other loans totaled $0.5 at December 31, 2002 and $1.3 million
at December 31, 2001. 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.
Direct Financing Lease Loans. The Bank participated as a lessor in a
leasing agreement that was classified as a direct financing lease. The direct
financing lease loan was paid off July 2002 and totaled $0.4 million at December
31, 2001. This loan represented 0.6% of the Bank's total loans at December 31,
2001.
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.
-12-
The following table summarizes the major classifications of the Bank's
loans (net of deferred origination costs) at December 31, 2002 and 2001:
December 31,
--------- ------------------------
2002 2001
---- ----
Mortgage loans on real estate: ($000)
Residential 1-4 family $26,712 $31,035
Multi-family commercial 77,919 70,858
Construction 2,174 1,520
Second mortgages 6,919 8,188
Equity lines of credit 13,780 10,684
Commercial $20,460 $16,333
Consumer installment loans:
Personal 2,054 2,525
Credit cards 298 334
Student Loans 0 234
Other 491 1,293
Direct financing lease 0 898
Net deferred loan origination costs 336 353
--- ---
Total Loans 151,143 144,255
------- -------
Allowance for credit losses (2,146) (1,786)
------- -------
Net loans $148,997 $142,469
======== ========
Loan Maturities. The following table shows the maturities of commercial and
real estate construction loans outstanding as of December 31, 2002 and the
classification of loans due after one year according to sensitivity to changes
in interest rates:
($000)
0-1 Yr. 1-5 Yrs. Over 5 Yrs. Total
------- -------- ----------- -----
Commercial $3,344 $7,361 $9,755 $20,460
Real estate construction 1,567 607 0 2,174
----- --- - -----
$4,911 $7,968 $9,755 $22,634
====== ====== ====== =======
Loans maturing after one year with:
Fixed rates $3,538 $0
Variable rates 4,430 9,755
----- -----
$7,968 $9,755
====== ======
Loan Losses. The following table summarizes the Bank's non-accrual and past due
loans as of December 31, 2002 and December 31, 2001. 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
-13-
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 - Allowance for Loan Losses."
2002 2001
---- ----
($000)
Nonaccrual loans $1,197 $724
Accruing loans past due 90 days or more 0 443
- ---
Total $1,197 $1,167
====== ======
Information with respect to nonaccrual loans at December 31, 2002 and December
31, 2001 is as follows:
2002 2001
---- ----
($000)
Nonaccrual loans $1,197 $724
Interest income that would have been
recorded under the original terms 68 36
Interest income recorded during the period 17 43
At December 31, 2002, $1.2 million of nonaccrual loans are collateralized.
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
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
BALANCE AT BEGINNING OF YEAR $ 1,786 $ 1,428 $ 838 $ 729 $ 609
CHARGE-OFFS
Commercial, Financial, Agricultural (14) (24) (54) (26) 0
Real Estate - Mortgages (42) (42) (48) (25) (50)
Installment Loans (20) (14) (3) (19) (22)
--- --- --- --- ---
TOTAL CHARGE-OFFS (76) (80) (105) (70) (72)
RECOVERIES
Commercial, Financial, Agricultural 2 11 0 1 7
Real Estate - Mortgages 0 1 1 0 22
Installment Loans 14 6 5 8 12
Overdrafts 0 0 0 0 1
--- --- --- --- ---
TOTAL RECOVERIES 16 18 6 9 42
NET CHARGE-OFFS (60) (62) (99) (61) (30)
ADDITIONS CHARGED TO OPERATIONS 420 420 689 170 150
--- --- --- --- ---
BALANCE AT END OF YEAR $ 2,146 $ 1,786 $ 1,428 $ 838 $ 729
======= ======= ======= ======= =======
-14-
Management's provision for loan losses reflects the continued growth trend
in commercial loans and the Bank's assessment of the local and New York State
economic environment. Both the local and New York State economies have lagged
behind national prosperity which is now unsettled. Marginal job growth, in
conjunction with a declining population base, has left the Bank's market more
susceptible to potential credit problems during an economic downturn. This is
particularly true of commercial borrowers. Commercial loans represent a segment
of significant past growth as well as concentration in the Company's commercial
real estate portfolio. Commercial real estate values may be susceptible to
decline in an adverse economy. Management believes that the reserve is also in
accordance with the regulations promulgated by the Office of the Comptroller of
the Currency, and is reflective of its assessment of the local environment as
well as a continued trend in commercial loans.
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, 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,
2002, the Bank's deposits totaled $239.5 million consisting of the following (in
thousands):
Demand deposits $44,665
NOW and Money Market accounts 10,535
Regular savings 94,908
Time deposits, $100,000 and over 28,441
Other time deposits 60,958
--------
Total $239,507
========
The following table shows daily average deposits and average rates paid on
significant deposit categories by the Bank:
2002 2001
--------------- ---------------
Average Balance Weighted Average Average Balance Weighted
($000) Rate ($000) Average Rate
Demand Deposits $42,165 ---% $ 36,133 ---%
NOW and Money Market Accounts 9,677 0.45% 8,510 0.89%
Regular Savings 75,741 1.11% 63,953 2.21%
Time Deposits 90,890 3.74% 86,005 5.25%
-------- --------
Total $218,473 1.96% $194,601 3.09%
======== ========
-15-
Federal Funds Purchased and Other Borrowed Funds. Another source of the Bank's
funds for lending at December 31, 2002 consisted of long term borrowings from
the Federal Home Loan Bank.
