10-Q 1 evbn-20170331x10q.htm 10-Q evbn 20170331 Q1





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, 2017



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,” “smaller reporting company,”  and “emerging growth 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

Emerging growth company

 

 



If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



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, 4,766,949 shares as of May 1, 2017



 

 

 


 



INDEX





EVANS BANCORP, INC. AND SUBSIDIARIES







 

 



 

 

PART 1.  FINANCIAL INFORMATION

PAGE



 

 

Item 1.

Financial Statements

 



 

 



Unaudited Consolidated Balance Sheets – March 31, 2017 and December 31, 2016



 

 



Unaudited Consolidated Statements of Income – Three months ended March 31, 2017 and 2016



 

 



Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2017 and 2016



 

 



Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2017 and 2016



 

 



Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2017 and 2016



 

 



Notes to Unaudited Consolidated Financial Statements



 

 

Item 2.

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

34 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41 



 

 

Item 4.

Controls and Procedures

42 



 

 

PART II.  OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

43 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43 



 

 

Item 6.

Exhibits

43 



 

 



Signatures

44 



 

 







 

 

 


 





 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

MARCH 31, 2017 AND DECEMBER 31, 2016

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

10,795 

 

$

12,503 

Interest-bearing deposits at banks

 

 

19,440 

 

 

581 

Securities:

 

 

 

 

 

 

Available for sale, at fair value (amortized cost: $115,188 at March 31, 2017;

 

 

114,896 

 

 

95,222 

$95,810 at December 31, 2016)

 

 

 

 

 

 

Held to maturity, at amortized cost (fair value: $1,387 at March 31, 2017;

 

 

1,408 

 

 

1,983 

$1,959 at December 31, 2016)

 

 

 

 

 

 

Federal Home Loan Bank common stock, at cost

 

 

1,366 

 

 

2,185 

Federal Reserve Bank common stock, at cost

 

 

1,546 

 

 

1,546 

Loans, net of allowance for loan losses of $13,579 at March 31, 2017

 

 

 

 

 

 

and $13,916 at December 31, 2016

 

 

932,004 

 

 

928,596 

Properties and equipment, net of accumulated depreciation of $17,328 at March 31, 2017

 

 

 

 

 

 

and $17,012 at December 31, 2016

 

 

11,065 

 

 

11,310 

Goodwill and intangible assets

 

 

8,638 

 

 

8,406 

Bank-owned life insurance

 

 

21,664 

 

 

21,534 

Other assets

 

 

16,838 

 

 

16,843 



 

 

 

 

 

 

TOTAL ASSETS

 

$

1,139,660 

 

$

1,100,709 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

$

194,747 

 

$

201,741 

NOW

 

 

103,907 

 

 

88,632 

Savings

 

 

531,408 

 

 

508,652 

Time

 

 

147,915 

 

 

140,949 

Total deposits

 

 

977,977 

 

 

939,974 



 

 

 

 

 

 

Securities sold under agreement to repurchase

 

 

11,679 

 

 

10,159 

Other borrowings

 

 

10,000 

 

 

28,200 

Other liabilities

 

 

16,047 

 

 

14,298 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

Total liabilities

 

 

1,027,033 

 

 

1,003,961 



 

 

 

 

 

 

CONTINGENT LIABILITIES AND COMMITMENTS

 

 

 

 

 

 



 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock, $.50 par value, 10,000,000 shares authorized; 4,763,696

 

 

 

 

 

 

and 4,302,504 shares issued at March 31, 2017 and December 31, 2016,

 

 

 

 

 

 

respectively, and 4,763,696 and 4,300,634 outstanding at March 31, 2017

 

 

 

 

 

 

and December 31, 2016, respectively

 

 

2,384 

 

 

2,153 

Capital surplus

 

 

58,543 

 

 

44,389 

Treasury stock, at cost, 0 and 1,870 shares at March 31, 2017 and

 

 

 

 

 

 

December 31, 2016, respectively

 

 

-    

 

 

-    

Retained earnings

 

 

53,874 

 

 

52,630 

Accumulated other comprehensive loss, net of tax

 

 

(2,174)

 

 

(2,424)

Total stockholders' equity

 

 

112,627 

 

 

96,748 



 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,139,660 

 

$

1,100,709 



 

 

 

 

 

 

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, 2017 AND 2016

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2017

 

2016

INTEREST INCOME

 

 

 

 

 

 

Loans

 

$

10,246 

 

$

8,730 

Interest-bearing deposits at banks

 

 

12 

 

 

11 

Securities:

 

 

 

 

 

 

Taxable

 

 

436 

 

 

377 

Non-taxable

 

 

224 

 

 

238 

Total interest income

 

 

10,918 

 

 

9,356 

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

1,116 

 

 

959 

Other borrowings

 

 

58 

 

 

50 

Junior subordinated debentures

 

 

100 

 

 

87 

Total interest expense

 

 

1,274 

 

 

1,096 

NET INTEREST INCOME  

 

 

9,644 

 

 

8,260 

(CREDIT) PROVISION FOR LOAN LOSSES

 

 

(435)

 

 

208 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

10,079 

 

 

8,052 

NON-INTEREST INCOME

 

 

 

 

 

 

Deposit service charges

 

 

390 

 

 

443 

Insurance service and fees

 

 

2,168 

 

 

1,748 

Gain on loans sold

 

 

18 

 

 

15 

Bank-owned life insurance

 

 

130 

 

 

136 

Interchange fee income

 

 

344 

 

 

318 

Other

 

 

472 

 

 

334 

Total non-interest income

 

 

3,522 

 

 

2,994 

NON-INTEREST EXPENSE

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,716 

 

 

5,514 

Occupancy

 

 

775 

 

 

699 

Advertising and public relations

 

 

190 

 

 

285 

Professional services

 

 

602 

 

 

580 

Technology and communications

 

 

607 

 

 

598 

Amortization of intangibles

 

 

28 

 

 

-    

FDIC insurance

 

 

227 

 

 

159 

Other

 

 

910 

 

 

693 

Total non-interest expense

 

 

9,055 

 

 

8,528 

INCOME BEFORE INCOME TAXES

 

 

4,546 

 

 

2,518 

INCOME TAX PROVISION

 

 

1,400 

 

 

804 

NET INCOME

 

$

3,146 

 

$

1,714 



 

 

 

 

 

 

Net income per common share-basic

 

$

0.68 

 

$

0.40 

Net income per common share-diluted

 

$

0.66 

 

$

0.40 

Cash dividends per common share

 

$

0.40 

 

$

0.38 

Weighted average number of common shares outstanding

 

 

4,634,096 

 

 

4,263,109 

Weighted average number of diluted shares outstanding

 

 

4,757,062 

 

 

4,328,034 



 

 

 

 

 

 

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, 2017 AND 2016

(in thousands)

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2017

 

 

2016



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

3,146 

 

 

 

 

$

1,714 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

 

 

187 

 

 

 

 

 

649 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

10 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

53 

 

 

 

 

 

35 

 

 

 

Total

 

 

 

 

63 

 

 

 

 

 

40 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX

 

 

250 

 

 

 

 

 

689 



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

3,396 

 

 

 

 

$

2,403 



 

 

 

 

 

 

 

 

 

 

 

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, 2017 AND 2016

 

 

 

 

 

 

 

 

(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, 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 compensation 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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

2,153 

 

$

44,389 

 

$

52,630 

 

$

(2,424)

 

$

-    

 

$

96,748 

Net Income

 

 

 

 

 

 

 

 

3,146 

 

 

 

 

 

 

 

 

3,146 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

250 

 

 

 

 

 

250 

Cash dividends ($0.40 per common share)

 

 

 

 

 

 

 

 

(1,902)

 

 

 

 

 

 

 

 

(1,902)

Stock compensation expense

 

 

 

 

 

136 

 

 

 

 

 

 

 

 

 

 

 

136 

Issued 440,000 shares in stock offering

 

 

220 

 

 

13,922 

 

 

 

 

 

 

 

 

 

 

 

14,142 

Issued 15,763 restricted shares

 

 

 

 

(8)

 

 

 

 

 

 

 

 

 

 

 

