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EVANS BANCORP INC - Quarter Report: 2016 September (Form 10-Q)





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    September 30, 2016



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



For the transition period from             to ______



Commission file number    001-35021



                                 EVANS BANCORP, INC.            .                

(Exact name of registrant as specified in its charter)



          New York                            16-1332767

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

incorporation or organization)       Identification No.)



One Grimsby Drive, Hamburg, NY        14075

(Address of principal executive offices)  (Zip Code)



       (716) 926-2000      .

(Registrant's telephone number, including area code)



                           Not Applicable                          

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

 since last report)



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



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



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



Large accelerated filer Accelerated filer

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



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

Yes   No 



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



Common Stock, $.50 par value 4,292,114 shares as of November 2, 2016

 

 

 


 

Table of Contents





INDEX





EVANS BANCORP, INC. AND SUBSIDIARIES







 

 



 

 

PART 1.   FINANCIAL INFORMATION

PAGE



 

 

Item 1.

Financial Statements

 



 

 



Unaudited Consolidated Balance Sheets – September 30, 2016 and December 31, 2015



 

 



Unaudited Consolidated Statements of Income – Three months ended September 30, 2016 and 2015



 

 



Unaudited Consolidated Statements of Income – Nine months ended September 30, 2016 and 2015



 

 



Unaudited Statements of Consolidated Comprehensive Income – Three months ended September 30, 2016 and 2015



 

 



Unaudited Statements of Consolidated Comprehensive Income – Nine months ended September 30, 2016 and 2015



 

 



Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Nine months ended September 30, 2016 and 2015



 

 



Unaudited Consolidated Statements of Cash Flows - Nine months ended September 30, 2016 and 2015



 

 



Notes to Unaudited Consolidated Financial Statements



 

 

Item 2.

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

39 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48 



 

 

Item 4.

Controls and Procedures

49 



 

 

PART II.  OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

50 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50 



 

 

Item 6.

Exhibits

50 



 

 



Signatures

51 



 

 







 

 

 


 

Table of Contents





 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

SEPTEMBER 30, 2016 AND DECEMBER 31, 2015

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

14,830 

 

$

11,813 

Interest-bearing deposits at banks

 

 

4,397 

 

 

10,808 

Securities:

 

 

 

 

 

 

Available for sale, at fair value (amortized cost: $101,758 at September 30, 2016;

 

 

103,385 

 

 

97,141 

$96,374 at December 31, 2015)

 

 

 

 

 

 

Held to maturity, at amortized cost (fair value: $1,475 at September 30, 2016;

 

 

1,474 

 

 

1,617 

$1,584 at December 31, 2015)

 

 

 

 

 

 

Federal Home Loan Bank common stock, at cost

 

 

3,220 

 

 

1,296 

Federal Reserve Bank common stock, at cost

 

 

1,510 

 

 

1,487 

Loans, net of allowance for loan losses of $13,712 at September 30, 2016

 

 

 

 

 

 

and $12,883 at December 31, 2015

 

 

899,140 

 

 

761,101 

Properties and equipment, net of accumulated depreciation of $16,693 at September 30, 2016

 

 

 

 

 

 

and $15,799 at December 31, 2015

 

 

11,485 

 

 

11,051 

Goodwill

 

 

8,101 

 

 

8,101 

Bank-owned life insurance

 

 

21,398 

 

 

20,978 

Other assets

 

 

15,723 

 

 

13,714 



 

 

 

 

 

 

TOTAL ASSETS

 

$

1,084,663 

 

$

939,107 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

$

195,869 

 

$

183,098 

NOW

 

 

87,047 

 

 

83,674 

Regular savings

 

 

496,926 

 

 

439,993 

Time

 

 

118,123 

 

 

96,217 

Total deposits

 

 

897,965 

 

 

802,982 



 

 

 

 

 

 

Securities sold under agreement to repurchase

 

 

11,606 

 

 

10,821 

Other borrowings

 

 

51,200 

 

 

10,000 

Other liabilities

 

 

17,364 

 

 

12,718 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

Total liabilities

 

 

989,465 

 

 

847,851 



 

 

 

 

 

 

CONTINGENT LIABILITIES AND COMMITMENTS

 

 

 

 

 

 



 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock, $.50 par value, 10,000,000 shares authorized; 4,290,222

 

 

 

 

 

 

and 4,260,203 shares issued at September 30, 2016 and December 31, 2015,

 

 

 

 

 

 

respectively, and 4,287,400 and 4,257,179 outstanding at September 30, 2016

 

 

 

 

 

 

and December 31, 2015, respectively

 

 

2,147 

 

 

2,132 

Capital surplus

 

 

43,983 

 

 

43,318 

Treasury stock, at cost, 2,822 and 3,024 shares at September 30, 2016 and

 

 

 

 

 

 

December 31, 2015, respectively

 

 

(69)

 

 

-    

Retained earnings

 

 

50,294 

 

 

47,616 

Accumulated other comprehensive loss, net of tax

 

 

(1,157)

 

 

(1,810)

Total stockholders' equity

 

 

95,198 

 

 

91,256 



 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,084,663 

 

$

939,107 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 











1

 


 

Table of Contents







 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

Three Months Ended September 30,



 

2016

 

2015

INTEREST INCOME

 

 

 

 

 

 

Loans

 

$

9,620 

 

$

8,403 

Interest bearing deposits at banks

 

 

 

 

16 

Securities:

 

 

 

 

 

 

Taxable

 

 

385 

 

 

407 

Non-taxable

 

 

235 

 

 

273 

Total interest income

 

 

10,241 

 

 

9,099 

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

977 

 

 

828 

Other borrowings

 

 

100 

 

 

49 

Junior subordinated debentures

 

 

95 

 

 

83 

Total interest expense

 

 

1,172 

 

 

960 

NET INTEREST INCOME  

 

 

9,069 

 

 

8,139 

PROVISION FOR LOAN LOSSES

 

 

1,006 

 

 

396 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

8,063 

 

 

7,743 

NON-INTEREST INCOME

 

 

 

 

 

 

Deposit service charges

 

 

475 

 

 

455 

Insurance service and fees

 

 

1,855 

 

 

1,972 

Gain on loans sold

 

 

35 

 

 

34 

Gain on insurance settlement

 

 

-    

 

 

734 

Bank-owned life insurance

 

 

144 

 

 

134 

Interchange fee income

 

 

319 

 

 

320 

Other

 

 

507 

 

 

608 

Total non-interest income

 

 

3,335 

 

 

4,257 

NON-INTEREST EXPENSE

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,402 

 

 

5,253 

Occupancy

 

 

732 

 

 

675 

Repairs and maintenance

 

 

200 

 

 

230 

Advertising and public relations

 

 

232 

 

 

188 

Professional services

 

 

535 

 

 

673 

Technology and communications

 

 

304 

 

 

354 

FDIC insurance

 

 

201 

 

 

151 

Other

 

 

1,105 

 

 

756 

Total non-interest expense

 

 

8,711 

 

 

8,280 

INCOME BEFORE INCOME TAXES

 

 

2,687 

 

 

3,720 

INCOME TAX PROVISION

 

 

471 

 

 

1,211 

NET INCOME

 

$

2,216 

 

$

2,509 



 

 

 

 

 

 

Net income per common share-basic

 

$

0.52 

 

$

0.59 

Net income per common share-diluted

 

$

0.51 

 

$

0.58 

Cash dividends per common share

 

$

0.38 

 

$

0.36 

Weighted average number of common shares outstanding

 

 

4,287,124 

 

 

4,241,156 

Weighted average number of diluted shares outstanding

 

 

4,362,479 

 

 

4,312,275 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 







2

 


 

Table of Contents























 

 

 

 

 



 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 



Nine Months Ended September 30,



2016

 

2015

INTEREST INCOME

 

 

 

 

 

Loans

$

27,228 

 

$

24,149 

Interest bearing deposits at banks

 

45 

 

 

50 

Securities:

 

 

 

 

 

Taxable

 

1,323 

 

 

1,242 

Non-taxable

 

695 

 

 

750 

Total interest income

 

29,291 

 

 

26,191 

INTEREST EXPENSE

 

 

 

 

 

Deposits

 

2,972 

 

 

2,471 

Other borrowings

 

201 

 

 

109 

Junior subordinated debentures

 

273 

 

 

243 

Total interest expense

 

3,446 

 

 

2,823 

NET INTEREST INCOME  

 

25,845 

 

 

23,368 

PROVISION FOR LOAN LOSSES

 

838 

 

 

1,012 

NET INTEREST INCOME AFTER

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

25,007 

 