Other borrowed funds consisted of $8.1 million in long-term borrowings.
These long-term borrowings consisted of various advances from the Federal Home
Loan Bank with interest rates ranging from 4.90% to 5.34%. The maturities of
other borrowed funds are as follows (in thousands):
2003 $3,390
2004 2,437
2005 1,467
2006 707
2007 91
Thereafter 19
------
Total $8,111
======
Securities Sold Under Agreements to Repurchase. The Bank enters into agreements
with depositors to sell to the depositors securities owned by the Bank and
repurchase the identical security, generally within one day. No physical
movement of the securities is involved. The depositor is informed the securities
are held in safekeeping by the Bank on behalf of the depositor. Securities sold
under agreements to repurchase totaled $6.5 million at December 31, 2002
compared to $4.0 million at December 31, 2001.
ASSET AND LIABILITY MANAGEMENT
The Bank's asset/liability management strategy is to maximize earnings and
return on capital while limiting exposure to risks associated with a volatile
interest rate environment. The Bank's exposure to interest rate risk is managed
primarily through the Bank's strategy of selecting the type and terms of
interest earning assets and interest bearing liabilities that generate favorable
earnings while limiting the potential negative effects of changes in the market
interest rates.
Management uses income simulations to quantify the potential impact on earnings
and capital with changes in interest rates. The model uses cash flows and
repricing information from loans and certificates of deposits, plus repricing
assumptions on products without specific repricing dates (eg. Savings and
investment bearing demand accounts), to calculate donations of each of the
Bank's assets and liabilities. In addition the model uses management assumptions
on growth with duration to project income. The model also projects the effect on
income with changes in interest rates as well as the value of the Company in
each of the theoretical rate environments.
The Bank maintains specific interest rate risk management policy limits. Based
on simulation modeling, these guidelines include a +/- 5.25% of net interest
income and a 6% of capital threshold on the value of the Company. At December
31, 2002 the effect of an immediate 200 basis point increase in interest rate
would increase the Company's net interest income by 2.7%, or $0.3 million. A 200
basis point decrease in interest rate would decrease the net income by 3.8% or
approximately $0.4 million.
The following schedule sets forth the maturities of the Bank's time
deposits as of December 31, 2002:
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 $11.0 $1.5 $8.9 $7.0 $28.4
Other time deposits 8.4 6.2 28.4 18.0 61.0
--- --- ---- ---- ----
Total time deposits $19.4 $7.7 $37.3 $25.0 $89.4
===== ==== ===== ===== =====
-16-
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.
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 sites may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
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 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. Other major
competition consists of Key Bank, N.A., and Fleet National Bank of New York,
both headquartered in Albany, New York, First Niagara Bank (formerly Lockport
Savings Bank), headquartered in Lockport, New York and also Community Bank,
N.A., headquartered in DeWitt, New York.. Additional competition includes
Charter One Bank, headquartered in Cleveland, Ohio and Citibank, NA,
headquartered in Rochester, New York. The Bank attempts to be 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.
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 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,
-17-
among others, and to related interests of such principal shareholders. In
addition, such legislation and regulations would affect the terms upon which any
person becoming a principal shareholder of a holding company may obtain credit
from banks with which the subsidiary bank maintains a correspondent
relationship.
Federal law also prohibits acquisitions of control of a bank holding
company (such as the Company) without prior notice to certain federal bank
regulators. Control is defined for this purpose as the power, directly, or
indirectly, to direct the management or policies of the bank or bank holding
company or to vote 25% or more of any class of voting securities of the bank
holding company.
In addition to the restrictions imposed upon a bank holding company's
ability to acquire control of additional banks, federal law generally prohibits
a bank holding company from acquiring a direct or indirect interest in, or
control of 5% or more of the outstanding voting shares of any company, and from
engaging directly or indirectly in activities other than that of banking,
managing or controlling banks or furnishing services to subsidiaries, except
that a bank holding company may engage in, and may own shares of companies
engaged in certain activities found by the Federal Reserve Board to be closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Gramm-Leach-Bliley Act of 1999 modernized the laws regarding the
financial services industry by expanding considerably the powers of banks and
bank holding companies to sell financial products and services. 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. The Bank utilized the provisions of this Act
to commence the operations of M&W Agency, Inc. and ENB Associates Inc.
The USA Patriot Act imposes additional obligations on U.S. financial
institutions, including banks, to implement policies, procedures and controls
which are reasonably designed to detect and report instances of money laundering
and the financing of terrorism.
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 expanded
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
-18-
companies with less than $150 million in assets, the above-described ratio will
not apply on a consolidated basis, but will apply on a bank-only basis unless
(i) the parent holding company is engaged in non-bank activities involving
significant leverage, or (ii) the parent holding company has a significant
amount of outstanding debt held by the general public. The Federal Reserve Board
has the discretionary authority to require higher capital ratios.
In connection with the risk-based capital framework applicable to bank
holding companies described above, the Federal Reserve Board applies a
risk-based capital framework for Federal Reserve member banks, such as the Bank.
