10-Q 1 evbn-20160331x10q.htm 10-Q evbn 20160331 Q1_Taxonomy2015





United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For quarterly period ended    March 31, 2016



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from             to ______



Commission file number    001-35021



                                 EVANS BANCORP, INC.            .                

(Exact name of registrant as specified in its charter)



          New York                            16-1332767

(State or other jurisdiction of         (I.R.S. Employer

incorporation or organization)       Identification No.)



One Grimsby Drive, Hamburg, NY        14075

(Address of principal executive offices)  (Zip Code)



       (716) 926-2000      .

(Registrant's telephone number, including area code)



                           Not Applicable                          

 (Former name, former address and former fiscal year, if changed

 since last report)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer Accelerated filer

Non-accelerated filer (Do not check if smaller reporting company) Smaller reporting company



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No 



Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:



Common Stock, $.50 par value 4,284,566 shares as of May 2, 2016

 

 

 


 





INDEX





EVANS BANCORP, INC. AND SUBSIDIARIES







 

 



 

 

PART 1.   FINANCIAL INFORMATION

PAGE



 

 

Item 1.

Financial Statements

 



 

 



Unaudited Consolidated Balance Sheets – March 31, 2016 and December 31, 2015

1



 

 



Unaudited Consolidated Statements of Income – Three months ended March 31, 2016 and 2015

2



 

 



Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2016 and 2015



 

 



Unaudited Consolidated Statements of Changes in Stockholder’s Equity – Three months ended March 31, 2016 and 2015



 

 



Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2016 and 2015



 

 



Notes to Unaudited Consolidated Financial Statements



 

 

Item 2.

 Management's Discussion and Analysis of Financial Condition and Results of Operations

35 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42 



 

 

Item 4.

Controls and Procedures

43 



 

 

PART II.  OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

44 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44 



 

 

Item 6.

Exhibits

45 



 

 



Signatures

46 



 

 







 

 

 


 





 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

MARCH 31, 2016 AND DECEMBER 31, 2015

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

11,287 

 

$

11,813 

Interest-bearing deposits at banks

 

 

22,105 

 

 

10,808 

Securities:

 

 

 

 

 

 

Available for sale, at fair value (amortized cost: $112,874 at March 31, 2016;

 

 

114,687 

 

 

97,141 

$96,374 at December 31, 2015)

 

 

 

 

 

 

Held to maturity, at amortized cost (fair value: $1,595 at March 31, 2016;

 

 

1,607 

 

 

1,617 

$1,584 at December 31, 2015)

 

 

 

 

 

 

Federal Home Loan Bank common stock, at cost

 

 

1,296 

 

 

1,296 

Federal Reserve Bank common stock, at cost

 

 

1,492 

 

 

1,487 

Loans, net of allowance for loan losses of $13,119 at March 31, 2016

 

 

 

 

 

 

and $12,883 at December 31, 2015

 

 

783,654 

 

 

761,101 

Properties and equipment, net of accumulated depreciation of $16,072 at March 31, 2016

 

 

 

 

 

 

and $15,799 at December 31, 2015

 

 

11,078 

 

 

11,051 

Goodwill

 

 

8,101 

 

 

8,101 

Bank-owned life insurance

 

 

21,114 

 

 

20,978 

Other assets

 

 

13,494 

 

 

13,714 



 

 

 

 

 

 

TOTAL ASSETS

 

$

989,915 

 

$

939,107 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

$

174,276 

 

$

183,098 

NOW

 

 

95,622 

 

 

83,674 

Regular savings

 

 

463,672 

 

 

439,993 

Time

 

 

115,479 

 

 

96,217 

Total deposits

 

 

849,049 

 

 

802,982 



 

 

 

 

 

 

Securities sold under agreement to repurchase

 

 

12,894 

 

 

10,821 

Other borrowings

 

 

10,000 

 

 

10,000 

Other liabilities

 

 

14,482 

 

 

12,718 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

Total liabilities

 

 

897,755 

 

 

847,851 



 

 

 

 

 

 

CONTINGENT LIABILITIES AND COMMITMENTS

 

 

 

 

 

 



 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock, $.50 par value, 10,000,000 shares authorized; 4,279,296

 

 

 

 

 

 

and 4,260,203 shares issued at March 31, 2016 and December 31, 2015,

 

 

 

 

 

 

respectively, and 4,279,210 and 4,257,179 outstanding at March 31, 2016

 

 

 

 

 

 

and December 31, 2015, respectively

 

 

2,142 

 

 

2,132 

Capital surplus

 

 

43,435 

 

 

43,318 

Treasury stock, at cost, 86 and 3,024 shares at March 31, 2016 and

 

 

-    

 

 

-    

December 31, 2015, respectively

 

 

 

 

 

 

Retained earnings

 

 

47,704 

 

 

47,616 

Accumulated other comprehensive loss, net of tax

 

 

(1,121)

 

 

(1,810)

Total stockholders' equity

 

 

92,160 

 

 

91,256 



 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

989,915 

 

$

939,107 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 







1

 


 





 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2016

 

2015

INTEREST INCOME

 

 

 

 

 

 

Loans

 

$

8,730 

 

$

7,813 

Interest bearing deposits at banks

 

 

11 

 

 

Securities:

 

 

 

 

 

 

Taxable

 

 

377 

 

 

405 

Non-taxable

 

 

238 

 

 

237 

Total interest income

 

 

9,356 

 

 

8,456 

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

959 

 

 

781 

Other borrowings

 

 

50 

 

 

15 

Junior subordinated debentures

 

 

87 

 

 

79 

Total interest expense

 

 

1,096 

 

 

875 

NET INTEREST INCOME  

 

 

8,260 

 

 

7,581 

PROVISION FOR LOAN LOSSES

 

 

208 

 

 

201 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

8,052 

 

 

7,380 

NON-INTEREST INCOME

 

 

 

 

 

 

Bank charges

 

 

443 

 

 

409 

Insurance service and fees

 

 

1,748 

 

 

1,829 

Gain on loans sold

 

 

15 

 

 

22 

Bank-owned life insurance

 

 

136 

 

 

137 

Interchange fee income

 

 

318 

 

 

294 

Other

 

 

334 

 

 

375 

Total non-interest income

 

 

2,994 

 

 

3,066 

NON-INTEREST EXPENSE

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,514 

 

 

4,794 

Occupancy

 

 

699 

 

 

695 

Repairs and maintenance

 

 

176 

 

 

173 

Advertising and public relations

 

 

285 

 

 

211 

Professional services

 

 

580 

 

 

511 

Technology and communications

 

 

422 

 

 

259 

Litigation expense

 

 

(100)

 

 

-    

FDIC insurance

 

 

159 

 

 

147 

Other

 

 

793 

 

 

722 

Total non-interest expense

 

 

8,528 

 

 

7,512 

INCOME BEFORE INCOME TAXES

 

 

2,518 

 

 

2,934 

INCOME TAX PROVISION

 

 

804 

 

 

1,029 

NET INCOME

 

$

1,714 

 

$

1,905 



 

 

 

 

 

 

Net income per common share-basic

 

$

0.40 

 

$

0.45 

Net income per common share-diluted

 

$

0.40 

 

$

0.44 

Cash dividends per common share

 

$

0.38 

 

$

0.36 

Weighted average number of common shares outstanding

 

 

4,263,109 

 

 

4,213,509 

Weighted average number of diluted shares outstanding

 

 

4,328,034 

 

 

4,291,676 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 





2

 


 









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2016

 

 

2015



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

1,714 

 

 

 

 

$

1,905 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

Unrealized gain on available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

649 

 

 

 

 

 

331 

 

 

 

Less: Reclassification of gain on sale of securities

 

-    

 

 

 

 

 

-    

 

 

 



 

 

 

 

649 

 

 

 

 

 

331 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

 

 

 

Amortization of actuarial assumptions

 

35 

 

 

 

 

 

24 

 

 

 

Total

 

 

 

 

40 

 

 

 

 

 

29 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

689 

 

 

 

 

 

360 



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

2,403 

 

 

 

 

$

2,265 



 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 















3

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

 

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 



 

Common

 

Capital

 

Retained

 

Comprehensive

 

Treasury

 

 

 



 

Stock

 

Surplus

 

Earnings

 

Income (Loss)

 

Stock

 

Total

Balance, December 31, 2014

 

$

2,123 

 

$

43,102 

 

$

42,822 

 

$

(1,508)

 

$

(751)

 

$

85,788 

Net Income

 

 

 

 

 

 

 

 

1,905 

 

 

 

 

 

 

 

 

1,905 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

360 

 

 

 

 

 

360 

Cash dividends ($0.36 per common share)

 

 

 

 

 

 

 

 

(1,517)

 

 

 

 

 

 

 

 

(1,517)

Stock options and restricted stock expense

 

 

 

 

 

117 

 

 

 

 

 

 

 

 

 

 

 

117 

Excess tax benefit from stock-based compensation

 

 

 

 

 

14 

 

 

 

 

 

 

 

 

 

 

 

14 

Repurchased 1,397 shares in Treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34)

 

 

(34)

Reissued 20,942 restricted shares

 

 

 

 

 

(503)

 

 

 

 

 

 

 

 

503 

 

 

-    

Reissued 4,872 shares through stock option exercise

 

 

 

 

 

(48)

 

 

 

 

 

 

 

 

116 

 

 

68 

Balance, March 31, 2015

 

$

2,123 

 

$

42,682 

 

$

43,210 

 

$

(1,148)

 

$

(166)

 

$

86,701 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

2,132 

 

$

43,318 

 

$

47,616 

 

$

(1,810)

 

$

-    

 

$

91,256 

Net Income

 

 

 

 

 

 

 

 

1,714 

 

 

 

 

 

 

 

 

1,714 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

689 

 

 

 

 

 

689 

Cash dividends ($0.38 per common share)

 

 

 

 

 

 

 

 

(1,626)

 

 

 

 

 

 

 

 

(1,626)

Stock options and restricted stock expense

 

 

 

 

 

118 

 

 

 

 

 

 

 

 

 

 

 

118 

Excess tax benefit from stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued 19,093 restricted shares

 

 

10 

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

-    

Reissued 2,938 restricted shares, net of forfeitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-    