 

22,356 

NON-INTEREST INCOME

 

 

 

 

 

Deposit service charges

 

1,321 

 

 

1,275 

Insurance service and fees

 

5,175 

 

 

5,623 

Gain on loans sold

 

79 

 

 

115 

Gain on insurance settlement

 

-    

 

 

734 

Bank-owned life insurance

 

421 

 

 

423 

Loss on tax credit investment

 

(2,139)

 

 

-    

Refundable state historic tax credit

 

1,508 

 

 

-    

Interchange fee income

 

977 

 

 

938 

Other

 

1,267 

 

 

1,692 

Total non-interest income

 

8,609 

 

 

10,800 

NON-INTEREST EXPENSE

 

 

 

 

 

Salaries and employee benefits

 

16,383 

 

 

15,114 

Occupancy

 

2,171 

 

 

2,066 

Repairs and maintenance

 

588 

 

 

618 

Advertising and public relations

 

707 

 

 

630 

Professional services

 

1,771 

 

 

1,855 

Technology and communications

 

1,065 

 

 

876 

FDIC insurance

 

542 

 

 

446 

Other

 

2,731 

 

 

2,429 

Total non-interest expense

 

25,958 

 

 

24,034 

INCOME BEFORE INCOME TAXES

 

7,658 

 

 

9,122 

INCOME TAX PROVISION

 

1,725 

 

 

3,033 

NET INCOME

$

5,933 

 

$

6,089 



 

 

 

 

 

Net income per common share-basic

$

1.39 

 

$

1.44 

Net income per common share-diluted

$

1.37 

 

$

1.41 

Cash dividends per common share

$

0.76 

 

$

0.72 

Weighted average number of common shares outstanding

 

4,278,171 

 

 

4,232,201 

Weighted average number of diluted shares outstanding

 

4,345,307 

 

 

4,306,532 



 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 







3

 


 

Table of Contents











 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,



 

2016

 

 

2015



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

2,216 

 

 

 

 

$

2,509 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities

 

 

 

 

(376)

 

 

 

 

 

412 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

23 

 

 

 

Amortization of actuarial assumptions

 

35 

 

 

 

 

 

13 

 

 

 

Total

 

 

 

 

40 

 

 

 

 

 

36 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX

 

 

(336)

 

 

 

 

 

448 



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

1,880 

 

 

 

 

$

2,957 



 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 





4

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended September 30,



 

2016

 

 

2015



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

5,933 

 

 

 

 

$

6,089 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

 

 

533 

 

 

 

 

 

106 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

15 

 

 

 

 

 

33 

 

 

 

Amortization of actuarial assumptions

 

105 

 

 

 

 

 

74 

 

 

 

Total

 

 

 

 

120 

 

 

 

 

 

107 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX

 

 

653 

 

 

 

 

 

213 



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

6,586 

 

 

 

 

$

6,302 



 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 









5

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

 

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 



 

Common

 

Capital

 

Retained

 

Comprehensive

 

Treasury

 

 

 



 

Stock

 

Surplus

 

Earnings

 

Income (Loss)

 

Stock

 

Total

Balance, December 31, 2014

 

$

2,123 

 

$

43,102 

 

$

42,822 

 

$

(1,508)

 

$

(751)

 

$

85,788 

Net Income

 

 

 

 

 

 

 

 

6,089 

 

 

 

 

 

 

 

 

6,089 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

213 

 

 

 

 

 

213 

Cash dividends ($0.72 per common share)

 

 

 

 

 

 

 

 

(3,043)

 

 

 

 

 

 

 

 

(3,043)

Stock options and restricted stock expense

 

 

 

 

 

384 

 

 

 

 

 

 

 

 

 

 

 

384 

Excess tax expense from stock-based compensation

 

 

 

 

 

31 

 

 

 

 

 

 

 

 

 

 

 

31 

Reissued 20,592 restricted shares, net of 588 forfeitures

 

 

 

 

 

(503)

 

 

 

 

 

 

 

 

503 

 

 

-    

Repurchased 8,676 shares in treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(210)

 

 

(210)

Reissued 11,832 shares in stock option exercises

 

 

 

 

 

(46)

 

 

 

 

 

 

 

 

212 

 

 

166 

Reissued 5,582 shares under Dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reinvestment Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

134 

 

 

138 

Issued 5,672 shares in Employee Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Plan

 

 

 

 

114 

 

 

 

 

 

 

 

 

 

 

 

117 

Balance, September 30, 2015

 

$

2,126 

 

$

43,086 

 

$

45,868 

 

$

(1,295)

 

$

(112)

 

$

89,673 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

2,132 

 

$

43,318 

 

$

47,616 

 

$

(1,810)

 

$

-    

 

$

91,256 

Net Income

 

 

 

 

 

 

 

 

5,933 

 

 

 

 

 

 

 

 

5,933 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

653 

 

 

 

 

 

653 

Cash dividends ($0.76 per common share)

 

 

 

 

 

 

 

 

(3,255)

 

 

 

 

 

 

 

 

(3,255)

Stock compensation expense

 

 

 

 

 

421 

 

 

 

 

 

 

 

 

 

 

 

421 

Excess tax benefit from stock-based compensation

 

 

 

 

 

22 

 

 

 

 

 

 

 

 

 

 

 

22 

Repurchased 3,280 shares in treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80)

 

 

(80)

Issued 19,093 restricted shares

 

 

10 

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

-    

Issued 5,270 shares under Dividend Reinvestment Plan

 

 

 

 

129 

 

 

 

 

 

 

 

 

 

 

 

132 

Issued 5,166 shares in Employee Stock Purchase Plan

 

 

 

 

106 

 

 

 

 

 

 

 

 

 

 

 

108 

Issued 490 shares in stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reissued 267 shares in stock option exercises

 

 

 

 

 

(6)

 

 

 

 

 

 

 

 

 

 

-    

Reissued 3,215 restricted shares, net of forfeitures

 

 

 

 

 

(5)

 

 

 

 

 

 

 

 

 

 

-    

Balance, September 30, 2016

 

$

2,147 

 

$

43,983 

 

$

50,294 

 

$

(1,157)

 

$

(69)

 

$

95,198 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 











6

 


 

Table of Contents







 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(in thousands)



 

Nine Months Ended September 30,



 

 

2016

 

 

2015

OPERATING ACTIVITIES:

 

 

 

 

 

 

Interest received

 

$

28,952 

 

$

25,623 

Fees received

 

 

8,648 

 

 

9,424 

Interest paid

 

 

(3,419)

 

 

(2,901)

Cash paid to employees and vendors

 

 

(24,467)

 

 

(23,860)

Cash contributed to pension plan

 

 

(140)

 

 

(165)

Income taxes paid

 

 

(974)

 

 

(601)

Proceeds from sale of loans held for resale

 

 

5,300 

 

 

13,063 

Originations of loans held for resale

 

 

(7,227)

 

 

(12,800)



 

 

 

 

 

 

Net cash provided by operating activities

 

 

6,673 

 

 

7,783 



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Available for sales securities:

 

 

 

 

 

 

Purchases

 

 

(25,953)

 

 

(28,457)

Proceeds from maturities, calls, and payments

 

 

18,425 

 

 

19,148 

Held to maturity securities:

 

 

 

 

 

 

Purchases

 

 

(194)

 

 

(346)

Proceeds from maturities, calls, and payments

 

 

337 

 

 

416 

Proceeds from property insurance

 

 

-    

 

 

1,183 

Additions to properties and equipment

 

 

(1,329)

 

 

(1,255)

Purchase of tax credit investment

 

 

(703)

 

 

(832)

Net increase in loans

 

 

(136,160)

 

 

(35,312)



 

 

 

 

 

 

Net cash used in investing activities

 

 

(145,577)

 

 

(45,455)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from (repayments of) borrowings, net

 

 

41,985 

 

 

(6,168)

Net increase in deposits

 

 

94,983 

 

 

74,668 

Dividends paid

 

 

(1,626)

 

 

(1,517)

Repurchase of treasury stock

 

 

(80)

 

 

(210)

Issuance of common stock

 

 

248 

 

 

117 

Reissuance of treasury stock

 

 

-    

 

 

303 



 

 

 

 

 

 

Net cash provided by financing activities

 

 

135,510 

 

 

67,193 



 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(3,394)

 

 

29,521 



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

 

22,621 

 

 

10,898 



 

 

 

 

 

 

End of period

 

$

19,227 

 

$

40,419 



(continued)





7

 


 

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 



 

Nine Months Ended September 30,



 

 

2016

 

