UNITED STATES
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For fiscal year ended: December 31, 2004 | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the transition period from to |
Commission file number: 0-18539
EVANS BANCORP, INC.
| New York | 16-1332767 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
| 14-16 North Main Street, Angola, New York | 14006 | |
| (Address of principal executive offices) | (Zip Code) |
(716) 926-2000
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
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.
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. þ
On June 30, 2004, the aggregate market value of the registrant’s common stock, $.50 par value (the “Common Stock”), held by non-affiliates of the registrant was approximately $48.5 million, based upon the closing price of a share of the registrant’s Common Stock as quoted by The Nasdaq National Market.
As of March 14, 2005, 2,589,918 shares of the registrant’s Common Stock were outstanding.
Page 1 of 126
Exhibit Index on Page 79
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the registrant’s 2005 Annual Meeting of Shareholders, to be held on April 19, 2005, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
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TABLE OF CONTENTS
INDEX
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PART I
Item 1.
BUSINESS
EVANS BANCORP, INC.
Evans Bancorp, Inc. (the “Company”) is a New York business corporation which is registered as a
financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The
principal offices of the Company are located at 14-16 North Main Street, Angola, New York 14006 and
its telephone number is (716) 926-2000. The Company was incorporated on October 28, 1988. Except
as the context otherwise requires, the Company and its direct and indirect subsidiaries are
collectively referred to in this Report as the “Company.” The Company’s common stock is traded on
the Nasdaq National Market system under the symbol “EVBN.”
At December 31, 2004, the Company had consolidated total assets of $429.0 million, deposits of
$301.9 million and stockholders’ equity of $35.5 million. The Company had 163 full-time and 14
part-time employees at December 31, 2004.
The Company’s primary business is the operation of its subsidiaries. It does not engage in any
other substantial business activities. The Company has two direct wholly-owned subsidiaries: Evans
National Bank (“Evans National Bank” or the “Bank”), which provides a full range of banking
services to consumer and commercial customers in Western New York, and Evans National Financial
Services, Inc. (“ENFS”), which owns 100% of the common stock of ENB Insurance Agency, Inc.
(“ENBI”), which sells various premium-based insurance policies on a commission basis. At December
31, 2004, the Bank represented 97.1% and ENFS represented 2.9% of the consolidated assets of the
Company. For further detail, see Note 17 to the Company’s Consolidated Financial Statements under
Item 8 of this Report on Form 10-K.
Evans National Bank
The Bank is a nationally chartered bank that has its headquarters and full-service banking office
at 14 North Main Street, Angola, New York, and a total of ten full-service banking offices in Erie
County and Chautauqua County, New York – one in each of Amherst, Angola, Derby, Evans, Forestville,
Hamburg, Lancaster, North Boston, North Buffalo (as of January 2005) and West Seneca.
At December 31, 2004, the Bank had total assets of $416.4 million, security investments of $169.9
million, net loans of $217.6 million, deposits of $301.9 million and stockholders’ equity of $30.6
million compared to total assets of $334.7 million, security investments of $120.6 million, net
loans of $185.5 million, deposits of $266.3 million and stockholders’ equity of $33.3 million at
December 31, 2003. The Bank’s principal source of funding is 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. The Bank’s
deposits are insured to the applicable limit by the Bank Insurance Fund (the “Insurance Fund”) of
the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of loan products to
its customers, including commercial and consumer loans and commercial and residential mortgage
loans.
As is the case with banking institutions generally, the Bank’s operations are significantly
influenced by general economic conditions and by related monetary and fiscal policies of banking
regulatory agencies, including the Federal Reserve Board (“FRB”) and FDIC. The Bank is also
subject to the supervision, regulation and examination of the Office of the Comptroller of the
Currency of the United States of America (the “OCC”).
Other Subsidiaries
In addition to the Bank, the Company has the following direct and indirect wholly-owned
subsidiaries:
ENB Associates Inc.
(“ENB Associates” or “ENB”). ENB, a wholly-owned subsidiary of the Bank,
offers non-deposit investment products, such as annuities and mutual funds, to the Bank’s
customers.
Evans National Leasing, Inc.
(“Evans National Leasing” or “ENL”). ENL was organized in December
2004 as a wholly-owned subsidiary of the Bank to conduct the business of general business equipment
leasing. ENL acquired the business
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and substantially all of the assets, and assumed certain liabilities of M&C Leasing Co., Inc. (“M&C
Leasing”) on December 31, 2004. ENL provides direct financing to the commercial small ticket lease
equipment market throughout the 48 contiguous United States.
Evans National Holding Corp.
(“ENHC”). ENHC was incorporated in February 2002 as a subsidiary of
the Bank, which owns 100% of the common stock of ENHC. ENHC operates as a real estate investment
trust (“REIT”) that holds commercial real estate loans and residential mortgages, which provides
additional flexibility and planning opportunities for the business of the Bank.
Evans National Financial Services, Inc.
(“Evans National Financial Services” or “ENFS”). ENFS is
located at One Grimsby Drive, Hamburg, New York. It was incorporated in September 2004 for the
primary purpose of holding the business and assets of the Company’s non-banking financial services
segment.
ENB Insurance Agency, Inc.
(“ENB Insurance Agency” or “ENBI”). ENBI, a wholly-owned subsidiary of
ENFS, is an insurance agency which sells various premium-based insurance policies on a commission
basis, including business and personal insurance, surety bonds, risk management, life, disability
and long-term care coverage. ENBI has offices located in Angola, Cattaraugus, Derby, Eden,
Gowanda, Hamburg, Lockport, North Boston, Randolph, Silver Creek, South Dayton, and West Seneca,
New York.
Frontier Claims Services, Inc.
(“FCS”). FCS is a wholly-owned subsidiary of ENBI and provides
claims adjusting services to various insurance companies.
The Company also has two special purpose entities: Evans Capital Trust I, a statutory trust formed
on September 29, 2004 under the Statutory Trust Act, solely for the purpose of issuing and selling
certain securities representing undivided beneficial interests in the assets of the trust,
investing the proceeds thereof in certain debentures of the Company and engaging in those
activities necessary, advisable or incidental thereto; and ENB Employers Insurance Trust, a
Delaware trust company formed in February 2003 for the sole purpose of holding life insurance
policies under the Bank’s bank-owned life insurance program.
The Company operates in two reportable segments – banking activities and insurance agency
activities. See Note 17 to the Company’s Consolidated Financial Statements included under Item 8
of this Report on Form 10-K for more information on the Company’s reportable segments.
Reorganization
The Company reorganized its corporate structure during 2004. In August 2004, the Company filed
for, and was approved as, a financial holding company under the Bank Holding Company Act of 1956.
Prior to August 2004, the Company operated as a bank holding company. Subsequent to this change,
the Company reorganized its corporate structure by creating a mid-tier holding company, ENFS,
which, on October 1, 2004, received a dividend-in-kind of all the assets, liabilities and equity of
ENBI from the Bank. The Company intends to conduct non-banking financial services activities under
ENFS.
Acquisitions
On January 2, 2004, ENBI, the Company’s wholly-owned insurance agency subsidiary, acquired
substantially all the business and assets of Ellwood Agency, Inc. (“Ellwood”) and Easy PA Insurance
Agency, Inc. (“Easy PA”), two Hamburg, New York-based insurance agencies. The Company paid the
aggregate purchase price of $0.8 million for these two agencies through a combination of cash and
stock, including the issuance of 31,942 shares of common stock with a fair market value on January
2, 2004 of $0.7 million, and $0.1 million in cash. Both acquisitions were accounted for under the
purchase method of accounting. Accordingly, the results of operations of the acquired companies
have been included in the Company’s Consolidated Statements of Income from the date of acquisition
and as a result, the Company recorded $0.8 million of intangible assets for 2004. The intangibles
are being amortized over a five-year period, of which $0.4 million is tax deductible. The
remaining intangibles are not tax deductible, due to the tax-free nature of the acquisition of the
Ellwood Agency.
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Effective October 1, 2004, ENBI acquired substantially all the business and assets of Ulrich &
Company, Inc. (“Ulrich”), a Lockport, New York-based insurance agency. The total purchase price
payable at closing of $6.4 million was paid in cash. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the results of operations of the acquisition have been
included in the Company’s Consolidated Statements of Income from the date of acquisition, and as a
result, the Company recorded $4.8 million of goodwill and $1.5 million of intangible assets related
to insurance expirations during 2004. The intangible assets are being amortized over 10 years.
The goodwill was assigned to the Company’s insurance segment. Additional contingent consideration
of up to $0.4 million may be paid over 12 months dependent on the outcome of certain post-closing
performance measures specified in the purchase agreement. The contingent consideration, if any,
may result in additional cost of the acquisition.
On December 31, 2004, Evans National Leasing, Inc., a wholly-owned subsidiary of the Bank, acquired
all of the business and assets, and assumed certain liabilities of M&C Leasing Co., Inc. (“M&C
Leasing”), a general business equipment leasing company located in West Seneca, New York.
Following the transaction, the operations of M&C Leasing merged into ENL. The total purchase price
included a cash payment of $1.2 million and assumption of $4.2 million in liabilities. The
acquisition was accounted for under the purchase method of accounting. Accordingly, the Company
recorded certain acquired assets and liabilities, as well as $1.5 million in goodwill. The
goodwill is assigned to the Company’s banking segment. Additional contingent consideration of up
to $0.5 million will be paid based on the outcome of certain post-closing performance measures for
fiscal years 2005-2009, as specified in the purchase agreement. The contingent consideration, if
any, will result in additional cost of the acquisition.
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 1933, 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,” “plan,” “seek,”
and similar expressions identify such forward-looking statements. These forward-looking statements
include statements regarding the Company’s business plans, prospects, growth and operating
strategies, statements regarding the asset quality of the Company’s loan and investment portfolios,
and estimates of the Company’s risks and future costs and benefits.
These forward-looking statements are based largely on the expectations of the Company’s management
and are subject to a number of risks and uncertainties, including but not limited to general
economic conditions, either nationally or in the Company’s market areas, that are worse than
expected; increased competition among depository or other financial institutions; inflation and
changes in the interest rate environment that reduce the Company’s margins or reduce the fair value
of financial instruments; changes in laws or government regulations affecting financial
institutions, including changes in regulatory fees and capital requirements; the Company’s ability
to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to
successfully integrate acquired entities; changes in accounting pronouncements and practices, as
adopted by financial institution regulatory agencies, the Financial Accounting Standards Board
(“FASB”) and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing
and saving habits; changes in the Company’s organization, compensation and benefit plans; and other
factors discussed elsewhere in this report on Form 10-K, as well as in the Company’s periodic
reports filed with the Securities and Exchange Commission (the “SEC”). Many of these factors are
beyond the Company’s control and difficult to predict.
Because of these and other uncertainties, the Company’s actual results, performance or achievements
could differ materially from those contemplated, expressed or implied by the forward-looking
statements contained herein. 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 Company’s primary market area is located in Erie County, Niagara County, northern Chautauqua
County and northwestern Cattaraugus County, New York, which include the municipalities of Amherst,
Boston, Cheektowaga, Depew, Evans, Forestville, Hamburg, Hanover, Lancaster, Kenmore, Lockport,
West Seneca and the northern portion of the city of Buffalo. This primary market area is the
primary area where the Bank receives deposits and makes loans and the ENBI sells insurance. Even
though ENL conducts business outside of this defined market area, this activity is not deemed to
expand the Company’s primary market.
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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 2004, 2003 and
2002. The assets and liabilities are presented as daily averages. The average loan balances
include both performing and non-performing loans. Interest income on loans does not include
interest on loans for which the Bank has ceased to accrue interest. Securities are stated at fair
value. Interest and yield are not presented on a tax-equivalent basis.
SECURITIES ACTIVITIES
The primary objective of the Bank’s securities portfolio is to provide liquidity while preserving
safety of principal. Secondary objectives include: the investment of funds during periods of
decreased loan demand, interest sensitivity considerations, providing collateral to secure local
municipal deposits, supporting local communities through the purchase
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of tax-exempt securities and tax planning considerations. The Bank’s Board of Directors is
responsible for establishing overall policy and reviewing performance of the Bank’s investments.
The Bank’s policy provides that acceptable portfolio investments include: U.S. Government
obligations, obligations of federal agencies, U.S. Government-sponsored enterprises, mortgage
backed securities, municipal obligations (general obligations, revenue obligations, school
districts and non-rated issues from the 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), collateral mortgage
obligations, Federal Reserve stock and Federal Home Loan Bank stock.
The Bank’s general investment policy is that in-state securities must be rated at least Moody’s BAA
(or equivalent) at the time of purchase. Out-of-state issues must be rated at least Moody’s AA (or
equivalent) at the time of purchase. Bonds or securities rated below A are 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
financial statements 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 & Poor’s. The
securities portfolio of the Bank is priced on a monthly basis.
Pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” which establishes accounting treatment for investments
in securities, all securities in the Bank’s investment portfolio are either designated as “held to
maturity” or “available for sale.”
Income from securities held in the Bank’s investment portfolio represented approximately 32.7% of
total interest income of the Company in 2004 as compared to 29.4% in 2003 and 29.8% in 2002. At
December 31, 2004, the Bank’s securities portfolio of $169.9 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 (“FNMA”) and Federal Home Loan Mortgage Corp.
The following table summarizes the Bank’s securities with those designated as available for sale
valued at fair value and securities designated as held to maturity valued at amortized cost as of
December 31, 2004, 2003 and 2002:
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The following table sets forth the contractual maturities and weighted average interest yields of
the Bank’s securities portfolio (yields on tax-exempt obligations are not presented on a
tax-equivalent basis) as of December 31, 2004:
LENDING ACTIVITIES
General
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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, and installment loans. The Bank primarily extends
loans to customers located within the Western New York area. Income on loans represented
approximately 66.7% of the total interest income of the Company in 2004 and approximately 70.0% and
69.6% of total interest income in 2003 and 2002, respectively. The Bank’s loan portfolio, after
unearned discounts, loan origination costs and allowances for credit losses, totaled $217.6 million
and $185.5 million at December 31, 2004 and December 31, 2003, respectively. At December 31, 2004,
the Bank had $3.0 million as an allowance for loan losses which is approximately 1.36% of total
loans. This compares with approximately $2.5 million at December 31, 2003 which was approximately
1.35% of total loans. The increase of the allowance for loan losses of $0.5 million in 2004 from
$2.5 million in 2003 reflects management’s assessment of the portfolio composition, of which higher
risk commercial real estate loans comprise a significant component, and its assessment of the New
York State and local economy. The net loan portfolio represented approximately 50.7% and 55.4% of
the Bank’s total assets at December 31, 2004 and December 31, 2003, respectively.
Real Estate Loans
.
Approximately 82.5% of the Bank’s loan portfolio at December 31, 2004
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 $181.9 million at December 31, 2004, compared to $159.5
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million at December 31, 2003. The real estate loan portfolio increased approximately 14.1% in 2004
over 2003 compared to an increase of 25.1% in 2003 over 2002.
The Bank offers fixed rate residential mortgages with terms of 10 to 30 years with, typically, up
to an 80% loan-to-value ratio. Fixed rate residential mortgage loans outstanding totaled $34.3
million at December 31, 2004, which was approximately 15.5% of total loans outstanding. In 1995,
the Bank entered into a contractual arrangement with FNMA, whereby mortgages can be sold to FNMA
and the Bank retains the servicing rights. In 2004, the Bank sold approximately $2.6 million in
mortgages to FNMA under this arrangement, compared to $15.7 million in mortgages sold in 2003. The
Bank currently retains the servicing rights on $29.2 million in mortgages sold to FNMA. The
Company has recorded no net servicing asset for such loans as it is considered immaterial. During
the 2004 fiscal year, the Bank portfolioed a larger percentage of fixed rate residential real
estate loans with desired maturities, within the context of overall maturities in the loan
portfolio, as a result of generally improving interest rates and the Bank’s capability to absorb
the corresponding interest rate risk within the Company’s tolerance ranges.
Since 1993, the Bank has offered adjustable rate residential mortgages with terms of up to 30
years. Rates on these mortgages remain fixed for the first three years and are adjusted annually
thereafter. On December 31, 2004, the Bank’s outstanding adjustable rate mortgages were $4.2
million or 1.9% of total loans. This balance did not include any construction mortgages, which are
discussed below.
The Bank also offers commercial mortgages with up to a 80% loan-to-value ratio for up to 20 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 $107.4 million at
December 31, 2004, which was approximately 48.7% of total loans outstanding. This balance included
$26.6 million in fixed rate and $80.8 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 15 years
and up to an 80% loan-to-value ratio. At December 31, 2004, the real estate loan portfolio
included $27.8 million of home equity loans outstanding, which represented approximately 12.6% of
its total loans outstanding. This balance included $22.2 million in variable rate and $5.6 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, 2004, fixed rate real estate construction loans outstanding were $1.9 million or 0.9%
of the Bank’s loan portfolio, and adjustable rate construction loans outstanding were $6.3 million
or 2.8% of the portfolio.
As of December 31, 2004, approximately $1.5 million or 0.7% of the Bank’s real estate loans were 30
to 90 days delinquent, and approximately $0.3 million or 0.2% of real estate loans were
non-accruing.
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 $28.8 million and $24.3 million at
December 31, 2004 and December 31, 2003, respectively. Commercial loans represented approximately
13.0% and 12.9% of the Bank’s total loans at December 31, 2004 and December 31, 2003, respectively.
As of December 31, 2004, approximately $0.7 million or 2.4% of the Bank’s commercial loans were 30
to 90 days past due and $1.4 million or 4.8% of its commercial loans were non-accruing. This was
primarily as a result of one commercial loan being put on non-accrual status during the fourth
quarter.
Commercial lending entails significantly more risk than real estate loans. Collateral, where
applicable, may consist of inventory, receivables, equipment and other business assets.
Approximately 77.1% of the Bank’s commercial loans are at variable rates which are tied to the
prime rate.
Installment Loans
. The Bank’s installment loan portfolio (which includes personal
loans and revolving credit card balances) totaled $2.8 million and $2.6 million at December 31,
2004 and December 31, 2003, respectively, representing approximately 1.3% of the Bank’s total loans
at December 31, 2004 and 1.4% of the Bank’s total loans at December 31, 2003. Traditional
installment loans are offered at fixed interest rates with various maturities up to 60 months, on a
secured and unsecured basis. At December 31, 2004, the installment loan portfolio included $0.2
million in fixed rate credit card
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balances at an interest rate of 10.0% and $0.1 million in the variable rate option. As of December
31, 2004, approximately $25 thousand or 0.9% of the Bank’s installment loans were 30 to 90 days
past due.
Student Loans
. During 2002, the Bank completed the sale of all of its 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. The Bank entered into this arrangement in order to enhance
application response time, as well as Bank profitability.
Other Loans
. Other loans totaled $2.0 million at December 31, 2004 and $1.2 million at
December 31, 2003. Other loans consisted primarily of: loans to municipalities, hospitals,
churches and non-profit organizations, at fixed or variable interest rates with multiple
maturities; and overdrafts, which totaled $1.5 million and $0.8 million December 31, 2004 and 2003,
respectively.
Direct Financing Leases.
On December 31, 2004, the Company, together with its newly
formed, indirect wholly-owned subsidiary, ENL, entered into a definitive asset purchase agreement
with M&C Leasing, a general business equipment leasing company located in West Seneca, New York.
As part of this transaction, the Bank purchased approximately $4.5 million in net lease
receivables. The lease receivables represent approximately 2.1% of the Bank’s total loans. As of
December 31, 2004, approximately $18 thousand or 0.4% of the Bank’s lease receivables were 30-90
days past due and $2 thousand or 0.04% were non-accruing.
The Bank’s lending limit to any one borrower is subject to regulation by the OCC. The Bank
continually monitors its loan portfolio to review compliance with new and existing regulations.
The following table summarizes the major classifications of the Bank’s loans (net of deferred
origination costs) as of the dates indicated.
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Loan Maturities and Sensitivities of Loans in Interest Rates
. The following table shows
the maturities of commercial and real estate construction loans outstanding as of December 31, 2004
and the classification of such loans due after one year according to sensitivity to changes in
interest rates.
Non-accrual, Past Due and Restructured Loans
. The following table summarizes the Bank’s
non-accrual and accruing loans 90 days or more past due as of the dates listed below. The Bank had
no restructured loans as of those dates. Any loans classified for regulatory purposes as loss,
doubtful, substandard or special mention that have not been disclosed do not (i) represent or
result from trends or uncertainties which management reasonably expects will materially impact the
Company’s 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.”
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The following table summarizes the Bank’s allowance for loan losses and changes in the allowance
for loan losses by loan categories:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Management’s provision for loan losses reflects the continued growth trend in higher risk
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 remains
unsettled. Marginal job growth, combined with a declining population base, has left the Bank’s
primary 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 commercial real estate portfolio. Commercial real estate values may
be susceptible to decline in an adverse economy. Management believes that the provision for loan
losses complies with the regulations of the OCC, and is reflective of its assessment of the local
environment, as well as a continued trend in commercial loan activity and balance outstanding.
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 FRB and the Federal Home Loan Bank (“FHLB”), and from the
First Tennessee Bank, which is a correspondent bank.
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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 FDIC. At December 31, 2004, the
Bank’s deposits totaled $301.9 million consisting of the following:
The following table shows daily average deposits and average rates paid on significant deposit
categories by the Bank (dollars in thousands):
Federal Funds Purchased and Other Borrowed Funds.
Another source of the Bank’s funds for
lending and investing activities at December 31, 2004 consisted of short and long term borrowings
from the Federal Home Loan Bank.
Other borrowed funds consisted of various advances from the Federal Home Loan Bank with both fixed
and variable interest rate terms ranging from 1.53% to 5.34%. The maturities and weighted average
rates of other borrowed funds are as follows (dollars in thousands):
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 that the securities are held in safekeeping by the Bank on behalf of the
depositor. Securities sold under agreements to repurchase totaled $7.3 million at December 31,
2004 compared to $5.5 million at December 31, 2003.
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MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the
Bank’s financial instruments. The primary market risk the Company is exposed to is interest rate
risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate
risk, which occurs when assets and liabilities re-price at different times and by different amounts
as interest rates change. As a result, net interest income earned by the Bank is subject to the
effects of changing interest rates. The Bank measures interest rate risk by calculating the
variability of net interest income in future periods under various interest rate scenarios using
projected balances for earning assets and interest-bearing liabilities. Management’s philosophy
toward interest rate risk management is to limit the variability of net interest income. The
balances of financial instruments used in the projections are based on expected growth from
forecasted business opportunities, anticipated prepayments of loans and investment securities and
expected maturities of investment securities, loans and deposits. Management supplements the
modeling technique described above with analysis of market values of the Company’s financial
instruments and changes to such market values given changes in the interest rates.
The Bank’s Asset-Liability Committee, which includes members of senior management, monitors the
Bank’s interest rate sensitivity with the aid of a computer model which considers the impact of
ongoing lending and deposit gathering activities, as well as interrelationships in the magnitude
and timing of the re-pricing of financial instruments, including the effect of changing interest
rates on expected prepayments and maturities. When deemed prudent, management has taken actions,
and intends to do so in the future, to mitigate exposure to interest rate risk through the use of
on- or off-balance sheet financial instruments. Possible actions include, but are not limited to,
changes in the pricing of loan and deposit products, modifying the composition of interest-earning
assets and interest-bearing liabilities, and other financial instruments used for interest rate
risk management purposes.
SENSITIVITY OF NET INTEREST INCOME
Many assumptions were utilized by the Bank to calculate the impact that changes in interest rates
may have on net interest income. The more significant assumptions related to the rate of
prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit
maturities. The Bank also assumed immediate changes in rates, including 200 basis point rate
changes. In the event that a 200 basis point rate change cannot be achieved, the applicable rate
changes are limited to lesser amounts such that interest rates cannot be less than zero. These
assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact
of changes in interest rates on net interest income. Actual results may differ significantly due
to the timing, magnitude, and frequency of interest rate changes in market conditions and interest
rate differentials (spreads) between maturity/re-pricing categories, as well as any actions, such
as those previously described, which management may take to counter such changes. In light of the
uncertainties and assumptions associated with the process, the amounts presented in the table above
and changes in such amounts are not considered significant to the Bank’s projected net interest
income.
16
The following schedule sets forth the maturities of the Bank’s time deposits as of December 31,
2004:
ENVIRONMENTAL MATTERS
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.
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.
COMPETITION
All phases of the Company’s business are highly competitive. The Company competes actively with
local, regional and national financial institutions, as well as with bank branches or insurance
agency offices in the Company’s market area of Erie County, Niagara County, northern Chautauqua
County, and northwestern Cattaraugus County, New York. These Western New York counties have a high
density of financial institutions, many of which are significantly larger and have greater
financial resources than the Company. The Company faces competition for loans and deposits from
other commercial banks, savings banks, savings and loan associations, mortgage banking companies,
credit unions, insurance companies and other financial services companies. The Company faces
additional competition for deposits and insurance business from non-depository competitors such as
the mutual fund industry, securities and brokerage firms, and insurance companies and brokerages.
The Company 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.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both federal and state laws and
regulations that are intended to protect depositors. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in the applicable law or regulation, or
a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may
have a material effect on the business, operations and earnings of the Company.
Bank Holding Company Regulation
As a financial holding company registered under the BHCA, the Company is subject to the regulation
and supervision of the FRB, and is required to file with the FRB periodic reports and other
information regarding its business operations and those of its subsidiaries.
17
The Company is required to obtain the prior approval of the FRB before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of a bank or bank holding company. The
FRB will not approve any acquisition, merger or consolidation that would have a substantial
anti-competitive result, unless the anti-competitive effects of the proposed transaction are
outweighed by a greater public interest in meeting the needs and convenience of the public. The
FRB also considers managerial, capital and other financial factors in acting on acquisition or
merger applications. A bank holding company may not engage in, or acquire direct or indirect
control of more than 5% of the voting shares of any company engaged in any non-banking activity,
unless such activity has been determined by the FRB to be closely related to banking or managing
banks. The FRB has identified by regulation various non-banking activities in which a bank holding
company may engage with notice to, or prior approval by, the FRB.
The FRB has enforcement powers over financial holding companies and their subsidiaries, among other
things, to interdict activities that represent unsafe or unsound practices or constitute violations
of law, rule, regulation, administrative orders, or written agreements with a federal bank
regulator. These powers may be exercised through the issuance of cease and desist orders, civil
monetary penalties or other actions.
Bank holding companies and their subsidiary banks are also subject to the provisions of the
Community Reinvestment Act (“CRA”). Under the terms of the CRA, the FRB (or other appropriate bank
regulatory agency, in the case of the Bank, the OCC) is required, in connection with its
examination of a bank, to assess such bank’s record in meeting the credit needs of the communities
served by that bank, including low- and moderate-income neighborhoods. Furthermore, such
assessment is taken into account in evaluating any application made by a bank holding company or a
bank for, among other things, approval of a branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares.
Supervision and Regulation of Bank Subsidiaries
The Bank is a nationally chartered banking corporation subject to supervision, examination and
regulation of the FRB, the FDIC and the OCC. These regulators have the power to enjoin “unsafe or
unsound practices,” require affirmative action to correct any conditions resulting from any
violation or practice, issue an administrative order that can be judicially enforced, direct an
increase in capital, restrict the growth of a bank, assess civil monetary penalties, and remove a
bank’s officers and directors.
The operations of the Bank are subject to numerous statutes and regulations. Such statutes and
regulations relate to required reserves against deposits, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends, establishment of branches, and other
aspects of the Bank’s operations. Various consumer laws and regulations also affect the operations
of the Bank, including state usury laws, laws relating to fiduciaries, consumer credit and equal
credit, fair credit reporting, and privacy of non-public financial information.
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder,
which govern certain transactions, such as loans, extensions of credit, investments and purchases
of assets between member banks and their affiliates, including their parent holding companies.
These restrictions limit the transfer of funds to the Company in the form of loans, extensions of
credit, investments or purchases of assets (collectively, “Transfers”), and they require that the
Bank’s transactions with the Company be on terms no less favorable to the Bank than comparable
transactions between the Bank and unrelated third parties. Transfers by the Bank to the Company
are limited in amount to 10% of the Bank’s capital and surplus, and transfers to all affiliates are
limited in the aggregate to 20% of the Bank’s capital and surplus. Furthermore, such loans and
extensions of credit are also subject to various collateral requirements. These regulations and
restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs,
including funds for acquisitions, and the payment of dividends, interest and operating expenses.
The Bank is prohibited from engaging in certain tying arrangements in connection with any extension
of credit, lease or sale of property or furnishing of services. For example, the Bank may not
generally require a customer to obtain other services from the Bank or the Company, and may not
require the customer to promise not to obtain other services from a competitor as a condition to an
extension of credit. The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal stockholders or any
related interest of such persons. Extensions of credit: (i) must be made on substantially the same
terms (including interest rates and collateral) as, and following credit underwriting procedures
that are not less stringent than those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. The Bank is also subject to certain
lending limits and restrictions on overdrafts to such persons. A violation of these restrictions
may result in the assessment of substantial civil monetary
18
penalties on the Bank or any officer, director, employee, agent or other person participating in
the conduct of the affairs of the Bank or the imposition of a cease and desist order.
The deposits of the Bank are insured by the FDIC through the Insurance Fund to the extent provided
by law. Under the FDIC’s risk-based insurance system, institutions insured through the Insurance
Fund are currently assessed premiums based on eligible deposits, and depending upon the
institutions’ capital position and other supervisory factors. Legislation also provides for
assessments against institutions insured through the Insurance Fund which will be used to pay
certain financing corporation (“FICO”) obligations. In addition to any Insurance Fund assessments,
banks insured through the Insurance Fund are expected to make payments for the FICO obligations
based on eligible deposits each year. The assessment is determined quarterly.
Regulations promulgated by the FDIC pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 place limitations on the ability of certain insured depository institutions
to accept, renew or rollover deposits by offering rates of interest which are significantly higher
than the prevailing rates of interest on deposits offered by other depository institutions having
the same type of charter in such depository institutions’ normal market area. Under these
regulations, well-capitalized institutions may accept, renew or rollover such deposits without
restriction, while adequately capitalized institutions may accept, renew or rollover such deposits
with a waiver from the FDIC (subject to certain restrictions on payment of rates).
Undercapitalized institutions may not accept, renew or rollover such deposits.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a depository
institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected
to be incurred by, the FDIC in connection with: (i) the default of a commonly controlled
FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured institution in danger of default. “Default” is defined generally as the
appointment of a conservator or receiver, and “in danger of Default” is defined generally as the
existence of certain conditions indicating that a “default” is likely to occur in the absence of
regulatory assistance.
The federal regulators have adopted regulations and examination procedures promoting the safety and
soundness of individual institutions by specifically addressing, among other things: (i) internal
controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets to
capital; (vii) minimum earnings; and (viii) compensation and benefits standards for management
officials.
The FRB, the OCC and other federal banking agencies have broad enforcement powers, including the
power to terminate deposit insurance, and impose substantial fines and other civil and criminal
penalties and appoint a conservator or receiver for the assets of a regulated entity. Failure to
comply with applicable laws, regulations and supervisory agreements could subject the Company or
its banking subsidiary, as well as officers, directors and other institution-affiliated parties of
these organizations, to administrative sanctions and potential civil monetary penalties.
Capital Adequacy
The FRB, the FDIC and the OCC have adopted risk-based capital adequacy guidelines for bank holding
companies and banks under their supervision. Under these guidelines, the so-called “Tier 1
capital” and “Total capital” as a percentage of risk-weighted assets and certain off-balance sheet
instruments must be at least 4% and 8%, respectively.
The FRB, the FDIC and the OCC have also imposed a leverage standard to supplement their risk-based
ratios. This leverage standard focuses on a banking institution’s ratio of Tier 1 capital to
average total assets, adjusted for goodwill and certain other items. Under these guidelines,
banking institutions that meet certain criteria, including excellent asset quality, high liquidity,
low interest rate exposure and good earnings, and that have received the highest regulatory rating
must maintain a ratio of Tier 1 capital to total adjusted average assets of at least 3%.
Institutions not meeting these criteria, as well as institutions with supervisory, financial or
operational weaknesses, along with those experiencing or anticipating significant growth, are
expected to maintain a Tier 1 capital to total adjusted average assets ratio equal to at least 4%.
As reflected in the following table, the risk-based capital ratios and leverage ratios of the
Company and the Bank as of December 31, 2004 and 2003 exceeded the required capital ratios for
classification as “well capitalized,” the highest classification under the regulatory capital
guidelines.
19
Capital Components and Ratios at December 31,
The federal banking agencies, including the FRB and the OCC, maintain risk-based capital standards
in order to ensure that those standards take adequate account of interest rate risk, concentration
of credit risk, the risk of non-traditional activities and equity investments in non-financial
companies, as well as reflect the actual performance and expected risk of loss on certain
multifamily housing loans. Bank regulators periodically propose amendments to the risk-based
capital guidelines and related regulatory framework, and consider changes to the risk-based capital
standards that could significantly increase the amount of capital needed to meet the requirements
for the capital tiers described below. While the Company’s management studies such proposals, the
timing of adoption, ultimate form and effect of any such proposed amendments on the Company’s
capital requirements and operations cannot be predicted.
The federal banking agencies are required to take “prompt corrective action” in respect of
depository institutions and their bank holding companies that do not meet minimum capital
requirements, FDICIA established five capital tiers: “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A
depository institution’s capital tier, or that of its bank holding company, depends upon where its
capital levels are in relation to various relevant capital measures, including a risk-based capital
measure and a leverage ratio capital measure, and certain other factors.
Under the implementing regulations adopted by the federal banking agencies, a bank holding company
or bank is considered “well capitalized” if it has: (i) a total risk-based capital ratio of 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6% or greater; and (iii) a leverage ratio of 5%
or greater; and is not subject to any order or written directive to meet and maintain a specific
capital level for an capital measure. An “adequately capitalized” bank holding company or bank is
defined as one that has: (i) a total risk-based capital ratio of 8% or greater; (ii) a Tier 1
risk-based capital ratio of 4% or greater; and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMELS rating of (1)). A bank holding company or
bank is considered (A) “undercapitalized” if it has: (i) a total risk-based capital ratio of less
than 8%; (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a leverage ratio of less
than 4% (or 3% in the case of a bank with a composite CAMELS rating of (1)); (B) “significantly
undercapitalized” if the bank has: (i) a total risk-based capital ratio of less than 6%; or (ii) a
Tier 1 risk-based capital ratio of less than 3%; or (iii) a leverage ratio of less than 3%; and (C)
“critically undercapitalized” if the bank has a ratio of tangible equity to total assets equal to
or less than 2%. The FRB may reclassify a “well capitalized” bank holding company or bank as
“adequately capitalized” or subject an “adequately capitalized” or “undercapitalized” institution
to the supervisory actions applicable to the next lower capital category if it determines that the
bank holding company or bank is in an unsafe or unsound condition or deems the bank holding company
or bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency.