Balance, March 31, 2016

 

$

2,142 

 

$

43,435 

 

$

47,704 

 

$

(1,121)

 

$

-    

 

$

92,160 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









4

 


 







 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(in thousands)



 

Three Months Ended March 31,



 

 

2016

 

 

2015

OPERATING ACTIVITIES:

 

 

 

 

 

 

Interest received

 

$

9,090 

 

$

8,256 

Fees received

 

 

2,839 

 

 

2,779 

Interest paid

 

 

(1,068)

 

 

(896)

Cash paid to employees and vendors

 

 

(8,353)

 

 

(7,804)

Income taxes paid

 

 

(9)

 

 

(1)

Proceeds from sale of loans held for resale

 

 

880 

 

 

2,658 

Originations of loans held for resale

 

 

(335)

 

 

(4,995)



 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

3,044 

 

 

(3)



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Available for sales securities:

 

 

 

 

 

 

Purchases

 

 

(20,471)

 

 

(4,244)

Proceeds from maturities, calls, and payments

 

 

3,883 

 

 

2,451 

Held to maturity securities:

 

 

 

 

 

 

Proceeds from maturities, calls, and payments

 

 

11 

 

 

11 

Additions to properties and equipment

 

 

(300)

 

 

(111)

Purchase of tax credit investment

 

 

(359)

 

 

(667)

Net increase in loans

 

 

(23,176)

 

 

(3,595)



 

 

 

 

 

 

Net cash used in investing activities

 

 

(40,412)

 

 

(6,155)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from (repayments of) borrowings, net

 

 

2,072 

 

 

(16,803)

Net increase in deposits

 

 

46,067 

 

 

72,723 

Repurchase of treasury stock

 

 

-    

 

 

(34)

Reissuance of treasury stock

 

 

-    

 

 

68 



 

 

 

 

 

 

Net cash provided by financing activities

 

 

48,139 

 

 

55,954 



 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

10,771 

 

 

49,796 



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

 

22,621 

 

 

10,898 



 

 

 

 

 

 

End of period

 

$

33,392 

 

$

60,694 



(continued)





5

 


 





 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 



 

Three Months Ended March 31,



 

 

2016

 

 

2015



 

 

 

 

 

 

RECONCILIATION OF NET INCOME TO NET CASH

 

 

 

 

 

 

PROVIDED BY (USED IN) OPERATING ACTIVITIES:

 

 

 

 

 

 



 

 

 

 

 

 

Net income

 

$

1,714 

 

$

1,905 



 

 

 

 

 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

359 

 

 

356 

Deferred tax expense

 

 

36 

 

 

42 

Provision for loan losses

 

 

208 

 

 

201 

Gain on loans sold

 

 

(15)

 

 

(22)

Stock options and restricted stock expense

 

 

118 

 

 

117 

Proceeds from sale of loans held for resale

 

 

880 

 

 

2,658 

Originations of loans held for resale

 

 

(335)

 

 

(4,995)

Changes in assets and liabilities affecting cash flow:

 

 

 

 

 

 

Other assets

 

 

561 

 

 

327 

Other liabilities

 

 

(482)

 

 

(592)



 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

$

3,044 

 

$

(3)



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 















6

 


 



PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS



EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIODS ENDED MARCH  31, 2016 AND 2015



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”), Evans National Holding Corp. (“ENHC”) and Suchak Data Systems, LLC (“SDS”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“TEA”), and TEA’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENBA”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles (“GAAP”) and with general practice within the industries in which it operates.  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 results of operations for the three and three month periods ended March  31, 2016 are not necessarily indicative of the results to be expected for the full year.  The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.







7

 


 



2. SECURITIES

The amortized cost of securities and their approximate fair value at March  31, 2016 and December 31, 2015 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

24,835 

 

$

387 

 

$

(15)

 

$

25,207 

States and political subdivisions

 

 

36,659 

 

 

1,046 

 

 

(23)

 

 

37,682 

Total debt securities

 

$

61,494 

 

$

1,433 

 

$

(38)

 

$

62,889 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

18,427 

 

$

276 

 

$

(26)

 

$

18,677 

FHLMC

 

 

4,393 

 

 

96 

 

 

(32)

 

 

4,457 

GNMA

 

 

11,044 

 

 

120 

 

 

(30)

 

 

11,134 

CMO

 

 

17,516 

 

 

116 

 

 

(102)

 

 

17,530 

Total mortgage-backed securities

 

$

51,380 

 

$

608 

 

$

(190)

 

$

51,798 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

112,874 

 

$

2,041 

 

$

(228)

 

$

114,687 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,607 

 

$

12 

 

$

(24)

 

$

1,595 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,607 

 

$

12 

 

$

(24)

 

$

1,595 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

21,914 

 

$

166 

 

$

(234)

 

$

21,846 

States and political subdivisions

 

 

36,838 

 

 

874 

 

 

(29)

 

 

37,683 

Total debt securities

 

$

58,752 

 

$

1,040 

 

$

(263)

 

$

59,529 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

12,312 

 

$

168 

 

$

(25)

 

$

12,455 

FHLMC

 

 

4,629 

 

 

61 

 

 

(56)

 

 

4,634 

GNMA

 

 

7,047 

 

 

82 

 

 

(61)

 

 

7,068 

CMO

 

 

13,634 

 

 

24 

 

 

(203)

 

 

13,455 

Total mortgage-backed securities

 

$

37,622 

 

$

335 

 

$

(345)

 

$

37,612 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

96,374 

 

$

1,375 

 

$

(608)

 

$

97,141 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,617 

 

$

 

$

(39)

 

$

1,584 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,617 

 

$

 

$

(39)

 

$

1,584 





8

 


 



Available for sale securities with a total fair value of $98.4 million and $86.0 million at March  31, 2016 and December 31, 2015, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.



The Company uses the Federal Home Loan Bank of New York (“FHLBNY”) as its primary source of overnight funds and also has several long-term advances with FHLBNY.  The Company had $10.0 million in borrowed funds at FHLBNY at each of March 31, 2016 and December 31, 2015.  The Company has placed sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meet FHLB collateral requirements.  As a member of the Federal Home Loan Bank (“FHLB”) System, the Bank is required to hold stock in FHLBNY.  The Bank held $1.3 million in FHLBNY stock at each of March  31, 2016 and December 31, 2015 at cost.  The Company regularly evaluates investments in FHLBNY for impairment, considering liquidity, operating performance, capital position, stock repurchase and dividend history.  As of March 31, 2016, the Bank’s investment in FHLBNY stock was not impaired.



The Bank, as a member of the Federal Reserve Bank (“FRB”) system, is currently required to purchase and hold shares of capital stock in the FRB in an amount equal to 6% of its capital and surplus. The Bank’s investment in FRB capital stock totaled $1.5 million at each of March 31, 2016 and December 31, 2015, at cost.   Based on the current capital adequacy and liquidity position of the FRB, management believes there is no impairment in the Company’s investment at March 31, 2016 and the cost of the investment approximates fair value.



The scheduled maturities of debt and mortgage-backed securities at March  31, 2016 and December 31, 2015 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.









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015



 

Amortized

 

Estimated

 

Amortized

 

Estimated



 

cost

 

fair value

 

cost

 

fair value



 

 

(in thousands)

 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

4,377 

 

$

4,428 

 

$

4,082 

 

$

4,142 

Due after one year through five years

 

 

29,114 

 

 

29,716 

 

 

29,113 

 

 

29,448 

Due after five years through ten years

 

 

21,802 

 

 

22,341 

 

 

19,356 

 

 

19,615 

Due after ten years

 

 

6,201 

 

 

6,404 

 

 

6,201 

 

 

6,324 



 

 

61,494 

 

 

62,889 

 

 

58,752 

 

 

59,529 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

51,380 

 

 

51,798 

 

 

37,622 

 

 

37,612 



 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale securities

 

$

112,874 

 

$

114,687 

 

$

96,374 

 

$

97,141 



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

315 

 

$

314 

 

$

309 

 

$

308 

Due after one year through five years

 

 

358 

 

 

352 

 

 

374 

 

 

365 

Due after five years through ten years

 

 

828 

 

 

827 

 

 

828 

 

 

815 

Due after ten years

 

 

106 

 

 

102 

 

 

106 

 

 

96 



 

 

1,607 

 

 

1,595 

 

 

1,617 

 

 

1,584 



 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities

 

$

1,607 

 

$

1,595 

 

$

1,617 

 

$

1,584 







Information regarding unrealized losses within the Company’s available for sale securities at March  31, 2016 and December 31, 2015 is summarized below.  The securities are primarily U.S. government-guaranteed agency securities or municipal securities.  All unrealized losses are considered temporary and related to market interest rate fluctuations.