 

2015



 

 

 

 

 

 

RECONCILIATION OF NET INCOME TO NET CASH

 

 

 

 

 

 

PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 



 

 

 

 

 

 

Net income

 

$

5,933 

 

$

6,089 



 

 

 

 

 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,079 

 

 

1,120 

Deferred tax (benefit) expense

 

 

(211)

 

 

645 

Provision for loan losses

 

 

838 

 

 

1,012 

Loss on tax credit investment

 

 

2,139 

 

 

-    

Refundable state historic tax credit

 

 

(1,508)

 

 

-    

Gain on loans sold

 

 

(79)

 

 

(115)

Gain on proceeds from insurance

 

 

-    

 

 

(734)

Stock options and restricted stock expense

 

 

421 

 

 

384 

Proceeds from sale of loans held for resale

 

 

5,300 

 

 

13,063 

Originations of loans held for resale

 

 

(7,227)

 

 

(12,800)

Cash contributed to pension plan

 

 

(140)

 

 

(165)

Changes in assets and liabilities affecting cash flow:

 

 

 

 

 

 

Other assets

 

 

(1,784)

 

 

(1,436)

Other liabilities

 

 

1,912 

 

 

720 



 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

6,673 

 

$

7,783 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 



















8

 


 

Table of Contents



PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS



EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”), Evans National Holding Corp. (“ENHC”) and Suchak Data Systems, LLC (“SDS”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“TEA”), and TEA’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENBA”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles (“GAAP”) and with general practice within the industries in which it operates.  Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”



The results of operations for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year.  The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 (“10-K”).  The Company’s significant accounting policies are disclosed in Note 1 to the 10-K.



An accounting policy not discussed in Note 1 to the 10-K is the accounting for rehabilitation of historic properties tax credit investments.  In the typical structure of these transactions, the Bank will invest in a partnership that is incurring expenses related to the rehabilitation of a certified historic structure located in New York State.  At the time the historic structure is placed in service, the Bank is eligible for a federal and New York State tax credit.  At the same time, the Bank evaluates its investment, which is valued at the present value of the expected cash flows from its partnership interest.  If the investment is determined to be impaired, the Bank will record that impairment loss on its income statement in non-interest income.  The federal tax credit impact is included in the Company’s estimated effective tax rate calculation and recorded in income tax expense.  For New York State, any new credit earned from rehabilitated historic properties placed in service on or after January 1, 2015, not used in the current tax year will be treated as a refund or overpayment of tax to be credited to the next year’s tax.  Since the realization of the tax credit does not depend on the Bank’s generation of future taxable income or the Bank’s ongoing tax status or tax position, the refund is not considered an element of income tax accounting (ASC 740).  In such cases, the Bank would not record the credit as a reduction of income tax expense; rather, the Bank includes the refundable New York State tax credit in non-interest income.















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2. SECURITIES

The amortized cost of securities and their approximate fair value at September 30, 2016 and December 31, 2015 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

15,097 

 

$

226 

 

$

 -

 

$

15,323 

States and political subdivisions

 

 

36,212 

 

 

949 

 

 

(17)

 

 

37,144 

Total debt securities

 

$

51,309 

 

$

1,175 

 

$

(17)

 

$

52,467 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

15,532 

 

$

308 

 

$

(16)

 

$

15,824 

FHLMC

 

 

3,840 

 

 

71 

 

 

(26)

 

 

3,885 

GNMA

 

 

2,652 

 

 

36 

 

 

(5)

 

 

2,683 

CMO

 

 

28,425 

 

 

252 

 

 

(151)

 

 

28,526 

Total mortgage-backed securities

 

$

50,449 

 

$

667 

 

$

(198)

 

$

50,918 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

101,758 

 

$

1,842 

 

$

(215)

 

$

103,385 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,474 

 

$

16 

 

$

(15)

 

$

1,475 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,474 

 

$

16 

 

$

(15)

 

$

1,475 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

21,914 

 

$

166 

 

$

(234)

 

$

21,846 

States and political subdivisions

 

 

36,838 

 

 

874 

 

 

(29)

 

 

37,683 

Total debt securities

 

$

58,752 

 

$

1,040 

 

$

(263)

 

$

59,529 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

10,314 

 

$

160 

 

$

(25)

 

$

10,449 

FHLMC

 

 

4,629 

 

 

61 

 

 

(56)

 

 

4,634 

GNMA

 

 

3,215 

 

 

48 

 

 

(27)

 

 

3,236 

CMO

 

 

19,464 

 

 

66 

 

 

(237)

 

 

19,293 

Total mortgage-backed securities

 

$

37,622 

 

$

335 

 

$

(345)

 

$

37,612 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

96,374 

 

$

1,375 

 

$

(608)

 

$

97,141 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,617 

 

$

 

$

(39)

 

$

1,584 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,617 

 

$

 

$

(39)

 

$

1,584 





Available for sale securities with a total fair value of $88 million and $86 million at September 30, 2016 and December 31, 2015, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

10

 


 

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The Company uses the Federal Home Loan Bank of New York (“FHLBNY”) as its primary source of overnight funds and also has several long-term advances with FHLBNY.  The Company had $51 million and $10 million in borrowed funds at FHLBNY at September 30, 2016 and December 31, 2015, 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 Federal Home Loan Bank (“FHLB”) System, the Bank is required to hold stock in FHLBNY.  The Bank held $3 million and $1 million in FHLBNY stock at September 30, 2016 and December 31, 2015, respectively.  The Company regularly evaluates investments in FHLBNY for impairment, considering liquidity, operating performance, capital position, stock repurchase and dividend history.  As of September 30, 2016, the Bank’s investment in FHLBNY stock was not impaired.



The Bank, as a member of the Federal Reserve Bank (“FRB”) system, is currently required to purchase and hold shares of capital stock in the FRB in an amount equal to 6% of its capital and surplus.  The Bank’s investment in FRB capital stock totaled $1.5 million at each of September 30, 2016 and December 31, 2015.  Based on the current capital adequacy and liquidity position of the FRB, management believes there is no impairment in the Company’s investment at September 30, 2016 and the cost of the investment approximates fair value.



The scheduled maturities of debt and mortgage-backed securities at September 30, 2016 and December 31, 2015 are summarized below.  All maturity amounts are contractual maturities.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

Amortized

 

Estimated

 

Amortized

 

Estimated



 

cost

 

fair value

 

cost

 

fair value



 

 

(in thousands)

 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

5,201 

 

$

5,218 

 

$

4,082 

 

$

4,142 

Due after one year through five years

 

 

30,792 

 

 

31,385 

 

 

29,113 

 

 

29,448 

Due after five years through ten years

 

 

12,479 

 

 

12,875 

 

 

19,356 

 

 

19,615 

Due after ten years

 

 

2,837 

 

 

2,989 

 

 

6,201 

 

 

6,324 



 

 

51,309 

 

 

52,467 

 

 

58,752 

 

 

59,529 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

50,449 

 

 

50,918 

 

 

37,622 

 

 

37,612 



 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale securities

 

$

101,758 

 

$

103,385 

 

$

96,374 

 

$

97,141 



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

219 

 

$

219 

 

$

309 

 

$

308 

Due after one year through five years

 

 

328 

 

 

324 

 

 

374 

 

 

365 

Due after five years through ten years

 

 

827 

 

 

834 

 

 

828 

 

 

815 

Due after ten years

 

 

100 

 

 

98 

 

 

106 

 

 

96 



 

 

1,474 

 

 

1,475 

 

 

1,617 

 

 

1,584 



 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities

 

$

1,474 

 

$

1,475 

 

$

1,617 

 

$

1,584 





While the contractual maturities of our mortgage-backed securities generally exceed ten years, the Company expects the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of these securities.  The duration of the investment securities portfolio decreased from 4.0 years at December 31, 2015 to 3.9 years at September 30, 2016.



Information regarding unrealized losses within the Company’s available for sale securities at September 30, 2016 and December 31, 2015 is summarized below.  The securities are primarily U.S. government-guaranteed agency securities or municipal securities.  All unrealized losses are considered temporary and are related to market interest rate fluctuations.