The Company and the Bank currently meet the definition of “well capitalized” institutions.
“Undercapitalized” depository institutions, among other things, are subject to growth limitations;
are prohibited, with certain exceptions, from making capital distributions; are limited in their
ability to obtain funding from a Federal Reserve Bank; and are required to submit a capital
restoration plan. The federal banking agencies may not accept a capital plan without determining,
among other things, that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution’s capital. In addition, for a capital restoration plan to be
acceptable, the depository institution’s parent holding company must guarantee that the institution
will comply with such capital restoration plan and provide appropriate assurances of performance.
If a depository institution fails to submit an acceptable plan, including if the holding company
refuses or is unable to make the guarantee described in the previous sentence, it is treated as if
it is
20
“significantly undercapitalized.” Failure to submit or implement an acceptable capital plan also
is grounds for the appointment of a conservator or a receiver. “Significantly undercapitalized”
depository institutions may be subject to a number of additional requirements and restrictions,
including orders to sell sufficient voting stock to become “adequately capitalized,” requirements
to reduce total assets and cessation of receipt of deposits from correspondent banks. Moreover,
the parent holding company of a “significantly undercapitalized” depository institution may be
ordered to divest itself of the institution or of non-bank subsidiaries of the holding company.
“Critically undercapitalized” institutions, among other things, are prohibited from making any
payments of principal and interest on subordinated debt, and are subject to the appointment of a
receiver or conservator.
Each federal banking agency prescribes standards for depository institutions and depository
institution holding companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to
absorb losses, a minimum ratio of market value to book value for publicly traded shares and other
standards as they deem appropriate. The FRB and the OCC have adopted such standards.
Financial Services Modernization and Other Recent Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”)
facilitates the interstate expansion and consolidation of banking organizations by permitting bank
holding companies that are adequately capitalized and managed to acquire banks located in states
outside their home states, regardless of whether such acquisitions are authorized under the law of
the host state. The Riegle-Neal Act also permits interstate mergers of banks, with some
limitations, and the establishment of new branches on an interstate basis, provided that such
actions are authorized by the law of the host state.
The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) permits banks, securities firms and insurance
companies to affiliate under a common holding company structure. In addition to allowing new forms
of financial services combinations, the GLB Act clarifies how financial services conglomerates will
be regulated by the different federal and state regulators. The GLB Act amended by the BHCA and
expanded the permissible activities of certain qualifying bank holding companies, known as
financial holding companies. In addition to engaging in banking and activities closely related to
banking, as determined by the FRB by regulation or order, financial holding companies may engage in
activities that are financial in nature or incidental to financial activities that are
complementary to a financial activity and do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. Under the GLB Act, all
financial institutions, including the Company and the Bank, are required to develop privacy
policies, restrict the sharing of non-public customer data with non-affiliated parties at the
customer’s request, and establish procedures and practices to protect customer data from
unauthorized access.
USA PATRIOT Act
The USA PATRIOT Act of 2002 (the “Patriot Act”) imposes additional obligations on U.S. financial
institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and
controls which are reasonably designed to prevent, detect and report instances of money laundering
and the financing of terrorism. In addition, provisions of the Patriot Act require the federal
financial institution regulatory agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing bank mergers and bank holding company
acquisitions.
Sarbanes-Oxley Act
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “SOA”) was signed into law. The stated goals
of the SOA are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
The SOA includes very specific additional disclosure requirements and new corporate governance
rules; requires the SEC, the national securities exchanges and the national securities associations
to adopt and implement disclosure and corporate governance standards; and mandates further studies
or certain issues by the SEC and the Comptroller General. The SOA represents significant federal
involvement in matters traditionally left to state regulatory systems, such as the regulation of
the accounting profession, and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.
21
The SOA addresses, among other matters: audit committees; required reporting on internal controls
over financial reporting by management and auditors; certification of financial statements by a
reporting company’s chief executive officer and chief financial officer, or their equivalent; the
forfeiture of bonuses or other incentive-based compensation and profits from the sale of an
issuer’s securities by directors and senior officers in the 12-month period following initial
publication of any financial statements that later require restatement; a prohibition on insider
trading during pension plan blackout periods; disclosure of off-balance sheet transactions; a
prohibition on certain loans to directors and officers; expedited filing requirements for Forms 4;
the adoption of a code of ethics for the issuer’s principal executive officer and principal
financial and accounting officers, and disclosure of any change or waiver of such code; “real time”
filing of periodic reports; the formation of a public company accounting oversight board; auditor
independence; and various increased civil and criminal penalties for violations of securities laws.
Some provisions of the SOA went into effect immediately (July 30, 2002), while others required the
SEC to adopt implementing rules within specified periods. Nearly all of the implementing rules
have been finalized by the SEC.
Monetary Policy and Economic Control
The commercial banking business is affected not only by general economic conditions, but also by
the monetary policies of the FRB. Changes in the discount rate on member bank borrowing,
availability of borrowing at the “discount window,” open market operations, the imposition of
changes in reserve requirements against member banks’ deposits and assets of foreign branches and
the imposition of and changes in reserve requirements against certain borrowings by banks and their
affiliates are some of the instruments of monetary policy available to the FRB. These monetary
policies are used in varying combinations to influence overall growth and distributions of bank
loans, investments and deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the FRB have had a significant effect on the operating results
of commercial banks and are expected to continue to do so in the future. The monetary policies of
these agencies are influenced by various factors, including inflation, unemployment, and short-term
and long-term changes in the international trade balance and in the fiscal policies of the United
States Government. Future monetary policies and the effect of such policies on the future business
and earnings of the Company cannot be predicted.
SUBSIDIARIES OF THE COMPANY
Evans National Financial Services, Inc.
ENFS, a wholly-owned subsidiary of the Company, is
a holding company for the financial services business of the Company, including ENBI.
ENB Insurance Agency, Inc.
ENBI, a retail property and casualty insurance agency, is a
wholly-owned subsidiary of ENFS, formed in connection with the acquisition of M&W Group, Inc. on
September 1, 2000. ENBI is headquartered in Angola, New York, with offices located throughout
Western New York in Derby, Eden, Gowanda, Hamburg, Lockport, North Boston, Silver Creek, South
Dayton, Cattaraugus, Randolph and West Seneca. ENBI 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, 2004, ENBI had a premium volume of approximately $36.9 million and
net premium revenue of $4.9 million.
ENBI’s primary market area is Erie, Chautauqua, Cattaraugus and Niagara counties. All lines of
personal insurance are provided, including automobile, homeowner’s, boat, recreational vehicle,
landlord and umbrella coverages. Commercial insurance products are also provided, consisting of
property, liability, automobile, inland marine, workers compensation, bonds, crop and umbrella
insurance. ENBI 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.
ENBI 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 ENBI’s competition comes from direct writers, as
well as some small local agencies located in the same towns and villages in which ENBI 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, ENBI has attempted to remain competitive in all aspects of its
business.
22
ENBI 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.
Frontier Claims Services, Inc
. FCS, a wholly-owned subsidiary of ENBI, provides insurance
adjusting services for insurance companies. FCS is located in Buffalo, New York.
Evans National Bank.
The Bank is a wholly-owned subsidiary of the Company. The Bank’s
business is described above.
Evans National Leasing, Inc.
ENL, a wholly-owned subsidiary of the Bank, was organized in
December 2004 to acquire the business and substantially all of the assets, and assume certain
liabilities, of M&C Leasing of West Seneca, New York. ENL provides direct financing leasing of
commercial small-ticket general business equipment to companies located throughout the contiguous
48 United States.
ENB Associates Inc.
ENB, a wholly-owned subsidiary of the Bank, provides non-deposit
investment products, such as mutual funds and annuities, to Bank customers at Bank branch
locations. ENB has an investment services agreement with O’Keefe Shaw & Co., Inc., through which
ENB can purchase and sell securities to its customers.
Evans National Holding Corp.
ENHC, a wholly-owned subsidiary of the Bank, holds certain
real estate loans and provides management services. ENHC is operated as a REIT, which provides
additional flexibility and planning opportunities for the business of the Bank.
Evans Capital Trust I.
Evans Capital Trust I, a wholly-owned subsidiary of the Company,
was organized solely to issue and sell certain securities representing undivided beneficial
interests of the Trust and investing the proceeds thereof in certain debentures of the Company.
The Company currently
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 Note 17 included in the
Company’s Consolidated Financial Statements under Item 8 of this Report on Form 10-K.
EMPLOYEES
As of December 31, 2004, the Company had no direct employees. As of December 31, 2004, the
following table summarizes the employment rosters of the Company’s subsidiaries:
The Company’s subsidiaries have good relationships with their employees.
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 SEC. We are providing the address of the Company’s Internet site solely for the
information of investors. We do not intend the address to be an active link or to otherwise
incorporate the contents of the website into this Report on Form 10-K.
23
The Bank conducts its business from its administrative office and nine branch offices as of
December 31, 2004; its tenth branch office opened in January 2005. The administrative office is
located at One Grimsby Drive in Hamburg, New York, and was purchased in June 2004. The
administrative office facility is 26,000 square feet and is owned by the Bank. This facility is
occupied by the Office of the President and Chief Executive Officer, as well as the Administrative
and Loan Divisions.
The Bank’s locations are as follows:
The Bank also operates in-school branch banking facilities in the West Seneca East High School,
4760 Seneca Street, West Seneca, New York and the West Seneca West High School, 3330 Seneca Street,
West Seneca, New York. The in-school branches each have a cash dispensing style ATM located at the
sites. There are no lease payments required.
During fiscal 2004, ENL operated from its leased offices at 1050 Union Road, Suite 2, West Seneca,
New York. In February 2005, ENL relocated their offices to One Grimsby Drive, Hamburg, New York.
ENBI operates from its headquarters, a 9,300 square foot office located at 16 North Main Street,
Angola, New York, which is owned by the Bank, and retail locations as follows:
There are no material legal proceedings to which the Company is a party.
The nature of the Company’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 Company,
there are no proceedings pending to which the Company is a party or to which its property is
subject, which, if determined adversely to the Company, would be
24
material in relation to the Company’s financial condition. No material proceedings are pending or
are known to be threatened or contemplated against the Company by governmental authorities.
No matters were submitted to a vote of shareholders during the fourth quarter of fiscal 2004.
PART II
Market.
The Company’s common stock is quoted on The Nasdaq National Market system
(“Nasdaq”) under the symbol EVBN, and has been quoted on Nasdaq since July 9, 2001. The Company
distributed a 5% stock dividend declared on January 29, 2003 to shareholders of record on December
2, 2002; a 5% stock dividend on December 1, 2003 to shareholders of record on October 14, 2003; and
a 5% stock dividend on December 30, 2004 to shareholders of record on December 9, 2004. All share
and per share data contained in this Report on Form 10-K have been adjusted to reflect the stock
dividends.
The following table shows, for the periods indicated, the high and low sales prices per share of
the Company’s common stock as reported on Nasdaq for fiscal 2004 and 2003.
Holders.
The approximate number of holders of record of the Company’s common stock at
March 14, 2005 was 1,479.
Cash Dividends.
The Company paid the following cash dividends on shares of the Company’s
common stock during fiscal 2003 and 2004:
In addition, the Company has declared a cash dividend of $0.33 per share payable on April 4, 2005
to holders of record as of March 14, 2005.
All per share amounts have been adjusted to reflect the stock dividends described above. As a
result of these adjustments, the amounts reported have been rounded for presentation purposes.
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 OCC. See Notes 8 and 19 to the Company’s Consolidated Financial
Statements included under Item 8 to this Report on Form 10-K.
Unregistered Sales of Equity Securities.
On December 31, 2004, ENL acquired substantially
all of the assets and business of M&C Leasing for an aggregate purchase price of approximately $1.2
million in cash, the assumption of $4.2 million in liabilities, plus up to approximately $0.5
million of potential earn-out payments payable to M&C Leasing if
25
ENL’s operations meet or exceed future annual performance targets. The earn-out payments are tied
to the attainment by ENL of annual net income, before taxes targets for its fiscal years ended
December 31, 2005, 2006, 2007, 2008 and 2009. Up to a maximum of $162,000 of the 2006 earn-out
payment, if any, may be paid to M&C Leasing in shares of Company common stock. Whether or not
shares of Company common stock are actually issued and, if so, the number of shares that may be
issued will depend upon, among other things, ENL’s net income, before taxes, for its fiscal year
2006 and the average closing sales price (or bid price, if no sales price is reported) per share of
the Company’s common stock for the 20 trading days immediately prior to the date of issuance, if at
all, of Company common stock. Any shares issued pursuant to the earn-out will be issued in
reliance upon an exemption from registration under Regulation D under the Securities Act.
Securities Sold Under Dividend Reinvestment Plan
.
On August 26, 1997, the Company filed a
registration statement on Form S-3D with the SEC registering 50,000 shares of its common stock
under the Securities Act for issuance under the Company’s Dividend Reinvestment Plan (the “DRIP”).
The Company has recently discovered that the number of shares of its common stock that have been
issued and sold under the DRIP is in excess of the number of shares registered by the Company. As
a result, the additional shares were issued and sold without registration under the Securities Act,
which may expose the Company to certain liabilities under the Securities Act. Based upon the
Company’s preliminary assessment, the Company believes that 11,545 unregistered shares were issued,
consisting of 4,070 shares in connection with a dividend paid on April 4, 2004 and 7,475 shares in
connection with a dividend paid on October 4, 2004. No shares of common stock have been issued or
sold under the DRIP since October 4, 2004.
The Company will evaluate whether an offer of rescission to those participants in the DRIP who
received unregistered shares of its common stock is appropriate. In consideration of all relevant
facts and circumstances, including the market prices of the Company’s common stock at relevant
times, the Company does not believe that any liability arising out of this matter will have a
material adverse effect on its financial condition or results of operations.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
The following
table includes all issuer repurchases, including those made pursuant to publicly announced plans or
programs.
All of the foregoing shares were purchased in open market transactions. On October 22,
2003, the Company announced that its Board of Directors had authorized the purchase of up to 50,000
shares of the Company’s common stock over a two-year period. The Company did not make any
repurchases during the quarter ended December 31, 2004 other than pursuant to this publicly
announced program, and there were no other publicly announced plans outstanding as of December 31,
2004. The number of shares and average price paid per share have been retroactively restated to
give effect to the 5% stock dividend issued in December 2004. The Company has placed such
repurchased shares in the treasury and accounts for such shares on a first-in-first-out basis. All
shares acquired during the fourth quarter of 2004 remained in the treasury as of December 9, 2004,
the record date for the 5% stock dividend, and were affected by such stock dividend. The maximum
number of shares authorized for repurchase by the Company have not been subject to adjustment for
stock dividends based on Company program guidelines.
26
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Item 8, “Consolidated Financial Statements and Supplementary Data,” of this Report
on Form 10-K for further information and analysis, including business acquisition discussions.
OVERVIEW
This discussion is intended to compare the performance of the Company for the years ended December
31, 2004, 2003 and 2002. The review of the information presented should be read in conjunction
with Item 1: “Business”; Item 6: “Selected Financial Data”; and Item 8: “Financial Statements and
Supplementary Financial Data.”
27
The Company is a financial holding company registered under the BHCA. During 2004, the Company
reorganized its corporate structure by creating a mid-tier wholly-owned subsidiary, ENFS, which was
formed by a dividend in-kind of all of the assets and liabilities of ENBI from the Bank. The
Company currently conducts its business through its two subsidiaries: the Bank and its
subsidiaries, ENB, ENL and ENHC; and ENFS and its subsidiary, ENBI. Unless the context otherwise
requires, the term “Company” refers to Evans Bancorp, Inc. and its subsidiaries. The Company
conducts its business through its subsidiaries. It does not engage in any other substantial
business.
The Company’s financial objectives are focused on earnings growth and return on average equity.
Over the last five years, the Company’s compounded annual net income growth has been 17.3%. The
compounded annual growth rate for gross loans and deposits for the last five years were 13.5% and
12.2%, respectively. To sustain future growth and to meet the Company’s financial objectives, the
Company has defined a number of strategies. Five of the more important strategies include:
The Company’s strategies are designed to direct tactical investment decisions supporting its
financial objectives. The Company’s most significant revenue source continues to be net interest
income, defined as total interest income less interest expense, which in fiscal 2004 accounted for
approximately 67% of total revenue. To produce net interest income and consistent earnings growth
over the long-term, the Company must generate loan and deposit growth at acceptable margins within
its market of operation. To generate and grow loans and deposits, the Company must focus on a
number of areas including, but not limited to, the economy, branch expansion, sales practices,
customer and employee satisfaction and retention, competition, evolving customer behavior,
technology, product innovation, interest rates, credit performance of its customers and vendor
relationships.
The Company also considers non-interest income important to its continued financial success. Fee
income generation is partly related to the loan and deposit operations, such as deposit service
charges, as well as selling financial products, such as commercial and personal insurance through
ENBI, non-deposit investment products through ENB and private wealth management services through a
strategic alliance with Mellon Financial Services Corp.
While the Company reviews and manages all customer segments, it has focused increased efforts on
four targeted segments: (1) high value consumers, (2) smaller businesses with credit needs under
$250,000, (3) medium-sized commercial businesses with credit needs over $250,000 up to $4.8
million, and (4) commercial real estate and construction-related businesses. These efforts have
resulted in material growth in the commercial and home equity portfolios, as well as core deposits
during fiscal 2003 and 2004.
To support growth in targeted customer segments, the Bank has opened two de-novo branches during
fiscal 2003 and 2004, with a third opened in January 2005. With all new and existing branches,
totaling ten in January 2005, the Company has strived to maintain a local community based
philosophy. The Bank has emphasized hiring local branch and lending personnel with strong ties to
the specific local communities it enters and serves.
The Company has expanded through acquisition, especially in its Insurance Agency segment, where
ENBI acquired three companies in 2004, including Ulrich & Company in October 2004 and Ellwood and
Easy PA agencies in January 2004. The Company will typically enter a new market for the insurance
agency segment through acquisition of an existing book of business.
The Company also entered the commercial small ticket direct financing lease business through the
Bank’s acquisition of M&C Leasing on December 31, 2004. Operated as Evans National Leasing, the
Company’s leasing business will be active throughout the 48 contiguous United States.
The Bank serves its market through 10 banking offices in Western New York, located in Amherst,
Angola, Derby, Evans, Forestville, Hamburg, Lancaster, North Boston and West Seneca. The tenth,
which opened in January 2005, is located in North Buffalo. The Company’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 Insurance Fund of the FDIC. The
Bank is regulated by the OCC.
28
The Company operates in two
reportable segments - banking activities and insurance agency
activities.
All share and per share information presented is stated after giving effect to a 5% stock dividend
paid on January 29, 2003 to shareholders of record on December 2, 2002; a 5% stock dividend paid on
December 1, 2003 to shareholders of record on October 14, 2003; and a 5% stock dividend paid on
December 30, 2004 to shareholders of record on December 9, 2004.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
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 Company’s Consolidated
Financial Statements and Notes. These estimates, assumptions and judgments are based on
information available as of the date of the Consolidated Financial Statements. Accordingly, as
this information changes, the Consolidated 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 included under Item 8 of this Report on Form 10-K. 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
Company’s Consolidated Financial Statements and how those values are determined.
Allowance for Loan Losses
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 losses in the Bank’s
loan portfolio. Determining the amount of the allowance for loan losses is considered a critical
accounting estimate because it requires significant judgment on the part of management 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 included under Item 8 of this
Report on Form 10-K describes the methodology used to determine the allowance for loan losses.
Goodwill
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 judgment on the part of management 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 Company’s Consolidated Financial Statements included under Item 8 of this Report on
Form 10-K discusses new accounting policies adopted by the Company during fiscal 2004 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
29
accounting standards materially affects the Company’s financial condition, results of operations,
or liquidity, the impacts are discussed in the applicable sections of this Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the notes to the Company’s
Consolidated Financial Statements included under Item 8 of this Report on Form 10-K.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
Net Interest Income
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 Company’s results of operations. These results are also impacted by non-interest
income, the provision for loan losses, non-interest expense and income taxes. Net income of $4.5
million in 2004 consists of $3.9 million related to the Company’s banking activities and $0.6
million related to the Company’s insurance agency activities. The total net income of $4.5 million
or $1.74 per share, basic and diluted in 2004 compares to $4.1 million or $1.58 per share, basic
and diluted for 2003. All per share data reflects the 5% stock dividends paid on December 1, 2003
and December 30, 2004.
Net interest income is dependent on the amounts and yields earned on interest earning assets as
compared to the amounts of and rates paid 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.
Net interest income, before the provision for loan losses, increased $1.8 million or 16.1% to $12.6
million in 2004, as compared to $10.8 million in 2003, an increase of 4.3% in 2003 over 2002. The
increase in 2004 was attributable to the increase in average interest-earning assets of $59.3
million, and an increase of $58.5 million in average interest-bearing liabilities over 2003. This
accounts, as indicated in the table above, for a net increase in net interest income due to volume
30
of approximately $1.7 million in net interest income. The increase in net interest income due to
volume increase on average earning assets was $2.7 million. The two most significant factors for
the increase in average earning assets included higher average securities and loans outstanding,
which totaled $152.7 million and $196.7 million in 2004, up 22.1% and 17.7%, respectively, from
2003’s averages of $125.1 million and $167.1 million.
The growth in average securities was largely attributable to the Company’s leverage strategy, which
involved borrowing $30.0 million at various maturities from the FHLB and corresponding purchases of
securities. The Company believes this strategy assists in utilizing excess capital.
Loan growth continues to be driven by commercial loan growth, which increased 16.0%, from $119.9
million average balance for 2003 to $139.0 million average balance in 2004. Additionally, the
Company has begun to portfolio residential mortgages with shorter maturities as the interest rate
market improved somewhat in 2004. Residential mortgages are included in consumer loans, which
increased 21.8% from $49.3 million average balance in 2003 to $60.0 million in 2004.
The increase of $2.7 million in net interest income due to volume increases in average earning
assets was offset by a $1.0 million decrease in net interest income from an increase in average
interest-bearing liabilities. The increase in interest-bearing liabilities was largely
attributable to an increase of $38.0 million or 34.6% in average savings deposits from $110.0
million in 2003 to $148.1 million in 2004. The largest increases in savings deposits included a
successful introduction of a competitive retail savings account and the continued success of a
municipal savings account, both of which offer money market equivalent rates.
Additionally, average other borrowed funds, including FHLB advances and trust preferred securities,
increased 91.7% or by $13.6 million in 2004 compared to 2003. As discussed above, the increase was
largely due to $30.0 million borrowed from the FHLB. Additionally, the Company raised $11.3
million through the issuance of Junior Subordinated Debentures. See Note 8 to the Consolidated
Financial Statements included under Item 8 of this Report on Form 10-K for discussion of the Junior
Subordinated Debentures.
In addition to changes in the composition of the Company’s earning assets and interest-bearing
liabilities, changes in interest rates and spreads can impact net interest income. Net interest
spread, or the difference between yield on earning assets and rate on interest-bearing liabilities,
was 3.26% in 2004, down slightly from 3.28% in 2003. The yield on interest-earning assets
decreased 18 basis points from 5.14% in 2003 to 4.96% in 2004, while the cost of interest-bearing
liabilities decreased 16 basis points, from 1.86% in 2003 to 1.70% in 2004.
Net interest-free funds consist largely of non-interest-bearing deposit accounts and stockholders’
equity, offset by bank-owned life insurance and non-interest-earning assets, including goodwill and
intangible assets. Average net interest-free funds totaled $57.4 million in 2004 compared to $56.7
million in 2003. The contribution of net interest-free funds to net interest margin was 0.27% in
2004, compared with 0.36% in 2003.
Reflecting the changes to the net interest spread and the contribution of interest-free funds as
described above, the Company’s net interest margin decreased from 3.64% during 2003 to 3.53% during
2004.
During the second part of 2004, the FRB took numerous steps to increase the level of interest rates
by increasing its benchmark overnight federal funds target rate by 125 basis points. The Company
believes the continued efforts by the FRB to mitigate potential inflation through raising
short-term interest rates, and the market trend indicating a flattening of the steepness of the
treasury yield curve, will continue to challenge net interest margin in 2005.
The Bank regularly monitors its exposure to interest rate risk. Management believes that 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 changes in interest rates. The Bank has
adopted an asset/liability policy that specifies minimum limits for liquidity and capital ratios.
This policy includes setting ranges for the negative impact acceptable on net interest income and
on the fair 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 meetings,
ALCO reviews the Bank’s status and formulates its strategies based on current economic conditions,
interest rate forecasts, loan demand, deposit volatility and the Bank’s earnings objectives.
31
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 probable loan losses based on management’s
evaluation of the Bank’s loan portfolio. Factors considered by the Bank’s management in
establishing the allowance include the collectibility of individual loans, 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 and determine the adequacy of the
allowance for loan losses. In making this determination, the Bank’s management analyzes the
ultimate collectibility of the loans in the Bank’s portfolio by considering feedback provided by
internal loan staff, the Bank’s 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 a subjectively determined allocation. The specific
credit allocation includes a detailed review of each loan in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan” and No. 118, “Accounting by Creditors for
Impairment of a Loan — Income Recognition and Disclosure,” and an allocation is made based on this
analysis. The general portfolio allocation consists of an assigned reserve percentage based on the
internal credit rating of each loan, using the Bank’s historical loss experience and industry loss
experience where the Bank does not have adequate or relevant experience.
The subjective portion of the allowance reflects management’s current assessment of the New York
State and Western New York economies. Both have lagged behind national prosperity, which continues
to remain unsettled. Marginal job growth, in conjunction with a declining population base, has
left the Bank’s primary 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 an area of concentration in the Bank’s real estate portfolio. Commercial real estate
values may be susceptible to decline in an adverse economy. The Bank’s management believes that
the Bank’s loan loss reserve complies with United States Generally Accepted Accounting Principles
and 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. For further discussion, see
Note 1 to the Company’s Consolidated Financial Statements included under Item 8 of this Report on
Form 10-K.
The Company’s provision for loan losses was $0.5 million in 2004 and 2003. Total non-performing
loans amounted to $1.8 million at December 31, 2004, as compared to $0.9 million at December 31,
2003.
The following table provides an analysis of the allowance for loan losses, the total of
charge-offs, non-performing loans and total allowance for loan losses as a percentage of total
loans outstanding for the five years ended December 31:
32
An allocation of the allowance for loan losses by portfolio type over the past five years follows
(dollars in thousands):
Both the total increase in allowance for loan losses and allocation of the allowance to
commercial loans are in response to the increase in total higher risk commercial loans. Commercial
real estate mortgages represent 59.0% or $107.4 million of total real estate mortgages at December
31, 2004, as compared to 62.5% or $99.7 million at December 31, 2003. 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, comprises 13.0% of total loans or $28.8 million at December 31, 2004, as
compared to 12.9% or $24.3 million at December 31, 2003. The increased allowance to commercial
categories addresses the Bank’s strategic decision to continue growing this segment, as well as the
local economy, which has lagged the national economy. Commercial loans are more susceptible to
decreases in credit quality in cyclical downturns and the larger individual balances of commercial
loan expose the Bank to larger losses. In addition, growth in the size of the commercial loan
portfolio during 2004, and the increase in non-accrual loans at December 31, 2004, required
additional allowance to provide for probable losses in these loans.
The allowance for loan losses is based on management’s estimate, and ultimate losses will vary from
current estimates. Factors underlying the determination of the allowance for loan losses are
continually evaluated by management based on changing market conditions and other known factors.
Some factors underlying the allocation of loan losses have changed in 2004 as a result of the
evaluation of underlying risk factors within each loan category. The underlying 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 11.8% in 2004 over 2003. This
compares to an increase of approximately $2.2 million or 40.0% in 2003 over 2002. Bank service
charge income in 2004 remained consistent with 2003. Service charge income in 2003 increased
approximately $0.7 million over 2002 due to the rollout of the Bank’s Safeguard Overdraft Service,
an automated overdraft privilege service, and concentrated effort on increasing fee income in late
2002.
Insurance fee revenue in 2004 increased $1.4 million over 2003. The increased insurance fee
revenue was primarily the result of acquisitions of Ellwood and Easy PA on January 2, 2004 and the
acquisition of Ulrich on October 1, 2004.
Other year-to-date non-interest income decreased by $0.2 million over 2003. Commission fees and
premium on loans sold also decreased in 2004 over 2003. These decreases are primarily attributed
to the competitive interest rate environment during 2003, which resulted in more prepayment fees
collected on refinanced loans and lower loan originations and sales volume in secondary markets
compared to 2003, which was a high point in a historic refinancing period.
In 2004, the Bank continued to grow its ATM network, with the addition of 3 new offsite locations.
Also, the Bank joined MoneyPass, a surcharge-free ATM network. This affiliation provides
surcharge-free access to funds at a number of nationwide locations for our customers.
33
Gains realized on the sales of securities, totaled approximately $0.2 million in 2004 versus
approximately $0.3 million in 2003.
Non-Interest Expense
Total non-interest expense increased approximately $2.0 million or 16.0% in 2004 over 2003. In
2004, the ratio of non-interest expense to average assets was 3.76% compared to 3.90% in 2003 and
4.01% in 2002. Non-interest expense categories include those most impacted by branch expansion and
the increased operations of ENBI due to acquisitions: salaries and benefits, occupancy,
advertising, and supplies, among others. Salary and benefit expense increased 16.4% during 2004
over 2003. Of the $1.1 million increase in salary and benefit expense in 2004 over 2003, the
Bank’s operations represented approximately $0.6 million and ENBI represented approximately $0.5
million. The full operating year of the Lancaster branch of the Bank, increased loan staffing,
ENBI expansion and merit increases contributed to the increased salary costs. ENBI acquired the
business, assets and certain liabilities of the Easy PA and Ellwood insurance agencies, both
located in Hamburg, New York, on January 2, 2004. On October 1, 2004, ENBI acquired Ulrich, a
retail property and casualty insurance agency located in Lockport, New York, which contributed to
ENBI’s salary and benefit increased expense in 2004.
Occupancy expense increased approximately $0.4 million or 24.1% from 2003 to 2004, primarily due to
ENBI’s acquisition growth and the Bank’s new branch in Lancaster, New York and new administrative
offices in Hamburg, New York.
Other expenses increased $0.1 million or approximately 5.9% in 2004. 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. The increase reflects other transaction-based expenses related to the
increased size and volume of the Bank’s business.
Amortization of intangibles has increased approximately $0.2 million, reflecting the three
insurance agency acquisitions completed in 2004.
Taxes
The provision for income taxes in 2004 of $1.4 million reflects an effective tax rate of
approximately 23.6%. This compares to $1.2 million or 23.1% in 2003. The Company continues to
maintain a substantial investment in tax-advantaged municipal bonds, which contributes to its
favorable tax position. Additionally, the Company benefits from favorable tax positions due to
ENHC’s structure as a REIT and bank-owned life insurance income, which is not taxed.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
Net Income
Net income of $4.1 million in 2003 consisted of $3.7 million related to the Company’s banking
activities and $0.4 million related to the Bank’s insurance agency activities. The total net
income of $4.1 million or $1.58 per share, basic and diluted in 2003, compared to $3.6 million or
$1.41 per share, basic and diluted for 2002.
Net Interest Income
Net interest income, before the provision for loan losses, increased $0.5 million or 4.3% to $10.8
million in 2003, as compared to $10.4 million in 2002, an increase of 14.1% from 2002 over 2001.
This increase in 2003 is attributable to the increase in average interest-earning assts of $54.5
million versus an increase of $52.0 million in average interest-bearing liabilities over 2002.
This accounts for a net increase due to volume of approximately $2.0 million in net interest
income. The yield on interest-earning assets decreased 111 basis points from 6.25% to 5.14% in
2003, while the cost of interest-bearing liabilities decreased 68 basis points, from 2.54% in 2002
to 1.86% in 2003. These rate changes resulted in less of a decrease in rate related changes on
interest expense versus interest income, or a net decrease in net interest income of approximately
$1.5 million. The Bank’s net interest margin decreased from 4.27% during 2002 to 3.64% during
2003.
34
The decrease in net interest margin from 2002 to 2003 is due primarily to three factors: increased
competition from both a loan and deposit pricing perspective, a decrease in the potential to adjust
deposit rates significantly lower as a result of the historically low interest rate environment,
and a large amount of activity in mortgage refinancing, which led to an acceleration of
amortization on investment securities purchased at a premium that were backed by mortgages.
Allowance for Loan Losses
In 2003, the Company’s provision for loan losses was $0.5 million, as compared to $0.4 million in
2002. Total non-performing loans amounted to $0.9 million at December 31, 2003, as compared to
$1.2 million at December 31, 2002.
Both the total increase in allowance for loan losses and allocation of the allowance to commercial
loans are in response to the increase in total higher risk commercial loans. Commercial real
estate mortgages represent 62.5% or $99.7 million of total real estate mortgages at December 31,
2003, as compared to 61.1% or $77.9 million at December 31, 2002. Commercial real estate loans
represent 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, comprised 12.9% of total loans or $24.3 million at December 31, 2003, as
compared to 13.5% of $20.5 million at December 31, 2002. The increased allowance and allocation to
commercial categories addressed the Bank’s strategic decision to continue growing this segment.
Commercial loans are more susceptible to decreases in credit quality in cyclical downturns and the
larger individual balances of commercial loans expose the Bank to larger losses. In addition,
growth in the size of the commercial loan portfolio during 2003 required additional allowance to
provide for probable losses in these loans.
Non-Interest Income
Total non-interest income increased approximately $2.2 million or 40.0% in 2003 over 2002. Bank
service charge income in 2003 increased approximately $0.7 million over 2002 due to a concentrated
effort on increasing fee income in late 2002 and early 2003, and the rollout of the Bank’s
Safeguard Overdraft Service in early 2003. Income from ENBI in 2003 accounted for approximately
$0.5 million of the increase in non-interest income. Income earned on bank-owned life insurance
increased approximately $0.3 million over 2002 as a result of a $6.2 million bank-owned life
insurance purchase in February 2003.
The competitive interest rate environment resulted in prepayment fees collected on refinanced loans
totaling an additional $0.3 million in 2003. New mortgage volume and refinancings also increased
appraisal fees and premiums received on residential mortgages sold to the FNMA for approximately
$0.1 million in 2003. ENB also benefited from the low interest rate environment as customers
searched for higher yields in mutual funds and annuities. ENB’s revenue increased $44 thousand in
2003 as compared to 2002.
Additionally, the Bank grew its ATM network with the addition of six new offsite locations during
2003. Also, the usage of the Bank’s point-of-sale debit cards increased. The ATM and debit card
data services collectively provided approximately an additional $0.2 million in fees in 2003 as
compared to 2002.