-    

Issued 5,429 shares in stock option exercises

 

 

 

 

104 

 

 

 

 

 

 

 

 

 

 

 

107 

Reissued 1,870 shares in stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-    

Balance, March 31, 2017

 

$

2,384 

 

$

58,543 

 

$

53,874 

 

$

(2,174)

 

$

-    

 

$

112,627 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017 AND 2016

(in thousands)



 

Three Months Ended March 31,



 

 

2017

 

 

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Interest received

 

$

10,801 

 

$

9,090 

Fees received

 

 

3,210 

 

 

2,839 

Interest paid

 

 

(1,263)

 

 

(1,068)

Cash paid to employees and vendors

 

 

(10,116)

 

 

(8,353)

Income taxes paid

 

 

(5)

 

 

(9)

Proceeds from sale of loans held for resale

 

 

2,788 

 

 

880 

Originations of loans held for resale

 

 

(3,354)

 

 

(335)



 

 

 

 

 

 

Net cash provided by operating activities

 

 

2,061 

 

 

3,044 



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Available for sales securities:

 

 

 

 

 

 

Purchases

 

 

(22,300)

 

 

(20,471)

Proceeds from maturities, calls, and payments

 

 

3,656 

 

 

3,883 

Held to maturity securities:

 

 

 

 

 

 

Purchases

 

 

(35)

 

 

-    

Proceeds from maturities, calls, and payments

 

 

610 

 

 

11 

Additions to properties and equipment

 

 

(56)

 

 

(300)

Purchase of tax credit investment

 

 

-    

 

 

(359)

  Insurance agency acquisitions

 

 

(275)

 

 

-    

Net increase in loans

 

 

(2,082)

 

 

(23,176)



 

 

 

 

 

 

Net cash used in investing activities

 

 

(20,482)

 

 

(40,412)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from (repayments of) short-term borrowings, net

 

 

(16,680)

 

 

2,072 

Net increase in deposits

 

 

38,003 

 

 

46,067 

Issuance of common stock

 

 

14,249 

 

 

-    



 

 

 

 

 

 

Net cash provided by financing activities

 

 

35,572 

 

 

48,139 



 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

17,151 

 

 

10,771 



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

 

13,084 

 

 

22,621 



 

 

 

 

 

 

End of period

 

$

30,235 

 

$

33,392 



(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, 2017 AND 2016

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 



 

Three Months Ended March 31,



 

 

2017

 

 

2016



 

 

 

 

 

 

RECONCILIATION OF NET INCOME TO NET CASH

 

 

 

 

 

 

PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 



 

 

 

 

 

 

Net income

 

$

3,146 

 

$

1,714 



 

 

 

 

 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

432 

 

 

359 

Deferred tax expense

 

 

367 

 

 

36 

(Credit) Provision for loan losses

 

 

(435)

 

 

208 

Gain on loans sold

 

 

(18)

 

 

(15)

Stock options and restricted stock expense

 

 

136 

 

 

118 

Proceeds from sale of loans held for resale

 

 

2,788 

 

 

880 

Originations of loans held for resale

 

 

(3,354)

 

 

(335)

Changes in assets and liabilities affecting cash flow:

 

 

 

 

 

 

Other assets

 

 

(901)

 

 

561 

Other liabilities

 

 

(100)

 

 

(482)



 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

2,061 

 

$

3,044 



 

 

 

 

 

 

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, 2017 AND 2016



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 month period ended March 31, 2017 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, 2016 (“10-K”).  The Company’s significant accounting policies are disclosed in Note 1 to the 10-K.    





7

 


 



2. SECURITIES



The amortized cost of securities and their approximate fair value at March 31, 2017 and December 31, 2016 were as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

16,795 

 

$

73 

 

$

(81)

 

$

16,787 

States and political subdivisions

 

 

34,472 

 

 

434 

 

 

(62)

 

 

34,844 

Total debt securities

 

$

51,267 

 

$

507 

 

$

(143)

 

$

51,631 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

22,140 

 

$

96 

 

$

(229)

 

$

22,007 

FHLMC

 

 

9,452 

 

 

31 

 

 

(78)

 

 

9,405 

GNMA

 

 

2,463 

 

 

29 

 

 

(21)

 

 

2,471 

SBA

 

 

7,975 

 

 

19 

 

 

(55)

 

 

7,939 

CMO

 

 

21,891 

 

 

52 

 

 

(500)

 

 

21,443 

Total mortgage-backed securities

 

$

63,921 

 

$

227 

 

$

(883)

 

$

63,265 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

115,188 

 

$

734 

 

$

(1,026)

 

$

114,896 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,408 

 

$

 

$

(25)

 

$

1,387 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,408 

 

$

 

$

(25)

 

$

1,387 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

12,958 

 

$

67 

 

$

(153)

 

$

12,872 

States and political subdivisions

 

 

34,952 

 

 

356 

 

 

(166)

 

 

35,142 

Total debt securities

 

$

47,910 

 

$

423 

 

$

(319)

 

$

48,014 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

14,694 

 

$

96 

 

$

(230)

 

$

14,560 

FHLMC

 

 

3,544 

 

 

32 

 

 

(51)

 

 

3,525 

GNMA

 

 

2,535 

 

 

19 

 

 

(21)

 

 

2,533 

CMO

 

 

27,127 

 

 

67 

 

 

(604)

 

 

26,590 

Total mortgage-backed securities

 

$

47,900 

 

$

214 

 

$

(906)

 

$

47,208 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

95,810 

 

$

637 

 

$

(1,225)

 

$

95,222 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,983 

 

$

 

$

(29)

 

$

1,959 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,983 

 

$

 

$

(29)

 

$

1,959 



8

 


 



Available for sale securities with a total fair value of $108 million and $87 million at March 31, 2017 and December 31, 2016, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.



The scheduled maturities of debt and mortgage-backed securities at March 31, 2017 and December 31, 2016 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, 2017

 

December 31, 2016



 

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

 

$

2,875 

 

$

2,885 

 

$

2,869 

 

$

2,876 

Due after one year through five years

 

 

30,201 

 

 

30,405 

 

 

30,171 

 

 

30,214 

Due after five years through ten years

 

 

15,487 

 

 

15,555 

 

 

12,166 

 

 

12,133 

Due after ten years

 

 

2,704 

 

 

2,786 

 

 

2,704 

 

 

2,791 



 

 

51,267 

 

 

51,631 

 

 

47,910 

 

 

48,014 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

63,921 

 

 

63,265 

 

 

47,900 

 

 

47,208 



 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale securities

 

$

115,188 

 

$

114,896 

 

$

95,810 

 

$

95,222 



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

174 

 

$

173 

 

$

780 

 

$

778 

Due after one year through five years

 

 

285 

 

 

279 

 

 

289 

 

 

283 

Due after five years through ten years

 

 

849 

 

 

842 

 

 

814 

 

 

805 

Due after ten years

 

 

100 

 

 

93 

 

 

100 

 

 

93 



 

 

1,408 

 

 

1,387 

 

 

1,983 

 

 

1,959 



 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities

 

$

1,408 

 

$

1,387 

 

$

1,983 

 

$

1,959 



Contractual maturities of the Company’s mortgage-backed securities generally exceed ten years; however, the effective lives may be significantly shorter due to prepayments of the underlying loans and due to the nature of these securities.  The duration of the investment securities portfolio increased from 3.4 years at December 31, 2016 to 3.7 years at March 31, 2017.



Information regarding unrealized losses within the Company’s available for sale securities at March 31, 2017 and December 31, 2016 is summarized below.  The securities are primarily U.S. government-guaranteed agency securities or municipal securities.  All unrealized losses are considered temporary and are related to market interest rate fluctuations.