The framework requires banks to maintain minimum capital levels based upon a
weighing of their assets according to risk. 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, 2002 and
December 31, 2001 with these minimum requirements is presented below:
Bank
-----------------------
Minimum
2002 2001 Requirements
---- ---- ------------
Total Risk-based Capital 16.2% 16.4% 8%
Tier 1 Risk-based Capital 14.9% 15.2% 4%
Leverage Ratio 9.3% 9.6% 4%
As of December 31, 2002, 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.
The following table shows consolidated operating and capital ratios for the
Company for the last three years:
2002 2001 2000
Return on Average Assets 1.36% 1.09% 1.53%
Return on Average Equity 13.3% 10.18% 15.25%
Dividend Payout Ratio 36.1% 42.0% 28.6%
Equity to Assets Ratio 10.69% 10.82% 11.54%
SUBSIDIARIES OF THE BANK
M&W Agency, Inc. Effective September 1, 2000, the Company completed its
acquisition of the assets, business and certain liabilities of M&W Group, Inc.,
a retail property and casualty insurance agency headquartered at Silver Creek,
New York, with offices located in Angola, Derby, Eden, North Collins, South
Dayton, Cattaraugus, Randolph and West Seneca, New York. The insurance agency
acquired is operated through M&W Agency, Inc. ("M&W"), an operating subsidiary
of the Bank.
M&W's legal headquarters are located at 265 Central Ave., Silver Creek, New
York 14136. M&W is a full-service insurance agency offering personal, commercial
and financial services products. It also has a small consulting department. For
the year ended December 31, 2002, M&W had a premium volume of $17.9 million and
net premium revenue of $2.9 million.
-19-
M&W's primary market area is southern Erie, Chautauqua and Cattaraugus
counties. M&W maintains offices in Silver Creek, Angola, North Collins, West
Seneca, Cattaraugus, South Dayton, Derby, Eden and Randolph, New York. All lines
of personal insurance are provided including automobile, homeowners, umbrellas,
boats, recreational vehicles and landlord coverages. Commercial insurance
products are also provided, consisting of property, liability, automobile,
inland marine, workers compensation, umbrellas, bonds and crop insurance. M&W
also provides the following financial services products: life and disability
insurance, medicare supplements, long term care, annuities, mutual funds,
retirement programs and New York State Disability.
M&W has a small consulting division which does work almost exclusively with
school districts. The majority of the work is done in preparing specifications
for bidding and reviewing existing insurance programs. The majority of the
consulting accounts are located in Central and Eastern New York. In the personal
insurance area the majority of M&W's competition comes from direct writers as
well as some small local agencies located in the same towns and villages in
which M&W has offices. In the commercial business segment the majority of the
competition comes from larger agencies located in and around Buffalo, New York.
By offering the large number of carriers which it has available to its
customers, M&W has attempted to remain competitive in all aspects of their
business.
M&W is regulated by the New York State Insurance Department. It meets and
maintains all licensing and continuing education requirements required by the
State of New York.
ENB Associates Inc. ENB Associates Inc., a wholly-owned subsidiary of the Bank,
was established during the first quarter of 2000 and provides non-deposit
investment products, such as mutual funds and annuities, to bank customers at
bank branch locations. ENB Associates Inc. has an investment services agreement
with O'Keefe Shaw & Co.,Inc., through which ENB can purchase and sell securities
to its customers. Prior to 2000, there was no impact on the Company's financial
statements for this subsidiary.
Evans National Holding Corp. Evans National Holding Corp. was incorporated in
February, 2002. In March, 2002, the Bank assigned its interests in approximately
$65.7 million in real estate mortgages to Evans National Holding Corp. in
exchange for 10 shares of common stock, 1,600 shares of preferred stock and
2,400 shares of excess stock, which represented all of the outstanding stock at
that time. Evans National Holding Corp. also entered into a Management and
Servicing Agreement with the Bank to provide management and other services to
it. Evans National Holding Corp. will be operated as a real estate investment
trust (REIT) which will provide additional flexibility and planning
opportunities for the business of the Bank. Subsequent to December 31, 2002,
ENHC accepted the subscription of 119 shares of non-voting preferred stock.
These subscriptions raised approximately $60,000 in capital to be used in the
business and activities of ENHC.
Commencing in 2000, the Company operates in two reportable segments-banking
and insurance. For the years ended December 31, 1999 and prior, the Company
determined that its business was comprised of banking activity only. For
disclosure of segmented operations, see Item 8." Consolidated Financial
Statements and Supplementary Data".
EMPLOYEES
As of December 31, 2002, the Bank employed 95 persons on a full-time basis
and 10 part-time employees. In addition, ENB Associates Inc. employed 1 person
on a full-time basis. M&W Agency, Inc. also employed 33 persons on a full-time
basis and 1 part-time employee.
OTHER INFORMATION
The Company's internet address is www.evansbancorp.com. Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of The Exchange Act, are available through the Company's website as soon
as reasonably practical after filing such material with, or furnishing it to,
The Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Bank conducts its business from its main office and seven 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
Administration Division.
The Bank also owns six of its eight branch offices. One is a 3,900 square
foot facility located at 8599 Erie Road
-20-
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 6840 Erie Road, Derby, New York. A fourth is a 2,880 square foot
facility located at 7205 Boston State Rd, Boston, New York. The fifth is a 3,500
square foot facility located on land it is leasing at 3388 Sheridan Drive,
Amherst, New York.
The Bank also owns a building adjacent to its Derby branch location which
houses its loan division operations.