9

 


 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Less than 12 months

 

 

12 months or longer

 

 

Total



 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized



 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses



 

 

(in thousands)

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 -

 

$

 -

 

$

1,985 

 

$

(15)

 

$

1,985 

 

$

(15)

States and political subdivisions

 

 

1,196 

 

 

(1)

 

 

1,115 

 

 

(22)

 

 

2,311 

 

 

(23)

Total debt securities

 

$

1,196 

 

$

(1)

 

$

3,100 

 

$

(37)

 

$

4,296 

 

$

(38)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

6,581 

 

$

(26)

 

$

 -

 

$

 -

 

$

6,581 

 

$

(26)

FHLMC

 

 

 -

 

 

 -

 

 

1,216 

 

 

(32)

 

 

1,216 

 

 

(32)

GNMA

 

 

4,427 

 

 

(22)

 

 

1,614 

 

 

(8)

 

 

6,041 

 

 

(30)

CMO'S

 

 

5,984 

 

 

(81)

 

 

3,637 

 

 

(21)

 

 

9,621 

 

 

(102)

Total mortgage-backed securities

 

$

16,992 

 

$

(129)

 

$

6,467 

 

$

(61)

 

$

23,459 

 

$

(190)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held To Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

630 

 

$

(7)

 

$

426 

 

$

(17)

 

$

1,056 

 

$

(24)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

18,818 

 

$

(137)

 

$

9,993 

 

$

(115)

 

$

28,811 

 

$

(252)













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Less than 12 months

 

 

12 months or longer

 

 

Total



 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized



 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses



 

 

(in thousands)

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

4,531 

 

$

(89)

 

$

5,855 

 

$

(145)

 

$

10,386 

 

$

(234)

States and political subdivisions

 

 

3,133 

 

 

(6)

 

 

1,117 

 

 

(23)

 

 

4,250 

 

 

(29)

Total debt securities

 

$

7,664 

 

$

(95)

 

$

6,972 

 

$

(168)

 

$

14,636 

 

$

(263)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

3,856 

 

$

(25)

 

$

 -

 

$

 -

 

$

3,856 

 

$

(25)

FHLMC

 

 

 -

 

 

 -

 

 

1,234 

 

 

(56)

 

 

1,234 

 

 

(56)

GNMA

 

 

3,480 

 

 

(55)

 

 

471 

 

 

(6)

 

 

3,951 

 

 

(61)

CMO'S

 

 

6,677 

 

 

(89)

 

 

3,661 

 

 

(114)

 

 

10,338 

 

 

(203)

Total mortgage-backed securities

 

$

14,013 

 

$

(169)

 

$

5,366 

 

$

(176)

 

$

19,379 

 

$

(345)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held To Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

626 

 

$

(11)

 

$

495 

 

$

(28)

 

$

1,121 

 

$

(39)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

22,303 

 

$

(275)

 

$

12,833 

 

$

(372)

 

$

35,136 

 

$

(647)





10

 


 



Management has assessed the securities available for sale in an unrealized loss position at March  31, 2016 and December 31, 2015 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, and the financial condition of the issuer (primarily government or government-sponsored enterprises).  In addition, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of 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 issuers.



The Company had not recorded any other-than-temporary impairment (“OTTI”) charges as of March  31, 2016 and did not record any OTTI charges during 2015.  Nevertheless, it remains possible that there could be deterioration in the asset quality of the securities portfolio in the future.  The credit worthiness of the Company’s portfolio is largely reliant on the ability of U.S. government sponsored agencies such as FHLB, Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations.  In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio.  The relatively stable past performance is not a guarantee for similar performance of the Company’s securities portfolio going forward.





3.  FAIR VALUE MEASUREMENTS



The Company follows the provisions of ASC Topic 820, “Fair Value Measurements.”  Those provisions relate to financial assets and liabilities carried at fair value and fair value disclosures related to financial assets and liabilities. ASC Topic 820 defines fair value and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.



There are three levels of inputs to fair value measurements:

·

Level 1, meaning the use of quoted prices for identical instruments in active markets;

·

Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and

·

Level 3, meaning the use of unobservable inputs.



Observable market data should be used when available.



FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS



The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis March  31, 2016 and December 31, 2015:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

25,207 

 

$

-    

 

$

25,207 

States and political subdivisions

 

 

-    

 

 

37,682 

 

 

-    

 

 

37,682 

Mortgage-backed securities

 

 

-    

 

 

51,798 

 

 

-    

 

 

51,798 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

496 

 

 

496 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

21,846 

 

$

-    

 

$

21,846 

States and political subdivisions

 

 

-    

 

 

37,683 

 

 

-    

 

 

37,683 

Mortgage-backed securities

 

 

-    

 

 

37,612 

 

 

-    

 

 

37,612 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

557 

 

 

557 



11

 


 

Securities available for sale



Fair values for securities are determined using independent pricing services and market-participating brokers.  The Company’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data.  Because many fixed income securities do not trade on a daily basis, the evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.  In addition, model processes, such as the Option Adjusted Spread model, are used to assess interest rate impact and develop prepayment scenarios.  The models and the process take into account market convention.  For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models.  The company’s service provider may occasionally determine that it does not have sufficient verifiable information to value a particular security.  In these cases the Company will utilize valuations from another pricing service.



Management believes that it has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.  On a quarterly basis, the Company reviews changes in the market value of its security portfolio.  Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities.  Additionally, on an annual basis, the Company has its entire security portfolio priced by a second pricing service to determine consistency with another market evaluator.  If, during the Company’s review or when comparing with another servicer, a material difference between pricing evaluations were to exist, the Company would submit an inquiry to the service provider regarding the data used to value a particular security.  If the Company determines it has market information that would support a different valuation than the initial evaluation it can submit a challenge for a change to that security’s valuation.  There were no material differences in valuations noted in the first quarter of 2016 or during fiscal year 2015.



Securities available for sale are classified as Level 2 in the fair value hierarchy as the valuation provided by the third-party provider uses observable market data.



Mortgage servicing rights



Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices.  Accordingly, the Company obtains the fair value of the MSRs using a third-party pricing provider.  The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio.  The valuation model used by the provider considers market loan prepayment predictions and other economic factors which management considers to be significant unobservable inputs.  The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease.  Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of MSRs to enable management to maintain an appropriate system of internal control.  Mortgage servicing rights are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.



The following table summarizes the changes in fair value for mortgage servicing rights during the three month periods ended March  31, 2016 and 2015, respectively:





 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended March 31,

(in thousands)

 

2016

 

2015

Mortgage servicing rights - January 1

 

$

557 

 

$

518 

Gains (losses) included in earnings

 

 

(69)

 

 

(45)

Additions from loan sales

 

 

 

 

24 

Mortgage servicing rights - March 31

 

$

496 

 

$

497 





12

 


 



Quantitative information about the significant unobservable inputs used in the fair value measurement of MSRs at the respective dates is as follows:









 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015

Servicing fees

 

0.25 

%

 

0.25 

%

Discount rate

 

9.52 

%

 

9.52 

%

Prepayment rate (CPR)

 

9.93 

%

 

8.55 

%







FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS



The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements.  The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis at March 31, 2016 and December 31, 2015:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

-    

 

 

-    

 

 

17,849 

 

$

17,849 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

-    

 

 

-    

 

 

17,758 

 

$

17,758 







Impaired loans



The Company evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy.    Each loan’s collateral has a unique appraisal and management’s discount of the value is based on factors unique to each impaired loan.  The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which ranges from 10%-50%.  Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on appraisals by qualified licensed appraisers hired by the Company.    Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.



13

 


 



The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company internal loan rating scale to a 5 (special mention) or a 6 (substandard) depending on the amount of the loan, the type of loan and the type of collateral.  All impaired commercial loans are either graded a 6 or 7 on the internal loan rating scale.  For consumer loans, the Company obtains appraisals when a loan becomes 90 days past due or is determined to be impaired, whichever occurs first.  Subsequent to the downgrade or reaching 90 days past due, if the loan remains outstanding and impaired for at least one year more, management may require another follow-up appraisal.  Between receipts of updated appraisals, if necessary, management may perform an internal valuation based on any known changing conditions in the marketplace such as sales of similar properties, a change in the condition of the collateral, or feedback from local appraisers.  Impaired loans had a gross value of $19.5 million, with a allowance for loan loss of $1.7 million, at each of March  31, 2016 and December 31, 2015.



FAIR VALUE OF FINANCIAL INSTRUMENTS



At March 31, 2016 and December 31, 2015, the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015



 

Carrying

 

Fair

 

Carrying

 

Fair



 

Amount

 

Value

 

Amount

 

Value



 

 

(in thousands)

 

 

(in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,392 

 

$

33,392 

 

$

22,621 

 

$

22,621 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

114,687 

 

 

114,687 

 

 

97,141 

 

 

97,141 

FHLB and FRB stock

 

 

2,788 

 

 

2,788 

 

 

2,783 

 

 

2,783 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities

 

 

1,607 

 

 

1,595 

 

 

1,617 

 

 

1,584 

Loans, net

 

 

783,654 

 

 

795,249 

 

 

761,101 

 

 

772,472 

Mortgage servicing rights

 

 

496 

 

 

496 

 

 

557 

 

 

557 



 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

174,276 

 

$

174,276 

 

$

183,098 

 

$

183,098 

NOW deposits

 

 

95,622 

 

 

95,622 

 

 

83,674 

 

 

83,674 

Regular savings deposits

 

 

463,672 

 

 

463,672 

 

 

439,993 

 

 

439,993 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreement to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase

 

 

12,894 

 

 

12,894 

 

 

10,821 

 

 

10,821 

Other borrowed funds

 

 

10,000 

 

 

10,080 

 

 

10,000 

 

 

9,874 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

 

 

11,330 

 

 

11,330 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

115,479 

 

 

116,402 

 

 

96,217 

 

 

96,975 





14

 


 



The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value.



Cash and Cash Equivalents.  For these short-term instruments, the carrying amount is a reasonable estimate of fair value.  “Cash and Cash Equivalents” includes interest-bearing deposits at other banks.



FHLB and FRB stock.  The carrying value of FHLB and FRB stock, which are non-marketable equity investments, approximate fair value.



Securities held to maturity.  The Company holds certain municipal bonds as held-to-maturity.  These bonds are generally small in dollar amount and are issued only by certain local municipalities within the Company’s market area.  The original terms are negotiated directly and on an individual basis consistent with our loan and credit guidelines.  These bonds are not traded on the open market and management intends to hold the bonds to maturity.  The fair value of held-to-maturity securities is estimated by discounting the future cash flows using the current rates at which similar agreements would be made with municipalities with similar credit ratings and for the same remaining maturities.



Loans and Leases, net.  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.  This fair value calculation is not necessarily indicative of the exit price, as defined in ASC 820.  



Deposits.  The fair value of demand deposits, NOW accounts, muni-vest 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.



Junior Subordinated Debentures.  There is no active market for the Company’s debentures and there have been no issuances of similar instruments in recent yearsThe Company looked at a market bond index to estimate a discount margin to value the debenturesThe discount margin was very similar to the spread to LIBOR established at the issuance of the debentures.  As a result, the Company determined that the fair value of the adjustable-rate debentures approximates their face amount.



Securities Sold Under Agreement to Repurchase.    The fair value of the securities sold under agreement to repurchase approximates its carrying value as the repurchase agreements are one day agreements.



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.