11

 


 

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September 30, 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

 

$

 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

States and political subdivisions

 

 

2,391 

 

 

(5)

 

 

740 

 

 

(12)

 

 

3,131 

 

 

(17)

Total debt securities

 

$

2,391 

 

$

(5)

 

$

740 

 

$

(12)

 

$

3,131 

 

$

(17)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

1,634 

 

$

(16)

 

$

 -

 

$

 -

 

$

1,634 

 

$

(16)

FHLMC

 

 

281 

 

 

(5)

 

 

1,098 

 

 

(21)

 

 

1,379 

 

 

(26)

GNMA

 

 

 -

 

 

 -

 

 

338 

 

 

(5)

 

 

338 

 

 

(5)

CMO

 

 

12,660 

 

 

(142)

 

 

1,300 

 

 

(9)

 

 

13,960 

 

 

(151)

Total mortgage-backed securities

 

$

14,575 

 

$

(163)

 

$

2,736 

 

$

(35)

 

$

17,311 

 

$

(198)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

390 

 

$

(3)

 

$

495 

 

$

(12)

 

$

885 

 

$

(15)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

17,356 

 

$

(171)

 

$

3,971 

 

$

(59)

 

$

21,327 

 

$

(230)













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Less than 12 months

 

 

12 months or longer

 

 

Total



 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized



 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses



 

 

(in thousands)

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

4,531 

 

$

(89)

 

$

5,855 

 

$

(145)

 

$

10,386 

 

$

(234)

States and political subdivisions

 

 

3,133 

 

 

(6)

 

 

1,117 

 

 

(23)

 

 

4,250 

 

 

(29)

Total debt securities

 

$

7,664 

 

$

(95)

 

$

6,972 

 

$

(168)

 

$

14,636 

 

$

(263)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

3,856 

 

$

(25)

 

$

 -

 

$

 -

 

$

3,856 

 

$

(25)

FHLMC

 

 

 -

 

 

 -

 

 

1,234 

 

 

(56)

 

 

1,234 

 

 

(56)

GNMA

 

 

1,161 

 

 

(21)

 

 

471 

 

 

(6)

 

 

1,632 

 

 

(27)

CMO

 

 

8,996 

 

 

(123)

 

 

3,661 

 

 

(114)

 

 

12,657 

 

 

(237)

Total mortgage-backed securities

 

$

14,013 

 

$

(169)

 

$

5,366 

 

$

(176)

 

$

19,379 

 

$

(345)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

626 

 

$

(11)

 

$

495 

 

$

(28)

 

$

1,121 

 

$

(39)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

22,303 

 

$

(275)

 

$

12,833 

 

$

(372)

 

$

35,136 

 

$

(647)





12

 


 

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Management has assessed the securities available for sale in an unrealized loss position at September 30, 2016 and December 31, 2015 and determined the decline in fair value below amortized cost to be temporary.  In making this determination, management considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, and the financial condition of the issuer (primarily government or government-sponsored enterprises).  In addition, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost.  Management believes the decline in fair value is primarily related to market interest rate fluctuations and not to the credit deterioration of the individual issuers.



The Company has not recorded any other-than-temporary impairment (“OTTI”) charges as of September 30, 2016 and did not record any OTTI charges during 2015.  Nevertheless, it remains possible that there could be deterioration in the asset quality of the securities portfolio in the future.  The credit worthiness of the Company’s portfolio is largely reliant on the ability of U.S. government sponsored agencies such as FHLB, Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations.  In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio.  The relatively stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.





3.  FAIR VALUE MEASUREMENTS



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



There are three levels of inputs to fair value measurements:

·

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

·

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

·

Level 3, meaning the use of unobservable inputs.



Observable market data should be used when available.



FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS



The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, respectively:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

15,323 

 

$

-    

 

$

15,323 

States and political subdivisions

 

 

-    

 

 

37,144 

 

 

-    

 

 

37,144 

Mortgage-backed securities

 

 

-    

 

 

50,918 

 

 

-    

 

 

50,918 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

459 

 

 

459 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

21,846 

 

$

-    

 

$

21,846 

States and political subdivisions

 

 

-    

 

 

37,683 

 

 

-    

 

 

37,683 

Mortgage-backed securities

 

 

-    

 

 

37,612 

 

 

-    

 

 

37,612 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

557 

 

 

557 



13

 


 

Table of Contents



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 and nine month periods ended September 30, 2016 and 2015, respectively:





 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended September 30,

(in thousands)

 

2016

 

2015

Mortgage servicing rights - July 1

 

$

466 

 

$

565 

Losses included in earnings

 

 

(22)

 

 

(46)

Additions from loan sales

 

 

15 

 

 

30 

Mortgage servicing rights - September 30

 

$

459 

 

$

549 





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Nine months ended September 30,

(in thousands)

 

2016

 

2015

Mortgage servicing rights - January 1

 

$

557 

 

$

518 

Losses included in earnings

 

 

(147)

 

 

(87)

Additions from loan sales

 

 

49 

 

 

118 

Mortgage servicing rights - September 30

 

$

459 

 

$

549 





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









 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015

Servicing fees

 

0.25 

%

 

0.25 

%

Discount rate

 

9.52 

%

 

9.52 

%

Prepayment rate (CPR)

 

10.22 

%

 

8.55 

%







FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS



The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements.  The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015:









 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

Level 2

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

-    

 

16,413 

 

$

16,413 



 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

-    

 

17,758 

 

$

17,758 







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.



15

 


 

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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 $18.3 million, with a allowance for loan loss of $1.9 million, at September 30, 2016 compared with $19.5 million and $1.7 million, respectively, at December 31, 2015.



FAIR VALUE OF FINANCIAL INSTRUMENTS



At each of September 30, 2016 and December 31, 2015, the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

Carrying

 

Fair

 

Carrying

 

Fair



 

Amount

 

Value

 

Amount

 

Value



 

 

(in thousands)

 

 

(in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,227 

 

$

19,227 

 

$

22,621 

 

$

22,621 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

103,385 

 

 

103,385 

 

 

97,141 

 

 

97,141 

FHLB and FRB stock

 

 

4,730 

 

 

4,730 

 

 

2,783 

 

 

2,783 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities

 

 

1,474 

 

 

1,475 

 

 

1,617 

 

 

1,584 

Loans, net

 

 

899,140 

 

 

920,249 

 

 

761,101 

 

 

772,472 

Mortgage servicing rights

 

 

459 

 

 

459 

 

 

557 

 

 

557 



 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

195,869 

 

$

195,869 

 

$

183,098 

 

$

183,098 

NOW deposits

 

 

87,047 

 

 

87,047 

 

 

83,674 

 

 

83,674 

Regular savings deposits

 

 

496,926 

 

 

496,926 

 

 

439,993 

 

 

439,993 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreement to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase

 

 

11,606 

 

 

11,606 

 

 

10,821 

 

 

10,821 

Other borrowed funds

 

 

51,200 

 

 

51,325 

 

 

10,000 

 

 

9,874 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

 

 

11,330 

 

 

11,330 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

118,123 

 

 

119,073 

 

 

96,217 

 

 

96,975 





16

 


 

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



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



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



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



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



Deposits.  The fair value of demand deposits, NOW accounts, muni-vest accounts and regular savings accounts is the amount payable on demand at the reporting date.  The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.



Junior Subordinated Debentures.  There is no active market for the Company’s debentures and there have been no issuances of similar instruments in recent 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.









17

 


 

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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:









 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015

Mortgage loans on real estate:

 

(in thousands)

Residential mortgages

 

$

111,685 

 

$

103,941 

Commercial and multi-family

 

 

462,411 

 

 

399,819 

Construction-Residential

 

 

1,214 

 

 

1,546 

Construction-Commercial

 

 

83,718 

 

 

60,892 

Home equities

 

 

64,138 

 

 

61,042 

Total real estate loans

 

 

723,166 

 

 

627,240 



 

 

 

 

 

 

Commercial and industrial loans

 

 

187,440 

 

 

144,330 

Consumer and other loans

 

 

1,531 

 

 

1,735 

Net deferred loan origination costs

 

 

715 

 

 

679 

Total gross loans

 

 

912,852 

 

 

773,984 



 

 

 

 

 

 

Allowance for loan losses

 

 

(13,712)

 

 

(12,883)



 

 

 

 

 

 

Loans, net

 

$

899,140 

 

$

761,101 





The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages.  In the three month period ended September 30, 2016, the Bank sold mortgages to FNMA totaling $1.7 million, as compared with $3.3 million in mortgages sold to FNMA in the three month period ended September 30, 2015.  During the nine month periods ended September 30, 2016 and 2015, the Bank sold $5.2 million and $12.9 million, respectively, to FNMA.  At September 30, 2016, the Bank had a loan servicing portfolio principal balance of $76 million upon which it earns servicing fees, as compared with $77 million at December 31, 2015.  The value of the mortgage servicing rights for that portfolio was $0.5 million at September 30, 2016 and $0.6 million at December 31, 2015.  At September 30, 2016 there were $2.5 million in residential mortgages held for sale compared with $0.5 million at December 31, 2015.  The Company had no commercial loans held-for-sale at September 30, 2016 or December 31, 2015.  The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.