The Bank currently leases branch offices in Hamburg and West Seneca. The
3,000 square foot branch office at 5999 South Park Avenue, Hamburg, New York, is
occupied pursuant to a long-term lease. 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, which carries a long-term
lease. In addition the Bank leases 726 square feet for a drive-thru facility.
The Bank operates an in-school branch banking facility in the West Seneca
East High School, 4760 Seneca Street, West Seneca, N.Y. 14224 and the West
Seneca West High School, 3330 Seneca Street, West Seneca, N.Y. 14224 in March
2002. The in-school branches each have a cash dispensing style ATM located at
the sites. There are no lease payments required.
M&W leases the following offices from Millpine Enterprises, a partnership
owned by Mr. Robert Miller and his family: 265 Central Avenue, Silver Creek, New
York; 5 Commercial Street, Angola, New York; 11 Main Street, Cattaraugus, New
York; 213 Pine Street, South Dayton, New York. Each lease is dated September 1,
2000 and extends for a period of four years with three options to renew for an
additional three year term each.
M&W also leases the following offices on a month to month basis: 10510 Main
Street, North Collins, New York; 7 Bank Street, Randolph, New York.
In January 2002, M&W entered into a five year lease for the office at the
site of the former Eden Agency whose business it acquired on January 1, 2002.
This site is located at 8226 North Main Street, Eden, New York 14057.
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 or its subsidiaries by governmental authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-21-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market. The Company's common stock began trading on the Nasdaq National
Market system on July 9, 2001. Prior to that time, there was no established
public trading market for the stock and the price listed represents the
highest and lowest per share prices known to management at which the stock
of the Company was sold in private transactions during the periods
indicated, without retail markup, markdown or commission. Evans Bancorp,
Inc. distributed a 5 for 4 split of its common stock on June 12, 2001 and a
1 for 20 stock dividend was declared on November 19, 2002 for shareholders
of record on December 2, 2002 which was distributed on January 29,2003. The
information listed has been adjusted to reflect this stock split and stock
dividend.
2002 2001
--------------- --------------
QUARTER High Low High Low
- ------- ---- --- ---- ---
FIRST $18.81 $17.19 $35.81 $35.81
SECOND $21.09 $17.10 $35.81 $35.81
THIRD $24.55 $15.48 $28.57 $17.14
FOURTH $23.38 $19.04 $21.49 $16.57
(b) Holders. As of January 31, 2003, 2,334,162 shares of the Company's
Common Stock were outstanding and the number of holders of record of the
Common Stock at that date was 1,152.
(c) Dividends.
Cash Dividends.
The Company paid a cash dividend of $0.21 per share on March 27, 2001
to holders of record on February 27, 2001
The Company paid a cash dividend of $0.26 per share on November 5,
2001 to holders of record on October 9, 2001.
The Company paid a cash dividend of $0.26 per share on April 2, 2002
to holders of record on March 12, 2002.
The Company paid a cash dividend of $0.30 per share on October 2, 2002
to holders of record on September 11, 2002.
The Company has declared a cash dividend of $0.32 per share payable on
April 1, 2003 to holders of record as of March 11, 2003.
All per share amounts have been adjusted to reflect the 5 for 4 stock
split distributed in June 2001 and the 1 for 20 stock dividend payable
to shareholders of record on December 2, 2002.
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 18 to the Consolidated
Financial Statements.
Stock Dividends and Splits. A 1 for 20 stock dividend was declared on
November 19, 2002 for shareholders of record on December 2, 2002. The
stock dividend will result in the issuance of 110,589 shares of common
stock and fractional shares to be determined and issued on January 29,
2003. The Company valued the
-22-
dividend stock price on December 31, 2002 at the amount of $23.38 per
share, as determined by the Nasdaq National Market December 31, 2002
close price. The appropriate amount of retained earnings was reclassified
to common stock and additional paid in capital. A 5 for 4 stock split was
distributed on June 12, 2001 to shareholders of record as of May 25,
2001. Fractional shares were redeemed for cash. The stock split resulted
in the issuance of 439,441 shares of common stock as well as fractional
shares paid in cash totaling $21,597. All share and per share data
reflect the split. There were no stock dividends or splits in 2000.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2002 with
respect to compensation plans under which the Company's equity securities are
authorized for issuance, and does not reflect the 2003 proposed amendment to
the Company's 1999 Stock Option and Long-Term Incentive Plan and the proposed
Evans Bancorp, Inc. Employee Stock Purchase Plan which are being presented to
the shareholders for approval at The 2003 Annual Meeting of Shareholders.