15

 


 



4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES



Loan Portfolio Composition

The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated:









 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015

Mortgage loans on real estate:

 

(in thousands)

Residential mortgages

 

$

105,545 

 

$

103,941 

Commercial and multi-family

 

 

406,206 

 

 

399,819 

Construction-Residential

 

 

1,149 

 

 

1,546 

Construction-Commercial

 

 

68,692 

 

 

60,892 

Home equities

 

 

61,593 

 

 

61,042 

Total real estate loans

 

 

643,185 

 

 

627,240 



 

 

 

 

 

 

Commercial and industrial loans

 

 

150,813 

 

 

144,330 

Consumer loans

 

 

1,684 

 

 

1,596 

Other

 

 

488 

 

 

139 

Net deferred loan origination costs

 

 

603 

 

 

679 

Total gross loans

 

 

796,773 

 

 

773,984 



 

 

 

 

 

 

Allowance for loan losses

 

 

(13,119)

 

 

(12,883)



 

 

 

 

 

 

Loans, net

 

$

783,654 

 

$

761,101 





The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages.  In the three month period ended March 31, 2016, the Bank sold mortgages to FNMA totaling $0.9 million, as compared with $2.6 million in mortgages sold to FNMA in the three month period ended March 31, 2015At March  31, 2016, the Bank had a loan servicing portfolio principal balance of $75.8 million upon which it earns servicing fees, as compared with $77.3 million at December 31, 2015.  The value of the mortgage servicing rights for that portfolio was $0.5 million at March  31, 2016 and $0.6 million at December 31, 2015.  At March 31, 2016, there were no residential mortgage loans held-for-sale, compared with $0.5 million in residential mortgages held-for-sale at December 31, 2015.  The Company had no commercial loans held-for-sale at March  31, 2016 or December 31, 2015.  The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.



As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.  Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2015 are consistent with those utilized by the Company in the three-month period ended March  31, 2016.



16

 


 

Credit Quality Indicators



The Bank monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”).  The primary CQI for its commercial mortgage and commercial and industrial (“C&I”) portfolios is the individual loan’s credit risk rating.  The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan and lease losses:



·

1-3-Pass

·

4-Watch

·

5-O.A.E.M. (Other Assets Especially Mentioned) or Special Mention

·

6-Substandard

·

7-Doubtful

·

8-Loss



The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process.  Consumers are not required to provide the Company with updated financial information as are commercial customers.  Consumer loans also carry smaller balances.  Given the lack of updated information after the initial underwriting of the loan and small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans.    However, once a consumer loan is identified as impaired, it is individually evaluated for impairment.



The following tables provide data, at the class level, of credit quality indicators of certain loans for the dates specified:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

3

 

$

40,299 

 

$

324,754 

 

$

365,053 

 

$

81,975 

4

 

 

22,985 

 

 

62,966 

 

 

85,951 

 

 

51,685 

5

 

 

1,224 

 

 

11,409 

 

 

12,633 

 

 

10,320 

6

 

 

4,184 

 

 

7,077 

 

 

11,261 

 

 

6,719 

7

 

 

-    

 

 

-    

 

 

-    

 

 

114 

Total

 

$

68,692 

 

$

406,206 

 

$

474,898 

 

$

150,813 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

3

 

$

42,383 

 

$

340,837 

 

$

383,220 

 

$

80,379 

4

 

 

13,098 

 

 

40,019 

 

 

53,117 

 

 

47,509 

5

 

 

1,224 

 

 

11,772 

 

 

12,996 

 

 

8,973 

6

 

 

4,187 

 

 

7,191 

 

 

11,378 

 

 

7,350 

7

 

 

-    

 

 

-    

 

 

-    

 

 

119 

Total

 

$

60,892 

 

$

399,819 

 

$

460,711 

 

$

144,330 



17

 


 



Past Due Loans

The following tables provide an analysis of the age of the recorded investment in loans that are past due as of the dates indicated:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Total Past 

 

Current 

 

Total

 

90+ Days

 

Non-accruing



 

30-59 days

 

60-89 days

 

90+ days

 

Due

 

Balance

 

Balance

 

Accruing

 

Loans



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

607 

 

$

217 

 

$

537 

 

$

1,361 

 

$

149,452 

 

$

150,813 

 

$

175 

 

$

5,331 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

1,014 

 

 

-    

 

 

521 

 

 

1,535 

 

 

104,010 

 

 

105,545 

 

 

-    

 

 

737 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

1,149 

 

 

1,149 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

5,533 

 

 

-    

 

 

3,291 

 

 

8,824 

 

 

397,382 

 

 

406,206 

 

 

2,839 

 

 

3,698 

  Construction

 

 

456 

 

 

-    

 

 

3,728 

 

 

4,184 

 

 

64,508 

 

 

68,692 

 

 

-    

 

 

4,184 

Home equities

 

 

94 

 

 

104 

 

 

762 

 

 

960 

 

 

60,633 

 

 

61,593 

 

 

-    

 

 

963 

Consumer

 

 

 

 

-    

 

 

-    

 

 

 

 

1,677 

 

 

1,684 

 

 

-    

 

 

14 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

488 

 

 

488 

 

 

-    

 

 

-    

Total Loans

 

$

7,711 

 

$

321 

 

$

8,839 

 

$

16,871 

 

$

779,299 

 

$

796,170 

 

$

3,014 

 

$

14,927 



NOTE: Loan balances do not include $603 thousand in net deferred loan origination costs as of March 31, 2016.





18

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Total Past 

 

Current 

 

Total

 

90+ Days

 

Non-accruing



 

30-59 days

 

60-89 days

 

90+ days

 

Due

 

Balance

 

Balance

 

Accruing

 

Loans



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

160 

 

$

224 

 

$

66 

 

$

450 

 

$

143,880 

 

$

144,330 

 

$

40 

 

$

5,312 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

822 

 

 

402 

 

 

569 

 

 

1,793 

 

 

102,148 

 

 

103,941 

 

 

-    

 

 

1,400 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

1,546 

 

 

1,546 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

1,919 

 

 

963 

 

 

457 

 

 

3,339 

 

 

396,480 

 

 

399,819 

 

 

457 

 

 

3,574 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

60,892 

 

 

60,892 

 

 

-    

 

 

4,187 

Home equities

 

 

253 

 

 

236 

 

 

267 

 

 

756 

 

 

60,286 

 

 

61,042 

 

 

-    

 

 

1,058 

Consumer

 

 

 

 

-    

 

 

-    

 

 

 

 

1,588 

 

 

1,596 

 

 

-    

 

 

14 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

139 

 

 

139 

 

 

-    

 

 

-    

Total Loans

 

$

3,162 

 

$

1,825 

 

$

1,359 

 

$

6,346 

 

$

766,959 

 

$

773,305 

 

$

497 

 

$

15,545 



NOTE: Loan balances do not include $679 thousand in net deferred loan origination costs as of December 31, 2015.





19

 


 



Allowance for loan losses



The following tables present the activity in the allowance for loan losses according to portfolio segment, for the three month periods ended March 31, 2016 and 2015:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer **

 

Residential Mortgages*

 

HELOC

 

Unallocated

 

Total

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,383 

 

$

7,135 

 

$

85 

 

$

909 

 

$

371 

 

$

-    

 

$

12,883 

 

Charge-offs

 

 

(13)

 

 

-    

 

 

(7)

 

 

-    

 

 

-    

 

 

-    

 

 

(20)

 

Recoveries

 

 

 

 

38 

 

 

 

 

-    

 

 

-    

 

 

-    

 

 

48 

 

Provision (Credit)

 

 

203 

 

 

269 

 

 

12 

 

 

(213)

 

 

(63)

 

 

-    

 

 

208 

 

Ending balance

 

$

4,580 

 

$

7,442 

 

$

93 

 

$

696 

 

$

308 

 

$

-    

 

$

13,119 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

516 

 

$

1,134 

 

$

41 

 

$

 

$

-    

 

$

-    

 

$

1,693 

 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

4,064 

 

 

6,308 

 

 

52 

 

 

694 

 

 

308 

 

 

-    

 

 

11,426 

 

Total

 

$

4,580 

 

$

7,442 

 

$

93 

 

$

696 

 

$

308 

 

$

-    

 

$

13,119 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

5,382 

 

$

10,092 

 

$

41 

 

$

2,482 

 

$

1,545 

 

$

-    

 

$

19,542 

 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

145,431 

 

 

464,806 

 

 

2,131 

 

 

104,212 

 

 

60,048 

 

 

-    

 

 

776,628 

 

Total

 

$

150,813 

 

$

474,898 

 

$

2,172 

 

$

106,694 

 

$

61,593 

 

$

-    

 

$

796,170 

 







* Includes construction loans

** Includes all other consumer loans



NOTE: Loan balances do not include $603 thousand in net deferred loan origination costs as of March 31, 2016.



20

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer **

 

Residential Mortgages*

 

HELOC

 

Unallocated

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,896 

 

$

5,650 

 

$

78 

 

$

941 

 

$

819 

 

$

149 

 

$

12,533 

Charge-offs

 

 

-    

 

 

-    

 

 

(6)

 

 

-    

 

 

-    

 

 

-    

 

 

(6)

Recoveries

 

 

38 

 

 

10 

 

 

 

 

-    

 

 

-    

 

 

-    

 

 

49 

Provision (Credit)

 

 

55 

 

 

170 

 

 

(3)

 

 

(17)

 

 

(4)

 

 

-    

 

 

201 

Ending balance

 

$

4,989 

 

$

5,830 

 

$

70 

 

$

924 

 

$

815 

 

$

149 

 

$

12,777 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

978 

 

$

124 

 

$

47 

 

$

 

$

-    

 

$

-    

 

$

1,152 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

4,011 

 

 

5,706 

 

 

23 

 

 

921 

 

 

815 

 

 

149 

 

 

11,625 

Total

 

$

4,989 

 

$

5,830 

 

$

70 

 

$

924 

 

$

815 

 

$

149 

 

$

12,777 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

6,577 

 

$

5,604 

 

$

47 

 

$

2,512 

 

$

981 

 

$

-    

 

$

15,721 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

125,839 

 

 

400,776 

 

 

1,779 

 

 

98,274 

 

 

58,708 

 

 

-    

 

 

685,376 

Total

 

$

132,416 

 

$

406,380 

 

$

1,826 

 

$

100,786 

 

$

59,689 

 

$

-    

 

$

701,097 



* Includes construction loans

** Includes all other consumer loans



NOTE: Loan balances do not include $641 thousand in net deferred loan origination costs as of March 31, 2015.