As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.  Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2015 are consistent with those utilized by the Company in the three and nine month periods ended September 30, 2016.



18

 


 

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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:



·

1-3.2-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:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

1-3.2

 

$

71,844 

 

$

370,026 

 

$

441,870 

 

$

113,112 

4

 

 

7,695 

 

 

75,283 

 

 

82,978 

 

 

54,780 

5

 

 

-    

 

 

12,243 

 

 

12,243 

 

 

11,432 

6

 

 

4,179 

 

 

4,859 

 

 

9,038 

 

 

8,028 

7

 

 

-    

 

 

-    

 

 

-    

 

 

88 

Total

 

$

83,718 

 

$

462,411 

 

$

546,129 

 

$

187,440 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

1-3

 

$

42,383 

 

$

340,837 

 

$

383,220 

 

$

80,379 

4

 

 

13,098 

 

 

40,019 

 

 

53,117 

 

 

47,509 

5

 

 

1,224 

 

 

11,772 

 

 

12,996 

 

 

8,973 

6

 

 

4,187 

 

 

7,191 

 

 

11,378 

 

 

7,350 

7

 

 

-    

 

 

-    

 

 

-    

 

 

119 

Total

 

$

60,892 

 

$

399,819 

 

$

460,711 

 

$

144,330 



19

 


 

Table of Contents



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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

 

$

9,892 

 

$

1,113 

 

$

1,608 

 

$

12,613 

 

$

174,827 

 

$

187,440 

 

$

373 

 

$

6,365 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

-    

 

 

209 

 

 

554 

 

 

763 

 

 

110,922 

 

 

111,685 

 

 

-    

 

 

872 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

1,214 

 

 

1,214 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

-    

 

 

4,102 

 

 

1,932 

 

 

6,034 

 

 

456,377 

 

 

462,411 

 

 

492 

 

 

1,893 

  Construction

 

 

262 

 

 

-    

 

 

4,179 

 

 

4,441 

 

 

79,277 

 

 

83,718 

 

 

-    

 

 

4,178 

Home equities

 

 

293 

 

 

437 

 

 

513 

 

 

1,243 

 

 

62,895 

 

 

64,138 

 

 

-    

 

 

1,087 

Consumer and other

 

 

12 

 

 

19 

 

 

 

 

37 

 

 

1,494 

 

 

1,531 

 

 

-    

 

 

19 

Total Loans

 

$

10,459 

 

$

5,880 

 

$

8,792 

 

$

25,131 

 

$

887,006 

 

$

912,137 

 

$

865 

 

$

14,414 



NOTE: Loan balances do not include $715 thousand in net deferred loan origination costs as of September 30, 2016.





20

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Total Past 

 

Current 

 

Total

 

90+ Days

 

Non-accruing



 

30-59 days

 

60-89 days

 

90+ days

 

Due

 

Balance

 

Balance

 

Accruing

 

Loans



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

160 

 

$

224 

 

$

66 

 

$

450 

 

$

143,880 

 

$

144,330 

 

$

40 

 

$

5,312 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

822 

 

 

402 

 

 

569 

 

 

1,793 

 

 

102,148 

 

 

103,941 

 

 

-    

 

 

1,400 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

1,546 

 

 

1,546 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

1,919 

 

 

963 

 

 

457 

 

 

3,339 

 

 

396,480 

 

 

399,819 

 

 

457 

 

 

3,574 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

60,892 

 

 

60,892 

 

 

-    

 

 

4,187 

Home equities

 

 

253 

 

 

236 

 

 

267 

 

 

756 

 

 

60,286 

 

 

61,042 

 

 

-    

 

 

1,058 

Consumer and other

 

 

 

 

-    

 

 

-    

 

 

 

 

1,727 

 

 

1,735 

 

 

-    

 

 

14 

Total Loans

 

$

3,162 

 

$

1,825 

 

$

1,359 

 

$

6,346 

 

$

766,959 

 

$

773,305 

 

$

497 

 

$

15,545 



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





21

 


 

Table of Contents



Allowance for loan losses



The following tables present the activity in the allowance for loan losses according to portfolio segment for the nine month periods ended September 30, 2016 and 2015:











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer

 

Residential Mortgages*

 

HELOC

 

Unallocated

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,383 

 

$

7,135 

 

$

85 

 

$

909 

 

$

371 

 

$

-    

 

$

12,883 

Charge-offs

 

 

(122)

 

 

-    

 

 

(36)

 

 

-    

 

 

-    

 

 

-    

 

 

(158)

Recoveries

 

 

78 

 

 

59 

 

 

11 

 

 

-    

 

 

 

 

-    

 

 

149 

Provision (Credit)

 

 

571 

 

 

538 

 

 

47 

 

 

(322)

 

 

 

 

-    

 

 

838 

Ending balance

 

$

4,910 

 

$

7,732 

 

$

107 

 

$

587 

 

$

376 

 

$

-    

 

$

13,712 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

720 

 

$

1,109 

 

$

46 

 

$

 

$

11 

 

$

-    

 

$

1,889 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

4,190 

 

 

6,623 

 

 

61 

 

 

584 

 

 

365 

 

 

-    

 

 

11,823 

Total

 

$

4,910 

 

$

7,732 

 

$

107 

 

$

587 

 

$

376 

 

$

-    

 

$

13,712 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

6,408 

 

$

7,663 

 

$

46 

 

$

2,602 

 

$

1,583 

 

$

-    

 

$

18,302 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

181,032 

 

 

538,466 

 

 

1,485 

 

 

110,297 

 

 

62,555 

 

 

-    

 

 

893,835 

Total

 

$

187,440 

 

$

546,129 

 

$

1,531 

 

$

112,899 

 

$

64,138 

 

$

-    

 

$

912,137 







* Includes construction loans



NOTE: Loan balances do not include $715 thousand in net deferred loan origination costs as of September 30, 2016.



22

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer

 

Residential Mortgages*

 

HELOC

 

Unallocated

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,896 

 

$

5,650 

 

$

78 

 

$

941 

 

$

819 

 

$

149 

 

$

12,533 

Charge-offs

 

 

(100)

 

 

(35)

 

 

(17)

 

 

(66)

 

 

-    

 

 

-    

 

 

(218)

Recoveries

 

 

88 

 

 

32 

 

 

 

 

 

 

-    

 

 

-    

 

 

129 

Provision (Credit)

 

 

(198)

 

 

1,143 

 

 

 

 

70 

 

 

(8)

 

 

-    

 

 

1,012 

Ending balance

 

$

4,686 

 

$

6,790 

 

$

74 

 

$

946 

 

$

811 

 

$

149 

 

$

13,456 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

735 

 

$

83 

 

$

44 

 

$

-    

 

$

-    

 

$

-    

 

$

862 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

3,951 

 

 

6,707 

 

 

30 

 

 

946 

 

 

811 

 

 

149 

 

 

12,594 

Total

 

$

4,686 

 

$

6,790 

 

$

74 

 

$

946 

 

$

811 

 

$

149 

 

$

13,456 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

5,306 

 

$

3,331 

 

$

44 

 

$

2,334 

 

$

1,038 

 

$

-    

 

$

12,053 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

127,474 

 

 

431,583 

 

 

2,890 

 

 

97,622 

 

 

58,863 

 

 

-    

 

 

718,432 

Total

 

$

132,780 

 

$

434,914 

 

$

2,934 

 

$

99,956 

 

$

59,901 

 

$

-    

 

$

730,485 



* Includes construction loans



NOTE: Loan balances do not include $754 thousand in net deferred loan origination costs as of September 30, 2015.