Gains realized on the sales of securities totaled approximately $0.3 million in 2003 versus an
approximate $0.1 million gain realized in 2002. During 2003, the Bank recognized losses on sales
and write downs in the carrying value of foreclosed real estate of $0.03 million versus losses of
$0.1 million in 2002.
Non-Interest Expense
Total non-interest expense increased approximately $2.1 million or 19.6% in 2003 over 2002. In
2003, the ratio of non-interest expense to average assets was 3.90% compared to 4.01% in 2002.
Non-interest expense categories include those most impacted by branch expansion and the operations
of ENBI and ENB: salaries and benefits, occupancy, advertising and supplies, among others. Salary
and benefit expense increased 23.1% in 2003 over 2002. Of the $1.3 million increase in salary and
benefit expense in 2003 over 2002, the Bank’s operations contributed approximately $1.0 million and
ENBI contributed approximately $0.3 million. The addition of the Bank’s Lancaster branch, full
operating year of the Bank’s Amherst branch, increased loan staffing, ENBI expansion and merit
increased contributed to the increased salary cost. ENBI acquired the business, assets and certain
liabilities of the Gutekunst Agency in the beginning of 2003, and completed a full year of
operations of FCS, acquired on January 1, 2003, which contributed to its increased salary and
benefits.
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Occupancy expense increased approximately $0.1 million or 8.8% from 2002 to 2003. ENBI’s
acquisition of FCS and a full year operation of the Bank’s Amherst branch location increased
related occupancy expenses: utilities, rent and depreciation, among others. Professional services
expense increased $0.1 million or 15.4% in 2003 versus 2002, due in part to the Bank’s engagement
of an outside consulting firm for a revenue enhancement project and engagement of attorneys to
prepare and review new employee benefit plans in 2003.
Other expenses increased $0.4 million or approximately 21.3% in 2003 over 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 other expenses. Additionally, other expenses increased due to costs associated with the
Bank’s conversion to a next generation item processing data center environment, which resulted in
increased capacity, capability and opportunity for future efficiencies.
Taxes
The provision for income taxes in 2003 of $1.2 million reflects an effective tax rate of
approximately 23.1%. This compares to $1.2 million or 24.9% in 2002. One reason for the decrease
in the effective tax rate was the establishment of ENHC as a REIT, which provided flexibility and
planning opportunities for the Bank, as well as state tax benefits. Also, the additional
bank-owned life insurance income earned in 2003 improved the Bank’s effective tax rate. The Bank
continues to maintain a substantial investment in tax-advantaged municipal bonds, which contributes
to its favorable tax position.
FINANCIAL CONDITION
The Company had total assets of $429.0 million at December 31, 2004, an increase of $94.3 million
or 28.2% over $334.7 million at December 31, 2003. Net loans of $217.6 million increased 17.3% or
$32.1 million over 2003. Securities increased $49.3 million or 40.9%, goodwill increased $6.3
million and intangible assets increased $2.0 million. Deposits grew by $35.6 million or 13.4%.
Other borrowed funds increased $42.6 million. Stockholders’ equity increased $2.2 million or 6.5%.
Net unrealized gains/losses on investment securities held by the Bank decreased $2.2 million over
2003, due to an increasing interest rate environment, which reduced the fair value of the Bank’s
securities portfolio.
Loans
Loans comprised 55.1% of the Company’s total average earning assets in 2004. Actual year-end
balances increased 17.3% versus an increase of 24.5% in 2003 and 4.6% in 2002. The Company
continues to focus its lending on commercial and residential mortgages, commercial loans and home
equity loans. Commercial mortgages make up the largest segment of the portfolio at 48.7% of total
loans. Residential mortgages comprise 17.4% of the loan portfolio and 12.6% are home equity loans.
Other commercial loans account for 13.0% of outstanding loans. Commercial loans total $28.8
million at December 31, 2004, reflecting an 18.4% or $4.5 million increase for 2004 over 2003.
Residential mortgages totaled $38.5 million at December 31, 2004, reflecting a 27.6% or $8.3
million increase in 2004 over 2003. Prior to fiscal 2004, a significant portion of fixed rate
residential mortgages originated were sold to the secondary market in order to minimize interest
rate risk in the Bank’s portfolio. In 2004, the Bank originated and retained fixed rate
residential real estate loans with shorter maturities, reflecting the improving interest rate
environment.
At December 31, 2004, the Bank had a loan/deposit ratio of 72.1%. This compares to a loan/deposit
ratio of 69.7% at December 31, 2003.
At December 31, 2004, the Bank retained the servicing rights to $29.2 million in long-term
mortgages sold to the FNMA. This compares to a loan servicing portfolio principal balance of $30.9
million at December 31, 2003. The arrangement that the Bank has with FNMA allows it to offer
long-term mortgages without exposure to the associated interest rate risks, while retaining
customer account relationships. In 2004 and 2003, the Bank sold loans to FNMA totaling
approximately $2.6 million and $15.7 million, respectively. The Bank did not record any related
asset to the servicing portfolio rights as management determined it is immaterial.
Securities and Federal Funds Sold
Securities and federal funds sold made up the remaining 44.7% of the Bank’s total average interest
earning assets at December 31, 2004 compared to 43.7% at December 31, 2003. These categories
provide the Bank with additional sources
36
of liquidity and income. The Bank’s securities portfolio increased 40.9% at December 31, 2004 over
December 31, 2003. It continues to have a large concentration in tax-advantaged municipal bonds,
which make up 28.2% of the portfolio at December 31, 2004 versus 46.7% at December 31, 2003; US
government-guaranteed mortgage-backed securities, which make up 52.5% of the portfolio at December
31, 2004 versus 34.4% at December 31, 2003; and U.S. government-sponsored agency bonds of various
types, which comprise 17.2% of the total at December 31, 2004 versus 17.4% at December 31, 2003.
As a member of both the Federal Reserve System and the Federal Home Loan Bank, the Bank is required
to hold stock in those entities. These investments made up 2.1% of the portfolio at December 31,
2004 versus 1.5% of the portfolio at December 31, 2003. The credit quality of the securities
portfolio is believed to be strong, with 96.1% of the securities portfolio carrying the equivalent
of a Moody’s rating of AAA.
The large increase in the portfolio was, as previously discussed, due to the purchase of $30.0
million of securities after advances from the Federal Home Loan Bank of New York. The majority of
the security purchases were of U.S. Government-sponsored mortgage-backed securities. The Company
determined the benefit of cash flows from mortgage-backed securities offers benefits in the current
interest rate environment. As a result of this strategy, the Company’s largest security portfolio
concentration became U.S. Government-sponsored mortgage-backed securities during 2004 as opposed to
New York State municipal securities, which had historically been the Company’s largest portfolio
concentration.
All fixed and adjustable rate mortgage pools contain a certain amount of risk related to the
uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact
on prepayment rates. The Company uses a third-party developed computer simulation model to monitor
the average life and yield volatility of mortgage pools under various interest rate assumptions.
Federal funds sold balances are largely maintained for liquidity purposes. The average balance
maintained in federal funds sold increased slightly in 2004 to 2.0% of total average earning assets
from 1.7% in 2003. At December 31, 2004, the Company was in a federal funds purchased position of
$21.1 million, which is reported as part of “other borrowed funds” on the Company’s Consolidated
Balance Sheets included under Item 8 of this Report on Form 10-K. The Company has attempted to
take advantage of the relatively low cost of such funds for funding purposes as a result of the
current rate environment. Additionally, during the last week of fiscal 2004, the Company incurred
short-term liabilities to finance certain deposit runoff and the acquisition of M&C Leasing on
December 31, 2004 for a cash payment of $1.2 million, assumption of $4.2 million in debt and up to
approximately $0.5 million in earn-out payments.
The Company manages its available for sale securities portfolio on a total return basis.
Management regularly reviews the performance of the Company’s securities and sells specific
securities to enhance net interest income and net interest margin. The Company realized $0.2
million in net gains on these sales in 2004 and $0.3 million in net gains in 2003.
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” outlines
accounting and reporting requirements for investment securities. The Company designates all
securities at the time of purchase as either “held to maturity” or “available for sale.”
Securities designated as held to maturity are stated on the Company’s Consolidated Balance Sheets
included under Item 8 of this Report on Form 10-K at amortized cost. Those designated as available
for sale are reported at fair market value. At December 31, 2004, $3.1 million in securities were
designated as held to maturity. These bonds are primarily municipal investments that the Bank has
made in its local trade area.
The available for sale portfolio totaled $166.8 million or approximately 98.2% of the Bank’s
securities portfolio at December 31, 2004. Net unrealized gains and losses on available for sale
securities resulted in a net unrealized gain of $1.0 million at December 31, 2004, as compared to
$3.1 million at December 31, 2003. Unrealized gains and losses on available for sale securities
are reported, net of taxes, as a separate component of shareholders’ equity. At December 31, 2004,
the impact to equity was a net unrealized gain of approximately $0.6 million.
Deposits
Total deposits increased $35.6 million or 13.4% in 2004 over 2003. Core deposit growth has been an
area the Bank has focused on, and its success is evident in the 4.1% increase in demand deposits,
1.6% increase in NOW accounts and 34.3% increase in savings accounts. Time deposits of less than
$100,000 decreased 9.5% in 2004. Several past certificate of deposit promotions matured in 2004,
and the Company did not aggressively price to retain those funds. Alternatively, as discussed
above, the Company has utilized lower-cost short-term borrowings to supplement funding.
37
Certificates of deposit in excess of $100,000 increased 8.4%. These funds are generally not
considered core deposits. Many of these deposits are obtained from municipalities through the
competitive bidding process. Certificates of deposit in excess of $100,000 have increased in 2003
and over the past several years due to the Bank’s expansion of its trade area.
Pension
The Company maintains a qualified defined benefit pension plan, which covers substantially all
employees. Additionally, the Company has entered into individual retirement agreements with
certain of its executive officers providing for unfunded supplemental pension benefits under the
Company’s Supplemental Executive Retirement Plan (the “SERP”). The Company’s pension expense for
all pension plans, including the SERP, approximated $0.5 million for each of the years ended
December 31, 2004 and December 31, 2003, and is calculated based upon a number of actuarial
assumptions, including an expected long-term rate of return on the Company’s plan assets of 7.50%
and 6.75% in 2004 and 2003, respectively; compensation rate increases of 4.75% in both 2004 and
2003 for the defined benefit pension plan and 5.00% in both 2004 and 2003 for the SERP.
The expected long-term rate of return on pension plan assets assumption was determined based on
historical returns earned by equity and fixed income securities, adjusted to reflect future return
expectations based on pension plan targeted asset allocation. In evaluating compensation rate
increases, the Company evaluated historical salary data as well as expected future increases. The
Company will continue to evaluate its actuarial assumptions, including its expected rate of return
and compensation rate increases at least annually, and will adjust as necessary.
The Company bases its determination of pension expense or income on a market-related valuation of
assets, which reduces year-to-year volatility. This market-related valuation recognizes investment
gains or losses over a three-year period from the year in which they occur. Investment gains or
losses for this purpose are the difference between the expected return calculated using the
market-related value of assets and the actual return based on the market-related value of assets.
Since the market-related value of assets recognizes gains or losses over a three-year period, the
future value of assets will be impacted as previously deferred gains or losses are recorded.
The discount rate utilized by the Company for determining future pension obligations is based on a
review of long-term bonds that receive one of the two highest ratings given by a recognized rating
agency. The discount rate determined on this basis has decreased from 6.25% at September 30, 2003,
for purposes of the Company’s defined benefit pension plan and at December 31, 2003, for purposes
of the SERP, both of which are the measurement dates, to 6.00% for both plans at September 30, 2004
and December 31, 2004, respectively.
Liquidity
The Company utilizes cash flows from its investment portfolio and federal funds sold balances to
manage the liquidity requirements it experiences due to loan demand and deposit fluctuations. The
Bank also has many borrowing options. As a member of the FHLB, the Bank is able to borrow funds at
competitive rates. Advances of up to $16.0 million can be drawn on the FHLB via the Bank’s
Overnight Line of Credit Agreement. An amount equal to 25% of the Bank’s total assets could be
borrowed through the advance programs under certain qualifying circumstances. The Bank also has
the ability to purchase up to $10.0 million in federal funds from one of its correspondent banks.
By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could also
borrow at the FRB’s discount window. Additionally, the Bank has access to capital markets as a
funding source.
The cash flows from the investment portfolio are laddered, so that securities mature at regular
intervals, to provide funds from principal and interest payments at various times as liquidity
needs may arise. Contractual maturities are also laddered, with consideration as to the volatility
of market prices, so that securities are available for sale from time-to-time without the need to
incur significant losses. At December 31, 2004, approximately 2.0% of the Bank’s debt securities
had maturity dates of one year or less, and approximately 19.9% had maturity dates of five years or
less. At December 31, 2004, the Bank had net short-term liquidity of $2.4 million as compared to
$6.7 million at December 31, 2003. The decrease in short-term liquidity at December 31, 2004
compared to December 31, 2003 was primarily due to an increase in the federal funds purchased
position from $13.5 on December 31, 2003 to $21.1 million on December 31, 2004, which is reported
as a part of “other borrowed funds” on the Company’s Consolidated Balance Sheets included in the
Company’s Consolidated Financial Statements included under Item 8 of this Report on Form 10-K. The
Bank has attempted to take advantage of the relatively low cost of funds for funding purposes as a
result of the current interest rate environment. Additionally, seasonal fluctuations in municipal
deposits are typically lowest at the end of the fiscal year until county tax receipts are received
in
38
February. Available assets of $167.3 million, less public and purchased funds of $164.8
million, resulted in a long-term liquidity ratio of 102% at December 31, 2004, versus 123% at
December 31, 2003.
Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance
with internal policies, and believes that available sources of liquidity are adequate to meet
funding needs in the normal course of business. Management does not anticipate engaging in any
activities, either currently or the long-term, for which adequate funding would not be available
and would therefore result in significant pressure on liquidity.
Liquidity needs can also be met by more aggressively pursuing municipal deposits, which are
normally awarded on the basis of competitive bidding. The Bank maintains a sufficient level of US
government and government agency securities and New York State municipal bonds that can be pledged
as collateral for these deposits.
Contractual Obligations
The Company is party to contractual financial obligations, including repayment of borrowings,
operating lease payments and commitments to extend credit. The table below presents certain future
financial obligations.
The Company’s variable rate debt included in other borrowed funds is related to short-term funding
which is used only to cover seasonal funding needs, which are undeterminable for a particular year.
At December 31, 2004, the Company had commitments to extend credit of $60.9 million compared to
$45.5 million at December 31, 2003. For additional information regarding future financial
commitment, this disclosure should be read in conjunction with Note 15 to the Company’s
Consolidated Financial Statements included under Item 8 of this Report on Form 10-K.
Capital
The Company and Bank have consistently maintained regulatory capital ratios at, or above, well
capitalized standards. For further detail on capital and capital ratios, see Note 19 to the
Company’s Consolidated Financial Statements included under Item 8 of this Report on Form 10-K.
Total Company stockholders’ equity was $35.5 million at December 31, 2004, up from $33.3 million at
December 31, 2003. Equity as a percentage of assets was 8.3% at December 31, 2004, compared to
10.0% at December 31, 2003. Book value per share of common stock rose to $13.68 at December 31,
2004, up from $12.98 at December 31, 2003.
To complete the acquisition of Ellwood Agency and Easy PA Insurance Agency by ENBI, the Company on
January 2, 2004 issued 31,942 shares of common stock to the previous owners of the two insurance
agencies. This resulted in an addition to stockholders’ equity of $0.7 million. For further
detail, see Note 21 to the Company’s Consolidated Financial Statements included under Item 8 of
this Report on Form 10-K.
39
Included in stockholders’ equity was accumulated other comprehensive income which reflects the net
after-tax impact of unrealized gains or losses on investment securities classified as available for
sale. Net unrealized gains on available-for-sale investment securities were $0.6 million, or $0.22
per share of common stock, at December 31, 2004; $1.9 million, or $0.75 per share of common stock,
at December 31, 2003; and $2.1 million, or $0.82 per share of common stock, at December 31, 2002.
Such unrealized gains are generally due to changes in interest rates and represent the difference,
net of applicable income tax effect, between the estimated fair value and amortized cost of
investment securities classified as available-for-sale.
In September 2001, the Company’s Board of Directors authorized the repurchase of up to 50,000
shares of the Company’s outstanding common stock over the following two years. In October of 2003,
the Board approved a new repurchase plan for a two year time period. Shares are held for reissue
in connection with the Company’s Stock Dividend Reinvestment Plan, the Company’s 1999 Stock Option
and Long-Term Incentive Plan, as amended, and general corporate purposes. During 2004 and 2003,
under these two plans, the Company repurchased 30,000 shares and 26,295 shares at a cost of $0.7
million and $0.6 million, respectively. Subject to ongoing capital and investment considerations,
management intends to continue to repurchase shares in 2005 on an opportunistic basis pursuant to
the repurchase plan.
The Company paid cash dividends per share of common stock of $0.64 in 2004, $0.60 in 2003, and
$0.51 in 2002. The dividend payout is continually reviewed by management and the Company’s Board
of Directors. The dividend payout ratio, which represents cash dividends paid, divided by net
income, was 36.77%, 37.71%, and 36.18% for the years 2004, 2003, and 2002, respectively.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the
Bank’s financial instruments. The primary market risk the Company is exposed to is interest rate
risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate
risk, which occurs when assets and liabilities re-price at different times and by different amounts
as interest rates change. As a result, net interest income earned by the Bank is subject to the
effects of changing interest rates. The Bank measures interest rate risk by calculating the
variability of net interest income in the future periods under various interest rate scenarios
using projected balances for interest-earning assets and interest-bearing liabilities.
Management’s philosophy toward interest rate risk management is to limit the variability of net
interest income. The balances of financial instruments used in the projections are based on
expected growth from forecasted business opportunities, anticipated prepayments of loans and
investment securities and expected maturities of investment securities, loans and deposits.
Management supplements the modeling technique described above with the analysis of market values of
the Bank’s financial instruments and changes to such market values given changes in the interest
rates.
The Bank’s Asset Liability Committee, which includes members of the Bank’s senior management,
monitors the Bank’s interest rate sensitivity with the aid of a computer-based model that considers
the impact of ongoing lending and deposit gathering activities, as well as interrelationships in
the magnitude and timing of the re-pricing of financial instruments, including the effect of
changing interest rates on expected prepayments and maturities. When deemed prudent, the Bank’s
management has taken actions and intends to do so in the future, to mitigate exposure to interest
rate risk through the use of on-or off-balance sheet financial instruments. Possible actions
include, but are not limited to, changes in the pricing of loan and deposit products, modifying the
composition of interest-earning assets and interest-bearing liabilities, and other financial
instruments used for interest rate risk management purposes.
SENSITIVITY OF NET INTEREST INCOME
40
Many assumptions were utilized by the Company to calculate the impact that changes in interest
rates may have on net interest income. The more significant assumptions related to the rate of
prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit
maturities. The Company also assumed immediate changes in rates, including 200 basis point rate
changes. In the event that a 200 basis point rate change cannot be achieved, the applicable rate
changes are limited to lesser amounts, such that interest rates cannot be less than zero. These
assumptions are inherently uncertain and, as a result, the Company cannot precisely predict the
impact of changes in interest rates on net interest income. Actual results may differ
significantly due to the timing, magnitude, and frequency of interest rate changes in market
conditions and interest rate differentials (spreads) between maturity/re-pricing categories, as
well as any actions, such as those previously described, which management may take to counter such
changes. In light of the uncertainties and assumptions associated with the process, the amounts
presented in the table, and changes in such amounts, are not considered significant to the
Company’s projected net interest income.
Financial instruments with off-balance sheet risk at December 31, 2004 included $16.3 million in
undisbursed lines of credit at an average interest rate of 4.7%; $5.4 million in fixed rate loan
origination commitments at 8.6%; $37.0 million in adjustable rate loan origination commitments at
6.8%; and $2.1 million in adjustable rate letters of credit at an average rate of 6.5%.
The following table represents expected maturities of interest-bearing assets and liabilities and
their corresponding average interest rates.
When rates rise or fall, the market value of the Company’s rate-sensitive assets and
liabilities increases or decreases. As a part of the Company’s asset/liability policy, the Company
has set limitations on the negative impact to the market value of its balance sheet that would be
acceptable. The Bank’s securities portfolio is priced monthly and adjustments are made on the
balance sheet to reflect the market value of the available for sale portfolio per SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” At year-end, the impact to
equity as a result of marking available for sale securities to market was an unrealized gain of
$0.6 million. On a monthly basis, the available for sale portfolio is shocked for immediate rate
increases of 200 basis points. At December 31, 2004, the Company determined it would take an
immediate increase in rates in excess of 200 basis points to eliminate the current capital cushion
in excess of regulatory requirements. The Company’s and the Bank’s capital ratios are also
reviewed on a quarterly basis.
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Capital Expenditures
The Company continues to pursue de novo branching to expand the Bank’s market. At December 31,
2004, the Bank had not committed to purchase any new facilities; however, opportunities may arise
during 2005. Other planned expenditures include replacing a number of personal computers,
replacing and adding automated teller machines (ATMs) and miscellaneous other equipment. The
Company believes it has a sufficient capital base to support these known and potential capital
expenditures with current assets and retained earnings.
Impact of Inflation and Changing Prices
There will continually be economic events, such as the changes in the economic policies of the FRB
that will have an impact on the profitability of the Company. Inflation may result in impaired
asset growth, reduced earnings and substandard capital ratios. The net interest margin can be
adversely impacted by the volatility of interest rates throughout the year. Since these factors
are unknown, management attempts to structure the balance sheet and re-pricing frequency of assets
and liabilities to avoid a significant concentration that could result in a negative impact on
earnings.
Segment Information
In accordance with the provisions of SFAS No. 131, “Disclosures About Segments of an Enterprise and
Related Information,” the Company’s reportable segments have been determined based upon its
internal profitability reporting system, which are comprised of banking activities and insurance
agency activities.
The banking activities segment includes all of the activities of the Bank in its function as a
full-service commercial bank. This includes the operations of ENB, which provides non-deposit
investment products and will include ENL, which provides direct financing leasing. Net income from
banking activities was $3.9 million in 2004, which represents a $0.2 million or 5.2% increase over
2003. The increase in net income from banking activities was driven by significant increases in
non-interest income. Total assets of the banking activities segment increased $86.8 million or
26.3% during 2004 to $416.4 million at December 31, 2004, due primarily to normal banking
activities and growth in deposits which were utilized to fund loans, the investment securities
portfolio, and the ENL purchase of M&C Leasing on December 31, 2004, which included $4.5 million in
net receivables and $1.5 million of goodwill.
The insurance activities segment includes activities of ENBI, which is a retail property and
casualty insurance agency with twelve locations in the Western New York area. Growth in the
overall ENBI property and casualty lines of business, as well as the acquisition of the business of
Ulrich on October 1, 2004 and the acquisitions of Easy PA and Ellwood on January 1, 2004,
contributed to the improvement in total revenue in 2004 of $1.4 million or 40.7% over 2003. Net
income from insurance activities was $0.6 million in 2004, which represents a $0.3 million or 70.9%
increase from 2003. Total assets of the insurance activities segment increased $7.6 million or
150% during 2004 to $12.6 million at December 31, 2004, due primarily to the acquisition of the
businesses of Ulrich, Ellwood and Easy PA during 2004.
Fourth Quarter Results
Net income was $1.2 million, or $0.46 per diluted share, for the quarter ended December 31, 2004 as
compared to $1.0 million, or $0.38 per diluted share, for the quarter ended December 31, 2003.
Net interest income of $3.2 million for the fourth quarter 2004 represented a $0.2 million increase
from the fourth quarter 2003, primarily as a result of growth in interest-earning assets. The net
interest margin for the fourth quarter 2004 was 3.29% as compared to 3.88% for the fourth quarter
2003, primarily resulting from strategies such as the leverage taken by the Company with Federal
Home Loan Bank borrowings and corresponding investment portfolio purchases, the $11.3 million
offering of issuance of junior subordinated debentures, and the increasing cost of funds related to
growth in higher costing deposits such as Muni-vest and the Bank’s new retail money market account.
Non-interest income was $2.3 million for the fourth quarter 2004, an increase of $0.6 million or
35.8%, over fourth quarter 2003, primarily as a result of increased insurance fee revenue.
Insurance fee revenue increased $0.7 million, or 97.3% over the prior year quarter and was
partially offset by a $0.1 million decline in loan-related fees. The increased insurance fee
revenue in the quarter was primarily the result of ENBI’s acquisition of Ulrich on October 1, 2004
and its acquisition of Ellwood and Easy PA on January 2, 2004. The decrease in loan-related fees
reflected lower loan originations and sales volume in secondary markets compared to fourth quarter
2003, which was a high point in a historic refinancing period.
42
Non-interest expense was $3.9 million for the fourth quarter of 2004, an increase of $0.7 million,
or 20.4%, over the fourth quarter of 2003. A component of the increase was an additional $0.4
million in salary and employee benefit expense related to Company growth and merit pay increases
awarded in early 2004, as well as an increase in the number of employees related to the insurance
agency acquisitions. Additionally, occupancy expense increased $0.1 million over fourth quarter
2003 primarily due to Company growth, including the insurance agency location in Lockport, New York
and the Bank’s new administrative offices in Hamburg, New York.
Recent Accounting Standards
On January 1, 2003, the Company implemented the provisions of Financial Accounting Standards Board
Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which was an interpretation
of a number of FASB statements. FIN 45 elaborates on the disclosures to be made by a guarantor in
its periodic financial statements. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of FIN 45 did not have a material impact on the Company’s
Consolidated Financial Statements.
In January 2003, FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable
Interest Entities,” and revised it in December 2003 with the issuance of FIN 46r. These
interpretations clarified the application of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support from other
parties. These interpretations require an enterprise to consolidate a variable interest entity (as
defined in FIN 46) if that enterprise has a variable interest (or combination of variable
interests) that will absorb a majority of the entity’s expected losses if they occur, receive a
majority of the entity’s expected returns if they occur, or both. These interpretations apply to
variable interest entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. The adoption of FIN 46 and FIN 46r
resulted in the Company not eliminating in consolidation the assets, liabilities, equity and
operations of Evans Capital Trust I, a statutory trust established for the purpose of issuing and
selling certain securities representing undivided beneficial interests in the assets of the Trust
and investing the proceeds thereof in certain junior subordinated debentures of the Company.
In December 2003, the American Institute of Certified Public Accounts’ Accounting Standards
Executive Committee issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or
Debt Securities Acquired in a Transfer.” The SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. The SOP addresses accounting
for differences between contractual cash flows and cash flows expected to be collected from an
investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes loans acquired in
business combinations and applies to all non-governmental entities, including not-for-profit
organizations. The SOP does not apply to loans originated by the entity. The provisions of this
SOP are not expected to have a material impact on the Company’s Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No.
123R”), an amendment of SFAS No. 123 which supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. SFAS No. 123R also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. That
cost is to be recognized over the period during which an employee is required to provide services
in exchange for the award.
SFAS No. 123R is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. Effective January 1, 2003, the Company has recognized expense for
stock-based compensation using the fair value method of accounting described in SFAS No. 123,
“Accounting for Stock Based Compensation.” The provisions of SFAS No. 123R will not have a
material impact on the Company’s Consolidated Financial Statements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations “Liquidity” and “Market Risk,” and is incorporated by reference
into this item.
43
Item 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
44
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of Evans Bancorp, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
stockholders’ equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The accompanying
consolidated statements of income, stockholders’ equity, and cash flows of Evans Bancorp, Inc. and
subsidiaries for the year ended December 31, 2002, were audited by other auditors whose report
dated January 28, 2003 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2004 and 2003 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Evans Bancorp, Inc. and subsidiaries as
of December 31, 2004 and 2003, and the results of their operations and their cash flows for the
years then ended in conformity with U.S. generally accepted accounting principles.
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Evans Bancorp, Inc.
We have audited the accompanying consolidated statements of income, stockholders’ equity and cash
flows of Evans Bancorp, Inc. and subsidiary (the “Company”) for the year ended December 31, 2002.
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the results of
the Company’s operations and its cash flows for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
46
EVANS BANCORP, INC. AND
SUBSIDIARIES
See notes to consolidated financial statements.
47
EVANS BANCORP, INC. AND
SUBSIDIARIES
See notes to consolidated financial statements.
48
EVANS BANCORP, INC. AND
SUBSIDIARIES
See notes to consolidated financial statements.
49
EVANS BANCORP, INC. AND
SUBSIDIARIES
(Continued)
50
EVANS BANCORP, INC. AND SUBSIDIARY
51
EVANS BANCORP, INC. AND
SUBSIDIARIES
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General
- 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. Through August 2004, the Company was registered with
the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as
amended. In August 2004, the Company filed for, and was approved as, a Financial Holding Company
under the Bank Holding Company Act. Subsequent to this change, the Company reorganized its
corporate structure by creating a mid-tier wholly-owned subsidiary, Evans National Financial
Services, Inc., which was formed by a dividend in-kind of all of the assets and liabilities of ENB
Insurance Agency, Inc. from Evans National Bank. The Company currently conducts its business
through its two subsidiaries: Evans National Bank (the “Bank”), a nationally chartered bank, and
its subsidiaries, ENB Associates Inc. (“ENB”), Evans National Leasing, Inc. (“ENL”) and Evans
National Holding Corp. (“ENHC”); and Evans National Financial Services, Inc. (“ENFS”) and its
subsidiary, ENB Insurance Agency, Inc. (“ENBI”). Unless the context otherwise requires, the term
“Company” refers to Evans Bancorp, Inc. and its subsidiaries. The Company conducts its business
through its subsidiaries. It does not engage in any other substantial business.
Regulatory Requirements
– The Company is subject to the rules, regulations, and reporting
requirements of various regulatory bodies, including the Federal Reserve Board (“FRB”), the Federal
Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), and
the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
– The consolidated financial statements include the accounts of the
Company, the Bank and subsidiaries. All material inter-company accounts and transactions are
eliminated in consolidation.
Accounting Estimates
– The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Securities
– Securities which the Bank has the positive intent and ability to hold to maturity are
classified as held to maturity and are stated at cost, adjusted for discounts and premiums that are
recognized in interest income over the period to the earlier of the call date or maturity using a
method that approximates level yield. These securities represent debt issuances of local
municipalities in the Bank’s market area for which market prices are not readily available. The
amortized cost of the securities approximates market value. Management periodically evaluates the
financial condition of the municipalities for impairment.
Securities classified as available for sale are stated at fair value with unrealized gains and
losses excluded from earnings and reported, net of deferred income taxes, in accumulated other
comprehensive income (loss), a component of stockholders’ equity. Gains and losses on sales of
securities are computed using the specific identification method.
Securities which have experienced an other-than-temporary decline in fair value are written down to
a new cost basis with the amount of the write-down included in earnings as a realized loss. The
new cost basis is not changed for subsequent recoveries in fair value. Factors which management
considers in determining whether an impairment in value of an investment is other than temporary
include the issuer’s financial performance and near term prospects, the financial condition and
prospects for the issuer’s geographic region and industry, and recoveries in fair value subsequent
to the balance sheet date.
The Bank does not engage in securities trading activities.
52
Derivative Instruments and Hedging Activities
- The Company follows the Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities” as amended. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities, which require that an entity recognize all derivatives as
either assets or liabilities on a balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives must be recognized in earnings when they occur, unless the
derivative qualifies as a hedge. If a derivative qualifies as a hedge, a company can elect to use
hedge accounting to eliminate or reduce income statement volatility that would arise from reporting
changes in a derivative’s fair value in income.
Management identified embedded derivatives in some loan commitments for residential mortgages where
the Company has the intent to sell to an investor such as the Federal National Mortgage Association
(“FNMA”).
Loans –
The Bank grants mortgage, commercial and consumer loans to customers. A substantial
portion of the loan portfolio is represented by mortgage loans throughout Erie, Chautauqua and
Niagara counties. The ability of the Bank’s debtors to honor their contracts is dependent upon
numerous factors, including the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future, or until
maturity or pay-off, generally are reported at their outstanding unpaid principal balances adjusted
for charge-offs, the allowance for loan losses, and any deferred fees or costs on those loans at
the time they were originated. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method of accounting.
The Bank considers a loan to be impaired when, based on current information and events, it is
probable that it will be unable to collect principal or interest due according to the contractual
terms of the loan. Loan impairment is measured based on the present value of expected cash flows
discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s
observable market price or the fair value of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the recorded investment in the loan. For
loans other than those that the Bank expects repayment through liquidation of the collateral, when
the remaining recorded investment in the impaired loan is less than or equal to the present value
of the expected cash flows, income is recorded on a cash basis.
The accrual of interest on commercial loans and mortgages is discontinued at the time the loan is
90 days delinquent, unless the credit is well secured and in process of collection. In all cases,
loans are placed on non-accrual status and are subject to charge-off at an earlier date if
collection of principal or interest is considered doubtful.
All interest due but not collected for loans that are placed on non-accrual status or charged off
is reversed against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until it again qualifies for an accrual basis. Loans are
returned to accrual status when all principal and interest amounts contractually due are brought
current, the adverse circumstances which resulted in the delinquent payment status are resolved,
and payments are made in a timely manner for a period of time sufficient to reasonably assure their
future dependability.
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 probable loan losses based
on the Bank’s management’s evaluation of the loan portfolio. Factors considered by the Bank’s
management in establishing the allowance include: the collectibility of individual loans, 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 and determine the adequacy of the
allowance for loan losses. In making this determination, the Bank’s management analyzes the
ultimate collectibility of the loans in its portfolio by considering 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 a subjectively determined allocation. The specific
credit allocation includes a detailed review of the loan in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan” and No. 118, “Accounting by Creditors for
Impairment of a Loan – Income Recognition and Disclosures,” and allocation is made based on this
analysis. The general portfolio allocation consists of an assigned reserve percentage based on the
credit rating of each loan.
53
The subjective portion of the allowance for loan losses reflects management’s evaluation of various
conditions, and involves a higher degree of uncertainty because this component of the allowance is
not identified with specific problem credits or portfolio segments. The conditions evaluated in
connection with this element include the following: industry and regional conditions, seasoning of
the loan portfolio and changes in the composition of and growth in the loan portfolio, the strength
and duration of the business cycle, existing general economic and business conditions in the
lending areas, credit quality trends in non-accruing loans, historical loan charge-off experience,
and the results of bank regulatory examinations.
Foreclosed Real Estate
– Foreclosed real estate is initially recorded at the lower of book or fair
value (net of costs of disposal) at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas costs relating to the holding of property are
expensed. Assessments are periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a property exceeds fair value.
Foreclosed real estate is classified as other assets on the consolidated balance sheets.