21

 


 



Impaired Loans

The following tables provide data, at the class level, of impaired loans as of the dates indicated:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With no related allowance recorded:

(in thousands)

Commercial and industrial

 

$

1,908 

 

$

1,975 

 

$

-    

 

$

2,074 

 

$

16 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,427 

 

 

2,483 

 

 

-    

 

 

2,462 

 

 

10 

 

 

12 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,999 

 

 

4,039 

 

 

-    

 

 

4,062 

 

 

22 

 

 

16 

Construction

 

 

834 

 

 

834 

 

 

-    

 

 

834 

 

 

-    

 

 

12 

Home equities

 

 

1,545 

 

 

1,607 

 

 

-    

 

 

1,560 

 

 

13 

 

 

Consumer

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

10,713 

 

$

10,938 

 

$

-    

 

$

10,992 

 

$

61 

 

$

48 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

3,474 

 

$

3,775 

 

$

516 

 

$

3,711 

 

$

40 

 

$

-    

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

55 

 

 

55 

 

 

 

 

55 

 

 

-    

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,075 

 

 

1,083 

 

 

232 

 

 

1,079 

 

 

12 

 

 

-    

Construction

 

 

4,184 

 

 

4,200 

 

 

902 

 

 

4,186 

 

 

48 

 

 

-    

Home equities

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Consumer

 

 

41 

 

 

56 

 

 

41 

 

 

43 

 

 

 

 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

8,829 

 

$

9,169 

 

$

1,693 

 

$

9,074 

 

$

101 

 

$



22

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

5,382 

 

$

5,750 

 

$

516 

 

$

5,785 

 

$

56 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,482 

 

 

2,538 

 

 

 

 

2,517 

 

 

10 

 

 

12 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

5,074 

 

 

5,122 

 

 

232 

 

 

5,141 

 

 

34 

 

 

16 

Construction

 

 

5,018 

 

 

5,034 

 

 

902 

 

 

5,020 

 

 

48 

 

 

12 

Home equities

 

 

1,545 

 

 

1,607 

 

 

-    

 

 

1,560 

 

 

13 

 

 

Consumer

 

 

41 

 

 

56 

 

 

41 

 

 

43 

 

 

 

 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

19,542 

 

$

20,107 

 

$

1,693 

 

$

20,066 

 

$

162 

 

$

49 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2015



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With no related allowance recorded:

(in thousands)

Commercial and industrial

 

$

1,750 

 

$

1,811 

 

$

-    

 

$

1,945 

 

$

58 

 

$

47 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,444 

 

 

2,555 

 

 

-    

 

 

2,474 

 

 

90 

 

 

63 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,888 

 

 

3,908 

 

 

-    

 

 

3,930 

 

 

27 

 

 

179 

Construction

 

 

834 

 

 

834 

 

 

-    

 

 

834 

 

 

-    

 

 

31 

Home equities

 

 

1,644 

 

 

1,711 

 

 

-    

 

 

1,661 

 

 

40 

 

 

52 

Consumer

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

10,560 

 

$

10,819 

 

$

-    

 

$

10,844 

 

$

215 

 

$

372 





23

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2015



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

3,572 

 

$

3,835 

 

$

552 

 

$

3,966 

 

$

255 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

55 

 

 

55 

 

 

 

 

55 

 

 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,083 

 

 

1,083 

 

 

235 

 

 

1,083 

 

 

 

 

42 

Construction

 

 

4,188 

 

 

4,201 

 

 

911 

 

 

4,188 

 

 

29 

 

 

166 

Home equities

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Consumer

 

 

42 

 

 

57 

 

 

42 

 

 

45 

 

 

 

 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

8,940 

 

$

9,231 

 

$

1,742 

 

$

9,337 

 

$

291 

 

$

225 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2015



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

5,322 

 

$

5,646 

 

$

552 

 

$

5,911 

 

$

313 

 

$

56 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,499 

 

 

2,610 

 

 

 

 

2,529 

 

 

91 

 

 

65 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

4,971 

 

 

4,991 

 

 

235 

 

 

5,013 

 

 

31 

 

 

221 

Construction

 

 

5,022 

 

 

5,035 

 

 

911 

 

 

5,022 

 

 

29 

 

 

197 

Home equities

 

 

1,644 

 

 

1,711 

 

 

-    

 

 

1,661 

 

 

40 

 

 

52 

Consumer

 

 

42 

 

 

57 

 

 

42 

 

 

45 

 

 

 

 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

19,500 

 

$

20,050 

 

$

1,742 

 

$

20,181 

 

$

506 

 

$

597 





24

 


 



Non-performing loans



The following table sets forth information regarding non-performing loans as of the dates specified:







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015

 



 

 

(in thousands)

 

Non-accruing loans:

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

5,331 

 

$

5,312 

 

Residential real estate:

 

 

 

 

 

 

 

Residential

 

 

737 

 

 

1,400 

 

Construction

 

 

-    

 

 

-    

 

Commercial real estate:

 

 

 

 

 

 

 

Commercial and multi-family

 

 

3,698 

 

 

3,574 

 

Construction

 

 

4,184 

 

 

4,187 

 

Home equities

 

 

963 

 

 

1,058 

 

Consumer loans

 

 

14 

 

 

14 

 

Other

 

 

-    

 

 

-    

 

Total non-accruing loans

 

$

14,927 

 

$

15,545 

 



 

 

 

 

 

 

 

Accruing loans 90+ days past due

 

 

3,014 

 

 

497 

 

Total non-performing loans

 

$

17,941 

 

$

16,042 

 



 

 

 

 

 

 

 

Total non-performing loans

 

 

 

 

 

 

 

to total assets

 

 

1.81 

%

 

1.71 

%

Total non-performing loans

 

 

 

 

 

 

 

to total loans

 

 

2.25 

%

 

2.07 

%



25

 


 



Troubled debt restructurings

The Company had $5.7 million and $5.8 million in loans that were restructured in a troubled debt restructuring (“TDR”) at March 31, 2016 and December 31, 2015, respectivelyOf those balances, $1.1 million and $1.8 million were in non-accrual status at March 31, 2016 and December 31, 2015, respectively.  Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable.  All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.



The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent.  This reserve methodology is used because all TDR loans are considered impaired.  As of March 31, 2016, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.



The following tables summarize the loans that were classified as troubled debt restructurings as of the dates indicated:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

March 31, 2016



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

533 

 

$

481 

 

$

52 

 

$

160 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,869 

 

 

124 

 

 

1,745 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,702 

 

 

327 

 

 

1,375 

 

 

-    

Construction

 

 

834 

 

 

-    

 

 

834 

 

 

-    

Home equities

 

 

761 

 

 

179 

 

 

582 

 

 

-    

Consumer loans

 

 

27 

 

 

-    

 

 

27 

 

 

27 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total troubled restructured loans

 

$

5,726 

 

$

1,111 

 

$

4,615 

 

$

187 









26

 


 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2015



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

517 

 

$

508 

 

$

 

$

165 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,789 

 

 

689 

 

 

1,100 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,732 

 

 

334 

 

 

1,398 

 

 

-    

Construction

 

 

834 

 

 

-    

 

 

834 

 

 

-    

Home equities

 

 

867 

 

 

281 

 

 

586 

 

 

-    

Consumer loans

 

 

28 

 

 

-    

 

 

28 

 

 

28 

Other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total troubled restructured loans

 

$

5,767 

 

$

1,812 

 

$

3,955 

 

$

193 







The Company’s TDRs have various agreements that involve deferral of principal payments, or interest-only payments, for a period (usually 12 months or less) to allow the customer time to improve cash flow or sell the property.  Other common types of concessions leading to the designation of a TDR are lines of credit that are termed out and extensions of maturities at rates that are less than market given the risk profile of the borrower.







27

 


 

The following table shows the data for TDR activity by type of concession granted to the borrower for the three month periods ended March 31, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2016

 

Three months ended March 31, 2015



 

(in thousands)

 

(in thousands)

Troubled Debt Restructurings by Type of Concession

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral of principal

 

-    

 

$

-    

 

$

-    

 

 

$

541 

 

$

541 

Extension of maturity

 

 

 

24 

 

 

24 

 

-    

 

 

-    

 

 

-    

Term-out line of credit

 

 

 

20 

 

 

20 

 

-    

 

 

-    

 

 

-    

Residential Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

 

 

95 

 

 

95 

 

-    

 

 

-    

 

 

-    

Commercial Real Estate & Construction

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Consumer loans

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Other

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    







The general practice of the Bank is to work with borrowers so that they are able to pay back their loan in full.  If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off.  The following table presents loans which were classified as TDRs during the previous 12 months which defaulted during the three month periods ended March 31, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2016

 

Three months ended March 31, 2015



 

(in thousands)

 

(in thousands)

Troubled Debt Restructurings

 

Number of  

 

Recorded 

 

Number of  

 

Recorded 

That Subsequently Defaulted

 

Contracts

 

Investment

 

Contracts

 

Investment

Commercial and Industrial

 

-    

 

$

-    

 

-    

 

$

-    

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

Residential

 

-    

 

 

-    

 

-    

 

 

-    

Construction

 

-    

 

 

-    

 

-    

 

 

-    

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

-    

 

 

-    

 

-    

 

 

-    

Construction

 

-    

 

 

-    

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

 

 

19 

Consumer loans

 

-    

 

 

-    

 

-    

 

 

-    

Other

 

-    

 

 

-    

 

-    

 

 

-    













28

 


 



5. PER SHARE DATA



The common stock per share information is based upon the weighted average number of shares outstanding during each period.  For the three periods ended March 31, 2016 and 2015, the Company had an average of 64,925 and 78,167 dilutive shares outstanding, respectively.



Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share.  For the three month periods ended March 31, 2016 and 2015, there was an average of 49,550 and 38,630 anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.