9

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

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

 

$

6,919 

 

$

(81)

 

$

 -

 

$

-    

 

$

6,919 

 

$

(81)

States and political subdivisions

 

 

9,370 

 

 

(46)

 

 

733 

 

 

(16)

 

 

10,103 

 

 

(62)

Total debt securities

 

$

16,289 

 

$

(127)

 

$

733 

 

$

(16)

 

$

17,022 

 

$

(143)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

15,301 

 

$

(229)

 

$

-    

 

$

-    

 

$

15,301 

 

$

(229)

FHLMC

 

 

7,730 

 

 

(37)

 

 

925 

 

 

(41)

 

 

8,655 

 

 

(78)

GNMA

 

 

1,036 

 

 

(19)

 

 

308 

 

 

(2)

 

 

1,344 

 

 

(21)

SBA

 

 

5,906 

 

 

(55)

 

 

-    

 

 

-    

 

 

5,906 

 

 

(55)

CMO

 

 

14,275 

 

 

(353)

 

 

3,662 

 

 

(147)

 

 

17,937 

 

 

(500)

Total mortgage-backed securities

 

$

44,248 

 

$

(693)

 

$

4,895 

 

$

(190)

 

$

49,143 

 

$

(883)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

611 

 

$

(13)

 

$

362 

 

$

(12)

 

$

973 

 

$

(25)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

61,148 

 

$

(833)

 

$

5,990 

 

$

(218)

 

$

67,138 

 

$

(1,051)













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 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

 

$

6,847 

 

$

(153)

 

$

-    

 

$

-    

 

$

6,847 

 

$

(153)

States and political subdivisions

 

 

16,895 

 

 

(146)

 

 

731 

 

 

(20)

 

 

17,626 

 

 

(166)

Total debt securities

 

$

23,742 

 

$

(299)

 

$

731 

 

$

(20)

 

$

24,473 

 

$

(319)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

9,577 

 

$

(230)

 

$

-    

 

$

-    

 

$

9,577 

 

$

(230)

FHLMC

 

 

1,728 

 

 

(8)

 

 

988 

 

 

(43)

 

 

2,716 

 

 

(51)

GNMA

 

 

1,046 

 

 

(17)

 

 

309 

 

 

(4)

 

 

1,355 

 

 

(21)

CMO

 

 

19,745 

 

 

(569)

 

 

1,166 

 

 

(35)

 

 

20,911 

 

 

(604)

Total mortgage-backed securities

 

$

32,096 

 

$

(824)

 

$

2,463 

 

$

(82)

 

$

34,559 

 

$

(906)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

863 

 

$

(3)

 

$

706 

 

$

(26)

 

$

1,569 

 

$

(29)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

56,701 

 

$

(1,126)

 

$

3,900 

 

$

(128)

 

$

60,601 

 

$

(1,254)





10

 


 



Management has assessed the securities available for sale in an unrealized loss position at March 31, 2017 and December 31, 2016 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 has not recorded any other-than-temporary impairment (“OTTI”) charges as of March 31, 2017 and did not record any OTTI charges during 2016.  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 stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.





3.  FAIR VALUE MEASUREMENTS



Fair value is defined in ASC Topic 820 “Fair Value Measurements and Disclosures” 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 inputs are quoted prices for identical instruments in active markets;



 

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and





 

 

 



 

 

Level 3 inputs are 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 as of March 31, 2017 and December 31, 2016, respectively:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

16,787 

 

$

-    

 

$

16,787 

States and political subdivisions

 

 

-    

 

 

34,844 

 

 

-    

 

 

34,844 

Mortgage-backed securities

 

 

-    

 

 

63,265 

 

 

-    

 

 

63,265 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

564 

 

 

564 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

12,872 

 

$

-    

 

$

12,872 

States and political subdivisions

 

 

-    

 

 

35,142 

 

 

-    

 

 

35,142 

Mortgage-backed securities

 

 

-    

 

 

47,208 

 

 

-    

 

 

47,208 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

527 

 

 

527 



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.



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, 2017 and 2016, respectively:





 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended March 31,

(in thousands)

 

2017

 

2016

Mortgage servicing rights - January 1

 

$

527 

 

$

557 

Gains (losses) included in earnings

 

 

11 

 

 

(69)

Additions from loan sales

 

 

26 

 

 

Mortgage servicing rights - March 31

 

$

564 

 

$

496 





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, 2017

 

December 31, 2016

Servicing fees

 

0.25 

%

 

0.25 

%

Discount rate

 

9.52 

%

 

9.52 

%

Prepayment rate (CPR)

 

8.15 

%

 

8.12 

%





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, 2017 and December 31, 2016:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

$

-    

 

$

17,535 

 

$

17,535 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

$

-    

 

$

13,114 

 

$

13,114 





Collateral dependent 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.



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 an allowance for loan loss of $2.0 million, at March 31, 2017 compared with $15.1 million and $2.0 million, respectively, at December 31, 2016.

13

 


 



FAIR VALUE OF FINANCIAL INSTRUMENTS



At each of March 31, 2017 and December 31, 2016, 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, 2017

 

December 31, 2016



 

Carrying

 

Fair

 

Carrying

 

Fair



 

Amount

 

Value

 

Amount

 

Value



 

 

(in thousands)

 

 

(in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,235 

 

$

30,235 

 

$

13,084 

 

$

13,084 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

114,896 

 

 

114,896 

 

 

95,222 

 

 

95,222 

FHLB and FRB stock

 

 

2,912 

 

 

2,912 

 

 

3,731 

 

 

3,731 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities

 

 

1,408 

 

 

1,387 

 

 

1,983 

 

 

1,959 

Loans, net

 

 

932,004 

 

 

913,707 

 

 

928,596 

 

 

945,998 

Mortgage servicing rights

 

 

564 

 

 

564 

 

 

527 

 

 

527 



 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

194,747 

 

$

194,747 

 

$

201,741 

 

$

201,741 

NOW deposits

 

 

103,907 

 

 

103,907 

 

 

88,632 

 

 

88,632 

Savings deposits

 

 

531,408 

 

 

531,408 

 

 

508,652 

 

 

508,652 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreement to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase

 

 

11,679 

 

 

11,679 

 

 

10,159 

 

 

10,159 

Other borrowed funds

 

 

10,000 

 

 

9,937 

 

 

28,200 

 

 

28,152 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

 

 

11,330 

 

 

11,330 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

147,915 

 

 

148,921 

 

 

140,949 

 

 

141,758 





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 Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, which are non-marketable equity investments, approximate fair value.



As a member of the FHLB System, the Bank is required to hold stock in FHLBNY.  The Company regularly evaluates investments in FHLBNY for impairment, considering liquidity, operating performance, capital position, stock repurchase and dividend history.  As of March 31, 2017, the Bank’s investment in FHLBNY stock was not impaired.



The Bank, as a member of the 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.  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, 2017.



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.

14

 


 



Loans Receivable.  The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, net of the appropriate portion of the allowance for loan losses.  For variable rate loans, the carrying amount is a reasonable estimate of fair value.  This fair value calculation is not necessarily indicative of the exit price, as defined in ASC 820.



Deposits.  The fair value of demand deposits, negotiable order of withdrawal (“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 years.  The Company looked at a market bond index to estimate a discount margin to value the debentures.  The 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, 2017

 

December 31, 2016

Mortgage loans on real estate:

 

(in thousands)

Residential mortgages

 

$

122,818 

 

$

118,542 

Commercial and multi-family

 

 

464,288 

 

 

462,385 

Construction-Residential

 

 

2,155 

 

 

2,540 

Construction-Commercial

 

 

95,757 

 

 

93,240 

Home equities

 

 

66,229 

 

 

66,234 

Total real estate loans

 

 

751,247 

 

 

742,941 



 

 

 

 

 

 

Commercial and industrial loans

 

 

192,041 

 

 

197,371 

Consumer and other loans

 

 

1,344 

 

 

1,417 

Net deferred loan origination costs

 

 

951 

 

 

783 

Total gross loans

 

 

945,583 

 

 

942,512 



 

 

 

 

 

 

Allowance for loan losses

 

 

(13,579)

 

 

(13,916)



 

 

 

 

 

 

Loans, net

 

$

932,004 

 

$

928,596 





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, 2017, the Bank sold mortgages to FNMA totaling $2.8 million, compared with $0.9  million in the three month period ended March 31, 2016.  At each of March 31, 2017 and December 31, 2016, the Bank had a loan servicing portfolio principal balance of $76 million upon which it earned servicing fees.  The value of the mortgage servicing rights for that portfolio was $0.6 million at March 31, 2017 and $0.5 million at December 31, 2016.  At March 31, 2017 there were $0.9 million in residential mortgages held for sale compared with $0.3 million at December 31, 2016.  The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.