23

 


 

Table of Contents



The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 2016 and 2015:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

($ in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer

 

Residential Mortgages*

 

HELOC

 

Unallocated

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,195 

 

$

7,308 

 

$

101 

 

$

763 

 

$

406 

 

$

-    

 

$

12,773 

Charge-offs

 

 

(89)

 

 

-    

 

 

(13)

 

 

-    

 

 

-    

 

 

-    

 

 

(102)

Recoveries

 

 

23 

 

 

 

 

 

 

-    

 

 

-    

 

 

-    

 

 

35 

Provision

 

 

781 

 

 

416 

 

 

15 

 

 

(176)

 

 

(30)

 

 

-    

 

 

1,006 

Ending balance

 

$

4,910 

 

$

7,732 

 

$

107 

 

$

587 

 

$

376 

 

$

-    

 

$

13,712 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

($ in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer

 

Residential Mortgages*

 

HELOC

 

Unallocated

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,645 

 

$

6,494 

 

$

71 

 

$

948 

 

$

803 

 

$

149 

 

$

13,110 

Charge-offs

 

 

(20)

 

 

-    

 

 

(6)

 

 

(66)

 

 

-    

 

 

-    

 

 

(92)

Recoveries

 

 

31 

 

 

 

 

 

 

-    

 

 

-    

 

 

-    

 

 

42 

Provision

 

 

30 

 

 

287 

 

 

 

 

64 

 

 

 

 

-    

 

 

396 

Ending balance

 

$

4,686 

 

$

6,790 

 

$

74 

 

$

946 

 

$

811 

 

$

149 

 

$

13,456 



24

 


 

Table of Contents



Impaired Loans

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At September 30, 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

 

$

3,192 

 

$

3,715 

 

$

-    

 

$

3,581 

 

$

249 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,530 

 

 

2,737 

 

 

-    

 

 

2,557 

 

 

33 

 

 

56 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,168 

 

 

2,202 

 

 

-    

 

 

2,217 

 

 

21 

 

 

57 

Construction

 

 

262 

 

 

262 

 

 

-    

 

 

548 

 

 

 

 

25 

Home equities

 

 

1,517 

 

 

1,597 

 

 

-    

 

 

1,546 

 

 

41 

 

 

18 

Consumer

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

9,669 

 

$

10,513 

 

$

-    

 

$

10,449 

 

$

345 

 

$

165 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At September 30, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

3,216 

 

$

3,266 

 

$

720 

 

$

3,256 

 

$

53 

 

$

96 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

72 

 

 

73 

 

 

 

 

73 

 

 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,054 

 

 

1,075 

 

 

223 

 

 

1,069 

 

 

37 

 

 

-    

Construction

 

 

4,179 

 

 

4,201 

 

 

886 

 

 

4,182 

 

 

145 

 

 

-    

Home equities

 

 

66 

 

 

68 

 

 

11 

 

 

67 

 

 

 

 

-    

Consumer

 

 

46 

 

 

70 

 

 

46 

 

 

47 

 

 

 

 

Total impaired loans

 

$

8,633 

 

$

8,753 

 

$

1,889 

 

$

8,694 

 

$

242 

 

$

99 



25

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At September 30, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

6,408 

 

$

6,981 

 

$

720 

 

$

6,837 

 

$

302 

 

$

105 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,602 

 

 

2,810 

 

 

 

 

2,630 

 

 

35 

 

 

57 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,222 

 

 

3,277 

 

 

223 

 

 

3,286 

 

 

58 

 

 

57 

Construction

 

 

4,441 

 

 

4,463 

 

 

886 

 

 

4,730 

 

 

146 

 

 

25 

Home equities

 

 

1,583 

 

 

1,665 

 

 

11 

 

 

1,613 

 

 

44 

 

 

18 

Consumer

 

 

46 

 

 

70 

 

 

46 

 

 

47 

 

 

 

 

Total impaired loans

 

$

18,302 

 

$

19,266 

 

$

1,889 

 

$

19,143 

 

$

587 

 

$

264 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2015



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With no related allowance recorded:

(in thousands)

Commercial and industrial

 

$

1,750 

 

$

1,811 

 

$

-    

 

$

1,945 

 

$

58 

 

$

47 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,444 

 

 

2,555 

 

 

-    

 

 

2,474 

 

 

90 

 

 

63 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,888 

 

 

3,908 

 

 

-    

 

 

3,930 

 

 

27 

 

 

179 

Construction

 

 

834 

 

 

834 

 

 

-    

 

 

834 

 

 

-    

 

 

31 

Home equities

 

 

1,644 

 

 

1,711 

 

 

-    

 

 

1,661 

 

 

40 

 

 

52 

Consumer

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

10,560 

 

$

10,819 

 

$

-    

 

$

10,844 

 

$

215 

 

$

372 





26

 


 

Table of Contents





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2015



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

3,572 

 

$

3,835 

 

$

552 

 

$

3,966 

 

$

255 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

55 

 

 

55 

 

 

 

 

55 

 

 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,083 

 

 

1,083 

 

 

235 

 

 

1,083 

 

 

 

 

42 

Construction

 

 

4,188 

 

 

4,201 

 

 

911 

 

 

4,188 

 

 

29 

 

 

166 

Home equities

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Consumer

 

 

42 

 

 

57 

 

 

42 

 

 

45 

 

 

 

 

Total impaired loans

 

$

8,940 

 

$

9,231 

 

$

1,742 

 

$

9,337 

 

$

291 

 

$

225 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2015



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

5,322 

 

$

5,646 

 

$

552 

 

$

5,911 

 

$

313 

 

$

56 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,499 

 

 

2,610 

 

 

 

 

2,529 

 

 

91 

 

 

65 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

4,971 

 

 

4,991 

 

 

235 

 

 

5,013 

 

 

31 

 

 

221 

Construction

 

 

5,022 

 

 

5,035 

 

 

911 

 

 

5,022 

 

 

29 

 

 

197 

Home equities

 

 

1,644 

 

 

1,711 

 

 

-    

 

 

1,661 

 

 

40 

 

 

52 

Consumer

 

 

42 

 

 

57 

 

 

42 

 

 

45 

 

 

 

 

Total impaired loans

 

$

19,500 

 

$

20,050 

 

$

1,742 

 

$

20,181 

 

$

506 

 

$

597 





27

 


 

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Non-performing loans



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







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015

 



 

 

(in thousands)

 

Non-accruing loans:

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

6,365 

 

$

5,312 

 

Residential real estate:

 

 

 

 

 

 

 

Residential

 

 

872 

 

 

1,400 

 

Construction

 

 

-    

 

 

-    

 

Commercial real estate:

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,893 

 

 

3,574 

 

Construction

 

 

4,178 

 

 

4,187 

 

Home equities

 

 

1,087 

 

 

1,058 

 

Consumer loans

 

 

19 

 

 

14 

 

Total non-accruing loans

 

$

14,414 

 

$

15,545 

 



 

 

 

 

 

 

 

Accruing loans 90+ days past due

 

 

865 

 

 

497 

 

Total non-performing loans

 

$

15,279 

 

$

16,042 

 



 

 

 

 

 

 

 

Total non-performing loans

 

 

 

 

 

 

 

to total assets

 

 

1.41 

%

 

1.71 

%

Total non-performing loans

 

 

 

 

 

 

 

to total loans

 

 

1.67 

%

 

2.07 

%



28

 


 

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Troubled debt restructurings

The Company had $5.1 million and $5.8 million in loans that were restructured in a troubled debt restructuring (“TDR”) at September 30, 2016 and December 31, 2015, respectively.  Of those balances, $1.2 million and $1.8 million were in non-accrual status at September 30, 2016 and December 31, 2015, respectively.  Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable.  All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.



The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent.  This reserve methodology is used because all TDR loans are considered impaired.  As of September 30, 2016, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

September 30, 2016



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

493 

 

$

450 

 

$

43 

 

$

160 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,962 

 

 

231 

 

 

1,731 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,646 

 

 

317 

 

 

1,329 

 

 

 

Construction

 

 

262 

 

 

-    

 

 

262 

 

 

-    

Home equities

 

 

674 

 

 

178 

 

 

496 

 

 

-    

Consumer loans

 

 

27 

 

 

-    

 

 

27 

 

 

27 

Total troubled restructured loans

 

$

5,064 

 

$

1,176 

 

$

3,888 

 

$

187 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2015



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

517 

 

$

508 

 

$

 

$

165 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,789 

 

 

689 

 

 

1,100 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,732 

 

 

334 

 

 

1,398 

 

 

-    

Construction

 

 

834 

 

 

-    

 

 

834 

 

 

-    

Home equities

 

 

867 

 

 

281 

 

 

586 

 

 

-    

Consumer loans

 

 

28 

 

 

-    

 

 

28 

 

 

28 

Total troubled restructured loans

 

$

5,767 

 

$

1,812 

 

$

3,955 

 

$

193 



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



29

 


 

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The following tables show the data for TDR activity by the type of concession granted to the borrower for the three and  nine month periods ended September 30, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2016

 

Three months ended September 30, 2015



 

(in thousands)

 

(in thousands)

Troubled Debt Restructurings by Type of Concession

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

-    

 

$

-    

 

$

-    

 

-    

 

$

-    

 

$

-    

Residential Real Estate & Construction

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Extension of maturity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate reduction