6. OTHER COMPREHENSIVE INCOME

The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three month periods ended March 31, 2016 and 2015:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2015

 

Net Change

 

Balance at March 31, 2016



 

(in thousands)

Net unrealized gain on investment securities

 

$

475 

 

$

649 

 

$

1,124 

Net defined benefit pension plan adjustments

 

 

(2,285)

 

 

40 

 

 

(2,245)

Total

 

$

(1,810)

 

$

689 

 

$

(1,121)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2014

 

Net Change

 

Balance at March 31, 2015



 

(in thousands)

Net unrealized gain on investment securities

 

$

911 

 

$

331 

 

$

1,242 

Net defined benefit pension plan adjustments

 

 

(2,419)

 

 

29 

 

 

(2,390)

Total

 

$

(1,508)

 

$

360 

 

$

(1,148)







29

 


 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2016
(in thousands)

 

Three months ended March 31, 2015
(in thousands)



 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

Unrealized gain on investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investment securities

 

$

1,047 

 

$

(398)

 

$

649 

 

$

541 

 

$

(210)

 

$

331 

Reclassification from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Net change

 

 

1,047 

 

 

(398)

 

 

649 

 

 

541 

 

 

(210)

 

 

331 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain (loss)

 

$

-    

 

$

-    

 

$

-    

 

$

-    

 

$

-    

 

$

-    

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

 

 

 

(3)

 

 

 

 

 

 

(2)

 

 

Amortization of actuarial loss (a)

 

 

56 

 

 

(21)

 

 

35 

 

 

48 

 

 

(24)

 

 

24 

Net change

 

 

64 

 

 

(24)

 

 

40 

 

 

55 

 

 

(26)

 

 

29 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

$

1,111 

 

$

(422)

 

$

689 

 

$

596 

 

$

(236)

 

$

360 



(a)   Included in net periodic pension cost, as described in Note 9 – “Net Periodic Benefit Costs”









7. SEGMENT INFORMATION



The Company is comprised of two primary business segments, banking and insurance agency activities.  The following tables set forth information regarding these segments for the three month periods ended March 31, 2016 and 2015.









 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2016



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

8,291 

 

$

(31)

 

$

8,260 

Provision for loan losses

 

 

208 

 

 

-    

 

 

208 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

8,083 

 

 

(31)

 

 

8,052 

Non-interest income

 

 

1,246 

 

 

-    

 

 

1,246 

Insurance service and fees

 

 

116 

 

 

1,632 

 

 

1,748 

Non-interest expense

 

 

7,327 

 

 

1,201 

 

 

8,528 

Income before income taxes

 

 

2,118 

 

 

400 

 

 

2,518 

Income tax provision

 

 

650 

 

 

154 

 

 

804 

Net income

 

$

1,468 

 

$

246 

 

$

1,714 



 

 

 

 

 

 

 

 

 





30

 


 







 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2015



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

7,609 

 

$

(28)

 

$

7,581 

Provision for loan losses

 

 

201 

 

 

-    

 

 

201 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

7,408 

 

 

(28)

 

 

7,380 

Non-interest income

 

 

1,237 

 

 

-    

 

 

1,237 

Insurance service and fees

 

 

162 

 

 

1,667 

 

 

1,829 

Non-interest expense

 

 

6,481 

 

 

1,031 

 

 

7,512 

Income before income taxes

 

 

2,326 

 

 

608 

 

 

2,934 

Income tax provision

 

 

794 

 

 

235 

 

 

1,029 

Net income

 

$

1,532 

 

$

373 

 

$

1,905 



 

 

 

 

 

 

 

 

 







8. CONTINGENT LIABILITIES AND COMMITMENTS



The unaudited 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 consist of commitments to extend credit and standby letters of credit.  A summary of the Bank’s commitments and contingent liabilities is as follows:







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015



 

(in thousands)



 

 

 

 

 

 

Commitments to extend credit

 

$

226,787 

 

$

206,346 

Standby letters of credit

 

 

3,550 

 

 

3,794 

Total

 

$

230,337 

 

$

210,140 





31

 


 



Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance by the customer.  The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited 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 of the Bank.  The Bank did not incur any losses on its commitments and did not record a reserve for its commitments during the first three months of 2016 or during 2015.



Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of GAAP.  The changes in the fair value of these commitments, due to interest rate risk, are not recorded on the consolidated balance sheets as the fair value of these derivatives is not considered to be material.







9. NET PERIODIC BENEFIT COSTS



On January 31, 2008, the Bank froze its defined benefit pension plan.  The plan covered substantially all Bank employees.  The plan provides benefits that are based on the employees’ compensation and years of service.  Under the freeze, eligible employees will receive, at retirement, the benefits already earned through January 31, 2008, but have not accrued any additional benefits since then.  As a result, service cost is no longer incurred.



The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected.  The amortization method the Bank used recognized the prior service cost and net gains or losses over the average remaining service period of active employees.



The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management.  The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected.  The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.



The Bank did not contribute to the defined benefit pension plan during the first three months of 2016 but expects to contribute $140 thousand to the pension plan at a later date in 2016.



32

 


 



The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three month periods ended March 31, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended March 31,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

47 

 

$

48 

Interest cost

 

 

55 

 

 

51 

 

 

36 

 

 

37 

Expected return on plan assets

 

 

(65)

 

 

(77)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

 

 

Amortization of the net loss

 

 

22 

 

 

17 

 

 

34 

 

 

31 

Net periodic cost (benefit)

 

$

12 

 

$

(9)

 

$

125 

 

$

123 











10RECENT ACCOUNTING PRONOUNCEMENTS



Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers.  The objective of this ASU is to require entities to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  This ASU will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective.  The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted.  The standard allows an entity to apply the amendments in the ASU using either the retrospective or cumulative effect transition method.  The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.



ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  The main objective of this ASU is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is evaluating the impact of the standard on its financial reporting.  The ASU will not impact results of operations or the financial position of the Company.



ASU 2016-02, LeasesThe objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements to meet that objective.  The main difference between previous GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.  Under this new guidance, a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.  The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP.  Information about the Company’s operating lease obligations is disclosed in Note 16 to the Company’s Financial Statements on Form 10-K for the year ended December 31, 2015.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.



ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU is part of the FASB’s Simplification Initiative.  The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Some of the areas of simplification apply only to nonpublic entities.  Although the impact on the Company’s financial statements is not expected to be material, the area of this ASU that will impact the Company is the elimination of the concept of a tax windfall pool.  Currently, an entity must determine for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess benefit or a tax deficiency.  Excess tax benefits are recognized in additional paid-in-capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement.  Excess tax benefits are not recognized until the deduction reduces taxes payable.  Under

33

 


 

the new standard, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.





34

 


 



ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This Quarterly Report on Form 10-Q 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, monetary policy, 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 and the Public Company Accounting Oversight Board; changes in tax policies, rates and regulations of federal, state and local tax authorities; 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 Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  Many of these factors are beyond the Company’s control and are 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.



APPLICATION OF CRITICAL ACCOUNTING ESTIMATES



The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP 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 Unaudited Consolidated Financial Statements and Notes.  These estimates, assumptions, and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements.  Accordingly, as this information changes, the Unaudited 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.  Refer to Note 3 – “Fair Value Measurements” to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.



Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2015.  These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.



Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and valuation of goodwill to

35

 


 

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.



Allowance for Loan Losses



The allowance for loan losses represents management’s estimate of probable losses in the Company’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 Company’s Unaudited Consolidated Balance Sheets.  Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 describes the methodology used to determine the allowance for loan losses.



Goodwill



The amount of goodwill reflected in the Company’s Unaudited 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.  The goodwill impairment testing is performed annually as of December 31stNo impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its fair value.  There were no triggering events in the three month period ended March 31, 2016 that resulted in an interim impairment test.





ANALYSIS OF FINANCIAL CONDITION



Loan Activity

Total loans grew to $797 million at March 31, 2016, a $23 million, or 3%, increase from total loans of $774 million at December 31, 2015, and a $95 million, or 14%, increase from total loans of $702 million at March 31, 2015.



Loans secured by real estate were $643 million at March 31, 2016, reflecting a $16 million, or 3%, increase from $627 million at December 31, 2015.  The most significant growth was in commercial construction loans, which grew $8 million, or 13%, in the first quarter to $69 million at March 31, 2016 as the Company’s footprint in Western New York continued to experience strong commercial construction loan demand.  The Company’s commercial real estate portfolio, which has historically been the fastest growing part of the real estate portfolio, grew to $406 million at the recent quarter end, a $6 million, or 2%, increase from $400 million at December 31, 2015, while the Company’s residential real estate loan portfolio increased $2 million, or 2%, to $106 million from $104 million over that same period. 



In the first quarter of 2016, residential mortgage originations of $5 million were lower than the previous quarter’s originations of $10 million and $7 million in last year’s first quarter.  Residential mortgages sold in the first quarter of 2016 equated to approximately 19% of the residential mortgages originated by the Company during this quarter, as compared with 16% of residential mortgages originated during the fourth quarter of 2015 and 41% in the first quarter of 2015.



The Company has focused on growth opportunities in commercial and industrial (“C&I”) lending as a way to diversify its overall loan portfolio.  The C&I portfolio grew to $151 million at March 31, 2016, representing a $7 million, or 5%, increase from $144 million at December 31, 2015.



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Credit Quality of Loan Portfolio

Total non-performing loans, defined as accruing loans greater than 90 days past due and non-accrual loans, totaled $18 million, or 2.25% of total loans outstanding, as of March 31, 2016, compared with $16 million, or 2.07% of total loans outstanding, as of December 31, 2015, and $12 million, or 1.68% of total loans outstanding at March 31, 2015.  The $2 million increase in non-performing loans as compared to the 2015 year-end was due to a single commercial real estate loan moving from performing status to 90 days past due and accruing.  Loans 90 days past due and still accruing are considered well secured and in the process of collection and are therefore not impaired and in nonaccrual status.  In addition to the $2 million commercial real estate loan that is 90 days past due and still accruing at March 31, 2016, the remainder of the $6 million increase in non-performing loans since the end of last year’s first quarter is primarily attributable to a single redevelopment project that defaulted in the fourth quarter of 2015 and was moved to nonaccrual status.