Number of Securities
Remaining Available
Number of Securities Weighted-Average for Future Issuance
To be Issued Exercise Price Under Equity Compensation
upon Exercise of of Outstanding Plans [Excluding
Outstanding Options, Options, Warrants Securities Reflected
Plan Category Warrants and Rights and Rights in Column (a)]
- ------------- ------------------- ---------- -----------
(a) (b) (c)
Equity Compensation Plans Approved by
Security None $ N/A 106,250
Holders
Equity Compensation Plans Not Approved by
Security None $ N/A N/A
Holders ----- -----
Total None $ N/A 106,250
-23-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Year Ended December 31, 2002 2001 2000 1999 1998
RESULTS OF OPERATIONS (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
Interest Income $ 15,212 $ 15,647 $ 15,071 $ 12,555 $ 11,852
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense 4,817 6,537 6,491 5,043 4,947
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 10,395 9,110 8,580 7,512 6,905
=============================================================================================================================
Non-Interest Income 5,474 A 4,528 3,648 C 1,343 1,220
=============================================================================================================================
Non-Interest Expense 10,650 B 9,531 7,535 6,050 5,197
- -----------------------------------------------------------------------------------------------------------------------------
Net Income 3,606 AB 2,579 3,223 C 2,027 2,043
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 288,711 $ 248,722 $ 224,549 $ 198,788 $ 174,120
=============================================================================================================================
Loans - Net 148,998 142,469 128,779 116,433 110,526
=============================================================================================================================
Allowance for Loan Losses 2,146 1,786 1,428 838 729
=============================================================================================================================
Securities 106,672 84,065 73,121 63,000 50,060
=============================================================================================================================
Total Deposits 239,507 204,260 186,701 169,949 144,084
=============================================================================================================================
Stockholders' Equity 30,862 26,961 25,179 18,285 18,623
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA *
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.55 $ 1.12 $ 1.40 $ 0.91 $ 0.92
=============================================================================================================================
Cash Dividend 0.56 0.47 0.40 0.36 0.28
=============================================================================================================================
Book Value at Year End 13.22 11.64 10.90 8.20 8.36
=============================================================================================================================
Market Value at Year End 23.38 18.09 35.81 35.81 34.29
=============================================================================================================================
Weighted Average Shares 2,325,414 2,310,137 2,305,662 2,229,311 2,229,428
- -----------------------------------------------------------------------------------------------------------------------------
A Includes one-time insurance proceeds of approximately $0.2 million
B Includes adjustment to reduce pension expense of approximately $0.2 million
C Includes one-time insurance proceeds of approximately $1.4 million
*Retroactively adjusted for the June 2001 5-for-4 stock split and the 1-for-20
stock dividend paid to shareholders of record on December 2, 2002.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8."Consolidated Financial Statements and
Supplementary Data" for further information and analysis.
-24-
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, 2002, 2001 and 2000. The review of the information
presented should be read in conjunction with the consolidated financial
statements and accompanying notes
Evans Bancorp, Inc. (the "Company") is the holding company for Evans National
Bank (the "Bank"), its wholly-owned subsidiary, which is a nationally chartered
bank founded in 1920 and headquartered in Angola, New York. The Bank's principal
business is to provide a full range of banking services to consumer and
commercial customers in Erie, Chautauqua and Cattaraugus Counties of Western New
York.
The Bank serves its market through eight banking offices located in Amherst,
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 ("OCC").
On March 11, 2000, ENB Associates Inc., a wholly-owned subsidiary of the Bank,
began the activity of providing non-deposit investment products, such as
annuities and mutual funds, to bank customers. Effective September 1, 2000, the
Company completed the acquisition of the assets, business and certain
liabilities of M&W Group, Inc., a retail property and casualty insurance agency
headquartered in Silver Creek, New York. The insurance agency acquired is
operated as M&W Agency, Inc., a wholly-owned subsidiary of the Bank. M&W Agency,
Inc. sells various premium-based insurance policies on a commission basis. M & W
Agency, Inc. operates offices located in Angola, Cattaraugus, Colden, Derby,
Eden, North Collins, Silver Creek, South Dayton, Randolph, and West Seneca, New
York. Evans National Holding Corp. ("ENHC") was incorporated in February 2002,
as a subsidiary of the Bank. ENHC is operated as a real estate investment trust
("REIT"), which will provide additional flexibility and planning opportunities
for the business of the Bank.
The Company operates in two reportable segments - banking and insurance.
All share and per share information presented is stated after giving effect to a
5-for-4 stock split distributed on June 12, 2001, to shareholders of record on
May 25, 2001, and a 1-for-20 stock dividend payable on January 29, 2003, to
shareholders of record on December 2, 2002.
The following discussion of financial condition and results of operations of the
Company and the Bank and its wholly-owned subsidiaries should be read in
conjunction with the consolidated financial statements and accompanying notes.
Statements included in this Management's Discussion and Analysis may contain
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1993, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve
substantial risks and uncertainties. When used in this report, the words
"anticipate", "believe", "estimate", "expect", "intend", "may" and similar
expressions identify such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the Company
or the Company's management and are subject to a number of risks and
uncertainties, including but not limited to economic, competitive, regulatory,
and other factors affecting the Company's operations, markets, products and
services, as well as expansion strategies and other factors discussed elsewhere
in this report filed by the Company with the Securities and Exchange Commission.
Many of these factors are beyond the Company's control. Forward-looking
statements speak only as of the date they are made. The Company undertakes no
obligation to publicly update or revise forward-looking information, whether as
a result of new, updated information, future events, or otherwise.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements, are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the industries in which it operates. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on
information available as of the date of the financial statements. Accordingly,
as this information changes, the
-25-
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments, and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value, when a decline in the value of an
asset not carried on the financial statements at fair value warrants an
impairment write-down or valuation reserve to be established, or when an asset
or liability needs to be recorded contingent upon a future event. Carrying
assets and liabilities at fair value inherently results in more financial
statement volatility. The fair values and the information used to record
valuation adjustments for certain assets and liabilities are based either on
quoted market prices or are provided by other third-party sources, when
available. When third-party information is not available, valuation adjustments
are estimated in good faith by management primarily through the use of internal
cash flow modeling techniques.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes and in this
financial review, provide information on how significant assets and liabilities
are valued in the financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions and estimates underlying those
amounts, management has identified the determination of the allowance for loan
losses and valuation of goodwill to be the accounting areas that require the
most subjective or complex judgments and as such could be most subject to
revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience and consideration
of current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the consolidated balance sheets. Note 1 to the consolidated financial statements
describes the methodology used to determine the allowance for loan losses.