Goodwill
– Goodwill represents the excess of the purchase price over the fair value of the net
assets acquired in connection with certain Company acquisitions. Through December 31, 2001,
goodwill was being amortized. Effective January 1, 2002, the Company adopted the provisions of
SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company periodically assesses whether
events or changes in circumstances indicate that the carrying amount of goodwill may be impaired,
on at least an annual basis, and evaluates the carrying amount of goodwill.
Bank-Owned Life Insurance
– The Bank has purchased insurance on the lives of Company directors and
certain members of Bank, ENBI and ENB management. The policies accumulate asset values to meet
future liabilities, including the payment of employee benefits, such as retirement benefits.
Increases in the cash surrender value are recorded as other income in the consolidated statements
of income.
Properties and Equipment
– Properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, which range from 3 to 39 years. Impairment losses on properties and equipment
are realized if the carrying amount is not recoverable from its undiscounted cash flows and exceeds
its fair value.
Loan Servicing
– The Bank, in its normal course of business, sells certain residential mortgages
which it originates to the FNMA. The Company maintains servicing rights on the loans that it sells
to FNMA and earns a fee thereon. At December 31, 2004 and 2003, the Company had approximately
$29.2 million and $30.9 million, respectively, in unpaid principal balances of loans that it
services for FNMA. For the years ended December 31, 2004 and 2003, the Company sold $2.6 million
and $15.7 million, respectively, in loans to FNMA. The Company did not record any related asset to
the servicing portfolio rights as management determined it immaterial.
Income Taxes
– Income taxes are accounted for under the asset and liability method under SFAS No.
109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the periods in which the deferred tax assets or liabilities
are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through income tax expense.
Net Income Per Share
– Net income per common share is based on the weighted average number of
shares outstanding during each year, retroactively adjusted for stock splits and stock dividends.
Dilutive earnings per common share is based on increasing the weighted-average number of shares of
common stock by the number of shares of common stock that would be issued assuming the exercise of
stock options. Such adjustments to weighted-average number of shares of common stock outstanding
are made only when such adjustments are expected to dilute earnings per common share. Basic and
diluted earnings per share are the same for December 31, 2004, 2003, and 2002. The Company’s
potential dilutive securities included 1,804 and 202 shares of common stock for the years ended
December 31, 2004 and 2003, respectively. There were no dilutive securities for the years ended
December 31, 2002. All share and per share information presented is stated after giving effect to
stock dividends.
Stock Dividends
– A 5% stock dividend was declared on November 16, 2004 for shareholders of record
on December 9, 2004. The stock dividend resulted in the issuance of 122,647 shares of common stock
and the payment of $16 thousand for fractional shares, and was issued on December 30, 2004. A 5%
stock dividend was declared on September 16, 2003 for shareholders of record on October 14, 2003.
The stock dividend resulted in the issuance of 116,459 shares of common stock and the payment of
$16 thousand for fractional shares, and was issued on December 1, 2003. Additionally, a 5%
54
stock dividend was declared on November 19, 2002 for shareholders of record on December 2, 2002.
The stock dividend resulted in the issuance of 110,589 shares of common stock and the payment of
$12 thousand for fractional shares, and was issued on January 29, 2003. All share data and per
share data contained in this document have been adjusted to reflect the stock dividends, except for
the share data contained in the consolidated statements of stockholders’ equity.
Comprehensive Income
– Comprehensive income includes both net income and other comprehensive
income, including the change in unrealized gains and losses on securities available for sale and
the change in additional minimum liability related to pension costs, net of tax.
Employee Benefits
– The Company maintains a non-contributory, qualified, defined benefit pension
plan (“Pension Plan”) that covers substantially all employees who meet certain age and service
requirements. The actuarially determined pension benefit in the form of a life annuity is based on
the employee’s combined years of service, age and compensation. The Company’s policy is to fund
the minimum amount required by government regulations.
The Company maintains a defined contribution 401(k) plan and accrues contributions due under this
plan as earned by employees. In addition, the Company maintains a non-qualified Supplemental
Executive Retirement Plan for certain members of senior management, a non-qualified Deferred
Compensation Plan for directors and certain members of management, and a non-qualified Executive
Incentive Retirement Plan for certain members of management, as described more fully in footnote
11.
Stock-Based Compensation
– At December 31, 2004 the Company had stock-based employee and
non-employee compensation plans, which are described more fully in footnote 12. The Company
accounts for these plans under SFAS No. 123, “Accounting for Stock-Based Compensation.” Under SFAS
No. 123, the fair value of the stock options granted to employees are recognized in compensation
salaries and employee benefits expense, and the fair value of the stock options granted to
directors are recognized in other non-interest expense in the consolidated statements of income.
Financial Instruments with Off-Balance Sheet Risk
– In the ordinary course of business, the Bank
has entered into off-balance sheet financial arrangements consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in the financial
statements when the transactions are executed.
Cash and Cash Equivalents
– For purposes of reporting cash flows, cash and cash equivalents include
cash due from banks and federal funds sold. Generally, federal funds sold are purchased for
one-day periods.
Cash due from banks includes reserve balances that the Bank is required to maintain with Federal
Reserve Banks. The required reserves are based upon deposits outstanding, and were approximately
$1.9 million and $1.1 million at December 31, 2004 and 2003, respectively.
Reclassifications
– Certain reclassifications have been made to the 2003 and 2002 financial
statements to conform with the 2004 presentation.
Recent Accounting Standards
On January 1, 2003, the Company implemented the provisions of Financial Accounting Standards Board
Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which was an interpretation
of a number of FASB statements. FIN 45 elaborates on the disclosures to be made by a guarantor in
its periodic financial statements. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of FIN 45 did not have a material impact on the Company’s
consolidated financial statements.
In January 2003, FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable
Interest Entities,” and revised it in December 2003 with the issuance of FIN 46r. These
interpretations clarified the application of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support from other
parties. These interpretations require an enterprise to consolidate a variable interest entity (as
defined in FIN 46) if that enterprise has a variable interest (or combination of variable
interests) that will absorb a majority of the entity’s expected losses if they occur, receive a
majority of the entity’s
55
expected returns if they occur, or both. These interpretations apply to variable interest entities
created after January 31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. The adoption of FIN 46 and FIN 46r resulted in the Company not
eliminating in consolidation the assets, liabilities, equity and operations of Evans Capital Trust
I, a statutory trust established for the purpose of issuing and selling certain securities
representing undivided beneficial interests in the assets of the Trust and investing the proceeds
thereof in certain junior subordinated debentures of the Company.
In December 2003, the American Institute of Certified Public Accounts’ Accounting Standards
Executive Committee issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or
Debt Securities Acquired in a Transfer.” The SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. The SOP addresses accounting
for differences between contractual cash flows and cash flows expected to be collected from an
investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes loans acquired in
business combinations and applies to all non-governmental entities, including not-for-profit
organizations. The SOP does not apply to loans originated by the entity. The provisions of this
SOP are not expected to have a material impact on the Company’s Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No.
123R”), an amendment of SFAS No. 123 which supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. SFAS No. 123R also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. That
cost is to be recognized over the period during which an employee is required to provide services
in exchange for the award.
SFAS No. 123R is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. Effective January 1, 2003, the Company has recognized expense for
stock-based compensation using the fair value method of accounting described in SFAS No. 123. The
provisions of SFAS No. 123R will not have a material impact on the Company’s Consolidated Financial
Statements.
2. SECURITIES
The amortized cost of securities and their approximate fair value at December 31 were as follows:
56
Available for sale securities with a total fair value of $133.3 million at December 31, 2004 were
pledged as collateral to secure public deposits and for other purposes required or permitted by
law.
The scheduled maturities of debt securities at December 31, 2004 are summarized
below. All maturity amounts are contractual maturities. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or prepay obligations with or
without call premiums.
57
Realized gains and losses from $17.2 million, $26.9 million and $7.6 million gross sales on
securities for the years ended December 31, 2004, 2003 and 2002, respectively, are summarized as
follows:
Management has assessed the securities available for sale in an unrealized loss position at
December 31, 2004 and determined the decline in fair value below amortized cost to be temporary.
In making this determination, management considered the period of time the securities were in a
loss position, the percentage decline in comparison to the securities amortized cost, the financial
condition of the issuer (primarily government or government-sponsored enterprises) and the
Company’s ability and intent to hold these securities until their fair value recovers to their
amortized cost. Management believes the decline in fair value is primarily related to market
interest rate fluctuations and not to the credit deterioration of the individual issuer.
Information regarding unrealized losses within the Company’s available for sale securities is
summarized below. The securities are all US government-guaranteed agency securities or fully
insured municipal securities. All unrealized losses are considered temporary and related to market
interest rate fluctuations.
58
3. LOANS, NET
Major categories of loans at December 31, 2004 and 2003 are summarized as follows:
Changes in the allowance for loan losses for the years ended December 31, 2004, 2003 and 2002 were
as follows:
Non-accrual loans, for which an allowance for loan impairment was not required under SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan” due to the adequacy of related collateral
values, totaled approximately $1.7 million and $0.3 million at December 31, 2004 and 2003,
respectively. The average recorded investment in these loans during 2004, 2003 and 2002 was
approximately $247 thousand; $121 thousand and $638 thousand, respectively. If such loans had been
in an accruing status, the Bank would have recorded additional interest income of approximately $38
thousand; $20 thousand and $68 thousand in 2004, 2003 and 2002, respectively. Actual interest
recognized on consolidated statements of income on non-accrual loans was $68 thousand, $13 thousand
and $48 thousand in 2004, 2003 and 2002, respectively.
The Bank had no loan commitments to borrowers in non-accrual status at December 31, 2004.
As of December 31, 2004 and 2003, the Bank had no other loans which were impaired as defined by
SFAS No. 114.
59
4. PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
Depreciation expense totaled $730 thousand in 2004; $680 thousand in 2003 and $666 thousand in
2002.
5. OTHER ASSETS
Other assets at December 31, were as follows:
6. GOODWILL AND INTANGIBLE ASSETS
The Company applies the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” and
discloses goodwill separate from other intangible assets in the consolidated balance sheets.
The Company discontinued the amortization of goodwill effective January 1, 2002, and evaluates the
carrying amount of goodwill for potential impairment on at least an annual basis.
Changes in the carrying amount of goodwill for the twelve-month period ended December 31, 2004, by
operating segment, are as follows:
60
Information regarding the Company’s other intangible assets at December 31 follows:
Amortization expense related to intangibles for the years ended December 31, 2004, 2003 and 2002
were $385 thousand; $168 thousand and $79 thousand, respectively. Estimated amortization expense
for each of the five succeeding fiscal years is as follows:
7. DEPOSITS
Time deposits, with minimum denominations of $100 thousand each, totaled $38.6 million and $35.6
million at December 31, 2004 and 2003, respectively.
At December 31, 2004, the scheduled maturities of time deposits are as follows:
61
8. OTHER BORROWED FUNDS AND JUNIOR SUBORDINATED DEBENTURES
Other borrowed funds include $68 million of borrowings at December 31, 2004. The borrowings mainly
consisted of various advances from the Federal Home Loan Bank with interest rates ranging from
1.53% to 5.34%, and federal funds purchased from one of the Bank’s correspondent banks at a rate of
2.55%. The FHLB advances are collateralized by certain qualifying assets. The maturities of other
borrowed funds are as follows:
Short-term borrowings outstanding at December 31, 2004 of $25.1 million consisted of $11.1 million
of an overnight line of credit with the Federal Home Loan Bank at a rate of 2.38%, a $4.0 million
one month advance from the Federal Home Loan Bank at a rate of 2.43%, and $10.0 million of federal
funds purchased from one of the Bank’s correspondent banks at a rate of 2.55%. The Bank has the
ability to borrow additional funds with the Federal Home Loan Bank based on the available
securities collateral of the Bank.
On October 1, 2004, Evans Capital Trust I, a statutory business trust wholly-owned by the Company
(the “Trust”), issued $11.0 million in aggregate principal amount of floating rate preferred
capital securities due November 23, 2034 (the “Capital Securities”) classified on the Company’s
consolidated balance sheets as Junior Subordinated Debentures. The distribution rate on the
Capital Securities of the Trust adjust quarterly based on changes in the three-month London
Interbank Offered Rate (“LIBOR”) and was 5.00% at December 31, 2004.
The Capital Securities have a distribution rate of LIBOR plus 2.65%, and the distribution dates are
February 23, May 23, August 23 and November 23.
The common securities of the Trust (the “Common Securities”) are wholly-owned by the Company and
are the only class of each Trust’s securities possessing general voting powers. The Capital
Securities represent preferred undivided interests in the assets of the corresponding Trust. Under
the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are
includable in the Company’s Tier 1 (Core) capital.
The proceeds from the issuances of the Capital Securities and Common Securities were used by the
Trust to purchase $11,330 thousand aggregate liquidation amount of floating rate junior
subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of the Company, due
October 1, 2037, comprised of $11.0 million of capital securities and $330 thousand of common
securities. The $330 thousand of common securities represent the initial capital contribution of
the Company to the Trust, which, in accordance with the provision of FIN 46r, has not been
consolidated.
The Junior Subordinated Debentures represent the sole assets of the Trust, and payments under the
Junior Subordinated Debentures are the sole source of cash flow for the Trust. The interest rate
payable on the Junior Subordinated Debentures was 5.0% at December 31, 2004.
Holders of the Capital Securities receive preferential cumulative cash distributions on each
distribution date at the stated distribution rate, unless the Company exercises its right to extend
the payment of interest on the Junior Subordinated Debentures for up to twenty quarterly periods,
in which case payment of distributions on the respective Capital Securities will be deferred for
comparable periods. During an extended interest period, in accordance with terms as defined in the
indenture relating to the Capital Securities, the Company may not pay dividends or distributions
on, or repurchase, redeem or acquire any shares of its capital stock. The agreements governing the
Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by
the Company of the payment of distributions on, the redemption of, and any liquidation distribution
with respect to the Capital Securities. The obligations under such guarantee and the Capital
Securities are subordinate and junior in right of payment to all senior indebtedness of the
Company.
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The Capital Securities will remain outstanding until the junior Subordinated Debentures are repaid
at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trust. The
Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the
stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior
Subordinated Debentures in whole upon the occurrence of one or more events (“Events”) set forth in
the indentures relating to the Capital Securities, and in whole or in part at any time after the
stated optional redemption date of November 23, 2009, contemporaneously with the optional
redemption of the related Junior Subordinated Debentures in whole or in part. The Junior
Subordinated Debentures are redeemable prior to their stated maturity dates at the Company’s
option: (i) on or after the stated optional redemption dates, in whole at any time or in part from
time to time; or (ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of one or more of the Events, in each case subject to
possible regulatory approval. The redemption price of the Capital Securities and the related
Junior Subordinated Debentures upon early redemption would be at the liquidation amount plus
accumulated but unpaid distributions.
9. 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.
10. COMPREHENSIVE INCOME
The following tables display the components of other comprehensive income:
63
11. EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLANS
Employees’ Pension Plan
– The Bank has a defined benefit pension plan covering substantially all
employees. The plan provides benefits that are based on the employees’ compensation and years of
service. The Bank uses an actuarial method of amortizing prior service cost and unrecognized net
gains or losses which result from actual experience and assumptions being different than those that
are projected. The amortization method the Bank is using recognizes the prior service cost and net
gains or losses over the average remaining service period of active employees which exceeds the
required amortization.
The following are reconciliations of the benefit obligation and the fair value of Pension Plan
assets, the funded status of the Pension Plan, the amounts not recognized in the consolidated
balance sheets, and the amounts recognized in the consolidated balance sheets.
64
The Plan’s assets are primarily invested in equity and fixed income mutual funds. Valuations of
the Pension Plan as shown above were conducted as of September 30, 2004 and 2003. Assumptions used
by the Bank in the determination of Pension Plan information consisted of the following:
The components of net periodic benefit cost consisted of the following:
The accumulated benefit obligations for years ended December 31, 2004 and 2003 are $2.1 million and
$1.9 million respectively.
The expected long-term rate of return on Pension Plan assets assumption was determined based on
historical returns earned by equity and fixed income securities, adjusted to reflect future return
expectations based on plan targeted asset allocation. Equity and fixed income securities were
assumed to earn returns in the ranges of 5.0% to 14.5% and 4.5% to 7.0%, respectively, including a
long-term inflation rate estimated at 3.0%. When these overall return expectations are applied to
the Pension Plan’s targeted allocation, the expected rate of return is determined to be 7.50%,
which is approximately the mid-point of the range of expected return. The weighted average asset
allocation of the Pension Plan at September 30, 2004 and 2003, the Pension Plan measurement date,
was as follows:
The Company’s targeted long-term asset allocation on average will approximate 60%-70% with equity
managers and 30%-40% with fixed income managers. This allocation is consistent with the Company’s
goal of diversifying the Pension Plan assets in order to preserve capital while achieving
investment results that will contribute to the proper funding of pension obligations and cash flow
requirements. The Company’s management regularly reviews the Pension Plan’s actual asset
allocation and periodically rebalances its investments to the targeted allocation when considered
appropriate. The Company’s management believes that 7.50% is a reasonable long-term rate of return
on the Pension Plan’s Qualified Plan assets. The Company’s management will continue to evaluate
its actuarial assumptions, including the expected rate of return, at least annually, and will
adjust as necessary. The Company’s required minimum contribution to the Pension Plan for the 2005
plan year is approximately $182 thousand.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
65
Supplemental Executive Retirement Plan
– The Bank also maintains a non-qualified supplemental
executive retirement plan (the “SERP”) covering certain members of the Company’s senior management.
The SERP was amended during 2003 to provide a benefit based on a percentage of final average
earnings, as opposed to the fixed benefit that the superceded plan provided for. The obligations
related to the SERP are indirectly funded by various life insurance contracts naming the Bank as
beneficiary. The Bank has also indirectly funded the SERP, as well as other benefits provided to
other employees through Bank-owned life insurance which was purchased in February 2003. The Bank
uses an actuarial method of amortizing unrecognized net gains or losses which result from actual
experience and assumptions being different than those that are projected. The amortization method
the Bank is using recognizes the net gains or losses over the average remaining service period of
active employees, which exceeds the required amortization. During 2002, the Bank made an
adjustment in the actuarial retirement calculation of approximately $180 thousand, which is
reflected as a decrease in SERP expense in the consolidated statements of income.
The following are reconciliations of the benefit obligation and the fair value of plan assets, the
funded status of the SERP, the amounts not recognized in the consolidated balance sheets, and the
amounts recognized in the consolidated balance sheets.
66
Valuations of the SERP liability, as shown above, were conducted as of December 31, 2004 and
2003. The accumulated benefit obligations for years ended December 31, 2004 and 2003 were $2.1 and
$1.8 respectively. Assumptions used by the Bank in both years in the determination of pension plan
information consisted of the following:
The components of net periodic benefit cost consisted of the following:
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
Other Compensation Plans
The Bank also maintains a non-qualified deferred compensation plan for certain directors. Expenses
under this plan were approximately $71 thousand in each of 2004, 2003 and 2002. The estimated
present value of the benefit obligation included in other liabilities was $0.9 million and $1.0
million at December 31, 2004 and 2003, respectively. This obligation is indirectly funded by life
insurance contracts naming the Bank as beneficiary. The increase in cash surrender value is
included in other non-interest income on the consolidated statements of income.
Effective April 1, 2003, the Company implemented a non-qualified deferred compensation plan whereby
certain directors and certain officers may defer a portion of their base pre-tax compensation.
Additionally, effective April 1, 2003, the Company implemented a non-qualified executive incentive
retirement plan, whereby the Company will defer on behalf of certain officers a portion of their
base compensation, as well as an incentive award based upon Company performance, until retirement
or termination of service, subject to certain vesting arrangements. Expense under these plans was
approximately $38 thousand in both 2004 and 2003. The benefit obligation, included in other
liabilities in the Company’s Consolidated Balance Sheets, was $321 thousand and $150 thousand at
December 31, 2004 and 2003, respectively.
Many of the benefit plans are indirectly funded by Bank-owned life insurance contracts with a total
aggregate cash surrender value of approximately $7.9 million and $7.3 million at December 31, 2004
and 2003, respectively. The increase in cash surrender value is included in the “Other
Non-Interest Income” financial statement line on the Company’s Consolidated Statements of Income.
Endorsement split-dollar life insurance benefits have also been provided to directors and certain
officers of the Bank and its subsidiaries.
67
The Bank also has a defined contribution retirement and thrift 401(k) Plan (the “401(k) Plan”) for
its employees who meet certain length of service and age requirements. The provisions of the
401(k) Plan allow eligible employees to contribute
between 1% and 15% of their annual salary, with a matching contribution by the Bank equal to 1% of
the employees’ base compensation plus 25% of the employees’ contribution up to 4% of their annual
salary. The Bank can also make discretionary contributions to the 401(k) Plan. The Bank’s expense
under this plan was approximately $71 thousand, $100 thousand and $50 thousand for the years ended
December 31, 2004, 2003 and 2002, respectively.
The Company has a Dividend Reinvestment Plan (the “DRIP”) which provides each holder of record of
the Bank’s common stock the opportunity to reinvest automatically the cash dividends they receive
on shares of the Bank’s common stock. Stockholders who do not wish to participate in the DRIP
continue to receive cash dividends, as declared, in the usual manner. Computershare Investor
Services LLC (the “Agent”) is the administrator of the DRIP. Shares purchased under the DRIP are
held in safekeeping by the Agent until the stockholder terminates his/her participation in the
DRIP. The Agent also acts as transfer agent and registrar for the Company’s common stock.
12. STOCK-BASED COMPENSATION
At December 31, 2004, the Company had two stock-based compensation plans, which are described
below. The Company accounts for the fair value of its grants under those plans in accordance with
SFAS No. 123. The Company granted stock options for the first time in 2003. The compensation cost
charged against income for those plans was $87 thousand and $35 thousand for 2004 and 2003,
respectively, included in “Salaries and Employee Benefits” in the Company’s Consolidated Statements
of Income. In addition, expense for director options was recognized for $78 thousand and $68
thousand in 2004 and 2003, respectively, as a part of “Other” expense in the Company’s Consolidated
Statements of Income.
Fixed Stock Option Plan
Under the Company’s 1999 Employee Stock Option and Long-Term Incentive Plan, as amended (the
“Option Plan”), the Company may grant options to officers, directors and key employees for up to
275,000 shares of common stock (as adjusted for stock dividends). Under the Option Plan, the
exercise price of each option is not to be less than 100% of the market price of the Company’s
stock on the date of grant and an option’s maximum term is ten years. The options have vesting
schedules from two years through nine years. At December 31, 2004, there were a total of 218,350
shares available for grant under the Option Plan. All fiscal 2003 granted eligible stock options
outstanding on December 9, 2004 were adjusted for the Company’s two stock dividends issued in
December 2003 and December 2004, in accordance with the terms of the Option Plan. Options issued
in 2004 are not yet eligible for adjustment until stock dividends and splits accumulate to 10% or
more. 2003 share and per share amounts within this note have been adjusted retroactively for the
effect of stock dividends, including the number and exercise price of shares subject to option
under the terms of the Option Plan.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in 2004 and
2003, respectively; dividend yield of 2.76 and 2.73 percent; expected volatility of 21.84 and 28.83
percent; risk-free interest rate of 3.66 and 2.77 percent; and expected life of 6.55 and 7.49
years. The weighted average fair value of options granted during the year were $5.66 per share in
2004 and $5.75 per share in 2003, as adjusted for the effect of stock dividends.
The following is a summary of the status of the Company’s stock option activity for 2004 and 2003:
68
The following table summarizes information about fixed stock options outstanding at December 31,
2004 and 2003:
Employee Stock Purchase Plan
On February 18, 2003, the Board of Directors of the Company adopted the Evans Bancorp, Inc.
Employee Stock Purchase Plan (the “Purchase Plan”). As of December 31, 2004, there were 96,613
shares of common stock available to issue to its full-time employees, nearly all of whom are
eligible to participate. Under the terms of the Purchase Plan, employees can choose each year to
have up to 15% of their annual base earnings withheld to purchase the Company’s common stock. The
Company grants options on January 1 and July 1 of each year during the term of the Purchase Plan.
The purchase price of the stock is 85% of the lower of its value on the grant date or the exercise
date price. During fiscal 2004, 77.8% of eligible employees participated in the Purchase Plan.
Under the Purchase Plan, the Company issued 8,602 shares to employees in 2004. Compensation cost
is recognized for the fair value of the employees’ purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 2004 and 2003, respectively: dividend yield
of 2.70% and 2.73%; expected life of six months; expected volatility of 25.90% and 28.83%;
risk-free interest rates of 1.36% and 0.90%. The weighed average fair value of those purchase
rights granted in 2004 and 2003 was $6.84 and $6.49 per share, respectively. The compensation cost
that has been charged against income for the Purchase Plan was $63 thousand and $30 thousand for
2004 and 2003, respectively.
13. INCOME TAXES
The components of the provision for income taxes were as follows:
The Company’s provision for income taxes differs from the amounts computed by applying the Federal
income tax statutory rates to income before income taxes. A reconciliation of the differences is
as follows:
69
At December 31, 2004 and 2003 the components of the net deferred tax asset were as follows:
The net deferred tax asset at December 31, 2004 and 2003 is included in “other assets” in the
accompanying consolidated balance sheets.
In assessing the realizability of the deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, availability of operating loss
carry-backs, projected future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income, the opportunity for net operating loss
carry-backs, and projections for future taxable income over the periods which deferred tax assets
are deductible, management believes it is more likely than not the Company will realize the
benefits of these deductible differences at December 31, 2004.
14. RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with certain directors, significant shareholders and
their affiliates (related parties) in the ordinary course of its business. The aggregate amount of
loans to such related parties was $6.2 million at December 31, 2004 and 2003. During 2004 and
2003, new loans to such related parties amounted to $1.3 million and $3.2 million, respectively,
and repayments amounted to $1.4 million and $1.9 million, respectively. Terms of these loans have
prevailing market pricing that would be offered to a similar customer base.
15. CONTINGENT LIABILITIES AND COMMITMENTS
The consolidated financial statements do not reflect various commitments and contingent liabilities
which arise in the normal course of business and which involve elements of credit risk, interest
rate risk and liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent
liabilities at December 31, 2004 and 2003 is as follows:
Commitments to extend credit and standby letters of credit all include exposure to some credit loss
in the event of non-performance of the customer. The Bank’s credit policies and procedures for
credit commitments and financial guarantees
70
are the same as those for extensions of credit that are recorded on the consolidated balance
sheets. Because these instruments have fixed maturity dates, and because they may expire without
being drawn upon, they do not necessarily represent cash requirements to the Bank. The Bank has
not incurred any losses on its commitments during the past three years.
The Company has entered into contracts with third parties, which contracts include indemnification
clauses. Examples of such contracts include contracts with third party service providers, brokers
and dealers, correspondent banks, purchasers of residential mortgages. Additionally, the Company
has bylaws, policies and agreements under which it indemnifies its officers and directors from
liability for certain events or occurrences while the directors or officers are, or were, serving
at the Company’s request in such capacities. The Company indemnifies its officers and directors to
the fullest extent allowed by law. The maximum potential amount of future payments that the
Company could be required to make under these indemnification provisions is unlimited, but would be
affected by all relevant defenses to such claims, as well as directors’ and officers’ liability
insurance maintained by the Company. Due to the nature of these indemnification provisions, it is
not possible to quantify the aggregate exposure to the Company resulting from them.
The Company leases certain offices, land and equipment under long-term operating leases. The
aggregate minimum annual rental commitments under these leases total approximately $362 thousand in
2005; $304 thousand in 2006; $261 thousand in 2007; $255 thousand in 2008; $237 thousand in 2009;
and $2.5 million thereafter. The rental expense under operating leases contained in the Company’s
Consolidated Statements of Income included $422 thousand, $317 thousand and $257 thousand in 2004,
2003 and 2002, respectively.
16. CONCENTRATIONS OF CREDIT
All of the Bank’s loans, commitments and standby letters of credit have been granted to customers
in the Bank’s market area. Investments in state and municipal securities also involve governmental
entities within the Bank’s market area, which is Western New York. The concentrations of credit by
type of loan are set forth in Footnote 3. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of policy, does not extend credit to any
single borrower or group in excess of 15% of capital.
17. SEGMENT INFORMATION
The Company is comprised of two primary business segments: banking and insurance agency activities.
The reportable segments are separately managed and their performance is evaluated based on net
income. All sources of segment specific revenues and expenses aware attributed to management’s
definition of net income. Revenues from transactions between the two segments are not significant.
The accounting policies of the segments are the same as those described in Note 1. The following
table sets forth information regarding these segments for the years ended December 31, 2004, 2003
and 2002.
71
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18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value.
Cash and Cash Equivalents
– For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
– For securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market prices for similar
securities.
Loans Receivable
– The fair value of fixed rate loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities, net of the appropriate portion of the allowance for
loan losses. For variable rate loans, the carrying amount is a reasonable estimate of fair value.
Deposits
– The fair value of demand deposits, NOW accounts and regular savings accounts is the
amount payable on demand at the reporting date. The fair value of time deposits is estimated using
the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased
– The carrying amount of federal funds purchased approximates their fair
values due to their short-term nature.
Other Borrowed Funds
– The fair value of the short-term portion of other borrowed funds
approximates its carrying value. The fair value of the long-term portion of other borrowed funds
is estimated using a discounted cash flow analysis based on the Company’s current incremental
borrowing rates for similar types of borrowing arrangements.
Junior Subordinated Debentures
– The carrying amount of junior subordinated debentures is a
reasonable estimate of fair value due to the fact that they bear a floating interest rate that
adjusts on a quarterly basis.
Commitments to extend credit and standby letters of credit
– As described in Note 15 “Contingent
Liabilities and Commitments,” the Company was a party to financial instruments with off-balance
sheet risk at December 31, 2004 and 2003. Such financial instruments consist of commitments to
extend permanent financing and letters of credit. If the options are exercised by the prospective
borrowers, these financial instruments will become interest-earning assets of the Company. If the
options expire, the Company retains any fees paid by the counterparty in order to obtain the
commitment or guarantee. The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate commitments, the fair value
estimation takes into consideration an interest rate risk factor. The fair value of guarantees and
letters of credit is based on fees currently charged for similar agreements. The fair value of
these off-balance sheet items at December 31, 2004 and 2003 approximates the recorded amounts of
the related fees, which are not considered material.
At December 31, 2004 and 2003, the estimated fair values of the company’s financial instruments
were as follows:
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19. REGULATORY MATTERS
The Company is subject to the dividend restrictions set forth by the FRB and the OCC. Under such
restrictions, the Company may not, without the prior approval of the FRB and the OCC, declare
dividends in excess of the sum of the current year’s earnings (as defined in FRB regulations) plus
the retained earnings (as defined in FRB regulations) from the prior two years.
Quantitative measures established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios (set forth in the table that follows) of total and Tier I
capital (as defined in FRB regulations) to risk-weighted assets (as defined in FRB regulations),
and of Tier I capital (as defined in FRB regulations)to average assets (as defined in FRB
regulations). Management believes as of December 31, 2004 and 2003, that the Company and the Bank
met all capital adequacy requirements to which it is subject.
The most recent notification from its regulators categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum total risk-based, Tier I risk-based and
Tier I leverage ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company’s or Bank’s category.
The Company’s and the Bank’s actual capital amounts and ratios were as follows:
74
20. PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as follows:
CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
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CONDENSED STATEMENTS OF CASH FLOWS
21. ACQUISITIONS
On January 2, 2004, ENBI, the Company’s wholly-owned insurance agency subsidiary, acquired
substantially all the business and assets of Ellwood Agency, Inc. (“Ellwood”) and Easy PA Insurance
Agency, Inc. (“Easy PA”), two Hamburg, New York-based insurance agencies. The Company paid the
aggregate purchase price of $0.8 million for these two agencies through a combination of cash and
stock, including the issuance of 31,942 shares of common stock with a fair market value on January
2, 2004 of $0.7 million, and $0.1 million in cash. Both acquisitions were accounted for under the
purchase method of accounting. Accordingly, the results of operations of the acquired companies
have been included in the Company’s Consolidated Statements of Income from the date of acquisition
and as a result, the Company recorded $0.8 million of intangible assets for 2004. The intangibles
are being amortized over a five-year period, of which $0.4 million is tax deductible. The
remaining intangibles are not tax deductible, due to the tax-free nature of the acquisition of the
Ellwood Agency.
Effective October 1, 2004, ENBI acquired substantially all the business and assets of Ulrich &
Company, Inc. (“Ulrich”), a Lockport, New York-based insurance agency. The total purchase price
payable at closing of $6.4 million was paid in cash. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the results of operations of the acquisition have been
included in the Company’s Consolidated Statements of Income from the date of acquisition, and as a
result, the Company recorded $4.8 million of goodwill and $1.5 million of intangible assets related
to insurance expirations during 2004. The intangible assets are being amortized over 10 years.
The goodwill was assigned to the Company’s insurance segment. Additional contingent consideration
of up to $0.4 million may be paid over 12 months dependent on the outcome of certain post-closing
performance measures specified in the purchase agreement. The contingent consideration, if any,
may result in additional cost of the acquisition.
On December 31, 2004, Evans National Leasing, Inc., a wholly-owned subsidiary of the Bank, acquired
all of the business and assets, and assumed certain liabilities of M&C Leasing Co., Inc. (“M&C
Leasing”), a general business equipment leasing company located in West Seneca, New York.
Following the transaction, the operations of M&C Leasing merged
76
into ENL. The total purchase price included a cash payment of $1.2 million and assumption of $4.2
million in liabilities. The acquisition was accounted for under the purchase method of accounting.
Accordingly, the Company recorded certain acquired assets and liabilities, as well as $1.5 million
in goodwill. The goodwill is assigned to the Company’s banking segment. Additional contingent
consideration of up to $0.5 million will be paid based on the outcome of certain post-closing
performance measures for fiscal years 2005-2009, as specified in the purchase agreement. The
contingent consideration, if any, will result in additional cost of the acquisition.
22. QUARTERLY FINANCIAL DATA - UNAUDITED
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Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
Item 9A.
CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s principal executive officer and
principal financial officer, evaluated the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the
Exchange Act. Based on that evaluation, the Company’s principal executive and principal financial
officers concluded that the Company’s disclosure controls and procedures as of December 31, 2004
(the end of the period covered by this Report) have been designed and are functioning effectively
to provide reasonable assurance that the information required to be disclosed by the Company in
reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms.
Item 9B.
OTHER INFORMATION
On December 30, 2004, the Bank entered into a Participatory Agreement with Mark DeBacker, Treasurer
of the Company and Senior Vice President and Chief Financial Officer of the Bank, pursuant to which
Mr. DeBacker became a participant in the Supplemental Executive Retirement Plan maintained by the
Bank. Other than Mr. DeBacker’s position as an executive officer of the Company and the Bank as
set forth above, there is no material relationship between the parties.