Commercial credits graded as “special mention” and “substandard” were $41 million at March 31, 2016, or roughly unchanged from the balance at December 31, 2015.  As noted in Note 4 to the Company’s Unaudited Financial Statements included in Part I of this Quarterly Report on Form 10-Q, internal risk ratings are the credit quality indicators used by the Company’s management to determine the appropriate allowance for loan losses for commercial credits.  “Special mention” and “substandard” loans are weaker credits with a higher risk of loss categorized as “criticized” credits rather than “pass” or “watch” credits.



The allowance for loan losses totaled $13 million, or 1.65% of total loans outstanding as of March 31, 2016, compared with $13 million, or 1.66% of total loans outstanding at December 31, 2015 and $13 million, or 1.82% of total loans outstanding as of March 31, 2015.  The decrease in the allowance to loan ratio since last year’s first quarter-end was driven by the strong loan growth without a proportional increase in the allowance.  A single large charge-off in the fourth quarter of 2015 lowered the allowance, somewhat offsetting the increase in the allowance over the past year due to the provision for loan growth.  The net charge-off (recovery) ratio for the first quarter of 2016 was (0.02) % of average net loans, compared with a ratio of 0.42% and (0.03) % in the fourth and first quarters of 2015, respectively.



Investing Activities

Total securities were $116 million at March 31, 2016, compared with $99 million at December 31, 2015 and $100 million at March 31, 2015.  Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, increased to $22 million at March 31, 2016 from  $11 million at December 31, 2015, but were down from $46 million at March 31, 2015.  The increase in interest-bearing deposits at banks from the 2015 year-end is largely a result of an increase in seasonal municipal deposits.  Given the expected short duration of these deposits, management has invested the funds in short-term assets.  A portion of the Bank’s excess liquidity from strong savings and time deposit growth was invested in investment securities purchased in the first quarter of 2016, including $11 million in U.S. government agency mortgage-backed securities, $4 million in U.S. government collateralized mortgage obligations, and $5 million in other U.S. government agency bonds.  Securities and interest-bearing deposits at correspondent banks made up 14% of the Bank’s total average interest earning assets in the first quarter of 2016,  consistent with the ratio in the fourth and first quarters of 2015, respectively.



The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities at 44% of total investment securities at March 31, 2016, compared with 38%  at December 31, 2015 and 40% at March 31, 2015.  The concentration in tax-advantaged debt securities issued by state and political subdivisions and U.S. government-sponsored agency bonds was 34% and 22%, respectively, of the total securities portfolio at March 31, 2016, compared with 40% and 22% at December 31, 2015 and 33% and 27% at March 31, 2015.



Management believes that the credit quality of the securities portfolio as a whole is strong, as the portfolio has no individual securities in a significant unrealized loss position.  Interest rates decreased in the first quarter,  resulting in  an increase in the net unrealized gain position of the available-for-sale investment portfolio to $1.8 million at March 31, 2016 from $0.8 million at December 31, 2015.  The net unrealized gain position was $2.0 million at March 31, 2015.



The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures.  The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.





37

 


 

Funding Activities

Total deposits at March 31, 2016 were $849 million, a $46 million, or 6%, increase from $803 million at December 31, 2015,  and a $69 million, or 9% increase, when compared with total deposits of $780 million at March 31, 2015Seasonal municipal deposits represented $25 million of the first quarter’s growth as municipalities collect property taxes in the first quarter before using those funds throughout the remainder of the fiscal year.  The rest of the growth in the Company’s total deposits from December 31, 2015 was due mainly to increases in savings deposits and time deposits.  With impending market disruption in the Western New York market due to a significant announced merger, the Company has maintained promotional savings and time deposit rates in an effort to attract new customers. 



The Company had $10 million in other borrowings, which reflected a long-term advance with the FHLBNY scheduled to mature in 2020, at each of March 31, 2016 and December 31, 2015, compared with no other borrowings at March 31, 2015.





38

 


 



ANALYSIS OF RESULTS OF OPERATIONS



Average Balance Sheet

The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated.  The assets and liabilities are presented as daily averages.  The average loan balances include both performing and non-performing loans.  Investments are included at amortized cost.  Yields are presented on a non-tax-equivalent basis.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Three months ended March 31, 2016

 

Three months ended March 31, 2015



 

Average

 

Interest

 

 

 

 

Average

 

Interest

 

 

 



 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/



 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate



 

(dollars in thousands)

 

(dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

772,672 

 

$

8,730 

 

4.52 

%

 

$

682,653 

 

$

7,813 

 

4.58 

%

Taxable securities

 

 

64,796 

 

 

377 

 

2.33 

%

 

 

68,373 

 

 

405 

 

2.37 

%

Tax-exempt securities

 

 

38,298 

 

 

238 

 

2.49 

%

 

 

32,513 

 

 

237 

 

2.92 

%

Interest bearing deposits at banks

 

 

18,862 

 

 

11 

 

0.23 

%

 

 

6,624 

 

 

 

0.06 

%

Total interest-earning assets

 

 

894,628 

 

$

9,356 

 

4.18 

%

 

 

790,163 

 

$

8,456 

 

4.28 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

12,733 

 

 

 

 

 

 

 

 

11,480 

 

 

 

 

 

 

Premises and equipment, net

 

 

11,092 

 

 

 

 

 

 

 

 

10,164 

 

 

 

 

 

 

Other assets

 

 

42,550 

 

 

 

 

 

 

 

 

42,728 

 

 

 

 

 

 

Total Assets

 

$

961,003 

 

 

 

 

 

 

 

$

854,535 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

88,220 

 

$

85 

 

0.39 

%

 

$

77,072 

 

$

79 

 

0.41 

%

Regular savings

 

 

447,318 

 

 

531 

 

0.47 

%

 

 

370,017 

 

 

269 

 

0.29 

%

Time deposits

 

 

108,954 

 

 

343 

 

1.26 

%

 

 

112,224 

 

 

435 

 

1.55 

%

Other borrowed funds

 

 

10,427 

 

 

44 

 

1.69 

%

 

 

9,156 

 

 

 

0.35 

%

Junior subordinated debentures

 

 

11,330 

 

 

87 

 

3.07 

%

 

 

11,330 

 

 

78 

 

2.75 

%

Securities sold U/A to repurchase

 

 

12,493 

 

 

 

0.19 

%

 

 

13,366 

 

 

 

0.18 

%

Total interest-bearing liabilities

 

 

678,742 

 

$

1,096 

 

0.65 

%

 

 

593,165 

 

$

875 

 

0.59 

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

176,074 

 

 

 

 

 

 

 

 

159,388 

 

 

 

 

 

 

Other

 

 

13,879 

 

 

 

 

 

 

 

 

14,785 

 

 

 

 

 

 

Total liabilities

 

$

868,695 

 

 

 

 

 

 

 

$

767,338 

 

 

 

 

 

 

Stockholders' equity

 

 

92,308 

 

 

 

 

 

 

 

 

87,197 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

961,003 

 

 

 

 

 

 

 

$

854,535 

 

 

 

 

 

 

Net interest earnings

 

 

 

 

$  

8,260 

 

 

 

 

 

 

 

$  

7,581 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.69 

%

 

 

 

 

 

 

 

3.84 

%

Interest rate spread

 

 

 

 

 

 

 

3.53 

%

 

 

 

 

 

 

 

3.69 

%





39

 


 



Net Income



Net income was $1.7 million, or $0.40 per diluted share, in the first quarter of 2016, down from $1.8 million, or $0.41 per diluted share, in the fourth quarter of 2015, and $1.9 million, or $0.44 per diluted share, in the first quarter of 2015.  The decrease from the linked quarter reflects lower net interest income of $0.2 million.  The year over year decrease is primarily due to increased non-interest expenses of $1.0 million, somewhat offset by an increase in net interest income of $0.7 millionReturn on average equity was 7.43% for the first quarter of 2016 compared with 7.72% in the fourth quarter of 2015 and 8.74% in the first quarter of 2015.



Other Results of Operations – Quarterly Comparison



Net interest income was $8.3 million in the first quarter of 2016,  down $0.2 million or 2% from the fourth quarter of 2015, but up $0.7 million or 9% from the prior year’s first quarterThe decrease in net interest income from the linked quarter reflects the accelerated interest income recognized in the fourth quarter from the payoff of a large investment security as well as one additional day in the fourth quarter, somewhat offset by growth in average interest-earning assets.  The increase in net interest income from last year’s first quarter reflected growth in average interest-earnings assets, particularly loans.  The positive impact from higher interest-earning assets was somewhat offset by a reduced net interest margin.

Net interest margin was 3.69%  in the first quarter of 2016, compared with 3.91% in the fourth quarter of 2015 and 3.84% in last year’s first quarter.  The yield on interest-earning assets was 4.18% in the recent quarter, compared with 4.37% in the fourth quarter of 2015 and 4.28% in the first quarter of 2015.  The decrease from the fourth quarter of 2015 is predominantly a result of a large investment security payoff in the fourth quarter, as reflected in the decrease in the yield on investment securities from 3.59% in the last quarter of 2015 to 2.39% in the initial quarter of 2016.  The decrease from the previous year’s first quarter reflects continued loan and investment security re-pricing in a persistent low interest rate environment.  The cost of interest-bearing liabilities was 0.65% in the first quarter of 2016, higher than 0.62% in the fourth quarter of 2015 and 0.59% in the first quarter of 2015.  The increase from the linked quarter and prior year first quarter reflects a continued shift in the regular savings deposit mix as both new and existing customers move to the Bank’s highest rate product. 

The provision for loan losses was $208 thousand in the first quarter of 2016, in line with the provision of $204 thousand and $201 thousand in the fourth and first quarters of the prior year, respectively.

Non-interest income was $3.0 million, or 27% of total revenue, in the recent quarter, up $0.1 million or 3% from the fourth quarter of 2015, but down $0.1 million or 2% from last year’s first quarter.  This increase from the linked quarter reflects seasonal profit sharing revenue at TEA as insurance service and fee income increased $0.2 million.  The decrease from last year’s first quarter is due to a $0.1 million decline in insurance service and fee income.  The lower insurance service and fee income is attributable to reduced financial services fee income and lower profit sharing revenue and FCS income.  The lower profit sharing revenue and FCS income reflects higher loss rates and fewer insurance claims, respectively, due to inclement weather in the previous winter.    