The Company had $9 million in commercial and industrial loans held for sale as of March 31, 2017.  This represents a single loan relationship in which the Bank was a participant in a larger syndicated loan.  There was no significant credit deterioration in the loan as the Bank received a bid for the loan at par and as a result the loan’s fair value was equal to its amortized cost.  The Bank does not typically sell its commercial loans or hold them for resale.  However, management determined that from a risk management and capital management perspective, selling this particular loan was in the Bank’s best interest.  The loan is expected to be sold in the second quarter of 2017.    There were no commercial loans held for sale as of December 31, 2016.   



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, 2016.  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, 2016.  Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2016 are consistent with those utilized by the Company in the three month period ended March 31, 2017.



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 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.  Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information.  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, 2017

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

1-3

 

$

80,643 

 

$

375,456 

 

$

456,099 

 

$

123,648 

4

 

 

10,936 

 

 

71,958 

 

 

82,894 

 

 

55,746 

5

 

 

-    

 

 

6,641 

 

 

6,641 

 

 

9,264 

6

 

 

4,178 

 

 

10,233 

 

 

14,411 

 

 

2,570 

7

 

 

-    

 

 

-    

 

 

-    

 

 

813 

Total

 

$

95,757 

 

$

464,288 

 

$

560,045 

 

$

192,041 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

December 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

1-3

 

$

82,520 

 

$

372,235 

 

$

454,755 

 

$

121,414 

4

 

 

6,541 

 

 

73,655 

 

 

80,196 

 

 

59,117 

5

 

 

-    

 

 

12,506 

 

 

12,506 

 

 

12,623 

6

 

 

4,179 

 

 

3,989 

 

 

8,168 

 

 

3,404 

7

 

 

-    

 

 

-    

 

 

-    

 

 

813 

Total

 

$

93,240 

 

$

462,385 

 

$

555,625 

 

$

197,371 



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, 2017

(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

 

$

2,751 

 

$

138 

 

$

931 

 

$

3,820 

 

$

188,221 

 

$

192,041 

 

$

72 

 

$

2,771 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

1,225 

 

 

70 

 

 

659 

 

 

1,954 

 

 

120,864 

 

 

122,818 

 

 

-    

 

 

846 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

2,155 

 

 

2,155 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

15,249 

 

 

213 

 

 

2,097 

 

 

17,559 

 

 

446,729 

 

 

464,288 

 

 

-    

 

 

3,174 

  Construction

 

 

4,127 

 

 

-    

 

 

4,179 

 

 

8,306 

 

 

87,451 

 

 

95,757 

 

 

-    

 

 

4,179 

Home equities

 

 

128 

 

 

207 

 

 

593 

 

 

928 

 

 

65,301 

 

 

66,229 

 

 

-    

 

 

1,232 

Consumer and other

 

 

50 

 

 

 

 

-    

 

 

57 

 

 

1,287 

 

 

1,344 

 

 

-    

 

 

11 

Total Loans

 

$

23,530 

 

$

635 

 

$

8,459 

 

$

32,624 

 

$

912,008 

 

$

944,632 

 

$

72 

 

$

12,213 



Note: Loan balances do not include $951 thousand in net deferred loan origination costs as of March 31, 2017.





18

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

 

$

6,772 

 

$

2,966 

 

$

1,150 

 

$

10,888 

 

$

186,483 

 

$

197,371 

 

$

-    

 

$

3,106 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

868 

 

 

123 

 

 

567 

 

 

1,558 

 

 

116,984 

 

 

118,542 

 

 

-    

 

 

862 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

2,540 

 

 

2,540 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

6,319 

 

 

1,522 

 

 

2,357 

 

 

10,198 

 

 

452,187 

 

 

462,385 

 

 

483 

 

 

1,874 

  Construction

 

 

257 

 

 

-    

 

 

4,417 

 

 

4,674 

 

 

88,566 

 

 

93,240 

 

 

239 

 

 

4,178 

Home equities

 

 

481 

 

 

119 

 

 

679 

 

 

1,279 

 

 

64,955 

 

 

66,234 

 

 

-    

 

 

1,261 

Consumer and other

 

 

15 

 

 

10 

 

 

 

 

30 

 

 

1,387 

 

 

1,417 

 

 

-    

 

 

17 

Total Loans

 

$

14,712 

 

$

4,740 

 

$

9,175 

 

$

28,627 

 

$

913,102 

 

$

941,729 

 

$

722 

 

$

11,298 



Note: Loan balances do not include $783 thousand in net deferred loan origination costs as of December 31, 2016.





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, 2017 and 2016:











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,813 

 

$

7,890 

 

$

96 

 

$

769 

 

$

348 

 

$

13,916 

Charge-offs

 

 

(33)

 

 

-    

 

 

(28)

 

 

-    

 

 

-    

 

 

(61)

Recoveries

 

 

147 

 

 

-    

 

 

12 

 

 

-    

 

 

-    

 

 

159 

Provision (Credit)

 

 

(964)

 

 

308 

 

 

55 

 

 

150 

 

 

16 

 

 

(435)

Ending balance

 

$

3,963 

 

$

8,198 

 

$

135 

 

$

919 

 

$

364 

 

$

13,579 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

253 

 

$

1,716 

 

$

36 

 

$

 

$

 

$

2,015 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

3,710 

 

 

6,482 

 

 

99 

 

 

918 

 

 

355 

 

 

11,564 

Total

 

$

3,963 

 

$

8,198 

 

$

135 

 

$

919 

 

$

364 

 

$

13,579 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

2,786 

 

$

12,473 

 

$

36 

 

$

2,561 

 

$

1,694 

 

$

19,550 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

189,255 

 

 

547,572 

 

 

1,308 

 

 

122,412 

 

 

64,535 

 

 

925,082 

Total

 

$

192,041 

 

$

560,045 

 

$

1,344 

 

$

124,973 

 

$

66,229 

 

$

944,632 







* Includes construction loans



Note: Loan balances do not include $951 thousand in net deferred loan origination costs as of March 31, 2017.



20

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

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



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





21

 


 



Impaired Loans

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2017



 

 

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

 

$

1,176 

 

$

1,279 

 

$

-    

 

$

1,183 

 

$

23 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,491 

 

 

2,697 

 

 

-    

 

 

2,493 

 

 

 

 

17 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,452 

 

 

2,506 

 

 

-    

 

 

2,534 

 

 

34 

 

 

19 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Home equities

 

 

1,611 

 

 

1,697 

 

 

-    

 

 

1,627 

 

 

15 

 

 

Consumer and other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

7,730 

 

$

8,179 

 

$

-    

 

$

7,837 

 

$

81 

 

$

45 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2017



 

 

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

 

$

1,610 

 

$

1,853 

 

$

253 

 

$

1,654 

 

$

24 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

70 

 

 

72 

 

 

 

 

70 

 

 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

5,843 

 

 

5,871 

 

 

541 

 

 

5,843 

 

 

13 

 

 

53 

Construction

 

 

4,178 

 

 

4,201 

 

 

1,175 

 

 

4,179 

 

 

50 

 

 

-    

Home equities

 

 

83 

 

 

85 

 

 

 

 

83 

 

 

 

 

-    

Consumer and other

 

 

36 

 

 

62 

 

 

36 

 

 

37 

 

 

 

 

Total impaired loans

 

$

11,820 

 

$

12,144 

 

$

2,015 

 

$

11,866 

 

$

90 

 

$

56 



22

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2017



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

2,786 

 

$

3,132 

 

$

253 

 

$

2,837 

 

$

47 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,561 

 

 

2,769 

 

 

 

 

2,563 

 

 

10 

 

 

17 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

8,295 

 

 

8,377 

 

 

541 

 

 

8,377 

 

 

47 

 

 

72 

Construction

 

 

4,178 

 

 

4,201 

 

 

1,175 

 

 

4,179 

 

 

50 

 

 

-    

Home equities

 

 

1,694 

 

 

1,782 

 

 

 

 