 

 

 

109 

 

 

109 

 

-    

 

 

-    

 

 

-    

Commercial Real Estate & Construction

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Consumer loans

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2016

 

Nine months ended September 30, 2015



 

(in thousands)

 

(in thousands)

Troubled Debt Restructurings by Type of Concession

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral of principal

 

-    

 

$

-    

 

$

-    

 

 

$

541 

 

$

541 

Extension of maturity

 

 

 

24 

 

 

24 

 

-    

 

 

-    

 

 

-    

Term-out line of credit

 

 

 

20 

 

 

20 

 

-    

 

 

-    

 

 

-    

Residential Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

 

 

95 

 

 

95 

 

-    

 

 

-    

 

 

-    

Extension of maturity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate reduction

 

 

 

109 

 

 

109 

 

-    

 

 

-    

 

 

-    

Commercial Real Estate & Construction

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Home Equities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    



30

 


 

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The general practice of the Bank is to work with borrowers so that they are able to pay back their loan in full.  If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off.  The following table presents loans which were classified as TDRs during the previous 12 months which defaulted during the three and nine month periods ended September 30, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2016

 

Three months ended September 30, 2015



 

(in thousands)

 

(in thousands)

Troubled Debt Restructurings

 

Number of  

 

Recorded 

 

Number of  

 

Recorded 

That Subsequently Defaulted

 

Contracts

 

Investment

 

Contracts

 

Investment

Commercial and Industrial

 

-    

 

$

-    

 

-    

 

$

-    

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

Residential

 

-    

 

 

-    

 

 

 

127 

Construction

 

-    

 

 

-    

 

-    

 

 

-    

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

-    

 

 

-    

 

 

 

416 

Construction

 

-    

 

 

-    

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

-    

 

 

-    

Consumer loans

 

-    

 

 

-    

 

-    

 

 

-    

















 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2016

 

Nine months ended September 30, 2015



 

(in thousands)

 

(in thousands)

Troubled Debt Restructurings

 

Number of  

 

Recorded 

 

Number of  

 

Recorded 

That Subsequently Defaulted

 

Contracts

 

Investment

 

Contracts

 

Investment

Commercial and Industrial

 

-    

 

$

-    

 

-    

 

$

-    

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

Residential

 

-    

 

 

-    

 

 

 

127 

Construction

 

-    

 

 

-    

 

-    

 

 

-    

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

-    

 

 

-    

 

 

 

661 

Construction

 

-    

 

 

-    

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

 

 

19 

Consumer loans

 

-    

 

 

-    

 

-    

 

 

-    







31

 


 

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5. PER SHARE DATA



The common stock per share information is based upon the weighted average number of shares outstanding during each period.  For the three and nine month periods ended September 30, 2016, the Company had an average of 75,355 and 67,136 dilutive shares outstanding, respectively.  The Company had an average of 71,119 and 74,331 dilutive shares outstanding for the three and nine months periods ended September 30, 2015, 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 both the three and nine month periods ended September 30, 2016, there were no anti-dilutive shares outstanding.  For the three and nine month periods ended September 30, 2015, there were 37,800 and 38,077 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.







6. OTHER COMPREHENSIVE INCOME

The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three and nine month periods ended September 30, 2016 and 2015:





 

 

 

 

 

 

 

 

 



 

Balance at June 30, 2016

 

Net Change

 

Balance at September 30, 2016



 

(in thousands)

Net unrealized loss on investment securities

 

$

1,384 

 

$

(376)

 

$

1,008 

Net defined benefit pension plan adjustments

 

 

(2,205)

 

 

40 

 

 

(2,165)

Total

 

$

(821)

 

$

(336)

 

$

(1,157)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Balance at June 30, 2015

 

Net Change

 

Balance at September 30, 2015



 

(in thousands)

Net unrealized gain on investment securities

 

$

605 

 

$

412 

 

$

1,017 

Net defined benefit pension plan adjustments

 

 

(2,348)

 

 

36 

 

 

(2,312)

Total

 

$

(1,743)

 

$

448 

 

$

(1,295)







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2015

 

Net Change

 

Balance at September 30, 2016



 

(in thousands)

Net unrealized gain on investment securities

 

$

475 

 

$

533 

 

$

1,008 

Net defined benefit pension plan adjustments

 

 

(2,285)

 

 

120 

 

 

(2,165)

Total

 

$

(1,810)

 

$

653 

 

$

(1,157)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2014

 

Net Change

 

Balance at September 30, 2015



 

(in thousands)

Net unrealized gain on investment securities

 

$

911 

 

$

106 

 

$

1,017 

Net defined benefit pension plan adjustments

 

 

(2,419)

 

 

107 

 

 

(2,312)

Total

 

$

(1,508)

 

$

213 

 

$

(1,295)



32

 


 

Table of Contents









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2016

 

Three months ended September 30, 2015



 

(in thousands)

 

(in thousands)



 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

Unrealized gain (loss) on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

(605)

 

$

229 

 

$

(376)

 

$

673 

 

$

(261)

 

$

412 

Reclassification from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Net change

 

 

(605)

 

 

229 

 

 

(376)

 

 

673 

 

 

(261)

 

 

412 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

$

 

$

(3)

 

$

 

$

37 

 

$

(14)

 

$

23 

Amortization of actuarial loss (a)

 

 

56 

 

 

(21)

 

 

35 

 

 

20 

 

 

(7)

 

 

13 

Net change

 

 

64 

 

 

(24)

 

 

40 

 

 

57 

 

 

(21)

 

 

36 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive (Loss) Income

 

$

(541)

 

$

205 

 

$

(336)

 

$

730 

 

$

(282)

 

$

448 



(a)

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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2016

 

Nine months ended September 30, 2015



 

(in thousands)

 

(in thousands)



 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

Unrealized gain (loss) on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

860 

 

$

(327)

 

$

533 

 

$

173 

 

$

(67)

 

$

106 

Reclassification from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Net change

 

 

860 

 

 

(327)

 

 

533 

 

 

173 

 

 

(67)

 

 

106 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

$

24 

 

$

(9)

$

 

15 

 

$

53 

 

$

(20)

 

$

33 

Amortization of actuarial loss (a)

 

 

168 

 

 

(63)

 

 

105 

 

 

120 

 

 

(46)

 

 

74 

Net change

 

 

192 

 

 

(72)

 

 

120 

 

 

173 

 

 

(66)

 

 

107 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

$

1,052 

 

$

(399)

 

$

653 

 

$

346 

 

$

(133)

 

$

213 



(a)

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





33

 


 

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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 and nine month periods ended September 30, 2016 and 2015.









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2016



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

9,103 

 

$

(34)

 

$

9,069 

Provision for loan losses

 

 

1,006 

 

 

-    

 

 

1,006 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

8,097 

 

 

(34)

 

 

8,063 

Non-interest income

 

 

1,480 

 

 

-    

 

 

1,480 

Insurance service and fees

 

 

100 

 

 

1,755 

 

 

1,855 

Non-interest expense

 

 

7,561 

 

 

1,150 

 

 

8,711 

Income before income taxes

 

 

2,116 

 

 

571 

 

 

2,687 

Income tax provision

 

 

251 

 

 

220 

 

 

471 

Net income

 

$

1,865 

 

$

351 

 

$

2,216 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2015



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

8,169 

 

$

(30)

 

$

8,139 

Provision for loan losses

 

 

396 

 

 

-    

 

 

396 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

7,773 

 

 

(30)

 

 

7,743 

Non-interest income

 

 

2,285 

 

 

-    

 

 

2,285 

Insurance service and fees

 

 

170 

 

 

1,802 

 

 

1,972 

Non-interest expense

 

 

7,033 

 

 

1,247 

 

 

8,280 

Income before income taxes

 

 

3,195 

 

 

525 

 

 

3,720 

Income tax provision

 

 

1,013 

 

 

198 

 

 

1,211 

Net income

 

$

2,182 

 

$

327 

 

$

2,509 





34

 


 

Table of Contents









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2016



 

 

Banking 

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

25,943 

 

$

(98)

 

$

25,845 

Provision for loan losses

 

 

838 

 

 

-    

 

 

838 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

25,105 

 

 

(98)

 

 

25,007 

Non-interest income

 

 

3,434 

 

 

-    

 

 

3,434 

Insurance service and fees

 

 

332 

 

 

4,843 

 

 

5,175 

Non-interest expense

 

 

22,439 

 

 

3,519 

 

 

25,958 

Income before income taxes

 

 

6,432 

 

 

1,226 

 

 

7,658 

Income tax provision

 

 

1,253 

 

 

472 

 

 

1,725 

Net income

 

$

5,179 

 

$

754 

 

$

5,933 











 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2015



 

 

Banking 

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

23,455 

 

$

(87)

 

$

23,368 

Provision for loan losses

 

 

1,012 

 

 

-    

 

 

1,012 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

22,443 

 

 

(87)

 

 

22,356 

Non-interest income

 

 

5,177 

 

 

-    

 

 

5,177 

Insurance service and fees

 

 

524 

 

 

5,099 

 

 

5,623 

Non-interest expense

 

 

20,604 

 

 

3,430 

 

 

24,034 

Income before income taxes

 

 

7,540 

 

 

1,582 

 

 

9,122 

Income tax provision

 

 

2,423 

 

 

610 

 

 

3,033 

Net income

 

$

5,117 

 

$

972 

 

$

6,089 







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:







 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(in thousands)



 

 

 

 

 

 

Commitments to extend credit

 

$

234,066 

 

$

206,346 

Standby letters of credit

 

 

3,511 

 

 

3,794 

Total

 

$

237,577 

 

$

210,140 



35

 


 

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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 nine months of 2016 or during 2015.