The information contained under Part II, Item 5. “Securities Sold Under Dividend Reinvestment Plan”
is incorporated by reference in response to this Item 9B.
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (Items 401, 405 and 406 of Regulation S-K) relating to the
Company’s directors and director nominees, executive officers, Audit Committee of the Board of
Directors (including identification of its “audit committee financial experts”) and Chief Executive
Officer/Treasurer Code of Ethics and compliance with Section 16(a) of the Exchange Act by the
Company’s officers, directors and 10% beneficial owners is included under the captions “Information
Regarding Directors, Director Nominees and Executive Officers,” “Board of Director Committees” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement related
to the 2005 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 11.
EXECUTIVE COMPENSATION
The information required by this item (Item 402 of Regulation S-K) relating to executive and
director compensation is included under the captions “Executive Compensation,” “Compensation of
Directors” and “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy
Statement related to the 2005 Annual Meeting of Shareholders and is incorporated herein by
reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item (Items 201(d) and 403 of Regulation S-K) relating to the
Company’s security ownership of certain beneficial owners and management, and securities authorized
for issuance under equity compensation
78
plans, is included under the caption “Equity Compensation Plan Information” in the Company’s Proxy
Statement related to the 2005 Annual Meeting of Shareholders and is incorporated herein by
reference.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item (Item 404 of Regulation S-K) is included under the caption
“Certain Relationships and Related Transactions” in the Company’s Proxy Statement related to the
2005 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is included under the caption “Independent Registered Public
Accounting Firm” in the Company’s Proxy Statement related to the 2005 Annual Meeting of
Shareholders and is incorporated herein by reference.
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report on Form 10-K:
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80
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the undersigned
thereunto duly authorized:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
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EXHIBIT INDEX
83
84
Table of Contents
Table of Contents
Table of Contents
2004
2003
2002
Average
Yield/
Average
Yield/
Average
Yield/
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
(dollars in thousands)
(dollars in thousands)
(dollars in thousands)
$
196,711
$
11,815
6.01
%
$
167,145
$
10,737
6.42
%
$
145,676
$
10,593
7.27
%
103,173
3,654
3.54
%
72,464
2,226
3.07
%
48,902
2,554
5.22
%
49,514
2,130
4.30
%
52,658
2,288
4.35
%
43,656
1.987
4.55
%
832
14
1.68
%
721
18
2.50
%
146
5
3.42
%
7,051
95
1.35
%
5,017
61
1.22
%
5,148
73
1.42
%
357,281
17,708
4.96
%
298,005
15,330
5.14
%
243,528
15,212
6.25
%
11,163
9,118
8,967
6,905
5,483
4,463
18,140
13,743
8,315
$
393,489
$
326,349
$
265,273
$
11,272
22
0.20
%
$
10,753
23
0.21
%
$
9,678
44
0.45
%
148,078
1,499
1.01
%
110,001
1,022
0.93
%
75,741
841
1.11
%
102,164
2,526
2.47
%
99,775
2,819
2.83
%
90,890
3,397
3.74
%
28,429
872
3.07
%
14,832
563
3.80
%
9,078
468
5.16
%
2,765
132
4.77
%
—
—
0.00
%
—
—
0.00
%
7,160
60
0.84
%
5,971
57
0.95
%
3,989
67
1.68
%
299,868
5,111
1.70
%
241,332
4,484
1.86
%
189,376
4,817
2.54
%
54,318
48,853
42,165
4,953
4,299
4,889
359,139
294,484
236,430
34,350
31,865
28,843
$
393,489
$
326,349
$
265,273
$
12,597
$
10,846
$
10,395
3.53
%
3.64
%
4.27
%
3.26
%
3.28
%
3.71
%
Table of Contents
December 31,
2004
2003
2002
(in thousands)
$
118,367
$
62,427
$
54,543
44,924
52,526
47,240
3,526
1,854
1,248
$
166,817
$
116,807
$
103,031
$
35
$
36
$
37
3,027
3,713
3,604
$
3,062
$
3,749
$
3,641
$
169,879
$
120,556
$
106,672
Table of Contents
Maturing
Within
After One But Within
After Five But Within
After
One Year
Five Years
Ten Years
Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(dollars in thousands)
$
1,997
2.00
%
$
24,468
3.32
%
$
17,972
4.52
%
$
73,930
4.79
%
825
4.62
%
5,525
4.77
%
26,517
4.56
%
12,057
4.79
%
$
2,822
2.77
%
$
29,993
3.59
%
$
44,489
4.54
%
$
85,987
4.79
%
$
—
—
$
—
—
$
—
—
$
35
—
537
2.25
%
399
3.62
%
750
3.15
%
1,341
4.12
%
537
2.25
%
399
3.62
%
750
3.15
%
1,376
4.01
%
$
3,359
2.68
%
$
30,392
3.59
%
$
45,239
4.52
%
$
87,363
4.78
%
Table of Contents
Table of Contents
December 31,
2004
2003
2002
2001
2000
(in thousands)
$
38,491
$
30,160
$
26,712
$
31,035
$
33,375
107,392
99,684
77,919
70,853
57,219
8,188
5,090
2,174
1,520
1,966
5,716
6,274
6,919
8,188
7,648
22,108
18,262
13,780
10,684
8,976
181,895
159,470
127,504
122,280
109,184
4,546
—
—
—
—
28,762
24,282
20,460
16,338
14,783
2,541
2,277
2,054
2,759
2,994
291
292
298
334
483
2,832
2,569
2,352
3,093
3,477
1,973
1,209
492
2,191
2,391
590
537
336
353
372
220,598
188,067
151,144
144,255
130,207
(2,999
)
(2,539
)
(2,146
)
(1,786
)
(1,428
)
$
217,599
$
185,528
$
148,998
$
142,469
$
128,779
Table of Contents
After One But
Within
Within Five
After Five
One Year
Years
Years
Total
(in thousands)
$
3,082
$
13,425
$
12,255
$
28,762
3,180
4,688
320
8,188
$
6,262
$
18,113
$
12,575
$
36,950
$
6,865
$
347
11,248
12,228
$
18,113
$
12,575
At December 31,
2004
2003
2002
2001
2000
(in thousands)
$
—
$
30
$
30
$
70
$
51
278
176
1,074
475
1,062
—
—
—
—
—
—
50
21
70
15
—
—
—
—
—
278
256
1,125
615
1,128
2
—
—
—
—
1,375
40
72
109
67
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
1,655
$
296
$
1,197
$
724
$
1,195
151
627
—
443
263
1,806
923
1,197
1,167
1,458
0.42
%
0.27
%
0.41
%
0.47
%
0.65
%
0.82
%
0.49
%
0.79
%
0.81
%
1.13
%
Table of Contents
2004
2003
2002
2001
2000
(in thousands)
$
2,539
$
2,146
$
1,786
$
1,428
$
838
(200
)
(54
)
(14
)
(24
)
(54
)
(6
)
(30
)
(42
)
(42
)
(48
)
(9
)
(11
)
(20
)
(14
)
(3
)
(215
)
(95
)
(76
)
(80
)
(105
)
48
7
2
11
—
8
—
—
1
1
4
1
14
6
5
60
8
16
18
6
(155
)
(87
)
(60
)
(62
)
(99
)
485
480
420
420
689
130
—
—
—
—
$
2,999
$
2,539
$
2,146
$
1,786
$
1,428
0.08
%
0.05
%
0.04
%
0.05
%
0.08
%
Table of Contents
(In thousands)
$
54,013
11,650
141,775
38,625
55,865
$
301,928
2004
2003
2002
Weighted
Weighted
Weighted
Average
Average
Average
Average
Average
Average
Balance
Rate
Balance
Rate
Balance
Rate
$
54,318
0.00
%
$
48,853
0.00
%
$
42,165
0.00
%
11,272
0.20
%
10,753
0.21
%
9,678
0.45
%
148,078
1.01
%
110,001
0.93
%
75,741
1.11
%
102,164
2.47
%
99,775
2.83
%
90,890
3.74
%
$
315,832
1.28
%
$
269,382
1.43
%
$
218,474
1.96
%
Weighted
Average
Maturities
Rate
$
28,699
2.55
%
2,859
3.02
%
8,762
3.53
%
663
3.18
%
14,051
2.96
%
13,000
3.46
%
$
68,034
3.09
%
Table of Contents
TO CHANGES IN INTEREST RATES
Calculated increase (decrease)
in projected annual net interest income
December 31, 2004
December 31, 2003
Changes in interest rates
(in thousands)
$
(497
)
$
515
(425
)
(1,390
)
Table of Contents
Time Deposit Maturity Schedule
(in thousands)
0-3
3-6
6-12
Over 12
Mos.
Mos.
Mos.
Mos.
Total
$
15,091
$
1,703
$
9,327
$
12,504
$
38,625
15,650
3,716
23,896
12,603
55,865
$
30,741
$
5,419
$
33,223
$
25,107
$
94,490
Table of Contents
Table of Contents
Table of Contents
(dollars in thousands)
2004
2003
Company
Bank
Company
Bank
$
33,852
$
33,443
$
27,283
$
27,283
35,474
30,629
33,324
33,324
257,905
256,558
214,773
214,773
13.1
%
13.0
%
12.7
%
12.7
%
14.3
%
14.2
%
13.9
%
13.9
%
8.1
%
8.0
%
8.3
%
8.3
%
Table of Contents
Table of Contents
Table of Contents
Full Time
Part Time
104
9
6
—
1
—
46
5
6
—
163
14
Table of Contents
Item 2.
PROPERTIES
Use
Location
Ownership
14-16 North Main Street, Angola, NY
Own building and land
8599 Erie Road, Evans, NY
Own building and land
25 Main Street, Forestville, NY
Own building and land
6840 Erie Road, Derby, NY
Own building and land
7205 Boston State Road, North Boston, NY
Own building and land
5999 South Park Avenue, Hamburg, NY
Building lease
938 Union Road, West Seneca, NY
Building lease
3388 Sheridan Drive, Amherst, NY
Own building, lease land
4979 Transit Road, Lancaster, NY
Own building, lease land
2670 Delaware Avenue, Buffalo, NY
(as of January 2005)
Own building, lease land
Use
Location
Ownership
5 Commercial Street, Angola, NY
Building lease
265 Central Avenue, Silver Creek, NY
Building lease
11 Main Street, Cattaraugus, NY
Building lease
213 Pine Street, South Dayton, NY
Building lease
7 Bank Street, Randolph, NY
Building lease
8226 North Main Street, Eden, NY
Building lease
25 Buffalo Street, Gowanda, NY
Building lease
55 Main Street, Hamburg, NY
Building lease
2628 Main Street, Lockport, NY
Building lease
6840 Erie Road, Derby, NY
Bank-owned building
and land
5999 South Park Avenue, Hamburg, NY
Bank building lease
938 Union Road, West Seneca, NY
Bank building lease
1481 Harlem Road, Buffalo, NY
Building lease
Item 3.
LEGAL PROCEEDINGS
Table of Contents
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITES
2004
2003
QUARTER
High
Low
High
Low
$24.30
$20.64
$21.78
$18.55
$23.62
$21.10
$21.72
$18.74
$23.28
$19.45
$21.53
$19.05
$27.17
$22.43
$23.14
$20.71
•
A cash dividend of $0.29 per share on April 1, 2003 to holders of record on March 11, 2003.
•
A cash dividend of $0.31 per share on October 1, 2003 to holders of record on September 10, 2003.
•
A cash dividend of $0.31 per share on April 6, 2004 to holders of record on March 16, 2004.
•
A cash dividend of $0.33 per share on October 4, 2004 to holders of record on September 10, 2004.
Table of Contents
Maximum number (or
Total number of shares
approximate dollar
Total number
Average
purchased as part of
value) of shares that may
of shares
price paid
publicly announced
yet be purchased under
Period
purchased
per share
plans or programs
the plans or programs
6,825
$
22.73
6,825
27,275
5,985
$
25.40
5,985
21,290
1,915
$
26.54
1,915
19,375
14,725
24.31
14,725
19,375
Table of Contents
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
As of and for the year ended December 31,
(Dollars in thousands except per share and ratio data)
2004
2003
2002
2001
2000
$
429,042
$
334,677
$
288,711
$
248,722
$
224,549
391,462
308,722
267,142
231,120
204,579
169,879
120,556
106,672
84,065
73,121
217,599
185,528
148,998
142,469
128,779
301,928
266,325
239,507
204,260
186,701
79,364
25,388
8,111
9,661
4,409
35,474
33,324
30,862
26,961
25,179
$
12,597
$
10,846
$
10,395
$
9,110
$
8,580
8,572
7,666
5,474
4,528
3,648
14,779
12,739
10,650
9,531
7,535
4,509
4,069
3,606
2,579
3,223
$
1.74
$
1.58
$
1.41
$
1.01
$
1.27
1.74
1.58
1.41
1.01
1.27
0.64
0.60
0.51
0.42
0.36
13.68
12.98
11.99
10.56
9.89
1.15
%
1.25
%
1.36
%
1.09
%
1.53
%
13.13
12.77
12.51
9.82
15.96
3.53
3.64
4.27
4.18
4.39
68.00
67.91
66.61
67.39
60.72
36.77
37.71
36.18
41.44
27.89
8.05
%
8.30
%
9.30
%
9.60
%
9.90
%
8.27
9.96
10.69
10.84
11.21
0.42
%
0.27
%
0.51
%
0.66
%
0.67
%
0.82
0.49
0.79
0.81
1.13
0.08
0.05
0.04
0.05
0.08
1.36
1.35
1.42
1.24
1.10
166.05
276.47
179.27
153.04
97.96
*
The calculation of the efficiency ratio excludes amortization of intangibles and goodwill, for
comparative purposes. The amounts excluded are $385 thousand, $168 thousand, $79 thousand, $340
thousand, and $110 thousand for 2004, 2003, 2002, 2001 and 2000, respectively.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table of Contents
•
Expanding Bank market reach and penetration through de-novo branching and potential acquisitions;
•
Continuing growth of non-interest income through insurance agency internal growth and potential acquisitions;
•
Focusing on profitable customer segments;
•
Leveraging technology to improve efficiency and customer service; and
•
Maintaining a community based approach.
Table of Contents
Table of Contents
2004 Compared to 2003
2003 Compared to 2002
Increase (Decrease) Due to
Increase (Decrease) Due to
(in thousands)
Volume
Rate
Total
Volume
Rate
Total
$
1,830
$
(752
)
$
1,078
$
1,460
$
(1,316
)
$
144
1,021
407
1,428
956
(1,284
)
(328
)
(135
)
(23
)
(158
)
394
(93
)
301
25
9
34
(1
)
(11
)
(12
)
2
(6
)
(4
)
15
(2
)
13
$
2,743
$
(365
)
$
2,378
$
2,824
$
(2,706
)
$
118
$
1
$
(2
)
$
(1
)
$
2
$
(23
)
$
(21
)
375
102
477
338
(157
)
181
60
(353
)
(293
)
258
(836
)
(578
)
583
(139
)
444
245
(160
)
85
$
1,019
$
(392
)
$
627
$
843
$
(1,176
)
$
(333
)
Table of Contents
Table of Contents
2004
2003
2002
2001
2000
(in thousands)
$
2,539
$
2,146
$
1,786
$
1,428
$
838
485
480
420
420
689
130
—
—
—
—
60
8
16
18
6
(215
)
(95
)
(76
)
(80
)
(105
)
$
2,999
$
2,539
$
2,146
$
1,786
$
1,428
0.07
%
0.05
%
0.04
%
0.04
%
0.08
%
0.82
%
0.49
%
0.79
%
0.81
%
1.13
%
1.36
%
1.35
%
1.42
%
1.24
%
1.10
%
Table of Contents
Percent of
Percent of
Percent of
Percent of
Percent of
loans in
Balance
loans in
Balance
loans in
Balance
loans in
Balance
loans in
Balance
each
at
each
at
each
at
each
at
each
at 12/31/2004
category
12/31/2003
category
12/31/2002
category
12/31/2001
category
12/31/2000
category
Attributable
to total
Attributable
to total
Attributable
to total
Attributable
to total
Attributable
to total
to:
loans:
to:
loans:
to:
loans
to:
loans
to:
loans
$
1,768
82.5
%
$
1,619
85.1
%
$
844
84.6
%
$
455
85.0
%
$
600
84.1
%
618
13.0
%
384
12.9
%
259
13.5
%
96
11.3
%
96
11.4
%
187
1.3
%
147
1.4
%
72
1.6
%
74
2.2
%
66
2.7
%
—
1.1
%
—
0.6
%
—
0.3
%
—
1.5
%
—
1.8
%
130
2.1
%
—
—
%
—
—
%
—
—
%
—
—
%
296
—
%
389
—
%
971
—
%
1,161
—
%
666
—
%
$
2,999
100.0
%
$
2,539
100.0
%
$
2,146
100.0
%
$
1,786
100.0
%
$
1,428
100.0
%
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Payments due within time period at December 31, 2004
(in thousands)
Due After
0-12 Months
1-3 Years
4-5 Years
5 Years
Total
$
7,306
$
—
$
—
$
—
$
7,306
362
565
492
2,465
3,884
28,699
11,621
14,714
13,000
68,034
—
—
—
11,330
11,330
$
36,367
$
12,186
$
15,206
$
26,795
$
90,554
$
1,240
$
2,146
$
1,640
$
1,783
$
6,809
Table of Contents
TO CHANGES IN INTEREST RATES
Calculated (decrease) increase
in projected annual net interest income
(in thousands)
Changes in interest rates
December 31, 2004
December 31, 2003
$
(497
)
$
515
(425
)
(1,390
)
Table of Contents
Expected
maturity year ended
December 31,
2005
2006
2007
2008
2009
Thereafter
Total
Fair Value
(Dollars in thousands)
32,065
15,617
12,715
16,413
10,735
77,228
164,773
166,997
6.01
%
6.81
%
6.70
%
8.82
%
6.52
%
6.88
%
6.86
%
6.86
%
10,709
5,878
5,880
3,336
2,370
27,652
55,825
55,825
6.00
%
5.89
%
5.55
%
5.75
%
6.24
%
5.01
%
5.44
%
5.44
%
984
—
—
—
—
—
984
984
1.60
%
—
—
—
—
—
1.60
%
1.60
%
3,359
3,025
7,356
11,872
8,139
136,128
169,879
169,879
2.68
%
2.89
%
3.23
%
3.70
%
4.02
%
4.58
%
4.37
%
4.37
%
222,808
14,044
2,433
8,120
510
—
247,915
247,490
1.38
%
3.24
%
2.87
%
3.90
%
3.46
%
—
1.59
%
1.59
%
36,005
2,859
8,762
663
14,051
13,000
75,340
73,987
2.07
%
3.02
%
2.53
%
3.18
%
2.96
%
3.46
%
2.84
%
2.84
%
11,330
11,330
11,330
4.72
%
4.72
%
4.72
%
Table of Contents
Table of Contents
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
45
46
47
48
49
50
52
Table of Contents
Evans Bancorp, Inc.:
March 8, 2005
Table of Contents
Angola, New York
Table of Contents
DECEMBER 31, 2004 AND 2003
(in thousands, except share and per share amounts)
Table of Contents
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(in thousands, except share and per share amounts)
2004
2003
2002
$
11,815
$
10,737
$
10,593
109
79
79
3,654
2,226
2,553
2,130
2,288
1,987
17,708
15,330
15,212
4,047
3,864
4,282
932
620
535
132
—
—
5,111
4,484
4,817
12,597
10,846
10,395
485
480
420
12,112
10,366
9,975
1,890
1,812
1,096
4,916
3,495
2,947
137
272
228
245
271
111
—
(27
)
(139
)
17
124
59
356
460
115
—
—
185
1,011
1,259
872
8,572
7,666
5,474
7,927
6,813
5,533
1,805
1,454
1,337
290
282
231
439
377
412
337
263
206
734
711
616
385
168
79
349
298
280
2,513
2,373
1,956
14,779
12,739
10,650
5,905
5,293
4,799
1,396
1,224
1,193
$
4,509
$
4,069
$
3,606
$
1.74
$
1.58
$
1.41
$
1.74
$
1.58
$
1.41
2,595,685
2,572,851
2,563,769
2,597,489
2,573,053
2,563,769
Table of Contents
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(in thousands,
except share and per share amounts)
Accumulated
Other
Common
Capital
Retained
Comprehensive
Treasury
Stock
Surplus
Earnings
Income
Stock
Total
$
1,103
$
13,727
$
11,464
$
666
$
—
$
26,960
3,606
3,606
1,437
1,437
effect - $102
(161
)
(161
)
4,882
(1,305
)
(1,305
)
5
159
164
(23
)
(23
)
4
163
167
17
17
55
2,530
(2,585
)
—
1,167
16,579
11,180
1,942
(6
)
30,862
4,069
4,069
(185
)
(185
)
effect - $102
161
161
4,045
(1,534
)
(1,534
)
103
103
(28
)
(28
)
5
185
190
(576
)
(576
)
(20
)
101
81
8
173
181
58
2,492
(2,530
)
(20
)
—
1,230
19,359
11,145
1,918
(328
)
33,324
4,509
4,509
(1,320
)
(1,320
)
effect - $22
(35
)
(35
)
3,154
(1,659
)
(1,659
)
165
165
18
340
358
15
708
723
(31
)
200
169
(16
)
(16
)
62
3,129
(3,158
)
(33
)
—
(744
)
(744
)
$
1,307
$
23,361
$
10,808
$
563
$
(565
)
$
35,474
Table of Contents
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(in
thousands)
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(in thousands)
See notes to consolidated financial statements.
(Concluded)
Table of Contents
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Table of Contents
Table of Contents
Table of Contents
Table of Contents
2004
(in thousands)
Unrealized
Amortized
Fair
Cost
Gains
Losses
Value
$
29,768
$
2
$
(513
)
$
29,257
90,031
19
(940
)
89,110
42,513
2,411
—
44,924
3,526
—
—
3,526
$
165,838
$
2,432
$
(1,453
)
$
166,817
$
35
$
—
$
—
$
35
3,027
—
—
3,027
$
3,062
$
—
$
—
$
3,062
Table of Contents
2003
(in thousands)
Unrealized
Amortized
Fair
Cost
Gains
Losses
Value
$
20,815
$
112
$
(15
)
$
20,912
41,671
64
(220
)
41,515
49,325
3,204
(3
)
52,526
1,854
—
—
1,854
$
113,665
$
3,380
$
(238
)
$
116,807
$
36
$
—
$
—
$
36
3,713
—
—
3,713
$
3,749
$
—
$
—
$
3,749
Available for
Held to Maturity
Sale Securities
Securities
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
(in thousands)
(in thousands)
$
2,821
$
2,822
$
537
$
537
30,205
29,993
399
399
43,195
44,489
750
750
86,091
85,987
1,376
1,376
$
162,312
$
163,291
$
3,062
$
3,062
Table of Contents
2004
2003
2002
(in thousands)
$
344
$
447
$
127
(99
)
(176
)
(16
)
$
245
$
271
$
111
2004
Less than 12 months
12 months or longer
Total
Description of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Securities
Value
Losses
Value
Losses
Value
Losses
(in thousands)
(in thousands)
(in thousands)
$
28,195
$
(513
)
$
—
$
—
$
28,195
$
(513
)
61,265
(758
)
16,419
(182
)
77,684
(940
)
—
—
—
—
—
—
$
89,460
$
(1,271
)
$
16,419
$
(182
)
$
105,879
$
(1,453
)
2003
Less than 12 months
12 months or longer
Total
Description of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Securities
Value
Losses
Value
Losses
Value
Losses
(in thousands)
(in thousands)
(in thousands)
$
4,525
$
(15
)
$
—
$
—
$
4,525
$
(15
)
25,990
(218
)
693
(3
)
26,683
(221
)
530
(3
)
—
—
530
(3
)
$
31,045
$
(236
)
$
693
$
(3
)
$
31,738
$
(239
)
Table of Contents
2004
2003
(in thousands)
$
38,491
$
30,160
107,392
99,684
8,188
5,090
5,716
6,274
22,108
18,262
181,895
159,470
4,546
—
28,762
24,282
2,832
2,569
1,973
1,209
590
537
220,598
188,067
(2,999
)
(2,539
)
$
217,599
$
185,528
2004
2003
2002
(in thousands)
$
2,539
$
2,146
$
1,786
485
480
420
130
—
—
60
8
16
(215
)
(95
)
(76
)
$
2,999
$
2,539
$
2,146
Table of Contents
2004
2003
(in thousands)
$
268
$
268
7,575
5,604
5,859
4,918
358
775
14,060
11,565
(6,313
)
(5,583
)
$
7,747
$
5,982
2004
2003
(in thousands)
$
1,161
$
242
1,801
1,446
472
416
943
455
$
4,377
$
2,559
Insurance
Banking
Agency
Activities
Activities
Total
(in thousands)
$
—
$
2,945
$
2,945
1,453
4,821
6,274
$
1,453
$
7,766
$
9,219
Table of Contents
Gross Carrying
Accumulated
Weighted Average
2004
Amount
Amortization
Net
Amortization Period
(in thousands)
$
594
$
(263
)
$
331
5 years
489
—
489
N/A
2,744
(394
)
2,350
8 years
$
3,827
$
(657
)
$
3,170
7 years
Gross
Carrying
Accumulated
Weighted Average
2003
Amount
Amortization
Net
Amortization Period
(in thousands)
$
549
$
(148
)
$
401
5 years
552
—
552
N/A
349
(125
)
224
5 years
$
1,450
$
(273
)
$
1,177
5 years
Year Ending
December 31
Amount
(in thousands)
$
504
487
429
340
163
(in thousands)
$
69,383
14,044
2,433
8,120
510
$
94,490
Table of Contents
(in thousands)
$
28,699
2,859
8,762
663
14,051
13,000
$
68,034
Table of Contents
2004
Before-tax
Income
Amount
Taxes
Net
(in thousands)
$
(1,918
)
$
745
$
(1,173
)
245
(98
)
147
(2,163
)
843
(1,320
)
(57
)
22
(35
)
$
(2,220
)
$
865
$
(1,355
)
2003
Before-tax
Income
Amount
Taxes
Net
(in thousands)
$
(32
)
$
13
$
(19
)
271
(105
)
166
(303
)
118
(185
)
263
(102
)
161
$
(40
)
$
16
$
(24
)
Table of Contents
2002
Before-tax
Income
Amount
Taxes
Net
(in thousands)
$
2,459
$
(954
)
$
1,505
111
(43
)
68
2,348
(911
)
1,437
(263
)
102
(161
)
$
2,085
$
(809
)
$
1,276
2004
2003
(in thousands)
$
2,687
$
2,514
217
157
155
158
108
199
(190
)
(147
)
(42
)
(194
)
2,935
2,687
2,281
2,011
239
270
—
194
(42
)
(194
)
2,478
2,281
(457
)
(406
)
336
492
(159
)
(176
)
(280
)
(90
)
(280
)
(90
)
(280
)
(90
)
Table of Contents
2004
2003
6.00
%
6.25
%
4.75
%
4.75
%
7.50
%
6.75
%
2004
2003
2002
(in thousands)
$
217
$
157
$
168
155
158
161
(169
)
(134
)
(121
)
(12
)
1
(16
)
$
191
$
182
$
192
2004
2003
62.4
%
61.5
%
37.6
%
38.5
%
100.0
%
100.0
%
(in thousands)
$
47
49
68
89
217
930
Table of Contents
2004
2003
(in thousands)
$
2,233
$
1,589
94
73
141
132
—
416
127
116
(93
)
(93
)
2,502
2,233
—
—
—
—
93
93
(93
)
(93
)
—
—
(2,502
)
(2,233
)
488
372
489
567
$
(1,525
)
$
(1,294
)
(2,071
)
(1,846
)
489
552
57
—
$
(1,525
)
$
(1,294
)
Table of Contents
2004
2003
6.00
%
6.25
%
N/A
N/A
5.00
%
5.00
%
2004
2003
2002
(in thousands)
$
94
$
73
$
49
141
132
109
89
104
62
$
324
$
309
$
220
(in thousands)
$
93
93
166
191
191
1,290
Table of Contents
Number of
Weighted-Average
Shares
Exercise Price
—
—
29,700
$
20.49
—
—
—
—
29,700
$
20.49
28,000
$
24.09
—
—
(1,050
)
22.13
56,650
$
22.24
24,650
$
22.46
Table of Contents
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Options
Exercise
Remaining
Options
Exercise
Price
Outstanding
Price
Life (Years)
Exercisable
Price
29,150
$
20.50
8.37
12,650
$
20.81
27,500
$
24.09
9.57
12,000
$
24.20
56,650
$
22.24
8.95
24,650
$
22.46
29,700
$
20.49
9.53
12,100
$
20.84
2004
2003
2002
(in thousands)
$
1,450
$
1,053
$
1,045
(54
)
171
148
$
1,396
$
1,224
$
1,193
2004
2003
2002
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
2,008
34
%
$
1,796
34
%
$
1,632
34
%
(735
)
(12
)
(729
)
(14
)
(628
)
(13
)
—
—
—
—
(63
)
(1
)
157
3
110
2
132
3
(34
)
(1
)
47
1
120
2
$
1,396
24
%
$
1,224
23
%
$
1,193
25
%
Table of Contents
2004
2003
(in thousands)
$
1,048
$
925
726
539
457
423
57
45
$
2,288
$
1,932
$
359
$
257
387
209
381
1,224
$
1,127
$
1,690
$
1,161
$
242
2004
2003
(in thousands)
$
58,799
$
43,593
2,069
1,892
$
60,868
$
45,485
Table of Contents
2004
Banking
Insurance Agency
Activities
Activities
Total
(in thousands)
$
12,692
$
(95
)
12,597
485
—
485
12,207
(95
)
12,112
3,417
—
3,417
—
4,916
4,916
239
—
239
10,947
3,832
14,779
4,916
989
5,905
1,000
396
1,396
$
3,916
$
593
$
4,509
Table of Contents
2003
Banking
Insurance Agency
Activities
Activities
Total
(in thousands)
$
10,870
$
(24
)
10,846
480
—
480
10,390
(24
)
10,366
3,927
—
3,927
—
3,495
3,495
244
—
244
9,847
2,893
12,739
4,714
578
5,293
992
231
1,224
$
3,722
$
347
$
4,069
2002
Banking
Insurance Agency
Activities
Activities
Total
(in thousands)
$
10,416
$
(21
)
10,395
420
—
420
9,996
(21
)
9,975
2,554
—
2,555
—
2,947
2,947
(27
)
—
(28
)
8,514
2,136
10,650
4,009
790
4,799
879
314
1,193
$
3,130
$
476
$
3,606
December 31, 2004
December 31, 2003
Identifiable Assets, Net
(in thousands)
$
416,424
$
329,623
12,618
5,054
$
429,042
$
334,677
Table of Contents
2004
2003
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(in thousands)
(in thousands)
Financial assets:
$
8,124
$
8,124
$
8,509
$
8,509
$
984
$
984
$
98
$
98
$
169,879
$
169,879
$
120,556
$
120,556
$
217,599
$
219,823
$
185,528
$
193,248
$
301,928
$
301,503
$
266,325
$
268,139
$
68,034
$
66,686
$
25,388
$
25,267
$
11,330
$
11,330
$
—
$
—
Table of Contents
2004
(dollars in thousands)
Minimum to be Well
Capitalized Under
Minimum for Capital
Prompt Corrective
Company
Bank
Adequacy Purposes
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
35,474
14.3
%
$
30,629
14.2
%
$
20,632
8.0
%
$
25,791
10.0
%
$
33,852
13.1
%
$
33,443
13.0
%
$
10,316
4.0
%
$
15,474
6.0
%
$
33,852
8.1
%
$
33,443
8.0
%
$
16,815
4.0
%
$
21,018
5.0
%
2003
(dollars in thousands)
Minimum to be Well
Capitalized Under
Minimum for Capital
Prompt Corrective
Company
Bank
Adequacy Purposes
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
33,324
13.9
%
$
33,324
13.9
%
$
17,182
8.0
%
$
21,477
10.0
%
$
27,283
12.7
%
$
27,283
12.7
%
$
8,591
4.0
%
$
12,886
6.0
%
$
27,283
8.3
%
$
27,283
8.3
%
$
13,220
4.0
%
$
16,526
5.0
%
Table of Contents
December 31,
2004
2003
(in thousands)
$
168
$
125
330
—
46,306
33,199
$
46,804
$
33,324
$
11,330
—
$
35,474
$
33,324
$
46,804
$
33,324
December 31,
2004
2003
2002
(in thousands)
$
2,402
$
1,534
$
1,305
496
363
163
(452
)
(286
)
(152
)
2,446
1,611
1,316
2,063
2,458
2,290
$
4,509
$
4,069
$
3,606
Table of Contents
Year Ended
2004
2003
2002
(in thousands)
$
4,509
$
4,069
$
3,606
(330
)
—
—
(2,063
)
(2,458
)
(2,290
)
2,116
1,611
1,316
(11,000
)
—
—
(11,000
)
—
—
11,330
—
—
(1,659
)
—
—
(744
)
—
—
8,927
—
—
43
77
11
125
48
37
$
168
$
125
$
48
Table of Contents
(in thousands, except per share data)
4
th
Quarter
3
rd
Quarter
2
nd
Quarter
1
st
Quarter
$
4,848
$
4,479
$
4,358
$
4,023
1,658
1,232
1,195
1,026
3,190
3,247
3,163
2,997
1,188
1,074
1,079
1,168
0.46
0.41
0.42
0.45
0.46
0.41
0.42
0.45
$
3,986
$
3,645
$
3,878
$
3,821
1,023
1,126
1,200
1,135
2,963
2,519
2,678
2,686
974
1,009
1,012
1,074
0.38
0.39
0.39
0.42
0.38
0.39
0.39
0.42
*
All share and per share information is stated after giving effect to the 5 percent stock dividend
paid in December 2003 and the 5 percent stock dividend paid in December 2004.
Table of Contents
Table of Contents
1.
Financial Statements: See “Index to Consolidated Financial Statements” under Part II, Item 8
of this Report on Form 10-K.
2.
All other schedules are omitted because they are not applicable or the required information
is included in the Company’s Consolidated Financial Statements or Notes thereto included in
this Report on Form 10-K.
3.
Exhibits
Exhibit No.
Exhibit Description
Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3a of the Company’s Registration Statement on Form S-4 (Registration No. 33-25321)
as filed on November 7, 1988).
Certificate of Amendment to the Company’s Certificate of Incorporation
(incorporated by reference to Exhibit 3.3 of the Company’s Form 10-Q for the
fiscal quarter ended March 31, 1997 as filed on May 14, 1997).