1,710 

 

 

16 

 

 

Consumer and other

 

 

36 

 

 

62 

 

 

36 

 

 

37 

 

 

 

 

Total impaired loans

 

$

19,550 

 

$

20,323 

 

$

2,015 

 

$

19,703 

 

$

171 

 

$

101 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 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

 

$

1,304 

 

$

1,604 

 

$

-    

 

$

1,455 

 

$

125 

 

$

51 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,513 

 

 

2,720 

 

 

-    

 

 

2,542 

 

 

39 

 

 

78 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,123 

 

 

2,168 

 

 

-    

 

 

2,181 

 

 

33 

 

 

89 

Construction

 

 

257 

 

 

257 

 

 

-    

 

 

404 

 

 

 

 

28 

Home equities

 

 

1,559 

 

 

1,621 

 

 

-    

 

 

1,606 

 

 

51 

 

 

30 

Consumer and other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

7,756 

 

$

8,370 

 

$

-    

 

$

8,188 

 

$

250 

 

$

276 





23

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 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

 

$

1,844 

 

$

1,913 

 

$

492 

 

$

1,898 

 

$

62 

 

$

53 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

71 

 

 

72 

 

 

 

 

72 

 

 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,054 

 

 

1,083 

 

 

296 

 

 

1,062 

 

 

50 

 

 

-    

Construction

 

 

4,179 

 

 

4,201 

 

 

1,175 

 

 

4,180 

 

 

194 

 

 

-    

Home equities

 

 

194 

 

 

206 

 

 

20 

 

 

195 

 

 

 

 

Consumer and other

 

 

43 

 

 

68 

 

 

43 

 

 

45 

 

 

 

 

Total impaired loans

 

$

7,385 

 

$

7,543 

 

$

2,027 

 

$

7,452 

 

$

320 

 

$

58 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

3,148 

 

$

3,517 

 

$

492 

 

$

3,353 

 

$

187 

 

$

104 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,584 

 

 

2,792 

 

 

 

 

2,614 

 

 

41 

 

 

79 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,177 

 

 

3,251 

 

 

296 

 

 

3,243 

 

 

83 

 

 

89 

Construction

 

 

4,436 

 

 

4,458 

 

 

1,175 

 

 

4,584 

 

 

196 

 

 

28 

Home equities

 

 

1,753 

 

 

1,827 

 

 

20 

 

 

1,801 

 

 

60 

 

 

31 

Consumer and other

 

 

43 

 

 

68 

 

 

43 

 

 

45 

 

 

 

 

Total impaired loans

 

$

15,141 

 

$

15,913 

 

$

2,027 

 

$

15,640 

 

$

570 

 

$

334 





24

 


 



Non-performing loans



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







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016

 



 

 

(in thousands)

 

Non-accruing loans:

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

2,771 

 

$

3,106 

 

Residential real estate:

 

 

 

 

 

 

 

Residential

 

 

846 

 

 

862 

 

Construction

 

 

-    

 

 

-    

 

Commercial real estate:

 

 

 

 

 

 

 

Commercial and multi-family

 

 

3,174 

 

 

1,874 

 

Construction

 

 

4,179 

 

 

4,178 

 

Home equities

 

 

1,232 

 

 

1,261 

 

Consumer loans

 

 

11 

 

 

17 

 

Total non-accruing loans

 

$

12,213 

 

$

11,298 

 



 

 

 

 

 

 

 

Accruing loans 90+ days past due

 

 

72 

 

 

722 

 

Total non-performing loans

 

$

12,285 

 

$

12,020 

 



 

 

 

 

 

 

 

Total non-performing loans

 

 

 

 

 

 

 

to total assets

 

 

1.08 

%

 

1.09 

%

Total non-performing loans

 

 

 

 

 

 

 

to total loans

 

 

1.30 

%

 

1.28 

%



25

 


 



Troubled debt restructurings

The Company had $9.1 million and $5.1 million in loans that were restructured in a troubled debt restructuring (“TDR”) at March 31, 2017 and December 31, 2016, respectively.  Of those balances, $1.7 million and $1.2 million were in non-accrual status at March 31, 2017 and December 31, 2016, 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 interest 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, 2017, 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, 2017



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

729 

 

$

714 

 

$

15 

 

$

168 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,949 

 

 

235 

 

 

1,714 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

5,713 

 

 

592 

 

 

5,121 

 

 

245 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Home equities

 

 

638 

 

 

177 

 

 

461 

 

 

-    

Consumer and other loans

 

 

26 

 

 

-    

 

 

26 

 

 

26 

Total troubled restructured loans

 

$

9,055 

 

$

1,718 

 

$

7,337 

 

$

439 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2016



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

574 

 

$

532 

 

$

42 

 

$

147 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,949 

 

 

227 

 

 

1,722 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,617 

 

 

313 

 

 

1,304 

 

 

-    

Construction

 

 

257 

 

 

-    

 

 

257 

 

 

-    

Home equities

 

 

667 

 

 

175 

 

 

492 

 

 

Consumer and other loans

 

 

26 

 

 

-    

 

 

26 

 

 

26 

Total troubled restructured loans

 

$

5,090 

 

$

1,247 

 

$

3,843 

 

$

174 



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 concessions leading to the designation of a TDR are lines of credit that are termed-out and/or extensions of maturities at rates that are less than the prevailing market rates given the risk profile of the borrower.



26

 


 



The following tables show the data for TDR activity by the type of concession granted to the borrower for the three month periods ended March 31, 2017 and 2016:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2017

 

Three months ended March 31, 2016



 

(Recorded Investment in thousands)

 

(Recorded Investment 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

-    

 

$

-    

 

$

-    

 

 

$

24 

 

$

24 

Interest rate reduction

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Term-out line of credit

 

 

 

180 

 

 

180 

 

 

 

20 

 

 

20 

Combination of concessions

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Residential Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

-    

 

 

-    

 

 

-    

 

 

 

95 

 

 

95 

Commercial Real Estate & Construction

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Extension of maturity

 

 

 

5,073 

 

 

5,073 

 

-    

 

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Consumer and other loans

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    





The general practice of the Bank is to work with borrowers so that they are able to repay 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.  There were no loans which were classified as TDRs during the previous 12 months which defaulted during each of the three month periods ended March 31, 2017 and 2016.









27

 


 



5. COMMON EQUITY AND EARNINGS 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 month periods ended March 31, 2017 and 2016, the Company had an average of 122,966 and 64,925 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, 2017 and 2016, there was an average of 24,990 and 49,550 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.



The Company issued 440,000 shares of common stock at $35.00 per share (including shares issued upon partial exercise of the underwriters’ allotment option in connection with the offering) in a registered common stock offering in January 2017.  The offering netted $14 million in additional capital after expenses.





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, 2017 and 2016:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2016

 

Net Change

 

Balance at March 31, 2017



 

(in thousands)

Net unrealized (loss) gain on investment securities

 

$

(365)

 

$

187 

 

$

(178)

Net defined benefit pension plan adjustments

 

 

(2,059)

 

 

63 

 

 

(1,996)

Total

 

$

(2,424)

 

$

250 

 

$

(2,174)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

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)



28

 


 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2017

 

Three months ended March 31, 2016



 

(in thousands)

 

(in thousands)



 

Before-Tax Amount

 

Income Tax (Provision) Benefit (b)

 

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

 

$

296 

 

$

(109)

 

$

187 

 

$

1,047 

 

$

(398)

 

$

649 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

$

 

$

 

$

10 

 

$

 

$

(3)

 

$

Amortization of actuarial loss (a)

 

 

43 

 

 

10 

 

 

53 

 

 

56 

 

 

(21)

 

 

35 

Net change

 

 

51 

 

 

12 

 

 

63 

 

 

64 

 

 

(24)

 

 

40 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

$

347 

 

$

(97)

 

$

250 

 

$

1,111 

 

$

(422)

 

$

689 



(a)

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

(b)

Tax benefit includes impact of re-valuation of deferred tax asset due to increase in marginal federal income tax rate

from 34% to 35%.



29

 


 



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, 2017 and 2016.