Total non-interest expense was $8.5 million in the first quarter of 2016, a decrease of $0.1 million or 2% from the fourth quarter of 2015, but an increase of $1.0 million or 14% from the prior-year period.  The decrease from the final quarter of 2015 resulted from a decrease in other expenses of $0.4 million and litigation expense of $0.1 million, offset by an increase in salaries and employee benefits of $0.1 million, professional services costs of $0.1 million, and technology and communications expenses of $0.1 million.  The decline in other expenses resulted from several items including lower loan expenses and lower travel, postage and supplies costs related to the Bank’s core banking system conversion project.  The decrease in litigation expense was attributable to reimbursement under a Bank insurance policy covering a portion of the cost associated with the settlement of litigation with the New York State Attorney General, as previously disclosed by the Company.  Salaries and benefits were higher in the first quarter when compared with the fourth quarter due to seasonal expenses such as health savings account contributions and payroll taxes, as well as merit increases and an increase in headcount.  The higher professional services costs and technology and communications costs in the first quarter of 2016 compared with the last quarter of 2015 were attributable to the Bank’s core banking system conversion project.

The increase of $1.0 million in non-interest expenses in the first quarter of 2016 when compared with the initial quarter of 2015 was largely driven by an increase in salaries and benefits costs of $0.7 million, as well as higher technology and communications costs of $0.2 million and higher advertising and professional services costs of $0.1 million each.  Higher salaries and benefits costs were due to higher salaries from added headcount related to the Company’s growth strategy as well as annual merit increases and higher benefits costs, particularly health insurance.  The increased technology and communications costs were related to the core conversion project.  The increase in professional services costs was primarily attributable to the core conversion project due to the hiring of temporary contractors, and costs related to the Company’s recent filing of a Registration Statement on Form S-3.

Income tax expense for the quarter ended March 31, 2016 was $0.8 million, representing an effective tax rate of 31.9% compared with an effective tax rate of 29.5% in the fourth quarter of 2015 and 35.1% in the first quarter of 2015.  The Company records income tax expense based on the expected effective tax rate for the year plus or minus applicable discreet items.  The decrease from last year’s first

40

 


 

quarter was due to one-time adjustments to deferred tax assets in the previous year’s first quarter as a result of statutory changes that came into effect on January 1, 2015.    





CAPITAL



The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a  Tier 1 leverage ratio of 10.18% and 10.45% at March 31, 2016 and December 31, 2015, respectively.  New minimum capital ratios, known as “Basel III”, became effective for the Company and the Bank on January 1, 2015 and will be fully phased-in on January 1, 2019.  As of March 31, 2016, the Company and the Bank met all applicable capital adequacy requirements under the Basel III capital rules.

Book value per share of the Company’s common stock was $21.54 at March 31, 2016, compared with $21.44 at December 31, 2015.  Tangible book value per share (a non-GAAP measure) at March 31, 2016 was $19.64, compared with $19.53 at December 31, 2015.

Tangible book value per share is a non-GAAP financial measure.  The Company calculates tangible book value per share by dividing tangible book value by the number of common shares outstanding, as compared to GAAP book value per share, which the Company calculates by dividing GAAP book value by the number of common shares outstanding.  Management believes that this information is consistent with treatment by bank regulatory agencies, which exclude intangible assets from the calculation of risk-based capital ratios.  Accordingly, management believes that this non-GAAP financial measure provides information that is important to investors and that is useful in understanding the Company’s capital position and ratios.  Further, management believes that presentation of this measure, together with the accompanying reconciliation, provides a complete understanding of factors and trends affecting the Company’s business and allows investors to view the Company’s performance in a manner similar to management, the financial services industry, bank stock analysts and regulatory agencies.  However, this non-GAAP financial measure is supplemental and is not a substitute for an analysis based on GAAP financial measures.  Note that other companies may use different calculations for this measure, and, therefore, the Company’s presentation of tangible book value per share may not be comparable to similarly titled measures reported by other companies.  Investors should review the Company’s consolidated financial statements in their entirety and should not rely on any single financial measure.

A reconciliation of this non-GAAP financial measure, tangible book value per share, to the most directly comparable GAAP financial measure, book value, is set forth in the following table:



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 

($ in thousands, except per share data)

 

March 31, 2016

 

December 31, 2015



 

 

 

 

 

 

Stockholders' equity ("book value")

 

$

92,160 

 

$

91,256 

Goodwill (related to insurance agency reporting unit)

 

 

(8,101)

 

 

(8,101)

Tangible book value (non-GAAP)

 

$

84,059 

 

$

83,155 

Number of common shares outstanding

 

 

4,279,296 

 

 

4,257,179 

Tangible book value per share

 

$

19.64 

 

$

19.53 





On February 16, 2016, the Company declared a cash dividend of $0.38 per share on the Company’s outstanding common stock.  The dividend was paid on April 5, 2016 to shareholders of record as of March 15, 2016.





LIQUIDITY



The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related 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 $208.6 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB.  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 $14.0 million in federal funds from its correspondent banks.  By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window.  The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.  The

41

 


 

Company’s primary source of liquidity is dividends from the Bank.  Additionally, the Company has access to capital markets as a funding source.



Cash flows from the Bank’s 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.  At March 31, 2016, approximately 4.1% of the Bank’s securities had contractual maturity dates of one year or less and approximately 29.9% had maturity dates of five years or less.



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.  As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank.  Included in the calculation are liquid assets and potential liabilities.  Management stresses the potential liabilities calculation to ensure a strong liquidity position.  Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases.  At March 31, 2016, in the Company’s internal stress test, the Company had net short-term liquidity of $210.1 million as compared with $282.0 million at December 31, 2015, due to the usage of cash for loan growthAvailable assets of $142.2 million, divided by public and purchased funds of $148.0 million, resulted in a long-term liquidity ratio of 96% at March 31, 2016, compared with 102% at December 31, 2015.



Management does not anticipate engaging in any activities, either currently or in the long term, for which adequate funding would not be available and which would therefore result in significant pressure on liquidity.



The Company believes that the Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for municipal deposits.







ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.



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 that 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 reprice 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 interest-earning assets and interest-bearing liabilities.  Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates.  The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans, and deposits.  Management supplements the modeling technique described above with 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 senior management, monitors the Bank’s interest rate sensitivity with the aid of a model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing 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, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and reliance on other financial instruments used for interest rate risk management purposes.



42

 


 

The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12-month period of time:





SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES

 





 

 

 

 

 

 



 

 

 

 

 

 



 

Calculated increase



 

in projected annual net interest income



 

(in thousands)



 

 

 

 

 

 



 

 

March 31, 2016

 

 

December 31, 2015

Changes in interest rates

 

 

 

 

 

 



 

 

 

 

 

 

+200 basis points

 

$

1,786 

 

$

1,034 

+100 basis points

 

 

2,305 

 

 

1,856 



 

 

 

 

 

 

-100 basis points

 

 

NM

 

 

NM

-200 basis points

 

 

NM

 

 

NM





Many assumptions were utilized by management to calculate the impact that changes in interest rates may have on the Bank’s 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 assumed immediate changes in rates including 200 basis point rate changes.  In each of the 100 and 200 basis point rate reduction scenarios, the applicable rate changes are limited to lesser amounts such that interest rates are not 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/repricing 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 Bank’s projected net interest income.







ITEM 4 - CONTROLS AND PROCEDURES



DISCLOSURE 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) as of March 31, 2016 (the end of the period covered by this Report).  Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of March 31, 2016 the Company’s disclosure controls and procedures were effective.



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING



No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





43

 


 



PART II - OTHER INFORMATION



ITEM 1 – LEGAL PROCEEDINGS



The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business.



In the opinion of management, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely, would have a material effect on the Company’s results of operations or financial condition.





ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



In March 2013, the Company announced it had been authorized by its Board of Directors to purchase up to 100,000 shares of the Company’s outstanding common stock.  In the first quarter of 2016, the Company did not purchase any shares of its common stock.



Issuer Purchases of Equity Securities





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

Maximum Number of Shares that may yet be Purchased Under the Plans or Programs

January 2016:

 

 

 

 

 

 

 

 

 

 

January 1, 2016 - January 31, 2016

 

 

-    

 

$

-    

 

-    

 

18,492 

February 2016:

 

 

 

 

 

 

 

 

 

 

February 1, 2016 - February 29, 2016

 

 

-    

 

$

-    

 

-    

 

18,492 

March 2016:

 

 

 

 

 

 

 

 

 

 

March 1, 2016 - March 31, 2016

 

 

-    

 

$

-    

 

-    

 

18,492 



 

 

 

 

 

 

 

 

 

 

Total:

 

 

-    

 

$

-    

 

-    

 

18,492 





(1) On March 25, 2013, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company’s common stock.  The repurchase program has no fixed expiration date but may be suspended or discontinued at any time.  The Company did not make any repurchases during the quarter ended March 31, 2016.



44

 


 



ITEM 6 – EXHIBITS 



The information called for by this item is incorporated herein by reference to the Exhibit Index included immediately following the signature page to this Quarterly Report on Form 10-Q.

45

 


 



SIGNATURES







Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





                                                                             Evans Bancorp, Inc.









DATE

May 2, 2016



/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)







DATE

May 2, 2016



/s/ John B. Connerton

John B.  Connerton

Treasurer

(Principal Financial Officer)











46

 


 

EXHIBIT INDEX







 

 

 

 

Exhibit No.

 

Name

 

 



 

 

 

 

31.1

 

Certification of Principal Executive Officer pursuant to

 

 



 

Section 302 of the Sarbanes-Oxley Act of 2002.

 

 



 

 

 

 

31.2

 

Certification of the Principal Financial Officer pursuant to

 

 



 

Section 302 of the Sarbanes-Oxley Act of 2002.

 

 



 

 

 

 

32.1

 

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.

 

 



 

 

 

 

32.2

 

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.

 

 



 

 

 

 

101

 

The following materials from Evans Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – March 31, 2016 and December 31, 2015; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2016 and 2015; (iii) Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2016 and 2015; (iv) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2016 and 2015; (v) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2016 and 2015; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

 



 

 

 

 







47