Bylaws of the Company (incorporated by reference to Exhibit 3b of the Company’s
Registration Statement on Form S-4 (Registration No. 33-25321) as filed on
November 7, 1988).
Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.3
of the Company’s Form 10-Q for the fiscal quarter ended June 30, 1996 as filed on
August 5, 1996).
Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.5
of the Company’s Form 10-K for the fiscal year ended December 31, 1997 as filed on
March 30, 1998).
Evans Bancorp Employee Stock Purchase Plan (incorporated by reference to Exhibit
4.7 of the Company’s Registration Statement on Form S-8 (Registration No.
333-106655 as filed on June 30, 2003).
Evans Bancorp, Inc. 1999 Stock Option and Long-Term Incentive Plan (incorporated
by reference to Exhibit 4.2 of the Company’s Form 10-K for the fiscal year ended
December 31, 2003 as filed on March 18, 2004).
Table of Contents
Exhibit No.
Exhibit Description
Evans Bancorp, Inc. Dividend Reinvestment Plan, as amended (incorporated by
reference to the Company’s Registration Statement on Form S-3 (Registration No.
333-34347 as filed on August 27, 1997).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the
Company’s Form 10-Q for the fiscal quarter ended March 31, 1997 as filed on May
14, 1997).
Indenture between the Company, as Issuer, and Wilmington Trust Company, as
Trustee, dated as of October 1, 2004 (incorporated by reference to Exhibit 10.2 of
the Company’s Form 10-Q for the fiscal quarter ended September 30, 2004 as filed
on November 4, 2004).
Employment Agreement between Evans National Bank and Richard M. Craig
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K for the
fiscal year ended December 31, 1997 as filed on March 30, 1998).
Employment Agreement between Evans National Bank and James Tilley (incorporated by
reference to Exhibit 10.2 of the Company’s Form 10-K for the fiscal year ended
December 31, 1997 as filed on March 30, 1998).
Employment Agreement between Evans National Bank and William R. Glass
(incorporated by reference to Exhibit 10.3 of the Company’s Form 10-K for the
fiscal year ended December 31, 1997 as filed on March 30, 1998).
Specimen 1984 Director Deferred Compensation Agreement (incorporated by reference
to Exhibit 10.5 of the Company’s Form 10 (Registration No. 0-18539) as filed on
April 30, 1990).
Specimen 1989 Director Deferred Compensation Agreement (incorporated by reference
to Exhibit 10.6 of the Company’s Form 10 (Registration No. 0-18539) as filed on
April 30, 1990).
Summary of Provisions of Director Deferred Compensation Agreements (incorporated
by reference to Exhibit 10.7 of the Company’s Form 10 (Registration No. 0-18539)
as filed on April 30, 1990).
Employment Agreement between Evans National Bank and Robert Miller (incorporated
by reference to Exhibit 10.11 of the Company’s Form 10-K for the fiscal year ended
December 31, 2000 as filed on March 29, 2001).
Investment Service Agreement between O’Keefe Shaw & Co., Inc. and ENB Associates
Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the
fiscal quarter ended March 31, 2000 as filed on May 8, 2000).
Employment Agreement between Evans National Bank and Mark DeBacker (incorporated
by reference to Exhibit 10.15 of the Company’s Form 10-Q for the fiscal quarter
ended June 30, 2001 as filed on August 1, 2001).
Evans National Bank Executive Life Insurance Plan (incorporated by reference to
Exhibit 10.10 to the Company’s Form 10-K for the fiscal year ended December 31,
2003 as filed on March 18, 2004).
Evans National Bank Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10.11 to the Company’s Form 10-K for the fiscal year ended
December 31, 2003 as filed on March 18, 2004).
Evans National Bank Deferred Compensation Plan for Officers and Directors
(incorporated by reference to Exhibit 10.12 to the Company’s Form 10-K for the
fiscal year ended December 31, 2003 as filed on March 18, 2004).
Agreement of Sale and Purchase of Assets among ENB Insurance Agency, Inc., Ulrich
& Company, Inc., Ulrich Development Company, LLC and David L. Ulrich dated as of
October 1, 2004 (incorporated by reference to Exhibit 10.1 of the Company’s Form
10-Q for the fiscal quarter ended September 30, 2004 as filed on November 4,
2004).
Form of Supplemental Executive Retirement Participatory Agreement (filed herewith).
Form of Deferred Compensation Participatory Agreement (filed herewith).
Form of Executive Life Insurance Split-Dollar Endorsement Participatory Agreement
(filed herewith).
Form of Floating Rate Junior Subordinated Debt Security due 2034 (incorporated by
reference to Exhibit 10.3 of the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2004 as filed on November 4, 2004).
Table of Contents
Exhibit No.
Exhibit Description
Amended and Restated Declaration of Trust of Evans Capital Trust I, dated as of
October 1, 2004 (incorporated by reference to Exhibit 10.4 of the Company’s Form
10-Q for the fiscal quarter ended September 30, 2004 as filed on November 4,
2004).
Guarantee Agreement of the Company, dated as of October 1, 2004 (incorporated by
reference to Exhibit 10.5 of the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2004 as filed on November 4, 2004).
Purchase Agreement among the Company, Evans Capital Trust I, and NBC Capital
Markets Group, Inc., dated as of October 1, 2004 (incorporated by reference to
Exhibit 10.6 of the Company’s Form 10-Q for the fiscal quarter ended September 30,
2004 as filed on November 4, 2004).
Asset Purchase Agreement by and among Evans National Leasing, Inc., Evans Bancorp,
Inc., M&C Leasing Co., Inc., APCOT NY Corp., John Gallo, and for certain limited
purposes, Brian Gallo, dated as of December 31, 2004 (filed herewith).
Subsidiaries of the Registrant (filed herewith).
Independent Registered Public Accounting Firm’s Consent from KPMG LLP (filed
herewith).
Independent Registered Public Accounting Firm’s Consent from Deloitte & Touche LLP
(filed herewith).
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
Certification of Principal Executive Officer pursuant to 18 USC Section 1350
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Financial Officer pursuant to 18 USC Section 1350
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
*
Indicates a management contract or compensatory plan or arrangement.
Table of Contents
EVANS BANCORP, INC.
By:
/s/ James Tilley
James Tilley, President and CEO
Date: March 28, 2005
Signature
Title
Date
James Tilley
President and CEO/Director
March 28, 2005
Mark DeBacker
Treasurer
March 28, 2005
Phillip Brothman
Chairman of the Board/Director
March 28, 2005
Vice Chairman
Thomas H. Waring, Jr.
of the Board/Director
March 28, 2005
James E. Biddle, Jr.
Secretary/Director
March 28, 2005
LaVerne G. Hall
Director
March 28, 2005
David M. Taylor
Director
March 28, 2005
Robert W. Allen
Director
March 28, 2005
William F. Barrett
Director
March 28, 2005
Robert G. Miller, Jr.
Director
March 28, 2005
John R. O’Brien
Director
March 28, 2005
Nancy W. Ware
Director
March 28, 2005
Mary Catherine Militello
Director
March 28, 2005
Table of Contents
Exhibit No.
Exhibit Description
Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3a of the Company’s Registration
Statement on Form S-4 (Registration No. 33-25321) as filed on
November 7, 1988).
Certificate of Amendment to the Company’s Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 of the
Company’s Form 10-Q for the fiscal quarter ended March 31,
1997 as filed on May 14, 1997).
Bylaws of the Company (incorporated by reference to Exhibit 3b
of the Company’s Registration Statement on Form S-4
(Registration No. 33-25321) as filed on November 7, 1988).
Amendment to the Bylaws of the Company (incorporated by
reference to Exhibit 3.3 of the Company’s Form 10-Q for the
fiscal quarter ended June 30, 1996 as filed on August 5,
1996).
Amendment to the Bylaws of the Company (incorporated by
reference to Exhibit 3.5 of the Company’s Form 10-K for the
fiscal year ended December 31, 1997 as filed on March 30,
1998).
Evans Bancorp Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.7 of the Company’s Registration
Statement on Form S-8 (Registration No. 333-106655 as filed on
June 30, 2003).
Evans Bancorp, Inc. 1999 Stock Option and Long-Term Incentive
Plan (incorporated by reference to Exhibit 4.2 of the
Company’s Form 10-K for the fiscal year ended December 31,
2003 as filed on March 18, 2004).
Evans Bancorp, Inc. Dividend Reinvestment Plan, as amended
(incorporated by reference to the Company’s Registration
Statement on Form S-3 (Registration No. 333-34347 as filed on
August 27, 1997).
Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of the Company’s Form 10-Q for the fiscal
quarter ended March 31, 1997 as filed on May 14, 1997).
Indenture between the Company, as Issuer, and Wilmington Trust
Company, as Trustee, dated as of October 1, 2004 (incorporated
by reference to Exhibit 10.2 of the Company’s Form 10-Q for
the fiscal quarter ended September 30, 2004 as filed on
November 4, 2004).
Employment Agreement between Evans National Bank and Richard
M. Craig (incorporated by reference to Exhibit 10.1 of the
Company’s Form 10-K for the fiscal year ended December 31,
1997 as filed on March 30, 1998).
Employment Agreement between Evans National Bank and James Tilley (incorporated by reference to Exhibit 10.2 of the
Company’s Form 10-K for the fiscal year ended December 31,
1997 as filed on March 30, 1998).
Employment Agreement between Evans National Bank and William
R. Glass (incorporated by reference to Exhibit 10.3 of the
Company’s Form 10-K for the fiscal year ended December 31,
1997 as filed on March 30, 1998).
Specimen 1984 Director Deferred Compensation Agreement
(incorporated by reference to Exhibit 10.5 of the Company’s
Form 10 (Registration No. 0-18539) as filed on April 30,
1990).
Specimen 1989 Director Deferred Compensation Agreement
(incorporated by reference to Exhibit 10.6 of the Company’s
Form 10 (Registration No. 0-18539) as filed on April 30,
1990).
Summary of Provisions of Director Deferred Compensation
Agreements (incorporated by reference to Exhibit 10.7 of the
Company’s Form 10 (Registration No. 0-18539) as filed on April
30, 1990).
Employment Agreement between Evans National Bank and Robert
Miller (incorporated by reference to Exhibit 10.11 of the
Company’s Form 10-K for the fiscal year ended December 31,
2000 as filed on March 29, 2001).
Investment Service Agreement between O’Keefe Shaw & Co., Inc.
and ENB Associates Inc. (incorporated by reference to Exhibit
10.1 of the Company’s Form 10-Q for the fiscal quarter ended
March 31, 2000 as filed on May 8, 2000).
Table of Contents
Exhibit No.
Exhibit Description
Employment Agreement between Evans National Bank and Mark DeBacker (incorporated by
reference to Exhibit 10.15 of the Company’s Form 10-Q for the fiscal quarter ended
June 30, 2001 as filed on August 1, 2001).
Evans National Bank Executive Life Insurance Plan (incorporated by reference to
Exhibit 10.10 to the Company’s Form 10-K for the fiscal year ended December 31, 2003
as filed on March 18, 2004).
Evans National Bank Supplemental Executive Retirement Plan (incorporated by reference
to Exhibit 10.11 to the Company’s Form 10-K for the fiscal year ended December 31,
2003 as filed on March 18, 2004).
Evans National Bank Deferred Compensation Plan for Officers and Directors
(incorporated by reference to Exhibit 10.12 to the Company’s Form 10-K for the fiscal
year ended December 31, 2003 as filed on March 18, 2004).
Agreement of Sale and Purchase of Assets among ENB Insurance Agency, Inc., Ulrich &
Company, Inc., Ulrich Development Company, LLC and David L. Ulrich dated as of October
1, 2004 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the
fiscal quarter ended September 30, 2004 as filed on November 4, 2004).
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 99.2 to
the Company’s current report on Form 8-K filed September 30, 2004).
Form of Supplemental Executive Retirement Participatory Agreement (filed herewith).
Form of Deferred Compensation Participatory Agreement (filed herewith).
Form of Executive Life Insurance Split-Dollar Endorsement Participatory Agreement
(filed herewith).
Form of Floating Rate Junior Subordinated Debt Security due 2034 (incorporated by
reference to Exhibit 10.3 of the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2004 as filed on November 4, 2004).
Amended and Restated Declaration of Trust of Evans Capital Trust I, dated as of
October 1, 2004 (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q
for the fiscal quarter ended September 30, 2004 as filed on November 4, 2004).
Guarantee Agreement of the Company, dated as of October 1, 2004 (incorporated by
reference to Exhibit 10.5 of the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2004 as filed on November 4, 2004).
Purchase Agreement among the Company, Evans Capital Trust I, and NBC Capital Markets
Group, Inc., dated as of October 1, 2004 (incorporated by reference to Exhibit 10.6 of
the Company’s Form 10-Q for the fiscal quarter ended September 30, 2004 as filed on
November 4, 2004).
Asset Purchase Agreement by and among Evans National Leasing, Inc., Evans Bancorp,
Inc., M&C Leasing Co., Inc., APCOT NY Corp., John Gallo, and for certain limited
purposes, Brian Gallo, dated as of December 31, 2004 (filed herewith).
Subsidiaries of the Registrant (filed herewith).
Independent Registered Public Accounting Firm’s Consent from KPMG LLP (filed herewith).
Independent Registered Public Accounting Firm’s Consent from Deloitte & Touche LLP
(filed herewith).
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
*
Indicates a management contract or compensatory plan or arrangement.
EXHIBIT 10.15
EVANS NATIONAL BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE 1 PARTICIPATION AGREEMENT
I, _____________, acknowledge my selection as a Participant in the Evans
National Bank Supplemental Executive Retirement Plan in accordance with
Section 2.1 of the Plan. Additionally, I acknowledge that I have read the
Plan document and agree to be bound by its terms.
Executed this __ day of ___________,____.
Accepted by Evans National Bank
By: _____________________________________
EXHIBIT 10.16
OFFICERS' AND DIRECTORS' DEFERRAL PLAN
DEFFERRAL AND DISTRIBUTION ELECTION FORM
NAME OF PLAN: Evans National Bank Deferred Compensation Plan for Officers and Directors
Please complete the following accurately and with a BALLPOINT PEN; PRINT CLEARLY. The information you provide should be current as of the date the form is completed. All participants who have fulfilled the eligibility requirements to participate in the plan must complete all sections of the form.
SECTION I. - GENERAL INFORMATION (Please complete and review and correct any information as needed.)
___________________________ __________________________ _______________________ ______________________
Last Name First Name Middle Initial Sex (M or F)
___________________________ __________________________ _______________________ ______________________
Social Security Number Date of Birth Employee # Date of Hire
(mmddyy) (If applicable) (mmddyy)
___________________________ __________________________
Home Phone Work Phone
______________________________________________________________________________________________________________
Street Address
______________________________________________________________________________________________________________
Mailing Address
_________________________________________________________ _______________________ ______________________
City State Zip
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SECTION II. - DEFERRAL ELECTION (Check Yes & fill in % or check No.)
_____ YES, I want to make a pre-tax deferral contribution to the Plan. I authorize the Bank to deduct the following percentage (no more than 100%) of my compensation from each paycheck and to credit that amount to pre-tax deferral portion of my Account.
______ Fee/Salary (if applicable)
______ Bonus (if applicable)
______ Other
______ NO, I do not wish to contribute to the Plan at this time.
SECTION III. - DISTRIBUTION ELECTION
I hereby designate a one time election to have any distribution of the balance in my Deferred Compensation Account paid to me in installments as designated below:
______ One lump sum;
______ Five (5) annual installments and with the amount of each installment determined as of each installment date by dividing the entire amount in my Deferred Compensation Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Deferred Compensation Account;
______ Ten (10) annual installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Deferred Compensation Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Deferred Compensation Account; or;
______ Fifteen (15) annual installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Deferred Compensation Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Deferred Compensation Account.
If a distribution election is not made herein, then the benefit shall be paid in ten (10) annual installments as set forth herein.
SECTION IV. - AUTHORIZATION
I authorize the Bank to effect the elections specified on this Deferral, Investment, and Distribution Election form. Any modification or revocation of this Distribution Election as elected by the participant in the signed written statement must be in writing, at least twelve (12) months prior to the date of the first scheduled payment and shall not be effective earlier than twelve (12) months after the modification is made. Additionally, such modification shall extend the deferral period for a period of at least five (5) additional years from the date the distribution was scheduled to begin. I understand that my elections will remain in effect until I submit a change according to the provisions of the Plan. Any modification to accelerate the distribution is prohibited.
EXHIBIT 10.17
SPLIT DOLLAR POLICY ENDORSEMENT
Insured:
New York Life Policy No.
Mass Mutual Policy No.
Southland Policy No.
Supplementing and amending the application of Evans National Bank to New York Life, Mass Mutual and Southland Life ("Insurer" or "Insurers"), the applicant requests and directs that:
BENEFICIARIES
1. Subject to the Evans National Bank Executive Life Insurance Plan (the "Plan"), the terms and conditions of which are incorporated by reference herein, the beneficiary designated by the Insured, or his/her transferee, shall be the beneficiary of the "Participant's interest" determined in accordance with Section 3.1 of the Plan.
2. The beneficiary of any remaining death proceeds shall be ENB Employers Insurance Trust, or any successor thereto.
OWNERSHIP
3. The Ownership of the policy shall be ENB Employers Insurance Trust. The Owner shall have all ownership rights in the Policy except as may be specifically granted to the Insured or his/her transferee in paragraph (4) of this endorsement.
4. The Insured or his/her transferee shall have the right to assign all rights and interest in the policy with respect to that portion of the death proceeds designated in paragraph (1) of this endorsement, and to exercise all settlement options with respect to such death proceeds.
MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY
Upon the death of the Insured, the interest of any collateral assignee of the Owner of the policy designated in paragraph (3) above shall be limited to the portion of the proceeds described in paragraph (2) above.
OWNERS AUTHORITY
The Insurer is hereby authorized to recognize the Owner's claim to rights hereunder without investigating the reason for any action taken by the Owner, including its statement of the amount of premiums it has paid on the policy. The signature of the Owner shall be sufficient for the exercise of any rights under this Endorsement and the receipt of the Owner for any sums received by it shall be a
full discharge and release to the Insurer. Any transferee's rights shall be subject to this Endorsement.
Signed at Angola, New York, this ______ day of _______________, 200.
EVANS NATIONAL BANK
By _________________________
Its ________________________
Acceptance and Beneficiary Designation
The Insured accepts and agrees to the foregoing and, subject to the rights of the Owner as stated above, designates ____________________ as direct beneficiary and
___________________________________ as contingent beneficiary of the portion of the proceeds described in paragraph (1) above.
Signed at Angola, New York, this ____________day of ________________, 200 .
EXHIBIT 10.22
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made as of December 31, 2004, by and among EVANS NATIONAL LEASING, INC., a New York corporation having an address at One Grimsby Drive, Hamburg, New York 14075 ("Buyer"), EVANS BANCORP INC., a New York corporation having an address at 14-16 North Main Street, Angola, New York 14006 ("Evans"), M & C LEASING CO., INC., a New York corporation having an address at 1050 Union Road, Suite 2, West Seneca, New York 14224-3402 ("Seller"), APCOT NY CORP., a New York corporation having an address at 1050 Union Road, Suite 2, West Seneca, New York 14224-3402 ( "Shareholder"), JOHN GALLO, an individual having an address at 5 Norwood Lane, Orchard Park, New York 14127 ("Gallo"), and solely for the purpose of Section 6.7 hereof, BRIAN GALLO, an individual having an address at 5292 Innesbrooke Court, Hamburg, New York 14075 ("Employee").
WHEREAS, Seller is in the business of equipment leasing;
WHEREAS, Buyer has offered to buy, and Seller has offered to sell, substantially all of the assets used in the Business (as such term is defined in Article 1 below) of Seller; and
WHEREAS, Shareholder owns all of the issued and outstanding capital stock of Seller; and
WHEREAS, Gallo owns all of the issued and outstanding capital stock of the Shareholder; and
WHEREAS, concurrently with the execution of this Agreement and as a condition of the consummation of the transactions contemplated herein, Gallo will enter into the Personal Goodwill Purchase Agreement with Buyer pursuant to which Gallo will transfer all of the Personal Goodwill to Buyer upon the terms and conditions set forth in the Personal Goodwill Purchase Agreement;
NOW THEREFORE, in consideration of the mutual covenants, representations and warranties made herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE 2 CERTAIN DEFINITIONS
For purposes of this Agreement, the following terms are defined terms and shall have the meanings set forth below:
"2006 Earn-Out Payment" has the meaning set forth in Section 2.3.1(c)(i)(2) of this Agreement.
"2006 Earn-Out Target" has the meaning set forth in Section 2.3.1(c)(i)(2) of this Agreement.
"Accountant Statement" has the meaning set forth in Section 2.3.1(d)(ii).
"Affiliate" means, with respect to any entity, all directors and officers of such entity, all persons and entities controlling, controlled by or under common control with such entity, and all directors and officers of such other entity; and with respect to any individual, any person who is related by blood or marriage to such individual.
"Agreement" refers to this entire Agreement, including the exhibits and schedules referred to herein.
"Annual Targets" have the meaning and are identified in Section 2.3.1(c)(ii)(1) and (2) of this Agreement.
"Ancillary Agreements" means collectively the Personal Goodwill Purchase Agreement, the Employment Agreements and all other agreements and documents to be executed as contemplated by an in connection with this Agreement.
"Assumed Contracts" means those contracts, leases, licenses and agreements to which Seller is a party, which are specifically identified on Exhibit A as being assumed by Buyer, and (b) all Equipment Leases entered into by Seller in the ordinary course of business consistent with past practices prior to the Closing Date which Equipment Leases have not expired prior to the Closing Date.
"Assumed Liabilities" means (a) the obligations of Seller under the Assumed Contracts; (b) liabilities for advance payments from customers that are reflected on the Financial Statements; and (c) security deposits in the aggregate amount of $177,862 transferred to Buyer at Closing, which security deposits were collected by Seller for refunds to lessees under the Equipment Leases included among the Purchased Assets (the "Transferred Deposits").
"Balance Sheet Date" has the meaning set forth in Section 3.6 of this Agreement.
"Bulk Sales Escrow Account" has the meaning set forth in Section 2.3.1(a) of this Agreement.
"Bulk Sales Tax Notice" has the meaning set forth in Section 2.3.1(a)(i) of this Agreement.
"Business" means the equipment leasing business of Seller as such business is currently conducted.
"Business Information and Records" means all records, information, files and papers of Seller relating to the Business, including, without limitation, the original of each Equipment Lease and all related schedules, addenda, riders, supplements and guarantees, other customer records and files, vendor, manufacturer and supplier lists, advertising and promotional materials, sales and purchase correspondence, sales reports, personnel records and books of account.
"Buyer" has the meaning set forth in the introductory paragraph of this Agreement.
"Buyer Indemnitees" has the meaning set forth in Section 10.2 of this Agreement.
"Cash Portion of the 2006 Earn-Out Payment" has the meaning set forth in
Section 2.3.1(c)(i) of this Agreement.
"Cash Purchase Price" has the meaning set forth in Section 2.3.1(a) of this Agreement.
"Closing" means the consummation of the transactions contemplated by this Agreement.
"Closing Date" means December 31, 2004.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contingent Purchase Price" shall mean the Base Earn-Out and the Additional Earn-Out as described in Section 2.3.1(c) of this Agreement.
"Employment Agreement" or "Employment Agreements" has the meaning set forth in Section 6.7 of this Agreement.
"Equipment" means the equipment and other property covered by an Equipment Lease, together with any and all attachments, accessories, accessions, additions, improvements, replacements and substitutions incorporated or installed on or in any item thereof and all rights and interests of Seller therein, including any
manufacturer's representations and warranties relating to or covering the Equipment and the residual interest in the Equipment at the end of the Equipment Lease term.
"Equipment Lease" means an equipment lease, direct financing lease, master lease agreement, loan and security agreement and all related schedules, supplements, riders, addenda and guarantees, or any other financing arrangement arising out of the lease, rental or financing of Equipment by Seller, which evidences the payment obligation of the lessee.
"Equipment Lease Payments" means any and all payments due and owing, or to become due and owing, to Seller pursuant to an Equipment Lease.
"ERISA" means The Employee Retirement Income Security Act of 1974, as
amended.
"Evans" has the meaning set forth in the introductory paragraph of this
Agreement.
|
"Evans Stock" has the meaning set forth in Section 2.3.1(c)(i) of this Agreement.
"Excluded Assets" means (a) all payments made and to be made to Seller under this Agreement and all other rights of Seller hereunder; (b) all tax refunds relating to periods prior to the Closing; (c) the minute book and all formation documents of Seller; (d) all claims, rights or causes of action relating to any Excluded Asset or Excluded Liability; (e) any and all prepaid insurance premiums; and (f) all cash and cash equivalents other than the Transferred Deposits.
"Excluded Liabilities" means all liabilities of Seller that are not expressly included as Assumed Liabilities.
"Financial Statements" has the meaning set forth in Section 3.6 of this Agreement.
"First Niagara Bank Leases" has the meaning set forth in Section 2.3.1(b)(ii) of this Agreement.
"GAAP" means United States generally accepted accounting principles, consistently applied.
"Gallo" has the meaning set forth in the introductory paragraph of this Agreement.
"Grid Note" has the meaning set forth in Section 2.3.1(b)(i) of this Agreement.
"Governmental Entity" means any court or tribunal or any governmental, regulatory or administrative body, agency or authority, whether federal, state, local or foreign.
"Hazardous Material" means any hazardous or toxic substance, material or waste or pollutants, contaminants or asbestos-containing material that is or becomes regulated by any authority in any jurisdiction in which any Leased Real Estate or any real property previously owned or leased by Seller is located.
"Leased Real Estate" has the meaning set forth in the definition of "Purchased Assets" in this Article 1.
"Intellectual Property" means all right, title or interest of Seller in any and all United States and foreign trademarks, service marks, trade names, copyrights, proprietary technology, trade secrets, know-how, licenses, computer software, inventions, patents, utility models, processes, designs, domain names, formulae, and methodologies, whether such rights arise at common law or by registration, together with any and all applications and registrations with respect to any of the foregoing, used in connection with the Business as it is currently conducted.
"Leases" shall have the meaning set forth in Section 3.18 of this Agreement.
"Liability Claims" has the meaning set forth in Section 10.4.3 of this Agreement.
"Lien" means a lien, mortgage, pledge, charge, encumbrance, conditional sale agreement or security interest.
"Material Adverse Effect" means (a) any change, event, fact or circumstance, whether or not covered by insurance, that has or would have a material adverse effect on the business, operations, property, prospects, condition (financial or otherwise), assets or liabilities of Seller, or (b) any change, event, fact or circumstance that would materially impair, or cause a material delay in, Seller's, Shareholder's or Gallo's ability to perform their obligations under this Agreement or under the Ancillary Agreements to which Seller, Shareholder and/or Gallo is or may be a party.
"Material Contracts" has the meaning set forth in Section 3.12 of this Agreement.
"Net Income, Before Taxes" means net income before taxes as calculated in accordance with GAAP consistently applied in the United States of America and utilizing accounting policies historically used in the preparation of Buyer's financial statements. Included in this calculation of Net Income, Before Taxes are specific allocations from Evans and Evans National Bank and interest expense as discussed in paragraph 1 of that certain letter agreement dated December 31, 2004 by and among Buyer and Seller.
"Operating Assets" means all right, title or interest of Seller in any machinery, equipment, spare parts, vehicles, furniture, tools and supplies owned, leased, licensed or otherwise possessed by Seller and used in connection with the Business, and any manuals, product literature, and manufacturer's representations and warranties that relate to any of the foregoing, excluding any such items that are sold, transferred, disposed of or consumed by Seller prior to the Closing Date in the ordinary course of business and consistent with past practices.
"Permits" means all permits, licenses, franchises, registrations, and other evidences of authority to carry on a particular activity.
"Person" means an individual or entity.
"Personal Goodwill" means Gallo's reputation, personal relationships with customers and suppliers, and expertise relating to, and used in connection with, the Business.
"Personal Goodwill Purchase Agreement" has the meaning set forth in
Section 6.8 of this Agreement.
"Purchased Assets" means all of Seller's right, title and interest in, to
and under all of the tangible and intangible assets of Seller of every kind and
description other than the Excluded Assets used in connection with the Business,
including without limitation: (a) the leasehold and subleased hold interests of
Seller in all real property listed on Schedule 1.0 hereto (collectively, the
"Leased Real Estate"), together with all interests of Seller in the buildings,
structures, installations, fixtures, trade fixtures and other improvements
situated thereon and all easements, rights of way and other rights, interests,
and appurtenances of Seller therein or thereunto pertaining (collectively with
the Leased Real Estate, the "Leasehold Interests"); (b) the Equipment; (c) the
Equipment Lease Payments; (d) the Transferred Deposits; (e) Receivables; (f) the
Operating Assets; (g) the Equipment Leases; (h) the Leases; (i) the Intellectual
Property; (j) the Business Information and Records; (k) the Assumed Contracts;
(l) the Permits; (m) the name "M & C Leasing Co., Inc.", and all derivatives
thereof; (n) the domain name "M&CLeasing.com" (o) all rights of Seller in or
under any refunds, and prepaid expenses, excluding prepaid insurance premiums;
(p) all claims, rights (including without limitation guarantees, warranties and
indemnities) and causes of action relating to any Purchased Asset or Assumed
Liability); (q) all warranties or guarantees by any manufacturer, supplier or
other vendor to the extent solely related to any of the Purchased Assets; and
(r) all goodwill of the Business as a going concern and all other intangible
properties.
"Purchase Price" has the meaning set forth in Section 2.3.1 of this Agreement.
"Receivables" means all unpaid accounts, notes and other miscellaneous receivables in favor of Seller with respect to the Business (including any credit card receivables), together with all collateral security therefor.
"Repaid Indebtedness" has the meaning set forth in Section 2.3.1(b) of this Agreement.
"Reviewing Accountants" has the meaning set forth in Section 2.3.1(d)(ii) of this Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or any successor law, and regulations and rules issued pursuant to the Securities Act or any successor law.
"Seller" has the meaning set forth in the introductory paragraph of this Agreement.
"Seller's Bylaws" has the meaning set forth in Section 3.1 of this Agreement.
"Seller's Capital Stock" has the meaning set forth in Section 3.2.1 of this Agreement.
"Seller's Certificate of Incorporation" has the meaning set forth in
Section 3.1 of this Agreement.
"Seller Indemnitees" has the meaning set forth in Section 10.3 of this Agreement.
"Shareholder" has the meaning set forth in the introductory paragraph of this Agreement.
"Shareholder's Capital Stock" has the meaning set forth in Section 3.2.2 of this Agreement.
"Statement of Objection" has the meaning set forth in Section 2.3.1(d)(i).
"Stock Portion of the 2006 Earn-Out Payment" has the meaning set forth in
Section 2.3.1(c)(i) of this Agreement
"Tax" or "Taxes" mean all federal, state, county, local, foreign and other taxes, including income taxes, estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, employment and payroll related taxes, unemployment taxes, property taxes and import duties, whether or not measured in whole or in part by net income and including deficiencies or other additions to tax, interest and penalties with respect thereto.
"Tax Return" means, since the date of Seller's incorporation, all returns, declarations, reports, claims for refund, information statements and other documents relating to Taxes, including all schedules and attachments thereto, and including all amendments thereof.
"Transferred Deposits" has the meaning set forth in the definition of "Assumed Liabilities" in this Article 1.
"UCC" means the Uniform Commercial Code as in effect from time to time in the State of New York.
ARTICLE 3 PURCHASE AND SALE; CLOSING
3.1. Purchase and Sale. At the Closing, upon the terms and subject to the conditions set forth in this Agreement, Seller shall sell, transfer, convey and assign to Buyer, and Buyer shall purchase from Seller, all of Seller's right, title and interest in and to the Purchased Assets. Seller shall transfer good and marketable title to the Purchased Assets to Buyer, free and clear of all Liens.
3.2. Closing Date. The Closing shall take place at the offices of Harris Beach LLP, Larkin at Exchange, 726 Exchange Street, Suite 1000, Buffalo, New York 14210 on December 31, 2004 at 10:00 A.M. or at such other date and time as may be reasonably agreed to by Buyer and Seller.
3.3. Purchase Price.
3.3.1. In consideration of the transfer of the Purchased Assets to Buyer hereunder, Buyer shall pay to Seller a purchase price (the "Purchase Price") which will consist of the Cash Purchase Price, the Contingent Purchase Price and the Repaid Indebtedness.
(a) The Cash Purchase Price will consist of $1,235,862 in cash (the "Cash Purchase Price"). At the Closing, Buyer shall deliver to Seller a bank check in the amount of $1,030,138, and the balance of the Cash Purchase Price shall be allocated as follows: $27,862 of the Cash Purchase Price shall be allocated to an interest bearing account (the "Bulk Sales Escrow Account") and $177,862 of the Cash Purchase Price shall represent the Transferred Deposits.
(i) The funds in the Bulk Sales Escrow Account shall be available to Buyer to pay Seller's liability, if any, for New York State and local sales and use taxes due from Seller to New York State and contained in the notice, if any, of total taxes due the State of New York (the "Bulk Sales Tax Notice") given by the New York State Department of Taxation and Finance to Buyer and Seller in accordance with section 537.6 of Part 537 of Title 20 of the NYCRR. Upon payment to New York State of the total taxes determined to be due from Seller to New York State and set out in the Bulk Sales Notice, and receipt by Buyer of a notice from the New York State Department of Taxation and Finance in accordance with section 537.6 of Part 537 of Title 20 of the NYCRR, that the liability for the payment to the State of New York of any such taxes determined to be due from Seller have been wholly paid or satisfied or no longer exists, Buyer shall release to Seller the balance, if any, of any funds remaining in the Bulk Sales Escrow Account. Buyer and Seller agree, that in the event either Buyer or Seller disputes the total tax(es) claimed to be due by Seller to the State of New York as set forth in the Bulk Sales Tax Notice, Buyer and Seller shall cooperate in good faith with one another to resolve any dispute with the New York State Department of Taxation and Finance as to such disputed amount to the reasonable satisfaction of Seller. Further, the parties agree that the Bulk Sales Escrow Account shall not be the exclusive source from which Buyer may recover any liability assessed and/or enforced against Buyer, the Purchase Price or the Purchased Assets as a result of Seller's sales and use tax deficiencies, if any, to New York State.
(ii) Commencing on December 31, 2005 and each quarter thereafter, Buyer agrees, that to the extent any security deposits constituting the Transferred Deposits are forfeited to Buyer under the associated Equipment Lease and subject to applicable law, to pay over to Seller to the extent permitted by applicable law any such funds so forfeited up to the aggregate amount of the Transferred Deposits.