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

9,670 

 

$

(26)

 

$

9,644 

(Credit) provision for loan losses

 

 

(435)

 

 

-    

 

 

(435)

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

10,105 

 

 

(26)

 

 

10,079 

Non-interest income

 

 

1,354 

 

 

-    

 

 

1,354 

Insurance service and fees

 

 

109 

 

 

2,059 

 

 

2,168 

Amortization expense

 

 

-    

 

 

28 

 

 

28 

Non-interest expense

 

 

7,647 

 

 

1,380 

 

 

9,027 

Income before income taxes

 

 

3,921 

 

 

625 

 

 

4,546 

Income tax provision

 

 

1,159 

 

 

241 

 

 

1,400 

Net income

 

$

2,762 

 

$

384 

 

$

3,146 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

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

 


 



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,



 

2017

 

2016



 

(in thousands)



 

 

 

 

 

 

Commitments to extend credit

 

$

203,354 

 

$

217,581 

Standby letters of credit

 

 

4,504 

 

 

3,736 

Total

 

$

207,858 

 

$

221,317 





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 2017 or during 2016.



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.



31

 


 



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 make a contribution to the defined benefit pension plan during the first three months of 2017.



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, 2017 and 2016:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended March 31,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

42 

 

$

47 

Interest cost

 

 

54 

 

 

55 

 

 

34 

 

 

36 

Expected return on plan assets

 

 

(69)

 

 

(65)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

 

 

Amortization of the net loss

 

 

23 

 

 

22 

 

 

20 

 

 

34 

Net periodic cost (benefit)

 

$

 

$

12 

 

$

104 

 

$

125 





32

 


 



10.  RECENT 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, 2017, including interim periods within the reporting period.  The Company does not expect the standard to have a material impact on the Company’s 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 ASU will not impact results of operations or the financial position of the Company, but will impact its fair value disclosures in the notes to the financial statements.

  

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 Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2016.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently evaluating the impact of the standard on its financial reporting.

  

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.  The standard was adopted effective January 1, 2017.  One part of this ASU that impacted the Company was the elimination of the concept of a tax windfall pool.  Previously, an entity determined for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes resulted in either an excess benefit or a tax deficiency.  Excess tax benefits were recognized in additional paid-in-capital; tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement.  Excess tax benefits were not recognized until the deduction reduced taxes payable.  Under the new standard, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement in the period in which they are incurred.  The impact in the first quarter of 2017 was a tax benefit of $0.1 million.    



In addition, the Company made the accounting policy election effective January 1, 2017 to account for forfeitures of stock awards when they occur rather than estimating the number of awards that are expected to vest.  When stock awards are granted, the Company assumes that the service condition will be achieved when determining the initial amount of compensation cost recognized.  The Company does not expect this election to have a material impact on its financial statements.



ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.  Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the “probable” threshold.  The main objective of this ASU (commonly known as the Current Expected Credit Loss Impairment Model, or CECL, in the industry) is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  To achieve this objective, the amendments in CECL replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The amendments in CECL are effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The FASB expects that an entity will be able to leverage its current systems and methods for recording the allowance for credit losses.  However, many financial institutions, particularly community banks similar in size to the Company and industry groups like the American Bankers Association, have expressed concern about the impact of CECL.  The life of loan loss concept presents complexities that can decrease capital, and add both volatility to ALLL estimates and additional costs.  CECL may increase the ALLL, though many factors will determine the impact for each bank.  Changes in expectations of future economic conditions play a large role in CECL and can significantly affect the credit loss estimate.  While OCC estimates made in 2012 projected a 30% to 50% increase in the ALLL, more

33

 


 



recent bank analyst projections were far lower.  A challenge for the Company could be the operational impact.  Costly new systems and process to track loan performance may need to be purchased or developed.  Significant procedural challenges may be faced both in implementation and on an ongoing basis.  The total impact of CECL to the Company’s financial statements is unknown but may be material.  Implementation of CECL will be a significant project for the Company through the projected implementation date of January 1, 2020.



ASU 2017-04, Simplifying the Test for Goodwill Impairment.  The objective of this ASU is to simplify how an entity is required to test goodwill impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Under the amendments in this ASU, an entity will perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.  The Company does not expect the standard to have a material impact on the Company’s financial reporting.





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; loan losses in excess of the Company’s allowance for loan losses; 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; the impact of such changes in accounting pronouncements and practices being greater than anticipated; the ability to realize the benefit of deferred tax assets; 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, 2016.  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, except to the extent required by law.





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

34

 


 



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, 2016.  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 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, 2016 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, 2017 that resulted in an interim impairment test.





ANALYSIS OF FINANCIAL CONDITION



Loan Activity

Total loans grew to $946 million at March 31, 2017, a $3 million increase from total loans of $943 million at December 31, 2016 and a  $149 million or 19% increase from $797 million at March 31, 2016.



Loans secured by real estate were $751 million at March 31, 2017, reflecting an  $8 million or 1% increase from $743 million at December 31, 2016 and a $108 million or 17% increase from $643 million at March 31, 2016.  Commercial and multi-family real estate loan growth slowed to a 2% annualized growth rate during the first quarter of 2017, but grew 14% over the past twelve months.  Commercial construction loans grew at a 11% annualized rate in the first quarter, but grew 39% since March 31, 2016Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio.  The market for commercial real estate in the Company’s footprint in Western New York has been strong, particularly in 2016.  However, demand for loans declined in December 2016 and January 2017 before improving in February and March.  Given the time it takes to underwrite and close a commercial real estate loan, it is expected that loan balance growth will not reflect the uptick in the pipeline until the second quarter of 2017.



35

 


 



In the first quarter of 2017, residential mortgage originations were  $11 million compared with the previous quarter’s originations of $16 million, but higher than the $5 million originated in last year’s first quarter.  Residential mortgages sold in the first quarter of 2017 equated to approximately 25% of the residential mortgages originated by the Company during this quarter, as compared with 28% of residential mortgages originated during the fourth quarter of 2016 and 19% in the first quarter of 2016.  While the Company has historically experienced most of its loan growth in commercial loans, residential mortgage loan growth been higher the past two quarters.  Management decides to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.



The Company has also focused on growth opportunities in commercial and industrial (“C&I”) lending as a way to diversify its overall loan portfolio.  The C&I portfolio declined to $192 million at March 31, 2017 from $197 million at December 31, 2016, but grew  $41 million or 27%  from $151 million at March 31, 2016.  Weak commercial loan demand in late fourth quarter of 2016 and early first quarter of 2017 and paydowns of outstanding balances on lines of credit contributed to the first quarter decrease in C&I loan balances.



Credit Quality of Loan Portfolio

Total non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $12 million, or 1.30% of total loans outstanding at March 31, 2017, compared with $12 million, or 1.28% of total loans outstanding, as of December 31, 2016 and $18 million, or 2.25% of total loans outstanding, as of March 31, 2016.  In the current quarter, an increase in non-accruing commercial real estate loans was offset by a decrease in non-accruing C&I loans and loans 90 days past due and accruing.  The improvement in the percentage of non-performing loans as a percentage of total loans from the end of last year’s first quarter represents a $3 million decrease in non-accruing C&I loans and a $3 million decrease in commercial real estate loans 90 days past due and accruing.



Troubled debt restructurings (“TDRs”) increased from $5 million at December 31, 2016 to $9 million at March 31, 2017.  The increase is attributable to a single commercial real estate loan of $5 million that matured in the first quarter and was subsequently extended.  While the borrower was considered to be financially troubled due to a high loan to collateral value ratio, the Company expects the borrower to pay the principal and interest of the restructured terms as contracted and therefore the loan remained in accruing status.