The amount of goodwill reflected in the Company's consolidated financial
statements is required to be tested by management for impairment on at least an
annual basis. The test for impairment of goodwill on the identified reporting
unit is considered a critical accounting estimate because it requires judgement
and the use of estimates related to the growth assumptions and market multiples
used in the valuation model.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Note 1 to the consolidated financial statements discusses new accounting
policies adopted by the Company during 2002 and the expected impact of
accounting policies recently issued or proposed but not yet required to be
adopted. To the extent management believes the adoption of new accounting
standards materially affects the Company's financial condition, results of
operations, or liquidity, the impacts are discussed in the applicable section(s)
of this financial review and notes to the consolidated financial statements.
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
and borrowings, provides the primary 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 $3.6 million in
2002 consists of $3.1 million related to the Company's banking activities and
$0.5 million related to the Bank's insurance activities. The total net income of
$3.6 million or $1.55 per share in 2002 compares to $2.6 million or $1.12 per
share for 2001. The 2002 earnings reflect a one-time life insurance proceeds
receipt of approximately $0.2 million and an adjustment to reduce pension
expense by approximately $0.2 million. Both items, combined, resulted in a
positive impact on 2002 earnings of approximately $0.4 million or $0.16 per
share. Also in 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, under which the Company no longer amortizes
goodwill. Adjusting 2001 earnings to exclude the effects of goodwill
amortization, net income for such year increases by $0.3 million or $0.14 per
share. For 2002, net income rose $0.7 million or 24.4% over 2001 after adjusting
2001 results to exclude goodwill amortization.
-26-
Net income in 2000 was $3.2 million or $1.40 per share. However, 2000 net income
includes a one-time insurance proceeds benefit of $1.4 million on a life
insurance policy on the former chairman, president and CEO. This policy was
purchased to indirectly fund a future obligation of the Bank as part of the
Supplemental Employee Retirement Plan ("SERP"). Excluding the one-time insurance
proceeds, 2001 net income increased by $0.7 million or 40.0% over 2000.
NET INTEREST INCOME
Net interest income is dependent on the amounts and yields on interest earning
assets as compared to the amounts of and rates on interest bearing liabilities.
The following table segregates changes in interest earned and paid 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 income and
expense due to both volume and rate has been allocated in the table to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------------------------------------------------------------
($000)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earned on:
Loans $ 1,000 ($1,458) ($ 458) $ 982 ($ 547) $ 435
Taxable securities 199 (538) (339) 263 (117) 146
Tax-exempt securities 481 (65) 416 (16) 37 21
Federal funds sold 150 (209) (59) 51 (77) (26)
Time deposits in other banks 5 0 5 0 0 0
- - - - - -
Total interest-earning assets $ 1,835 ($2,270) ($ 435) $ 1,280 ($ 704) $ 576
====== ======== ====== ====== ====== ====
Interest paid on:
NOW accounts $ 12 ($ 44) ($ 32) ($ 2) ($ 7) ($ 9)
Savings deposits 319 (893) (574) 105 (354) (249)
Time deposits 274 (1,393) (1,119) 414 (226) 188
Federal Funds Purchased &
other borrowings 72 (67) 5 149 (33) 116
-- ---- - --- ---- ---
Total interest-bearing liabilities $ 677 ($2,397) ($1,720) $ 666 ($ 620) $ 46
==== ======== ======== ==== ====== ===
Net interest income, before the provision for credit losses, increased to $10.4
million or 14.1% in 2002, as compared to $9.1 million in 2001, an increase of
6.2% from 2000 to 2001. This increase in 2002 is attributable to the increase in
average earning assets of $25.8 million versus an increase of $19.1 million in
average interest-bearing liabilities over 2001. This accounts, as indicated in
the table above, for a net increase due to volume of approximately $1.2 million
in net interest income. The tax-equivalent yield on earning assets decreased 87
basis points from 7.58% in 2001 to 6.71% in 2002, while the cost of funds had a
greater decrease of 131 basis points, from 3.85% in 2001 to 2.54% in 2002. This
resulted in a greater decrease in rate related changes on interest expense
versus interest income, or a net increase in net
-27-
interest income of approximately $0.1 million. The Bank's net interest margin
increased from 4.20% during 2001 to 4.32% during 2002.
The increase in net interest income, before the provision for credit losses, in
2001 was primarily attributable to the increase in average earning assets of
$19.1 million versus an increase of $15.9 million in average interest-bearing
liabilities over 2000. The tax-equivalent yield on earning assets decreased 49
basis points from 8.07% in 2000 to 7.58% in 2001. The cost of funds decreased
only 35 basis points, from 4.20% in 2000 to 3.85% in 2001. The Bank's net
interest margin decreased from 4.43% at December 31, 2000, to 4.20% at December
31, 2001.