(b) At the Closing, in addition to the Cash Purchase Price, Buyer shall pay-off the following indebtedness (collectively, the "Repaid Indebtedness"):
(i) Seller's Grid Note dated April 20, 2004 in the maximum principal amount of $5,000,000, including any and all term notes executed and delivered thereunder, evidencing Seller's indebtedness to Manufacturers and Traders Trust Company (the "Grid Note"), having an aggregate outstanding balance (including principal, accrued interest and prepayment penalties) as of the Closing Date of $4,230,334.12. Such repayment shall be made by wire transfer of immediately available funds to an account designated by Manufacturer and Traders Trust Company for repayment of the Grid Note; and
(ii) Seller's equipment leases with First Niagara Bank, Lease Nos. 200328235 and 24990 (collectively, the "First Niagara Bank Leases"), in the aggregate amount (including principal, accrued interest and prepayment penalties) as of the Closing Date of $14,167.96. Such repayment shall be made in the form of a reimbursement to Seller by Buyer, upon Seller's delivery to Buyer of a letter from First Niagara Bank confirming the payment of any and all obligations of Seller under the First Niagara Leases
and executed UCC-3 Termination Statements terminating UCC-1 Financing Statement Filing Number 200309241637599 and UCC-1 Financing Statement Filing Number 200278, Filing Date August 30, 2002. Such reimbursement to be made to Seller by Buyer by bank check in the aggregate amount of $14,167.96.
(c) Contingent Purchase Price.
(i) Base Earn-Out. Within 45 days of December 31, 2006, Buyer
shall calculate the Buyer's Net Income, Before Taxes for its 2006 fiscal year.
Seller shall be entitled to an earn-out payment with respect to such period (the
"2006 Earn-Out Payment") equal to a maximum of $324,000 if the sum of Buyer's
Net Income, Before Taxes for its 2006 fiscal year and its 2005 fiscal year
exceeds $850,000 (the "2006 Earn-Out Target"). If the 2006 Earn-Out Target is
not met, then Seller shall be entitled to a 2006 Earn-Out Payment equal to the
maximum potential 2006 Earn-Out Payment ($324,000), less the shortfall in the
2006 Earn-Out Target. The 2006 Earn-Out Payment shall be payable as follows:
one-half of the 2006 Earn-Out Payment actually earned by Seller, shall be
payable in cash (the maximum amount of cash payable to Seller shall be $162,000)
(the "Cash Portion of the 2006 Earn-Out Payment") and one-half of the 2006
Earn-Out Payment actually earned by Seller, shall be payable in shares of Evans
common stock (the "Stock Portion of the 2006 Earn-Out Payment"), par value $.50
per share (the "Evans Stock") (the maximum amount of Evans Stock payable to
Seller hereunder shall be, in value (as determined herein) to $162,000). The
number of shares of Evans Stock to be issued to Seller in payment of the Stock
Portion of the 2006 Earn-Out Payment shall be equal to the quotient obtained by
dividing the aggregate Stock Portion of the 2006 Earn-Out Payment to which
Seller shall be entitled to receive for such period by the average of the
closing sales price of the Evans Stock (or the closing bid price, if no sales
were reported) as quoted on the Nasdaq National Market for the 20 trading days
immediately prior to the date of issuance of such shares of Evans Stock
hereunder (which date of issuance shall be within 60 days of the end of Buyer's
2006 fiscal year). Payment of the Stock Portion of the 2006 Earn-Out Payment
payable hereunder, assumes the continuing accuracy and truthfulness of the
representations, warranties and covenants set out in Section 3.29 of this
Agreement, and the continued availability to Evans of an exemption from
registration under the Securities Act for the issuance of the Evans Stock to
Seller. In the event Seller shall be entitled to a Stock Portion of the 2006
Earn-Out Payment under this Section 2.3.1(c)(i), Seller shall be required to
confirm the accuracy and truthfulness of such representations, warranties and
covenants set out in Section 3.29 of this Agreement as of the date of issuance
of the Evans Stock. In the event that Evans determines, in Evans' sole
discretion, that an exemption from registration under the Securities Act for the
issuance of the Evans Stock to Seller is not available, Evans may, at its
election and in its sole discretion, pay the Stock Portion of the 2006 Earn-Out
Payment in cash.
(ii) Additional Earn-Out.
(1) In addition to the Base Earn-Out, in the event Buyer's Net Income, Before Taxes (as determined by Buyer within 45 days of December 31 of its applicable fiscal year end) for its 2005 fiscal year, 2006 fiscal year, 2007 fiscal year, 2008 fiscal year and 2009 fiscal year exceeds the Annual Target for the fiscal year, as set forth below, Seller shall be entitled to an additional earn-out payment equal to 25% of such excess up to a maximum of $40,000 for each such fiscal year.
Fiscal Year Annual Targets (#1) ----------- ------------------- 2005 $120,000 2006 $420,000 2007 $620,000 2008 $680,000 2009 $740,000 |
For illustrative purposes only, in the event Buyer's Net Income, Before Taxes for its 2006 fiscal year is $600,000, Seller shall be entitled to an additional earn-out payment equal to $40,000. In the event Buyer's Net Income, Before Taxes for its 2006 fiscal year is $450,000, Seller shall be entitled to an additional earn-out payment equal to $7,500.
(2) In the event an Annual Target set forth in subsection (ii)(1) above is not met for a fiscal year, Seller shall be entitled to an additional earn-out payment equal to 25% of the excess over the Annual Targets set forth below, up to a maximum of the total amount of the shortfall in earn-out payments made pursuant to Section 2.3(c)(ii)(1) of this Agreement from the prior fiscal year.
Fiscal Year Annual Targets (#2) ----------- ------------------- 2006 $ 820,000 2007 $1,020,000 2008 $1,080,000 2009 $1,140,000 |
(d) Determination of Net Income, Before Taxes; Dispute Resolution.
(i) Buyer's Net Income, Before Taxes shall be determined by Buyer within 45 days after December 31 of its applicable fiscal year end. Unless within 30 days after its receipt of the Buyer's calculation of Buyer's Net Income, Before Taxes Seller shall deliver to Buyer a reasonably detailed statement describing its objections to such calculation (a "Statement of Objection"), Buyer's calculation of Buyer's Net Income, Before Taxes shall be final and binding.
(ii) If Seller delivers to Buyer a timely Statement of Objection, Buyer shall have no obligation to pay any earn-out until such time as the Seller's objections, as set forth in the Statement of Objection, are resolved. Upon receipt of a timely Statement of Objection, Buyer and Seller and their respective independent accountants shall negotiate in good faith and use reasonable best efforts to resolve such dispute. If a resolution is reached, such resolution shall be final and binding on the parties. If a final resolution is not reached within 30 days after Seller has delivered its Statement of Objection, any remaining disputes shall be resolved by a firm of independent accountants selected jointly by the parties (the "Reviewing Accountants"). The Reviewing Accountants shall be instructed to resolve any matters in dispute as promptly as practicable, but in no event more than 30 days after such matters have been submitted to them, and to set forth their resolution in a statement (the "Accountant Statement") setting Buyer's Net Income, Before Taxes for the disputed period. In such event, the determination of the Reviewing Accountants shall be final and binding on the parties hereto and the Accountant Statement shall be the Buyer's Net Income, Before Taxes for the disputed period for purposes of calculating any earn-out. The fees and expenses of the Reviewing Accountants shall be borne equally by Seller and Buyer.
3.4. Assumption of Liabilities. At and after the Closing, Buyer will assume and pay as they become due or perform the Assumed Liabilities. Buyer shall not assume, or become obligated to pay or perform under, any liability, obligation or contract of Seller other than the Assumed Liabilities, provided that Buyer shall be responsible for all liabilities incurred by Buyer in connection with the operation of the Business following the Closing. Without limiting the generality of the foregoing, Seller shall be solely responsible for payment promptly when due of all amounts at any time owing by Seller with respect to the Business of Seller, both before and after the Closing, whether accrued or contingent, known or unknown, other than the Assumed Liabilities, including, without limitation, liabilities arising out of the provision by Seller of goods or services prior to the Closing, obligations for any of Seller's Taxes; provided, that Seller shall not be liable for any occurrences or events arising in connection with Buyer's operation of the Business following Closing. Seller agrees that it will, forthwith after receipt, transfer and deliver to Buyer any mail or other documents received by Seller relating to any of the Assumed Liabilities transferred to Buyer hereunder, such mail and documents to be delivered in the form and condition in which received, except for the opening of any envelope or package.
3.5. Allocation of Purchase Price. The Purchase Price shall be allocated
among the Purchased Assets in the manner set forth on Exhibit B. Such allocation
constitutes a good faith allocation in accordance with the requirements of
Section 1060 of the Code. Buyer and Seller shall not take any position
inconsistent with such allocation for the purposes of any tax return of any
kind, whether federal, state or local, filed by or on behalf of either of them
or by or on behalf of any of their Affiliates.
3.6. Closing Deliveries; Further Assurances. The transfer of the Purchased Assets to be transferred by Seller to Buyer at the Closing shall be effected by deeds, bills of sale, assignments and consents thereto and such other instruments of transfer and conveyance as shall transfer to Buyer full title to the Purchased Assets free and clear of all Liens whatsoever, all of which documents shall be in form and substance reasonably satisfactory to counsel to Buyer and duly executed by or on behalf of Seller. At the Closing, Buyer shall deliver to Seller an instrument of assumption with respect to the Assumed Liabilities in form and substance reasonably satisfactory to counsel to Seller. Seller shall, at Buyer's request, at any time and from time to time after the Closing Date, do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances and assurances as may be reasonably required for the better assigning, transferring, granting, conveying, assuring and confirming to Buyer, or to its successors and assigns, or for aiding and assisting in the collecting and reducing to possession of, any or all of the Purchased Assets.
3.7. Expenses. Except as otherwise expressly set forth herein, each party hereto shall pay its own expenses, fees and charges (including attorneys' fees and accountants' fees) in connection with the preparation and negotiation of this Agreement and the consummation of the transactions contemplated hereby.
3.8. Payment of Taxes. Seller shall make all required reports and pay directly to each and every taxing authority any and all Taxes, fees and assessments, including applicable transfer taxes, plus any penalty or interest thereon, that arise as a result of the sale of the Purchased Assets by Seller to Buyer under this Agreement; provided, however, Buyer shall pay the sales tax due on the sale of the furniture, fixtures and equipment constituting the Purchased Assets as identified on Exhibit B.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER, THE SHAREHOLDER AND GALLO
Seller, Shareholder and Gallo jointly and severally represent and warrant to Buyer as follows:
4.1. Organization and Qualification. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Seller is duly qualified or licensed to do business as a foreign corporation and is in good standing in all of the states and other jurisdictions listed on Schedule 4.1 to this Agreement, which constitute all states and other jurisdictions where the nature of the activities conducted by Seller makes such qualification or licensing necessary. Seller has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business, including the Business, as it is currently conducted. True and complete copies of Seller's certificate of incorporation and bylaws have been delivered to Buyer, each so delivered being in full force and effect and as amended to the date hereof ("Seller's Certificate of Incorporation" and "Seller's Bylaws", respectively).
4.2. Capitalization; Subsidiaries.
4.2.1. The authorized capital stock of Seller consists of 200 shares of common stock, no par value per share ("Seller's Capital Stock"), of which 100 shares are issued and outstanding, all of which are owned by Shareholder. Shareholder is and will be on the Closing Date the sole record and beneficial owner and holder of the shares of Seller's Capital Stock owned by it, free and clear of all Liens. All of the outstanding shares of Seller's Capital Stock are duly authorized, validly issued, fully paid and nonassessable. None of the outstanding shares of Seller's Capital Stock have been issued in violation of Seller's Certificate of Incorporation or Seller's Bylaws or in violation of any preemptive rights or rights of first refusal under any provision of applicable law, Seller's Certificate of Incorporation or Seller's Bylaws, or any contracts or agreements to which Seller is subject, bound or a party. There are no outstanding warrants, options, rights, "phantom" stock rights, agreements, convertible or exchangeable securities, pre-emptive rights or agreements, instruments, understandings or other commitments relating to the issuance, sale or transfer of any of Seller's Capital Stock or other securities of Seller.
4.2.2. The authorized capital stock of the Shareholder consists of 200 shares of common stock, no par value per share ("Shareholder's Capital Stock"), of which 100 shares are issued and
outstanding, all of which are owned by Gallo. Gallo is and will be on the Closing Date the sole record and beneficial owner and holder of the shares of Shareholder's Capital Stock owned by it, free and clear of all Liens. All of the outstanding shares of Shareholder's Capital Stock are duly authorized, validly issued, fully paid and nonassessable. None of the outstanding shares of Shareholder's Capital Stock have been issued in violation of the Shareholder's Certificate of Incorporation or the Shareholder's Bylaws or in violation of any preemptive rights or rights of first refusal under any provision of applicable law, the Shareholder's Certificate of Incorporation or the Shareholder's Bylaws, or any contracts or agreements to which the Shareholder is subject, bound or a party. There are no outstanding warrants, options, rights, "phantom" stock rights, agreements, convertible or exchangeable securities, pre-emptive rights or agreements, instruments, understandings or other commitments relating to the issuance, sale or transfer of any of Shareholder's Capital Stock or other securities of Shareholder.
4.2.3. Seller does not, directly or indirectly, own any capital stock of or other equity interests in any corporation, partnership, joint venture or similar entity.
4.3. Authorization.
4.3.1. Seller has all requisite corporate power and authority to execute, deliver and perform this Agreement and the Ancillary Agreements to which Seller is to be a party and to consummate the transactions contemplated herein or therein. The board of directors of Seller and Shareholder have approved Seller's execution, delivery and performance of this Agreement and of each Ancillary Agreement to which Seller is to be a party. Seller has duly executed and delivered this Agreement and each Ancillary Agreement to which it is to be a party, and this Agreement and each Ancillary Agreement to which it is a party constitute Seller's legal, valid and binding obligation, enforceable against Seller in accordance with its terms (subject to applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent transfer or similar laws affecting creditors' rights generally and to general equitable principles).
4.3.2. Shareholder has all requisite corporate power and authority to execute, deliver and perform this Agreement and the Ancillary Agreements to which Shareholder is to be a party and to consummate the transactions contemplated herein or therein. The board of directors of Shareholder and Gallo have approved Shareholder's execution, delivery and performance of this Agreement and each Ancillary Agreement to which Shareholder is to be a party. Shareholder has duly executed and delivered this Agreement and each Ancillary Agreement to which it is to be a party, and this Agreement and each Ancillary Agreement to which it is a party constitute Shareholder's legal, valid and binding obligation, enforceable against Shareholder in accordance with its terms (subject to applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent transfer or similar laws affecting creditors' rights generally and to general equitable principles).
4.3.3. Gallo has the requisite authority and capacity to execute, deliver and perform this Agreement and each of the Ancillary Agreements to which Gallo is to be a party and to consummate the transactions contemplated herein or therein. Gallo has duly executed and delivered this Agreement and each Ancillary Agreement to which Gallo is a party, and this Agreement and each Ancillary Agreement to which Gallo is a party constitute Gallo's legal, valid and binding obligation, enforceable against Gallo in accordance with its terms (subject to applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent transfer or similar laws affecting creditors' rights generally and to general equitable principles).
4.4. Conflicting Agreements; Liens.
4.4.1. Seller's execution, delivery and performance of this Agreement and the Ancillary Agreements to which Seller is to be a party, and the consummation of the transactions contemplated hereby or thereby, do not and will not, with notice, lapse of time, or both (a) violate or conflict with any of the terms, conditions or provisions of Seller's Certificate of Incorporation or Seller's Bylaws; (b) violate any statute, rule, regulation, order or decree of any Governmental Entity applicable to Seller or by which any of the Purchased Assets may be bound; or (c) conflict with, result in a breach of, give rise to a default under, or
give to others any right of termination, cancellation, modification or acceleration under any of the terms, conditions or provisions of, any Assumed Contract, or any Lien, Lease, agreement or instrument to which Seller is a party or by which Seller or any of the Purchased Assets may be bound, and will not result in a declaration or imposition of any Lien of any nature whatsoever upon any of the Purchased Assets.
4.4.2. Shareholder's execution, delivery and performance of this Agreement and the Ancillary Agreements to which Shareholder is to be a party, and the consummation of the transactions contemplated hereby or thereby, do not and will not, with notice, lapse of time, or both (a) violate or conflict with any of the terms, conditions or provisions of Shareholder's certificate of incorporation or Shareholder's bylaws; (b) violate any statute, rule, regulation, order or decree of any Governmental Entity applicable to Shareholder or by which any of the Purchased Assets may be bound; or (c) conflict with, result in a breach of, give rise to a default under, or give to others any right of termination, cancellation, modification or acceleration under any of the terms, conditions or provisions of, any Assumed Contract, or any Lien, Lease, agreement or instrument to which Shareholder is a party or by which Shareholder or any of the Purchased Assets may be bound, and will not result in a declaration or imposition of any Lien of any nature whatsoever upon any of the Purchased Assets.
4.4.3. The execution, delivery and performance of this Agreement and the Ancillary Agreements to which Gallo is to be a party by Gallo, and the consummation of the transactions contemplated hereby or thereby, does not and will not, with notice, lapse of time, or both (a) violate any statute, rule, regulation, order or decree of any Governmental Entity applicable to Gallo or by which the Purchased Assets or Personal Goodwill may be bound; or (b) conflict with, result in a breach of, give rise to a default under, or give to others any right of termination, cancellation, modification or acceleration under any of the terms, conditions or provisions of, any Lien, Lease, agreement or instrument to which Gallo is a party or by which Gallo or any of the Purchased Assets or Personal Goodwill may be bound, and will not result in a declaration or imposition of any Lien of any nature whatsoever upon the Purchased Assets or the Personal Goodwill.
4.5. Third Party Consents. No notice to, consent, authorization, license, Permit, registration or approval of, or exemption or other action by, Shareholder, Gallo or any Person or Governmental Entity is required in connection with the execution, delivery or performance of this Agreement by Seller or the consummation by Seller of the transactions contemplated hereby.
4.6. Financial Statements. Seller has delivered to Buyer the following financial statements, including the notes thereto (collectively, the "Financial Statements"): (a) the audited balance sheet of Seller at December 31, 2003 (the "Balance Sheet Date"), and related audited statements of income and cash flow for the twelve (12) month period then ended; and (b) an unaudited balance sheet of Seller at September 30, 2004, and related unaudited statements of income and cash flow for the nine (9) month period then ended. The Financial Statements are complete and correct, are in accordance with all books, records and accounts of Seller, have been prepared in accordance with GAAP with respect to the periods indicated, and fairly and adequately present the financial condition of Seller as of the respective dates thereof and the results of its operations and cash flows for the respective periods covered thereby.
4.7. No Undisclosed Liabilities. As of the Balance Sheet Date, Seller had no claims, liabilities or indebtedness of any nature, whether absolute, accrued, contingent or otherwise, other than liabilities disclosed or reserved against in the Financial Statements. Since the Balance Sheet Date, Seller has not incurred any claims, liabilities or indebtedness of any nature, whether absolute, accrued, contingent or otherwise, other than liabilities disclosed or reserved against in the Financial Statements or incurred in the ordinary course of business and consistent with past practices, and which are properly reflected or reserved against in a balance sheet prepared in accordance with GAAP.
4.8. Title to Purchased Assets. Seller has good and marketable title to all of the Purchased Assets, free and clear of all Liens, and at the Closing Seller will convey to Buyer, good and marketable title to all of the Purchased Assets, free and clear of all Liens.
4.9. Condition of Purchased Assets. The Operating Assets are in good repair and operating condition, reasonable wear and tear excepted, and are suitable to be used for their intended purpose in connection with the Business. Seller, Shareholder and Gallo have no knowledge that the Equipment is not in good repair and operating condition, reasonable wear and tear excepted, or that the Equipment is not suitable to be used for its intended purpose in connection with the Business. Seller has taken all steps necessary to preserve the confidential nature of all proprietary and confidential information relating to the Business.
4.10. Equipment Leases.
4.10.1. The Equipments Leases arise from the bona fide lease, sale or financing of the Equipment relating to such Equipment Leases and have been originated or purchased by Seller in the ordinary course of business and consistent with past practice. Except as set forth on Schedule 3.10.1 to this Agreement, no lessee under any of the Equipment Leases has given notice of termination, has threatened to terminate, or has provided a notice of non-renewal of any Equipment Lease.
4.10.2. Each Equipment Lease is a legal, valid and binding obligation of the parties thereto, enforceable in accordance with its terms.
4.10.3. No Equipment Lease was entered into for personal, family or household purposes and no Equipment Lease is a consumer lease as defined in Article 2A of the UCC.
4.10.4. Each Equipment Lease and the other related documents in the Business Information and Records of Seller accurately reflect the agreements between the parties thereto with respect to such Equipment Lease.
4.10.5. Except as set forth on Schedule 3.10.5 to this Agreement, no Equipment Lease requires the prior written consent of the lessee thereto, or contains any other restriction on the ability of Seller, to transfer or assign such Equipment Lease to Buyer as contemplated by this Agreement.
4.10.6. Except as set forth on Schedule 3.10.6 to this Agreement, Seller has a first priority perfected security interest in the Equipment relating to each Equipment Lease, free and clear of all Liens, except the interests of the lessee thereunder.
4.10.7. Except as set forth on Schedule 3.10.7 to this Agreement, none of the Equipment Leases permit the lessee thereunder to transfer lessee's interest therein to a third party, or the sale, assignment, or transfer of the Equipment subject to the Equipment Lease, without the prior written consent of Seller.
4.10.8. Except as set forth on Schedule 3.10.8 to this Agreement, none of the Equipment Leases are delinquent in payments thereunder and no event of default has occurred or is continuing under any of the Equipment Leases.
4.10.9. Schedule 3.10.9 to this Agreement contains a complete list of all Equipment Leases that: (a) have a net book value of more than $10,000, (b) had or has Equipment that was abandoned, or lost, or (c) had Equipment that is subject to an active proceeding for reclamation, replevin, attachment, or other similar proceeding.
4.10.10. Each Equipment Lease, including each Equipment Lease under which the lessee is a Governmental Entity, and Seller's performance thereunder complies with all laws applicable to such Equipment Lease, and Seller has not received any notice of violation of any law relating to any Equipment Lease.
4.10.11. The terms of each Equipment Lease provides that the lessee thereunder is responsible: (a) for the maintenance and repair of the Equipment, (b) for the maintenance of adequate
casualty and property insurance on the Equipment and for the payment of the premiums for such insurance, and (c) for the payment of all taxes due and owing which arise under the Equipment Lease.
4.10.12. Except as otherwise set forth on Schedule 3.10.12 to this Agreement, the payment and performance obligations of each lessee under an Equipment Lease are fully guaranteed, each such guaranty is in full force and effect and each such guaranty is a legal, valid and binding obligation of the guarantor therein and/or thereunder, enforceable in accordance with its terms.
4.10.13. True and complete copies of all Equipment Leases, and all other documents in the Business Information and Records of Seller relating to such Equipment Leases, have been provided to Buyer. Additionally, Seller has provided to Buyer a true and complete copy of each standard form or form of Equipment Lease used by Seller in the past 5 years.
4.11. Absence of Changes. Since the Balance Sheet Date there has not been:
4.11.1. Any change in the Business, results of operations, earnings, backlog, prospects, properties, assets, liabilities or condition, financial or otherwise, of Seller (including without limitation the loss of any customer or supplier or the cancellation of any order or Equipment Lease) other than changes in the ordinary course of business, none of which, singly or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect.
4.11.2. Any damage, destruction or loss with respect to any Purchased Asset (whether or not covered by insurance) which has had or is reasonably likely to have a Material Adverse Effect.
4.11.3. Except in the ordinary course of business and consistent with past practice, for full and fair value received, any sale, lease, license, mortgage, assignment, transfer or other disposition or imposition of a Lien upon any tangible or intangible asset used or useful in the Business; or any acquisition by Seller of any business, property or assets other than in the ordinary course of business and consistent with past practices.
4.11.4. Any capital expenditure or commitment to make a capital expenditure relating to the Purchased Assets.
4.11.5. Any amendment, cancellation, termination or waiver of any Permit, contract right or other right relating to the Business under any contract or agreement.
4.11.6. Any material change in the Business or commercial practices customarily followed by Seller.
4.11.7. Any adoption or authorization of a plan of complete or partial liquidation of Seller or the Business.
4.11.8. Any change in the accounting practices, procedures or methods of Seller, except as may be required by GAAP.
4.11.9. Any declaration, set-aside or payment of any dividend (whether in cash, property or securities).
4.11.10. Any resignation or threatened resignation of any employee or officer of Seller.
4.11.11. Any commencement, settlement, judgment or other resolution of any litigation relating to the Business or the Purchased Assets.
4.11.12. Any increase in or establishment of any bonus, severance, pension, profit-sharing, stock option or other employee benefit plan or compensation payable or to become payable to any employee of Seller, or any recognition or certification of a labor union or collective bargaining unit with respect to any employees of Seller.
4.12. Contracts and Agreements. Schedule 3.12 to this Agreement lists every agreement and contract, other than the Equipment Leases, to which Seller is a party or by which its property or assets may be bound and which is not terminable by Seller without the payment of a penalty or other consequence upon not more than 30 days notice, that:
4.12.1. Is material to the continued operation of the Business.
4.12.2. Involves the future payment or receipt of more than $10,000 per year or $25,000 in the aggregate.
4.12.3. Relates to the borrowing of money or the extension of credit, including any guarantee of any obligation thereunder or the pledge of any assets or security therefor.
4.12.4. Involves the leasing of Equipment to a Governmental Entity.
4.12.5. Involves the purchase, sale or lease of any Operating Assets or other personal property used or useful in the operation of the Business.
4.12.6. Is with an agent, consultant, advisor, broker, salesman, sales representative, distributor, sales agent or dealer.
4.12.7. Relates to any Intellectual Property, including all license agreements (whether Seller is licensee or licensor thereunder).
4.12.8. Is a joint venture, partnership, or debt or equity investment agreement.
4.12.9. Is a tolling agreement.
4.12.10. Is with any Affiliate of Seller.
4.12.11. Relates to any purchase or sale of fixed assets or any sale, assignment, transfer or other disposition of any contract right, Permit or intangible asset.
4.12.12. Restricts in any way the right of Seller to compete with any person or entity in any line of business.
4.12.13. Was otherwise not made in the ordinary course of business consistent with past practice.
Such contracts and agreements are collectively referred to herein as the "Material Contracts". True, correct and complete copies of all Material Contracts referred to in this Section 3.12 (including all amendments and modifications thereto) and, in the case of oral contracts and agreements, accurate descriptions of the material terms thereof, have been provided to Buyer. All such Material Contracts are valid, enforceable and in full force and effect. Neither Seller nor, to Seller's knowledge, any third party to any Material Contract is in breach or default thereunder, and, to Seller's knowledge, no event has occurred that, with the giving of notice or the passage of time or both, would constitute a default thereunder.
4.13. Permits. Seller has all Permits as are necessary to enable Buyer to conduct the Business following the Closing. All such Permits are listed on Schedule 3.13 to this Agreement and are in full force and
effect. No violations have occurred or are continuing in respect of any such Permit and no proceeding is pending, or to Seller's knowledge, threatened, that may cause the revocation or limitation of any such Permit. All such Permits are assignable without consent of the other party or parties thereto and none of the Permits will be modified, subject to termination or otherwise affected by assignment to Buyer or by consummation of the transactions contemplated by this Agreement.
4.14. Compliance with Laws. Seller is not in violation of any applicable law, regulation, order, judgment or decree affecting the Business or the Purchased Assets promulgated or issued by any Governmental Entity which violation or the correction of which could reasonably be expected to have a Material Adverse Effect. Seller has not received any notice of an alleged violation of any law, regulation, order, judgment or decree affecting the Business or the Purchased Assets. There is no law, regulation, order, judgment or decree outstanding and affecting the Business or the Purchased Assets that requires or will require, from and after Closing, a change in the manner of conducting the Business or increased expenditures by or on behalf of the Business. No proceeding or investigation by any Governmental Entity is pending or, to Seller's knowledge, threatened.
4.15. Transferred Deposit.The aggregate amount of $177,862 allocated and deposited in the Transferred Deposit account represents the aggregate amount of security deposits collected by Seller in connection with and under the Equipment Leases transferred to Buyer at Closing as Purchased Assets.
4.16. Taxes. Seller has filed or caused to be filed on a timely basis all Tax Returns with respect to Taxes that are or were required to be filed pursuant to applicable law. All Tax Returns filed by Seller are true, correct and complete. Seller has paid, or made provision for the payment of, all Taxes that have or may become due for all periods covered by the Tax Returns or otherwise, or pursuant to any assessment received by Seller, except such Taxes, if any, as are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the unaudited balance sheet of Seller at September 30, 2004. Seller currently is not the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made or is expected to be made by any Governmental Entity in a jurisdiction where Seller does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no unpaid Taxes or assessments that are or could become a Lien on the Purchased Assets or the Purchase Price. All Taxes that Seller is or was required by applicable law to withhold, deduct or collect have been duly withheld, deducted and collected and, to the extent required, have been paid to the proper Governmental Entity or other Person. Seller has delivered to Buyer true and correct copies of all of Seller's federal, state and local Tax Returns for the past three (3) tax years.
4.17. Litigation. Except as set forth on Schedule 3.17 to this Agreement, there is no legal action, suit, claim or controversy (including without limitation with respect to product liability and warranties, employee matters and environmental matters) pending or, to Seller's knowledge, threatened against Seller or involving the Business or any of the Purchased Assets, or that questions the validity of this Agreement or seeks to delay, prohibit or enjoin or otherwise challenge the transactions contemplated hereby.
4.18. Leases. Seller owns fee simple title to no real property. The leases listed and described on Schedule 3.18 to this Agreement constitute all Leased Real Estate and all leases under which any Operating Asset is leased, used, occupied or held by Seller and used in connection with the Business (the "Leases"). True, correct and complete copies of all of the Leases (including all amendments and modifications thereto) have been delivered to Buyer. Except as otherwise set forth on Schedule 3.18 to this Agreement, the Leases are valid, enforceable and in full force and effect and will not be modified, subject to termination or otherwise affected by assignment to Buyer or by consummation of the transactions contemplated by this Agreement. Neither Seller nor, to Seller's knowledge, any other party to any Lease is in default thereunder, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute a default thereunder.
4.19. Benefit Plans. Schedule 3.19 to this Agreement contains a true, correct and complete list of all of the following contracts, plans and policies to which Seller is a party or by which its property or assets may be bound:
4.19.1. Contracts with officers and employees relating to employment or severance, other than any contract that is terminable by Seller at will without penalty or other consequence;
4.19.2. Collective bargaining agreements, union contracts, labor agreements, conciliation agreements or contracts with any labor union or other representative of employees;
4.19.3. Pension, profit-sharing, bonus, commission, retirement, stock option, other employee benefit or welfare plans or other similar plans or arrangements; and
4.19.4. Published employment policies.
Seller has furnished to Buyer true and complete copies of all contracts, plans and policies referred to on Schedule 3.19 to this Agreement. No officer or employee of Seller will be entitled to any additional benefits or any acceleration of the time of payment or the vesting of benefits as a result of the transactions contemplated by this Agreement.
4.20. ERISA Compliance.
4.20.1. No corporation or other entity is a member with Seller of a controlled group of corporations as defined in Section 414(b) of the Code, or is under common control with Seller as defined in Section 414(c) of the Code.
4.20.2. No employee benefit plan maintained by Seller is a "multiemployer plan" as defined in Section 3(37)(A) of ERISA.
4.20.3. Seller has not terminated any plan that is an "employee
pension benefit plan" as described in Section 3(2) of ERISA, and no
condition presently exists that could result in such termination under
Section 4042 of ERISA.
4.20.4. No "reportable event" (as defined in Section 4043 of ERISA) has occurred with respect to an employee pension benefit plan maintained by Seller for which notice to the Pension Benefit Guaranty Corporation is required pursuant to regulations under Section 4043 of ERISA.
4.20.5. Seller has not engaged in any "prohibited transaction" as defined in Section 406 of ERISA (other than a prohibited transaction that is exempt under Section 407 or 408 of ERISA).
4.20.6. No employee, officer or director of Seller, or any person for whom Seller is directly or indirectly responsible, whether by way of indemnity or otherwise, has engaged in a prohibited transaction (other than a prohibited transaction that is exempt under Section 407 or 408 of ERISA).
4.20.7. Seller has complied in all material respects with the reporting and disclosure requirements of Part I of ERISA.
4.20.8. There is no accumulated funding deficiency as defined in
Section 412 of the Code with respect to any employee benefit plan
maintained by Seller. All contributions required to have been made to such
employee benefit plans have been timely made.
4.21. Employee Relations. Schedule 3.21 to this Agreement lists each employee of Seller and such employee's years of service, age, salary and position. Seller maintains satisfactory relations with its employees. There have been no labor controversies and no strikes, lockouts, work stoppages or work slowdowns or threats thereof with respect to any group of employees of Seller during the past three (3) years, and Seller has not received notice of or otherwise become aware of any effort to organize its employees into a collective bargaining unit during the past three (3) years. No claim has been asserted or, to Seller's knowledge, threatened
by an employee on account of any alleged violation by Seller of any law relating to employment discrimination or employment practices.
4.22. Intellectual Property. Seller owns (or possesses adequate licenses or other rights to use, with or without payment of royalties) all Intellectual Property necessary to carry on the Business as it is now conducted. Schedule 4.22 to this Agreement contains a list and a brief description (including, if applicable, date of application, filing or registration and registration or application number) of all items of Intellectual Property, and no such filing, registration or application has been canceled or abandoned or has expired. Subject to the license agreements identified on Schedule 3.22 to this Agreement, Seller has the right to use all of the Intellectual Property free and clear of all Liens and, after the Closing, Buyer will have the right to use the Intellectual Property free and clear of all Liens. There is no settlement, forbearance, consent or order to which Seller is a party which restricts Seller's right to use or transfer any Intellectual Property or which permits any third party to use any Intellectual Property (other than the license agreements identified on Schedule 3.22 to this Agreement). Seller has not infringed and is not infringing, and has not engaged and is not engaging in the unauthorized use or misappropriation of, any patent, copyright, trademark, service mark, trade name, process, design, computer software, invention, trade secret, know-how, technology or similar proprietary right owned or controlled by any third party. There is no pending or, to Seller's knowledge, threatened, claim, action or proceeding against Seller relating to any such infringement, unauthorized use or misappropriation.
4.23. Solvency.
4.23.1. Seller is not now insolvent and will not be rendered insolvent by the consummation of the transactions contemplated by this Agreement. As used in this section, "insolvent" means that the sum of the debts and other liabilities of Seller exceeds the present fair saleable value of Seller's assets.