Commercial credits graded as “special mention” and “substandard, or the criticized loan portfolio, were $34 million at March 31, 2017, a $4 million decrease from $38 million at December 31, 2016 and $7 million lower than the $41 million in criticized loans at March 31, 2016.  The decrease in criticized loans in the recent quarter was in the C&I portfolio as one large loan relationship was upgraded to watch from special mention as the borrower demonstrated improved operating performance over a sustained period of time.  The level of criticized loans can fluctuate as new information is constantly received on the Company’s borrowers and their financial circumstances change over time.  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 Company maintains an allowance for loan losses that in management’s judgment appropriately reflects losses inherent in the loan portfolio.  The allowance for loan losses totaled $13.6 million or 1.44% of total loans outstanding at March 31, 2017, compared with $13.9 million or 1.48% of total loans outstanding as of December 31, 2016 and $13.1 million or 1.65% of total loans outstanding at March 31, 2016The Company released $0.4 million in allowance for loan losses during the 2017 first quarter, reflecting favorable credit quality trends including a sustained historically low charge-off ratio and a decrease in criticized loans.  The net charge-off (recovery) ratio for the first quarter of 2017 was (0.04)% of average net loans, compared with a ratio of 0.07% and (0.02)% in the fourth quarter of 2016 and first quarter of 2016, respectively.



Investing Activities

Total securities were $116 million at March 31, 2017, compared with $97 million at December 31, 2016 and $116 million at March 31, 2016.  Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, increased to $19 million at March 31, 2017 from $1 million at December 31, 2016, but decreased from $22 million at March 31, 2016.  The Company experienced strong loan growth in 2016, resulting in the decrease in investment securities and short-term interest-bearing deposits at banks from the end of the first quarter of 2016 to December 31, 2016A common equity issuance and seasonal municipal deposit inflows in the first quarter of 2017 increased liquidity, resulting in the increased investment securities and interest-bearing deposits at other banks.  Securities and interest-bearing deposits at correspondent banks made up 11% of the Bank’s total average interest earning assets in the first quarter of 2017,  compared with 10% in the fourth quarter of 2016 and 14% in last year’s first quarter.



The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities at 55% of total investment securities at March 31, 2017, compared with 49% at December 31, 2016 and 44% at March 31,

36

 


 



2016.  The concentration in tax-advantaged debt securities issued by state and political subdivisions and U.S. government-sponsored agency bonds was 31% and 14%, respectively, of the total securities portfolio at March 31, 2017, compared with 38% and 13% at December 31, 2016 and 34% and 22% at March 31, 2016.



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.  The total net unrealized loss position of the available-for-sale investment portfolio was  $0.3 million at March 31, 2017, compared with $0.6 million at December 31, 2016



The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures.  The Company has no 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.



Funding Activities

Total deposits at March 31, 2017 were $978 million, a $38 million or 4% increase from $940 million at December 31, 2016 and a $129 million or 15% increase from $849 million at March 31, 2016The growth in the first quarter reflected growth in savings deposits of $23 million, NOW deposits of $15 million, and time deposits of $7 million.  Demand deposits declined $7 million during the first quarter.  Most of the NOW and savings deposit growth is attributable to seasonal municipal deposit growth as municipalities collect annual property tax receipts in the first quarter. The $129 million deposit growth since the end of last year’s first quarter reflects growth across all product categories including savings deposits of $68 million, time deposits of $33 million, demand deposits of $20 million, and NOW deposits of $8 million.  With market disruption in the Western New York market due to a significant merger between two of the Company’s competitors, the Company has maintained highly competitive savings and time deposit rates in an effort to attract new customers.  Due to the transactional nature of demand deposits, average balances are a useful metric to meaningfully measure sustained growth rates.  Average demand deposits were $196 million in the current quarter, a 1% decrease from $199 million in the fourth quarter of 2016, but 12% higher than the $176 million average balance in the first quarter of 2016.  Most of the Company’s demand deposit growth over the past twelve months has been with commercial customers. 



The Company had $10 million in other borrowings at March 31, 2017, which consisted of a long-term advance with the FHLBNY scheduled to mature in 2020.  Other borrowings were $28 million at December 31, 2016 and $10 million at March 31, 2016.  The Company relied less on its overnight line of credit with FHLBNY in the first quarter due to the inflow of seasonal municipal deposits and the proceeds from the common equity offering.





37

 


 



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 book value.   Yields are presented on a non-tax-equivalent basis.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Three months ended March 31, 2017

 

Three months ended March 31, 2016



 

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

 

$

924,612 

 

$

10,246 

 

4.49 

%

 

$

772,672 

 

$

8,730 

 

4.54 

%

Taxable securities

 

 

70,584 

 

 

436 

 

2.51 

%

 

 

64,796 

 

 

377 

 

2.34 

%

Tax-exempt securities

 

 

36,440 

 

 

224 

 

2.49 

%

 

 

38,298 

 

 

238 

 

2.50 

%

Interest bearing deposits at banks

 

 

5,943 

 

 

12 

 

0.82 

%

 

 

18,862 

 

 

11 

 

0.23 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

1,037,579 

 

$

10,918 

 

4.27 

%

 

 

894,628 

 

$

9,356 

 

4.21 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

12,750 

 

 

 

 

 

 

 

 

12,733 

 

 

 

 

 

 

Premises and equipment, net

 

 

11,233 

 

 

 

 

 

 

 

 

11,092 

 

 

 

 

 

 

Other assets

 

 

46,741 

 

 

 

 

 

 

 

 

42,550 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,108,303 

 

 

 

 

 

 

 

$

961,003 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

94,088 

 

$

51 

 

0.22 

%

 

$

88,220 

 

$

85 

 

0.39 

%

Savings

 

 

510,632 

 

 

610 

 

0.48 

%

 

 

447,318 

 

 

531 

 

0.48 

%

Time deposits

 

 

144,888 

 

 

455 

 

1.27 

%

 

 

108,954 

 

 

343 

 

1.27 

%

Other borrowed funds

 

 

15,522 

 

 

53 

 

1.38 

%

 

 

10,427 

 

 

44 

 

1.70 

%

Junior subordinated debentures

 

 

11,330 

 

 

100 

 

3.58 

%

 

 

11,330 

 

 

87 

 

3.09 

%

Securities sold U/A to repurchase

 

 

11,896 

 

 

 

0.17 

%

 

 

12,493 

 

 

 

0.19 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

788,356 

 

$

1,274 

 

0.66 

%

 

 

678,742 

 

$

1,096 

 

0.65 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

196,331 

 

 

 

 

 

 

 

 

176,074 

 

 

 

 

 

 

Other

 

 

15,053 

 

 

 

 

 

 

 

 

13,879 

 

 

 

 

 

 

Total liabilities

 

$

999,740 

 

 

 

 

 

 

 

$

868,695 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

108,563 

 

 

 

 

 

 

 

 

92,308 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

1,108,303 

 

 

 

 

 

 

 

$

961,003 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earnings

 

 

 

 

$  

9,644 

 

 

 

 

 

 

 

$  

8,260 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.77 

%

 

 

 

 

 

 

 

3.71 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.61 

%

 

 

 

 

 

 

 

3.56 

%



38

 


 



Net Income



Net income was $3.1 million, or $0.66 per diluted share, in the first quarter of 2017, compared with $2.3 million, or $0.53 per diluted share, in the trailing fourth quarter of 2016 and $1.7 million, or $0.40 per diluted share, in last year’s first quarter.  The increase from each comparative period reflects higher non-interest income and net interest income, along with lower provision for loan losses.  Return on average equity was 11.59% for the first quarter of 2017 compared with 9.70% in the trailing fourth quarter of 2016 and 7.43% in the first quarter of 2016.



Other Results of Operations – Quarterly Comparison



Net interest income of $9.6 million increased $0.2 million, or 3%, from the fourth quarter of 2016 and $1.4 million, or 17%, from the prior-year first quarter.  Average commercial loans, including both commercial real estate and commercial and industrial loans, were $747 million in the first quarter compared with $745 million in the trailing fourth quarter, but were 21% higher than $616 million in the 2016 first quarter.  The high volume of loan closings in the fourth quarter of 2016 somewhat muted commercial loan growth in the first quarter of 2017.  However, the Company expects stronger growth trends through the rest of 2017, given the strength of the commercial loan pipeline at the end of the first quarter.  The strong growth of average commercial loans from last year’s first quarter was the primary driver of the improvement in net interest income in the first quarter of 2017 when compared with the first three months of 2016.  The 3% increase in net interest income when compared with the fourth quarter of 2016 largely reflected a higher net interest margin.