Management believes the increase in net interest margin from 2001 to 2002 is a
result of a more stable interest rate environment during 2002. After the Federal
Reserve cut key interest rates eleven times in 2001, 2002 had only one decrease
of 50 basis points. The more stable rate environment allowed the Bank to more
effectively manage within the current environment.
The Bank believes net interest margin will be challenged in 2003 due to two main
factors. 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 banks generally 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.
Secondly, as the Bank responds to competitive pricing for assets, the current
low interest rate environment will make it difficult to competitively adjust the
pricing of liabilities much further. The historically low environment provides
the Bank a smaller interval to move rates on deposits to offset any decrease on
assets.
The Bank regularly 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. Ranges have been set for the negative impact
acceptable on net interest income and on the market value of equity 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount charged against the Bank's
earnings to establish a reserve or allowance sufficient to absorb expected loan
losses based on management's evaluation of the loan portfolio. Factors
considered include current loan concentrations, charge-off history, delinquent
loan percentages, input from regulatory agencies and general economic
conditions.
On a quarterly basis, management of the Bank meets to review the adequacy of the
allowance for loan losses. In making this determination, the Company analyzes
the ultimate collectibility of the loans in its portfolio by incorporating
feedback provided by internal loan staff, an independent loan review function
and information provided by examinations performed by regulatory agencies.
The analysis of the allowance for loan losses is composed of three components:
specific credit allocation, general portfolio allocation and subjectively by
determined allocation. The specific credit allocation includes a detailed review
of the credit in accordance with SFAS No. 114 and No. 118, and allocation is
made based on this analysis. The general portfolio allocation consists of an
assigned reserve percentage based on the credit rating of the loan.
The subjective portion of the allowance reflects management's current assessment
of the New York State and local economies. Both have lagged behind national
prosperity, which has continued to remain unsettled. Marginal job growth, in
conjunction with a declining population base, has left the Bank's market more
susceptible to potential credit problems. This is particularly true of
commercial borrowers. Commercial loans represent a segment of significant past
growth as well as concentration in the Company's real estate portfolio.
Commercial real estate values may be susceptible to decline in an adverse
economy. Management believes that the reserve is also in accordance with
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regulations promulgated by the OCC, and is reflective of its assessment of the
local environment as well as a continued growth trend in commercial loans.
In 2002, the Bank charged $0.4 million against earnings for loan losses as
compared to $0.4 million in 2001. In 2000, $0.7 million was charged against
earnings for this purpose. Total non-performing loans amounted to $1,197,000 at
December 31, 2002, as compared to $1,167,000 at December 31, 2001 and $1,460,000
at December 31, 2000.
The amount charged to loan losses over the past three years has been greater
than the Bank's actual loan losses. The following table provides an analysis of
the allowance for loan losses, the total of non-performing loans and total
allowance for loan losses as a percentage of total loans outstanding for the
three years ended December 31:
2002 2001 2000
Balance, beginning of year $ 1,786,115 $ 1,428,467 $ 838,167
Provisions for loan losses 420,000 420,000 689,000
Recoveries 15,689 17,250 6,356
Loans charged off (76,198) (79,602) (105,056)
-------- -------- ---------
Balance, end of year $ 2,145,606 $ 1,786,115 $ 1,428,467
========= ========= =========
Actual loan losses 0.05% 0.06% 0.08%
Non-performing loans 0.79% 0.81% 1.13%
Allowance for loan losses 1.42% 1.24% 1.11%
An allocation of the funding allowance for loan losses by portfolio type over
the past five years follows: (all amounts in $000)
BALANCE AT BALANCE AT BALANCE AT BALANCE AT BALANCE AT
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
TO: TO: TO: TO: TO:
Real estate loans $ 844 $ 455 $ 600 $ 716 $ 457
Commercial loans & leases 259 96 96 50 78
Installment loans (including credit cards ) 72 74 66 56 53
Student loans 0 0 0 0 0
All other loans 0 0 0 0 0
Unallocated 971 1,161 666 16 141
----------------------------------------------------------------------------------
Total $ 2,146 $ 1,786 $ 1,428 $ 838 $ 729
==================================================================================
-29-
Both the total increase in allowance for loan losses and allocation of the
allowance to commercial loans and leases are in response to the increase in
total commercial loans. Commercial real estate mortgages represent 61.1% or
$77.9 million of total real estate mortgages at December 31, 2002, as compared
to 57.9% or $70.8 million at December 31, 2001. Commercial real estate contains
mortgage loans to developers and owners of commercial real estate. Additionally,
commercial loans, which represent loans to a wide variety of businesses, small
and moderate across varying industries, has increased to 13.5% of total loans or
$20.5 million at December 31, 2002, as compared to 11.3% or $16.3 million at
December 31, 2001. The increased allowance and allocation to commercial
categories are to provide for the current economic condition deterioration.
Commercial loans are more susceptible to decreases in credit quality in cyclical
downturns and the larger individual balances of commercial loans expose the
Company to larger losses. In addition, growth in the size of the commercial loan
portfolio during 2002 required additional allowance to provide for probable
losses inherent but undetected in the new loans originated during the year.