4.23.2. Immediately after giving effect to the consummation of the
transactions contemplated by this Agreement: (i) Seller will be able to
pay its liabilities as they become due in the ordinary course of its
business; (ii) Seller will not have unreasonably small capital with which
to conduct its present or proposed business; (iii) Seller will have assets
(calculated at fair market value) that exceed its liabilities; and (iv)
taking into account all pending and threatened litigation, final judgments
against Seller in actions for money damages are not reasonably anticipated
to be rendered at a time when, or in amounts such that, Seller will be
unable to satisfy any such judgments promptly in accordance with their
terms (taking into account the maximum probable amount of such judgments
in any such actions and the earliest reasonable time at which such
judgments might be rendered) as well as all other obligations of Seller.
The cash available to Seller, after taking into account all other
anticipated uses of the cash, will be sufficient to pay all such debts and
judgments promptly in accordance with their terms
4.24. No Finder. Seller has not paid, or become obligated to pay, any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated hereby.
4.25. Assets of Business. Except for the Excluded Assets, the Purchased Assets and Personal Goodwill (a) constitute all of the assets, tangible and intangible, of any nature whatsoever, necessary to operate the Business in the manner presently operated by Seller and (b) include all of the assets presently used by Seller in connection with the operation of the Business.
4.26. Hazardous Substances.
4.26.1. Seller, Shareholder or Gallo, have no knowledge that there is now, or has ever been, any disposal, release or threatened release of Hazardous Materials on, from or under any Leased Real Estate or any real property previously owned or leased by Seller that may (a) give rise to a clean-up responsibility, personal injury liability or property damage claim against Seller or Buyer, (b) result in Seller or Buyer being named a potentially responsible party for any clean up-costs, personal injuries or property damage, or (c) give rise to any cause of action by any third party against Seller or Buyer. For purposes of this
Section 4.26, the terms "disposal," "release," and "threatened release" shall have the definitions assigned thereto by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.
4.26.2. Seller, Shareholder or Gallo have no knowledge that any of the Leased Real Estate or any real property previously owned or leased by Seller is in violation of any law relating to industrial hygiene or to the environmental conditions on, under or about such properties, including, without limitation, soil and ground water condition, and to the actual knowledge of Seller, Shareholder or Gallo, without independent inquiry, there are no underground tanks or related piping, conduits or related structures existing on, under or about the Leased Real Estate or any real property previously owned or leased by Seller. During the period of Seller's ownership or lease of the Leased Real Estate or such other real property, neither Seller nor any third party has used, generated, manufactured, treated or stored on, under or about such properties or transported to or from such properties any Hazardous Materials.
4.26.3. During the period of Seller's ownership or lease of the Leased Real Estate or such other real property, there has been no action, suit, demand, claim, notice or noncompliance or violation, notice of liability, investigation, order or decree brought or delivered or, to Seller's knowledge, threatened against Seller or any settlement or consent decree reached by Seller with any third party or third parties alleging the presence, disposal, release or threatened release of any Hazardous Materials on, from or under any of such properties.
4.26.4. Seller has delivered to Buyer true and complete copies of all environmental reports, studies, surveys or analyses in its possession or under its control relating to the Leased Real Estate or to any other real property previously owned or leased by Seller.
4.27. Insurance. Seller has in full force and effect the policies of liability, errors and omissions and other forms of insurance relating to the Business listed on Schedule 4.27 to this Agreement. Seller is not in default under any such policy and there is no material inaccuracy in any application relating to any such policy. Seller has not received a notice of cancellation or non-renewal with respect to any such policy. There are no pending claims under any such policy.
4.28. Disclosure. None of the information included in this Agreement or in any other written document furnished or to be furnished by Seller pursuant to this Agreement is false or misleading in any material respect or omits to state a fact necessary in order to make any of the statements made herein or therein not misleading in any material respect. There is no fact or condition the occurrence or existence of which has had or could reasonably be expected to have a Material Adverse Effect that has not been set forth or referred to in this Agreement.
4.29. Warranties relating to Acquisition of Evans Stock.
4.29.1. Each of Seller, Shareholder and Gallo, by reason of its or his business and financial experience, has such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that each of Seller, Shareholder and Gallo is capable of (i) evaluating the merits and risks of an investment in the Evans Stock and making an informed investment decision and (ii) bearing the economic risk of such investment. Prior to the Closing Date, each of Seller, Shareholder and Gallo has received from Buyer, and had an opportunity to review, copies of: (a) Evans' annual report on Form 10-K for its fiscal year ended December 31, 2003; (b) Evans' proxy statement dated March 22, 2004 relating to Evans' 2004 annual meeting of shareholders to be held on April 20, 2004, and (c) such other reports and documents required to be filed and filed by Evans with the SEC under Sections 13(a), 14(a), 14(c) and 15(d) of the Securities Exchange Act of 1934, as amended, since the filing of its Form 10-K for its fiscal year ended December 31, 2003 with the SEC, specifically Evans': (1) Form 10-Q for the quarterly period ended March 31, 2004; (2) Form 10-Q for the quarterly period ended June 30, 2004; (3) Form 8-K dated September 27, 2004; (4) Form 8-K dated October 1, 2004; and (5) Form 10-Q for the quarterly period ended September 30, 2004. Seller is acquiring the Evans Stock for investment for its own
account, not as a nominee or agent and not with the view to, or any intention of, a resale or distribution thereof, in whole or in part, or the grant of any participation therein.
4.29.2. Seller understands that the Evans Stock are "restricted securities" under the federal securities laws inasmuch as the Evans Stock are being acquired from Evans in a transaction not involving a public offering and that under such laws and applicable regulations such securities may not be resold, transferred or otherwise disposed of without registration under the Securities Act and under applicable state securities laws or an exemption therefrom, and that in the absence of an effective registration statement covering the Evans Stock or an available exemption from such registration, the Evans Stock must be held indefinitely. In this connection, Seller represents that it is familiar with Rule 144 promulgated under the Securities Act and understands the resale limitations imposed thereby and by the Securities Act. Seller represents that, in the absence of an effective registration statement covering the Evans Stock, it will not offer, sell or otherwise transfer the Evans Stock except pursuant to an effective registration statement under the Securities Act covering the Evans Stock, or pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. Seller understands that for the sole purpose of enforcing the Securities Act as hereafter defined, Evans may place stop transfer instructions against the Evans Stock and the certificates therefor to restrict the transfer thereof. Seller understands that a legend, in substantially the form as that set forth below, will be placed on any certificate or certificates evidencing the Evans Stock:
"The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or applicable state securities laws, and may not be offered, sold or otherwise transferred under the Securities Act, except pursuant to an effective registration statement under the Securities Act and applicable state securities laws covering the securities, or pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws."
Such legend shall be immediately removed upon the effectiveness of any registration statement regarding the Evans Stock, but may be replaced by any other applicable legend reflecting any legal restriction related to such Evans Stock such as a legal restriction related to transfers of Evans Stock by a then "affiliate" (as defined in Rule 144(a)(1) of the Securities Act) of Evans.
Seller understands that Evans is under no obligation to register the Evans Stock under the Securities Act or any applicable state securities laws or to require Evans to assist Seller in determining or establishing exemptions from such registration requirements. As a result, Seller understands it may be unable to liquidate its investment in case of an emergency or a change in circumstances.
Seller hereby acknowledges that because of the restrictions on transfer of the Evans Stock to be issued in connection with this Agreement it may have to bear the economic risk of the investment commitment in the Evans Stock for an indefinite period of time. Seller will observe and comply with the Securities Act and the rules and regulations promulgated thereunder, as now in effect and as from time to time amended, in connection with any offer, sale, pledge, transfer or other disposition of the Evans Stock.
4.29.3. Each of Seller, Shareholder and Gallo understands that an investment in the Evans Stock involves substantial risks. Each of Seller, Shareholder and Gallo has been given the opportunity to make a thorough investigation of the proposed activities of Evans and, upon request to Evans, has been furnished with materials relating to Evans and its proposed activities to the extent such information is publicly available. Each of Seller, Shareholder and Gallo has had an opportunity to ask questions of and receive answers from Evans, or from a Person or Persons acting on Evans' behalf, concerning the terms and conditions of the Seller's investment in the Evans Stock. Seller has relied upon, and is making its investment decision upon, the reports, schedules, forms, statements and other documents filed with the SEC by Evans, and other information publicly available about Evans.
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller, Shareholder and Gallo as follows:
5.1. Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Buyer has all requisite corporate power and authority to own, operate and lease its property and to carry on its business as it is currently conducted.
5.2. Authorization. Buyer has all requisite corporate power and authority to execute, deliver and perform this Agreement and the Ancillary Agreements to which Buyer is to be a party and to consummate the transactions contemplated herein or therein. Buyer has taken all corporate action required to authorize the execution, delivery and performance of this Agreement and each Ancillary Agreement to which Buyer is to be a party. Buyer has duly executed and delivered this Agreement and each Ancillary Agreement to which it is a party, and this Agreement and each Ancillary Agreement to which it is a party constitute Buyer's legal, valid and binding obligation, enforceable against Buyer in accordance with its terms (subject to applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent transfer or similar laws affecting creditors' rights generally and to general equitable principles).
5.3. Conflicting Agreements; Liens. The execution and delivery of this Agreement by Buyer and the consummation of the transactions contemplated hereby do not and will not (a) conflict with or result in the breach of, any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Buyer; (b) violate any statute, rule, regulation, order or decree of any Governmental Entity applicable to Buyer or by which its property or assets may be bound; or (c) conflict with, result in a breach of, or give rise to a default under, any of the terms, conditions or provisions of any Lien, lease, agreement or instrument to which Buyer is a party or by which its property or assets may be bound, and will not result in a declaration or imposition of any Lien of any nature whatsoever upon any of the assets of Buyer.
5.4. No Litigation. There is no legal action, suit, claim or controversy pending or, to Buyer's knowledge, threatened against Buyer in any jurisdiction that questions the validity of this Agreement or seeks to delay, prohibit or enjoin or otherwise challenge the transactions contemplated hereby.
5.5. No Finder. Buyer has not paid, or become obligated to pay, any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated hereby.
5.6. Disclosure. None of the information included in this Agreement or in any written document furnished or to be furnished by Buyer pursuant to this Agreement is false or misleading or omits to state a fact necessary in order to make any of the statements made herein or therein not misleading in any material respect.
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF EVANS
Evans represents and warrants to Seller, Shareholder and Gallo as follows:
6.1. Organization. Evans is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Evans has all requisite corporate power and authority to own, operate and lease its property and to carry on its business as it is currently conducted.
6.2. Authorization. Evans has all requisite corporate power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated herein. Evans has taken all corporate action required to authorize the execution, delivery and performance of this Agreement. Evans has duly executed and delivered this Agreement and this Agreement constitutes Evans' legal, valid and binding obligation, enforceable against Evans in accordance with its terms (subject to applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent transfer or similar laws affecting creditors' rights generally and to general equitable principles).
6.3. Conflicting Agreements; Liens. The execution and delivery of this Agreement by Evans and the consummation of the transactions contemplated hereby do not and will not (a) conflict with or result in the breach of, any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Evans; (b) violate any statute, rule, regulation, order or decree of any Governmental Entity applicable to Evans or by which its property or assets may be bound; or (c) conflict with, result in a breach of, or give rise to a default under, any of the terms, conditions or provisions of any Lien, lease, agreement or instrument to which Evans is a party or by which its property or assets may be bound, and will not result in a declaration or imposition of any Lien of any nature whatsoever upon any of the assets of Evans.
6.4. No Litigation. There is no legal action, suit, claim or controversy pending or, to Evan's knowledge, threatened against Evans in any jurisdiction that questions the validity of this Agreement or seeks to delay, prohibit or enjoin or otherwise challenge the transactions contemplated hereby.
6.5. No Finder. Evans has not paid, or become obligated to pay, any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated hereby.
6.6. Disclosure. None of the information included in this Agreement or in any written document furnished or to be furnished by Evans pursuant to this Agreement is false or misleading or omits to state a fact necessary in order to make any of the statements made herein or therein not misleading in any material respect.
ARTICLE 7 FURTHER AGREEMENTS OF THE PARTIES
7.1. Buyer's Investigations. No evaluations, inspections or investigations with respect to the Business or the Purchased Assets conducted by Buyer or its agents or representatives prior to Closing shall diminish in any way the effect of any representation or warranty made by Seller, Shareholder or Gallo in this Agreement or relieve Seller, Shareholder or Gallo from any obligation under this Agreement.
7.2. Seller's Retained Liabilities. Seller agrees, and the Shareholder and Gallo shall cause Seller, to pay and discharge when due, in accordance with its normal practices as such may be from time to time, but subject to its right to contest and defend the same in its sole discretion, all of the Excluded Liabilities.
7.3. Buyer's Assumed Liabilities. Buyer agrees to pay and discharge when due, in accordance with its normal practices as such may be from time to time, but subject to its right to contest and defend the same in its sole discretion, all of the Assumed Liabilities.
7.4. Noncompetition. For a period of three (3) years from and after the Closing Date (the "Non-Competition Period"), neither Seller nor any Affiliate of Seller, shall, directly or indirectly, anywhere in the United States, (a) own, manage, control, conduct or operate any business which would compete with Buyer in the equipment leasing business; (b) solicit any employee of Buyer for the purposes of obtaining the services of such person, or otherwise encourage any such person to discontinue his or her employment with Buyer; or (c) solicit any customer of Buyer to become a customer of any competing or similar business. Without limiting the generality of Section 11.7 of this Agreement, if a court of competent jurisdiction declares by final judgment that any term or provision of this Section 7.4 is invalid or unenforceable, the parties hereto agree such court shall have the power to reduce the scope, duration, or geographic areas of such term or provision, to delete a specific phrase or invalid or unenforceable term, and to replace such provision, phrase or term with a valid and enforceable provision, phrase or term that most closely expresses the intent of the parties as set forth in this Section 7.4. Seller acknowledges that monetary damages would not be an adequate remedy in the event of a breach of this Section 7.4 and agree that, in the event of any such breach, Buyer shall be entitled to an injunction or other appropriate relief.
7.5. Equipment Lease Payments. Seller shall pay over to Buyer any Equipment Lease Payments received by Seller after the Closing Date. Buyer acknowledges that Seller has made no representations or warranties as to the collectability of the Equipment Lease Payments except for the representations and warranties of Seller in Article 3 of this Agreement, and subject to and in reliance upon such representations and
warranties, Buyer acknowledges that from and after the Closing, Buyer shall be responsible for collection of Equipment Lease Payments.
7.6. Name Change. On or prior to the Closing Date, Seller shall change its name to "J Gallo Inc.," or another name acceptable to Buyer, and shall cease all use of the name "M & C Leasing Co., Inc." and all derivatives thereof. Seller acknowledges that, at all times after the Closing, Buyer shall have sole ownership of the name "M & C Leasing Co., Inc." and all derivatives thereof, and neither Seller nor any of its Affiliates shall do anything inconsistent with such ownership.
7.7. Employment Agreements. At the Closing, Gallo and Employee shall each execute and deliver to Buyer Employment Agreements in the form annexed hereto as Exhibits C-1 and C-2, as applicable; it being understood that the execution and delivery of the Employment Agreements is a condition to Buyer's consummation of the transactions contemplated by this Agreement.
7.8. Personal Goodwill Purchase Agreement. At the Closing, Gallo shall execute and deliver to Buyer the Personal Goodwill Purchase Agreement in the form annexed hereto as Exhibit D (the "Personal Goodwill Purchase Agreement"); it being understood that the execution and delivery of the Personal Goodwill Purchase Agreement is a condition to Buyer's consummation of the transactions contemplated by this Agreement.
7.9. Assignment of Lease; Estoppel Certificates. Buyer and Seller shall enter into an Assignment of Lease for the Leased Real Property on terms and conditions reasonably acceptable to Buyer, and Seller shall have received any and all consents required for such assignment(s). Seller shall have delivered an Estoppel Certificate from the Lessor with respect to the Leased Real Property.
7.10. Officer's Certificates of Seller and Shareholder. Seller and Shareholder shall have delivered to Buyer a certificate of a duly authorized officer of Seller and Shareholder, as applicable, attaching a copy of Seller's and Shareholder's bylaws and certificate of incorporation and the resolutions of Seller's and Shareholder's board of directors and Shareholder or Gallo authorizing the transactions contemplated by this Agreement and certifying as to the incumbency of its officers executing this Agreement and the Ancillary Agreements to which Seller is a party.
7.11. Officer's Certificate. Buyer shall have delivered to Seller a certificate of a duly authorized officer of Buyer attaching a copy of Buyer's bylaws and the resolutions of Buyer's board of directors and sole shareholder authorizing the transactions contemplated by this Agreement.
7.12. No Publicity. Any public announcement, press release or similar publicity with respect to the transactions contemplated by this Agreement shall occur, if at all, at such time and in such manner as the parties mutually agree, provided, however, that Buyer and Evans shall be entitled to make, without Seller or Shareholder's agreement, any disclosure and/or filing relating to the transactions contemplated by this Agreement that is required by applicable law or The Nasdaq Stock Market after making good faith efforts to consult with Seller and Shareholder to the greatest extent reasonably practical in light of the then existing circumstances and legal requirements. Seller, Shareholder and Gallo acknowledge that under applicable federal securities law and the rules of The Nasdaq Stock Market, Evans is required to announce the execution of this Agreement, file a report with the SEC within 4 business days of its execution disclosing the execution of this Agreement and its material terms, and file a copy of this Agreement with the SEC.
7.13. Turbo License. Seller acknowledge and agrees that to the extent its existing license to use the Turbo Lease software used in connection with the Business is not assignable or cannot be immediately assigned to Buyer, Seller shall immediately purchase for Buyer a version of Turbo Lease software at least equal to the current version of the Turbo Lease software currently used by Seller in the operation of the Business for use by Buyer in the operation of the Business from and after the Closing.
ARTICLE 8 INTENTIONALLY OMITTED.
ARTICLE 9 INTENTIONALLY OMITTED.
ARTICLE 10 INTENTIONALLY OMITTED.
ARTICLE 11 INDEMNIFICATION
11.1. Survival. Regardless of any investigation, evaluation or inspection conducted before or after the Closing, and notwithstanding any knowledge or notice of any fact or circumstance which either Buyer or Evans, on the one hand, or Seller, Shareholder or Gallo, on the other, may have as the result of such investigation or otherwise, Buyer and Evans, on the one hand, and Seller, Shareholder and Gallo, on the other, shall each be entitled to rely upon the representations, warranties, covenants and agreements of the other in this Agreement and in the Ancillary Agreements. All representations, warranties, covenants and agreements made by any party in this Agreement or any Ancillary Agreement, certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing for that period of time set forth in Section 10.1.1, 10.1.2 and 10.1.3 below, as applicable, and any claims by a Buyer Indemnitee under Section 10.2 or a Seller Indemnitee under Section 10.3 for indemnification must be made within the period so established, except as to any matters with respect to which a bona fide written claim shall have been made or action at law or in equity shall have been commenced before termination of the applicable period in which event survival shall continue (but only with respect to, and to the extent of, such claim until such claim shall have been finally resolved):
11.1.1. representations and warranties set forth in Sections 3.1, 3.2, 3.3, 3.8, 3.10.10, 3.13 and 3.14 of this Agreement shall survive and remain in full force and effect indefinitely;
11.1.2. representations and warranties relating to Taxes shall survive and remain in full force and effect until 30 days after the expiration of the applicable statute of limitations, including all periods of extension;
11.1.3. all other representations and warranties made by any party in this Agreement shall survive the Closing for a period of 12 months.
11.2. Indemnification by Seller, Shareholder and Gallo. Seller, Shareholder and Gallo shall jointly and severally indemnify, defend and hold harmless Buyer and its shareholder and their respective Affiliates and the employees, successors and assigns of any of them (collectively, the "Buyer Indemnitees") from and against any and all claims, expenses (including attorneys' fees and other expenses of investigation and defense), losses, proceedings, audits and liabilities suffered, incurred or paid by any Buyer Indemnitee resulting from or arising out of (a) any inaccuracy or breach by Seller, Shareholder or Gallo of any representation, warranty, indemnity, covenant or other agreement (without regard to any materiality qualifier contained in any representations or warranties referenced in Sections 10.1.1 and 10.1.2 above) of Seller, Shareholder or Gallo set forth in this Agreement or any Ancillary Agreement; (b) any failure to comply with fraudulent conveyance laws or other laws for the protection of creditors (other than obligations and liabilities that arise from Buyer's failure to pay or discharge the Assumed Liabilities); or (c) any Taxes imposed on, assessed against or otherwise payable by a Buyer Indemnitee with respect to all taxable periods or portions thereof ending on or prior to the Closing Date, including, without limitation, any Taxes arising as a result of the transactions contemplated by this Agreement or by reason of Buyer being a successor in interest or transferee.
11.3. Indemnification by Buyer. Buyer shall indemnify, defend and hold harmless Seller, Shareholder, Gallo and their respective Affiliates and the employees, successors and assigns of any of them (collectively, the "Seller Indemnitees") from and against any and all claims, expenses (including attorneys' fees and other expenses of investigation and defense), losses, proceedings, audits and liabilities suffered, incurred or paid resulting from or arising out of (a) any inaccuracy or breach by Buyer of any representation, warranty, indemnity, covenant or other agreement of Buyer set forth in this Agreement or the Ancillary Agreements; or (b)
the operation by Buyer of the Business after the Closing Date (other than claims, expenses arising out of the conduct of the Business by Seller on or prior to the Closing (other than the Assumed Liabilities)).
11.4. Other Indemnification Matters.
11.4.1. Notwithstanding anything in this Article 10 to the contrary, in the event of any breach of a representation or warranty by a party that is willful or constitutes a fraud, such party's liability for breach of such representation or warranty shall survive the Closing and continue in full force and effect forever thereafter and shall not be subject to the limitations set forth in Section 10.4.2 below.
11.4.2. Neither Buyer or Evans, on the one hand, nor Seller, Shareholder or Gallo, on the other, will have liability (for indemnification or otherwise) with respect to matters described in Section 10.1.3 in excess of the sum of the Purchase Price (consisting of the Cash Purchase Price, the Repaid Indebtedness and the Contingent Purchase Price) and all consideration paid to Gallo under the Personal Goodwill Purchase Agreement.
11.4.3. Notwithstanding anything in this Article 10 to the contrary,
Seller, Shareholder and Gallo, jointly and severally, shall be liable for
any and all claims, expenses (including attorneys' fees and other expenses
of investigation and defense), losses, proceedings, audits and liabilities
associated with, resulting from or arising out of: (a) an inaccuracy or
breach of the representations and warranties set forth in Section 3.15 and
resulting in claims for return of security deposits relating to the
Equipment Leases transferred to Buyer at Closing as Purchased Assets that
exceed $177,862 (exclusive of any interest earned thereon); (b) the
litigations identified by Seller in Schedule 3.17 to this Agreement; and
(c) for avoidance of any doubt, any inaccuracies or breaches by Seller of
the representations and warranties described in Sections 10.1.1 and 10.1.2
(collectively, the "Liability Claims"). Seller, Shareholder and Gallo
shall jointly and severally indemnify, defend and hold harmless the Buyer
Indemnitees from and against any and all claims, expenses (including
attorneys' fees and other expenses of investigation and defense), losses,
proceedings, audits and liabilities suffered, incurred or paid by any
Buyer Indemnitee resulting from or arising out of the Liability Claims,
and there shall be no time limit within which to seek recovery for a
Liability Claim (other than as specifically set forth in Section 10.1.2
with respect matters covered thereunder) or any limit on the amount that
may be recovered by a Buyer Indemnitee with respect thereto.
11.5. Allocation of Responsibility. With respect to losses, damages and expenses arising from matters that existed, were created or arose in part from a state of facts existing or events occurring on or before the Closing Date and in part from a state of facts existing or events occurring after the Closing Date, such losses, damages and expenses shall be allocated between Seller and Buyer on the basis of the extent to which such state of facts or events related to periods on or before the Closing Date, on the one hand, and after the Closing Date, on the other hand. To the extent Buyer Indemnitees, on the one hand, and Seller Indemnitees, on the other, do not suffer or otherwise incur any expenses, losses, claims, proceedings, audits, liabilities or damages as a result of an inaccuracy or breach of a representation or warranty, Buyer Indemnitees, on the one hand, and Seller Indemnitees, on the other, may not seek indemnification for such inaccuracy or breach of such representation or warranty.
11.6. Procedures. If any Buyer Indemnitee or Seller Indemnitee becomes aware of any claim or demand potentially giving rise to a right of indemnification under Section 10.2 or 10.3 above with respect to any third party claim, such person shall give written notice to the indemnifying party thereof within a reasonable time after learning of such claim or demand. The indemnifying party shall have 30 days from the date of its receipt of such notice to notify the indemnified party whether the indemnifying party desires, at its sole cost and expense, to undertake the defense, compromise or settlement of such claim. The indemnified party shall have the right to participate in such defense, compromise and settlement through counsel of its choosing and at its own expense and shall have the right to approve any compromise or settlement involving any action other than solely the payment of money damages or that might otherwise have an adverse impact on the business or properties of the indemnified party. If the indemnifying party does not elect to undertake the defense, compromise or settlement of such claim, the indemnified party, without waiving any rights against the
indemnifying party, may defend, compromise or settle such claim in its reasonable discretion and shall be entitled to recover from the indemnifying party the amount of any judgment or settlement together with any and all other indemnifiable costs, expenses and liabilities relating thereto. The failure by any indemnified party to promptly deliver the notice required by this Section 10.6 shall not relieve the indemnifying party of its obligations hereunder except to the extent such failure materially and adversely prejudices the indemnifying party's ability to defend, compromise or settle such claim. All amounts received by any indemnified party under this 10.6 shall be net of any amounts received by such party under any policy of insurance relating thereto.
11.7. Remedies Cumulative. Except as otherwise expressly provided herein, the remedies provided for under this 10.7 are cumulative and shall be in addition to, and not in lieu of, all other remedies available to the parties hereto, whether under this Agreement or at law or in equity; provided that any remedies seeking monetary damages outside of this Article 10 with respect to liabilities and/or claims with respect to matters described in Section 10.1.3 shall be brought within the time period applicable to claims or actions to be made with respect representations and warranties under Section 10.1.3 and shall be limited as described in Section 10.4.2 hereof.
11.8. Survival of Covenants and Agreements. All covenants and agreements to be performed after the Closing shall continue indefinitely.
ARTICLE 12 MISCELLANEOUS
12.1. Books and Records. Seller shall deliver to Buyer promptly after the Closing all of the Business Information and Records. Buyer shall preserve such records for the lesser of (a) four (4) years after the Closing Date or (b) such period as Buyer would ordinarily preserve such records pursuant to its records retention policy as currently in effect. During such period, Buyer shall make the same available for examination (or for the making of copes or extracts) by Seller upon request, if necessary for a lawful purpose, at reasonable times so as not to interfere with Buyer's business. In the event that, prior to the expiration of such period, Buyer decides to destroy any such records pursuant to its records retention policy then in effect, Buyer shall give Seller at least thirty (30) days notice of such decision during which time Seller may request that Buyer transfer to Seller all such records to be destroyed and, if such a request is received, Buyer shall comply therewith at Seller's sole cost and expense; if no such request is received by Buyer, Buyer may destroy the records with respect to which notice has been given to Seller.
12.2. Notices. All notices, consents, waivers, notifications, and other communications required or permitted by this Agreement shall be in writing and shall be deemed given when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid); (b) sent by facsimile with confirmation of transmission by the transmitting equipment and confirmed by hard copy mailed by regular mail the same day; or (c) if sent by certified mail, return receipt requested; in each case to the following addresses, facsimile numbers and marked to the attention of the person (by name or title) designated below (or to such other address, facsimile number, or person as an party may designate by notice to the other parties):
If to Buyer: Evans National Leasing, Inc.
One Grimsby Drive
Hamburg, New York 14075
Attn.: William R. Glass, Chief Executive Officer
Fax: (716)926-2006
With a copy to: Harris Beach LLP
Larkin at Exchange
Exchange Street, Suite 1000
Buffalo, New York 14210
Attn.: Phillip Brothman
Fax: (716)200-5201
114
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If to Evans: Evans Bancorp. Inc.
14-16 North Main Street
Angola, New York 14006
Attn.: James Tilley, President and CEO
Fax: (716)926-2006
With a Copy to: Harris Beach LLP
Larkin at Exchange
Exchange Street, Suite 1000
Buffalo, New York 14210
Attn.: Phillip Brothman
Fax: (716)200-5201
If to Seller: M & C Leasing Co., Inc.
1050 Union Road, Suite 2
West Seneca, New York 14224
Attn.: John Gallo
Fax: (716) 873-1002
With a copy to: Amigone, Sanchez, Mattrey & Marshall, LLP
1300 Main Place Tower
350 Main Street
Buffalo, New York 14202
Attn. Vincent J. Sanchez, Esq.
Fax (716) 852-1344
If to the Shareholder: Apcot NY Corp.
1050 Union Road, Suite 2
West Seneca, New York 14224
Attn.: John Gallo
Fax: (716) 873-1002
With a copy to: Amigone, Sanchez, Mattrey & Marshall, LLP
1300 Main Place Tower
350 Main Street
Buffalo, New York 14202
Attn. Vincent J. Sanchez, Esq.
Fax (716) 852-1344
If to Gallo: John Gallo
5 Norwood Lane
Orchard Park, New York 14127
With a copy to: Amigone, Sanchez, Mattrey & Marshall, LLP
1300 Main Place Tower
350 Main Street
Buffalo, New York 14202
Attn. Vincent J. Sanchez, Esq.
Fax (716) 852-1344
|
12.3. Assignment; Binding Effect; Benefits. Buyer may assign its rights and obligations under this Agreement to any Affiliate of Buyer, including any successor to or purchaser of all or substantially all of the
stock or assets of Buyer. Except as set forth in this Section 11.3, neither this Agreement nor any rights or obligations arising hereunder shall be assignable by any party hereto without the prior written consent of the other parties. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns.
12.4. Waiver. No delay or failure by any party to exercise any right, remedy or power hereunder shall impair or be construed as a waiver thereof. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any contemporaneous or subsequent breach of that provision or of any other provision.
12.5. Entire Agreement; Amendments. This Agreement sets forth the entire agreement and understanding between Buyer and Evans, on the one hand, and Seller, Shareholder and Gallo, on the other, and supersedes all prior agreements relating to the subject matter hereof. This Agreement may be amended, modified or supplemented only by a written instrument signed by the parties hereto.
12.6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to its conflicts of laws provisions.
12.7. Severability. In the event any provision of this Agreement is found to be void or unenforceable by a court of competent jurisdiction, the remaining provisions hereof shall continue to be binding upon the parties with the same effect as though such void or unenforceable provision had been deleted.
12.8. No Third-Party Beneficiaries. Each of the parties hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto and their respective permitted successors and assigns under Section 11.3 above.
12.9. Headings. The headings and subheadings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of any provision of this Agreement.
12.10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which when taken together shall constitute one instrument.
12.11. Pronouns. As used in this Agreement, the masculine, feminine or neuter gender shall be deemed to include the others whenever the context so indicates or requires.
12.12. Ambiguities. The parties acknowledge that the parties and their counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any exhibit or amendments hereto.
12.13. Construction. Whenever the term "include" or "including" is used in this Agreement, it shall mean "including, without limitation" (whether or not such language is specifically set forth) and shall not be deemed to limit the range of possibilities to those items specifically enumerated. The words "hereof", "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision. Terms defined in the singular have a comparable meaning when used in the plural and vice versa.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized representatives as of the date first above set forth.
EVANS NATIONAL LEASING, INC.
By: /s/ William R. Glass
-------------------------------
Title: Chief Executive Officer
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EVANS BANCORP, INC.
By: /s/ James Tilley
-------------------------------
Title: President/CEO
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M & C LEASING CO., INC.
By: /s/ John Gallo
-------------------------------
Title: President
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APCOT NY CORP.
By: /s/ John Gallo
-------------------------------
Title: President
/s/ John Gallo
-------------------------------
John Gallo, Individually
/s/ Brian Gallo
-------------------------------
Brian Gallo, Individually
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EXHIBIT A
EXHIBIT B
ALLOCATION OF PURCHASE PRICE
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The following entities comprise the direct and indirect subsidiaries of the Registrant:
Evans National Bank
Evans National Financial Services, Inc.
ENB Insurance Agency, Inc.
Frontier Claims Services, Inc.
ENB Associates Inc.
Evans National Holding Corp.
Evans National Leasing, Inc.
Evans Capital Trust I
ENB Employers Insurance Trust
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Evans Bancorp, Inc.:
We consent to the incorporation by reference in the Registration Statements (No. 333-106655) on Form S-8 and (No. 333-34347) on Form S-3D of Evans Bancorp, Inc. of our report dated March 8, 2005, with respect to the consolidated balance sheets of Evans Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended, which report appears in the December 31, 2004 Annual Report on Form 10-K of Evans Bancorp, Inc.
/s/ KPMG LLP ---------------- Buffalo, New York March 28, 2005 |
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-106655 of Evans Bancorp, Inc. on Form S-8 and Registration Statement No. 333-34347 of Evans Bancorp, Inc. on Form S-3 of our report dated January 28, 2003 on the consolidated statements of income, changes in stockholders' equity and cash flow of Evans Bancorp, Inc. for the year ended December 31, 2002, appearing in this Annual Report on Form 10-K of Evans Bancorp, Inc. for the year ended December 31, 2004.
/s/ DELOITTE & TOUCHE LLP ------------------------- Buffalo, New York March 8, 2005 |
EXHIBIT 31.1
CERTIFICATION
I, James Tilley, certify that:
1. I have reviewed this annual report on Form 10-K of Evans Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 28, 2005 /s/ James Tilley ----------------- James Tilley President and Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Mark DeBacker, certify that:
1. I have reviewed this annual report on Form 10-K of Evans Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 28, 2005 /s/ Mark DeBacker ----------------- Mark DeBacker Treasurer (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, James Tilley, the President and Chief Executive Officer of Evans Bancorp,
Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge: (1)
that the Annual Report of Evans Bancorp, Inc. on Form 10-K for the fiscal year
ended December 31, 2004 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and (2) that information contained
in such Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operations of Evans Bancorp, Inc. This
certification is made to comply with the provisions of Section 906 of the
Sarbanes-Oxley Act and is not intended to be used for any other purpose.
Date: March 28, 2005
By /s/ James Tilley
----------------
Name: James Tilley
Title: President and Chief Executive Officer
(Principal Executive Officer)
|
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark DeBacker, the Treasurer of Evans Bancorp, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge: (1) that the Annual Report of Evans Bancorp, Inc. on Form 10-K for the fiscal year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Evans Bancorp, Inc. This certification is made to comply with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose.
Date: March 28, 2005
By: /s/ Mark DeBacker
-----------------
Name: Mark DeBacker
Title: Treasurer
(Principal Financial Officer)
|