First quarter net interest margin of 3.77% improved 11 basis points from the 2016 fourth quarter and 6 basis points from the first quarter of 2016.  The margin improvement stems from increased yields on interest-earning assets.  The higher yields when compared with the fourth quarter reflect an increase of 10 basis points in loan yields and 38 basis points in investment security yields.  Loan yields have benefited from variable loan re-pricing, due to an increase in the prime rate after the Federal Reserve increased its target rate by 25 basis points late in 2016 and again in March of 2017.  Fourth quarter 2016 investment yields had a higher than typical impact from accelerated premium amortization, resulting in somewhat depressed yields in that quarter.  The improved asset yields when compared with last year’s first quarter reflect an asset mix increasingly weighted toward loans.  Average loans were 89% of average interest-earning assets in the first three months of 2017 compared with 86% in the prior-year period.

The $0.4 million release of allowance for loan losses in the first quarter of 2017 reflects a decrease in commercial and industrial loan balances and favorable credit quality trends including a sustained historically low charge-off ratio and a decrease in criticized loans.  Strong loan growth in each of the fourth and the first quarters of 2016, along with a higher level of non-performing loans in the first quarter of 2016, were the primary factors driving the provision for loan losses of $0.4 million and $0.2 million in each of those respective periods.

Non-interest income was $3.5 million in the first quarter of 2017, an increase from $2.6 million in the fourth quarter of 2016 and $3.0 million in the prior year first quarter.  The fourth quarter of 2016 included the impact of a net reduction of noninterest income of $0.3 million related to an investment in an historic rehabilitation tax credit.  There were no comparable transactions in each of the first quarters of 2017 and 2016.

Insurance revenue increased from $1.3 million in the trailing fourth quarter and $1.7 million in last year’s first quarter to $2.2 million in the first three months of 2017 due to higher profit sharing revenue, including a seasonal impact when comparing to the fourth quarter.  There was also continued growth in commercial lines insurance commissions and personal lines revenue was bolstered by revenue from two recent insurance agency acquisitions.  Two business lines that struggled in 2016, insurance claims services and financial services, both demonstrated improved performance in the first quarter of 2017.    

Non-interest expenses increased 6% to $9.1 million in the first quarter of 2017 when compared to the comparable prior year period, but decreased 1% from the trailing fourth quarter, primarily due to lower salaries and benefits costs.    Salaries and benefits costs decreased $0.1 million to $5.7 million in the recent first quarter when compared with the fourth quarter of 2016, reflecting seasonal incentive compensation in the fourth quarter.  The 4% increase from last year’s first quarter reflects strategic personnel hires to support the Company’s continued growth.

Other expenses of $0.9 million in the first quarter of 2017 were higher when compared with the first three months of 2016 mostly due to the receipt of an insurance claim of $0.1 million in the first quarter of 2016 from litigation costs recorded in previous periods.  Occupancy costs of $0.8 million were higher in the first quarter of 2017 when compared to the prior year due to additional depreciation costs of the new core banking system.  Higher FDIC insurance costs of $0.2 million reflect the Company’s balance sheet growth over the past year.

39

 


 



The efficiency ratio for the current quarter was 68.6%, compared with 74.2% in the fourth quarter of 2016 and 75.8% in last year’s first quarter.  The calculation of the efficiency ratio for the fourth quarter of 2016 excludes the net impact of the tax credit investment.  The decrease in the efficiency ratio this quarter reflects the Company’s strong revenue growth.

Income tax expense of $1.4 million was recorded for the first quarter of 2017, compared with $0.2 million in the fourth quarter of 2016 and $0.8 million recognized in last year’s first quarter.  The effective tax rate for the quarter was 30.8% compared with 7.8% in the fourth quarter of 2016 and 31.9% in the first quarter of 2016.  The lower effective tax rate in the fourth quarter of 2016 reflects the impact of the tax credit investment transaction.  The decrease in the effective tax rate in the first three months of 2017 when compared with the comparable prior year period is due to an increase in the value of the deferred tax asset recorded in the this year’s first quarter, reflecting an increase in the Company’s projected marginal federal tax rate due to the growth in the Company’s taxable income.  The first quarter of 2017 income tax expense was also impacted by the recognition of a tax benefit related to the vesting of employee and director stock awards, as described in Note 10 to the Unaudited Consolidated Financial Statements on this Form 10-Q.





CAPITAL



The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a  Tier 1 leverage ratio of 10.76% at March 31, 2017, compared with 9.49% and 10.18% at December 31, 2016  and March 31, 2016, respectively.  The increase reflects the impact of the Company’s registered common stock offering in January 2017 which netted $14 million in additional capital after expenses.  The Company issued 440,000 shares of common stock at $35.00 per share (including shares issued upon partial exercise of the underwriters’ allotment option in connection with the offering)The offering was accretive to book value per share.  Book value per share increased to $23.64 at March 31, 2017, compared with $22.50 at December 31, 2016 and $21.54 at March 31, 2016. 

On February 21, 2017, the Company declared a cash dividend of $0.40 per share on the Company’s outstanding common stock.  The dividend was paid on April 4, 2017 to shareholders of record as of March 14, 2017.    This semi-annual dividend represents a $0.02, or 5%, increase from the previous semi-annual dividend paid on October 4, 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.  The Company uses the Federal Home Loan Bank of New York (“FHLBNY”) as its primary source of overnight funds and also has one long-term advance with FHLBNY.  The Company had $10 million and $28 million in borrowed funds at FHLBNY at March 31, 2017 and December 31, 2016, respectively.  The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements.    As a member of the FHLB, the Bank is able to borrow funds at competitive rates.  Advances of up to $201 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 $18 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.



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, 2017, approximately 3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 29% had maturity dates of five years or less.  Additionally, mortgage-backed securities, which comprise 55% of the investment portfolio at March 31, 2017, provide consistent cash flows for the Bank.



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



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.  In the Company’s internal stress test at  March 31, 2017 the Company had net short-term liquidity

40

 


 



of $215 million as compared with $248 million at December 31, 2016.  Available assets of $139 million, divided by public and purchased funds of $183 million, resulted in a long-term liquidity ratio of 76% at March 31, 2017, compared with 58% at December 31, 2016.



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.



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, 2017

 

 

December 31, 2016

Changes in interest rates

 

 

 

 

 

 



 

 

 

 

 

 

+200 basis points

 

$

1,800 

 

$

1,838 

+100 basis points

 

 

2,613 

 

 

2,590 



 

 

 

 

 

 

-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.

41

 


 



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, 2017 (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, 2017 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, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





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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 the first quarter of 2017, the Company purchased shares of its common stock as follows:



Issuer Purchases of Equity Securities





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased (1)

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)

 

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

January 2017:

 

 

 

 

 

 

 

 

 

 

January 1, 2017 - January 31, 2017

 

 

-    

 

$

-    

 

-    

 

15,212 

February 2017:

 

 

 

 

 

 

 

 

 

 

February 1, 2017 - February 28, 2017

 

 

683 

 

$

38.92 

 

-    

 

15,212 

March 2017:

 

 

 

 

 

 

 

 

 

 

March 1, 2017 - March 31, 2017

 

 

-    

 

$

-    

 

-    

 

15,212 



 

 

 

 

 

 

 

 

 

 

Total:

 

 

683 

 

$

38.92 

 

-    

 

15,212 



(1)

The total shares purchased in the period consist of shares constructively tendered to the Company by attestation in satisfaction of the exercise price due upon exercise of options issued pursuant to the Company’s 2009 Long-Term Incentive Plan.  The “average price paid per share” reported in the table above, with respect to such shares, reflects the fair market value of the Company’s common stock on the exercise date, which was the closing sales price of the Company’s common stock as reported on the NYSE MKT on that date.



(2)

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 maximum number of shares that may be purchased under this program as of March 31, 2017 was 15,212.



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.



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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, 2017



/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)







DATE

May 2, 2017



/s/ John B. Connerton

John B.  Connerton

Treasurer

(Principal Financial Officer)











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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, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – March 31, 2017 and December 31, 2016; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2017 and 2016; (iii) Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2017 and 2016; (iv) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2017 and 2016; (v) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2017 and 2016; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

 



 

 

 

 









45