The unallocated portion of the allowance reflects estimated probable inherent
but undetected losses within the portfolio due to uncertainties in economic
conditions, delays in obtaining information, including unfavorable information
about a borrower's financial condition, the difficulty in identifying triggering
events that correlate perfectly to subsequent loss rates and risk factors that
have not yet manifested themselves in loss allocation factors. In addition, the
unallocated allowance includes a component that explicitly accounts for the
inherent imprecision in loan loss models. The Company has changed its portfolio
mix in recent years. As a result, historical loss experience data used to
establish allocation estimates might not precisely correspond to the current
portfolio. The longer-term consequences of the September 11, 2001 terrorist
attacks and the recessionary environment also affect the precision of the
allocation model's estimates of loss. Given these recent factors, the losses in
the historical testing period may not be representative of the actual losses
inherent in the portfolio that have not yet been recognized.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. The methodology to determine the adequacy of the
allowance for loan losses is consistent with prior years.
NON-INTEREST INCOME
Total non-interest income increased approximately $0.9 million or 20.9% in 2002
over 2001. This compares to an increase of approximately $0.9 million from 2000
to 2001. Non-interest income for 2002 included approximately $0.2 million of
life insurance proceeds, which the Bank recorded as the beneficiary of a life
insurance policy on a director. Excluding this one-time item, non-interest
income increased $0.7 million or 16.8% from 2001 to 2002. Income from the M&W
Agency, Inc. accounted for a substantial portion of this increase in
non-interest income, approximately $0.5 million.
The competitive interest rate environment resulted in prepayment fees collected
on refinanced loans totaling an additional $0.1 million. New mortgage volume and
refinancings also increased appraisal fees and premiums received on residential
mortgages sold to the Federal National Mortgage Association ("FNMA") for
approximately $0.1 million. ENB Associates also benefited in the low interest
rate environment as customers searched for higher yields in mutual funds and
annuities. ENB Associates' revenue increased $0.1 million in 2002 as compared to
2001.
Additionally, the Bank has grown its ATM network with the addition of one at the
new Amherst branch and two new offsite locations during 2002. Also, the usage of
the Bank's point-of-sale debit cards has increased. Both data services have
provided approximately an additional $0.1 million in fees as compared to 2001.
These increases were offset by a decrease of approximately $0.1 million in gains
realized on the sale of assets, primarily planned sales of securities, totaling
approximately $0.1 million in 2002 versus an approximate $0.2 million gain
realized in 2001. During 2002, the Bank also recognized losses on sales and
write downs in the carrying value of foreclosed real estate of $0.1 million.
Non-interest income for 2000 included approximately $1.4 million of life
insurance proceeds, which the Bank recorded as the beneficiary of a life
insurance policy on its former chairman, president and CEO. Excluding this
one-time item, non-interest income increased $2.3 million or 99.7% from 2000 to
2001. Income from the M&W Agency, Inc. accounted for a substantial portion of
this increase in non-interest income, approximately $1.8 million in 2001, which
was the first full year it was operated by the Company. Income on a property
foreclosed on in 2001 accounted for approximately $0.1 million in additional
income in 2001.
-30-
In 2001, the Bank received a six-month benefit from the increase in service
charges on deposit accounts instituted in July 2001. Loan-related income also
increased in 2001. 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.
Gains realized on the sale of assets, primarily planned sales of securities,
totaled approximately $0.2 million in 2001 versus an approximate $0.1 million
loss realized in 2000.
NON-INTEREST EXPENSE
Total non-interest expense increased approximately $1.1 million or 11.7% in 2002
over 2001. In 2002, the ratio of non-interest expense to average assets was
4.01% compared to 4.01% in 2001 and 3.55% in 2000. Non-interest expense
categories include those most impacted by branch expansion and the operations of
the M&W Agency, Inc. and ENB Associates Inc.: salaries, occupancy, advertising,
and supplies, among others. Salary and benefit expense increased 10.1% in 2002.
Of the $0.5 million in salary and benefit expense increases in 2002, the Bank's
operations contributed approximately $0.3 million of the increase and M&W Agency
contributed approximately $0.2 million of the increase from 2001. The addition
of the Amherst branch, increased loan staffing, M&W Agency expansion and
promotional increases contributed to the increased salary costs. M&W Agency
acquired the business, assets and certain liabilities of the Eden Agency in the
beginning of 2002, and opened an additional office at the Derby Bank branch
location, which led to its increased salary and benefits. The increased costs
were offset by an adjustment to reduce pension expense of approximately $0.2
million related to the supplemental executive retirement plan ("SERP").
Occupancy expense increased approximately $0.2 million or 15.7%. The Bank's
capital expenditures completed in 2002 included a new branch in Amherst,
renovation of an owned building to house the Bank's loan operations, renovations
to the Bank's administrative offices in Angola, New York, and M&W Agency's
addition of the Eden location. All additions increased related occupancy
expenses: utilities, rent, and depreciation, among others. Professional services
increased $0.1 million or 29.6%. The Bank engaged outside consulting firms and
attorneys for a revenue enhancement project, strategic expansion study and
assistance in formation of ENHC.
Miscellaneous other expenses increased $0.2 million or approximately 11.2% in
2002. Expenses associated with Internet banking, ATM expense, telephone and data
line costs, postage costs, maintenance on foreclosed properties, director fees
and correspondent bank service charges fall under miscellaneous expenses. All of
these categories increased in 2002 as compared to 2001, for approximately $0.5
million. Due to the January 1, 2002, SFAS No. 142 adoption by the Company,
systematic goodwill amortization ceased and the net goodwill recorded by the
Company is evaluated for impairment on an annual basis. The cessation of<