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







9. NET PERIODIC BENEFIT COSTS



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



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



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



The Bank contributed $140 thousand to the defined benefit pension plan in the first nine months of 2016.



36

 


 

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The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three and nine month periods ended September 30, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended September 30,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

47 

 

$

49 

Interest cost

 

 

55 

 

 

51 

 

 

36 

 

 

37 

Expected return on plan assets

 

 

(66)

 

 

(77)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

 

 

Amortization of the net loss

 

 

22 

 

 

18 

 

 

34 

 

 

33 

Net periodic cost (benefit)

 

$

11 

 

$

(8)

 

$

125 

 

$

127 











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Nine months ended September 30,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

141 

 

$

147 

Interest cost

 

 

165 

 

 

153 

 

 

108 

 

 

111 

Expected return on plan assets

 

 

(197)

 

 

(231)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

24 

 

 

24 

Amortization of the net loss

 

 

66 

 

 

54 

 

 

102 

 

 

97 

Net periodic cost (benefit)

 

$

34 

 

$

(24)

 

$

375 

 

$

379 







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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, 2016, including interim periods within that reporting period.  The Company does not expect the standard to have a material impact on its ongoing financial reporting.



ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  The main objective of this ASU is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years.  The 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 Financial Statements on Form 10-K for the year ended December 31, 2015.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  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.  Although the impact on the Company’s financial statements is not expected to be material, the area of this ASU that will impact the Company is the elimination of the concept of a tax windfall pool.  Currently, an entity must determine for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess benefit or a tax deficiency.  Excess tax benefits are recognized in additional paid-in-capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement.  Excess tax benefits are not recognized until the deduction reduces taxes payable.  Under the new standard, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.



ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.  Current GAAP require 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 Board 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 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 of January 1, 2020.

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



This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties.  When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements.  These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.



These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to: general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  Many of these factors are beyond the Company’s control and are difficult to predict.



Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.  Forward-looking statements speak only as of the date they are made.  The Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.



APPLICATION OF CRITICAL ACCOUNTING ESTIMATES



The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes.  These estimates, assumptions, and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements.  Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported.  Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.  When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.  Refer to Note 3 – “Fair Value Measurements” to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.



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

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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, 2015 describes the methodology used to determine the allowance for loan losses.



Goodwill



The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis.  The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.  The goodwill impairment testing is performed annually as of December 31stNo impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its fair value.  There were no triggering events in the nine month period ended September 30, 2016 that resulted in an interim impairment test.



ANALYSIS OF FINANCIAL CONDITION



Loan Activity

Total loans grew to $913 million at September 30, 2016, a $60 million or 7% increase from total loans of $853 million at June  30, 2016 and a  $139 million or 18% increase from $774 million at December 31, 2015.



Loans secured by real estate were $723 million at September 30, 2016, reflecting a $51 million or 8% increase from $672 million at June  30, 2016 and a $96 million or 15% increase from $627 million at December 31, 2015.  Commercial and multi-family real estate loans were $462 million at September 30, 2016, $36 million higher than $426 million at June  30, 2016.  The portfolio was $400 million at the previous year-end.  Commercial construction loans also experienced strong growth, and were up 37% or $23 million during the first nine months of 2016 to $84 million at September 30, 2016, including $11 million of growth in the third quarter of 2016.  The Company’s footprint in Western New York has continued to experience strong commercial real estate and commercial construction loan demand.



In the third quarter of 2016, residential mortgage originations of $10 million were equal to the previous quarter’s originations of $10 million and higher than the $9 million in last year’s third quarter.  Residential mortgages sold in the third quarter of 2016 equated to approximately 17% of the residential mortgages originated by the Company during this quarter, as compared with 25% of residential mortgages originated during the second quarter of 2016 and 37% in the third quarter of 2015.  The Company originated $25 million in residential mortgages in the first nine months of 2016 and sold 20% of those loans, compared with $26 million and 50%, respectively, in the first nine months of 2015.  The Company retained more of the mortgages it originated during the first nine months of 2016 compared with the prior year period as a way to diversify its balance sheet.



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 grew to $187 million at September 30, 2016, representing an  $8 million or 4% increase from $179 million at June  30, 2016 and $43 million or 30% higher than the $144 million balance at December 31, 2015.



Credit Quality of Loan Portfolio

Total non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $15 million, or 1.67% of total loans outstanding at September 30, 2016, compared with $16 million, or 1.88% of total loans outstanding, as of June 30, 2016 and $16 million, or 2.07% of total loans outstanding, as of December 31, 2015.  The $1 million decrease in non-performing loans as compared to the previous quarter-end was due to a decrease in loans 90 days past due and accruing.  The balance in nonaccrual loans was largely unchanged in the quarter as the amount of loans that moved to nonaccrual was offset by nonaccrual loans

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that paid off or returned to accruing status.  The percentage of non-performing loans as a percentage of total loans has also decreased because of the Company’s loan growth throughout 2016.



Total past due loans (inclusive of nonaccrual loans) increased from $6 million at December 31, 2015 and $22 million at June 30, 2016 to $25 million at September 30, 2016.  Past due C&I loans increased from less than $1 million at the prior year-end to $5 million at June 30, 2016 and $13 million at September 30, 2016.  Most of the increase is attributable to two loan relationships.  One relationship, for $6 million, was 30 days past its maturity date at September 30, 2016, but subsequently paid off in the fourth quarter.  The second relationship, for $3 million, made two payments in the first month of the fourth quarter to go back to a current status.  Past due commercial construction loans were $4 million at September 30, 2016, down from $9 million at the previous quarter end, but increased from zero at the end of 2015.  The $4 million balance in past due commercial construction loans at September 30, 2016 is comprised of a single relationship which was in nonaccrual status at December 31, 2015, but was not past due.  The loan remains in nonaccrual status as of the end of the third quarter of 2015.



Commercial credits graded as “special mention” and “substandard, or the criticized loan portfolio, was $41 million at September 30, 2016, a $6 million increase from $35 million at June 30, 2016, but approximately equal to the $41 million in criticized loans at December 31, 2015.  $5 million of the increase in the recent quarter was in the commercial and industrial portfolio as several loans were downgraded to special mention as potential weaknesses were identified in those credits.  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.  The level of criticized loans at September 30, 2016 is consistent with the level of criticized loans at the previous year-end.  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 $14 million or 1.50% of total loans outstanding at September 30, 2016, compared with $13 million or 1.50% of total loans outstanding as of June 30, 2016 and $13 million or 1.66% of total loans outstanding at December 31, 2015.  The allowance for loan losses increased in the third quarter as the Company recorded a $1 million provision for loan loss due to loan growth, increased criticized loan balances, and increased specific reserve levels on impaired loans while incurring minimal net charge-offs.  The allowance to loan ratio of 1.50% was unchanged quarter over quarter as the increase in the allowance for loan loss was commensurate with the loan growth during the quarter.  However, the ratio has declined since year-end despite the increase in the allowance due to the Company’s strong loan growth.  The net charge-off (recovery) ratio for the third quarter of 2016 was 0.03% of average net loans, compared with a ratio of (0.01)% and 0.03% in the second quarter of 2016 and third quarter of 2015, respectively.



Investing Activities

Total securities were $105 million at September 30, 2016, compared with $111 million at June  30, 2016 and $99 million at December 31, 2015.  Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, increased to $4 million at September 30, 2016 from $1 million at June  30, 2016, but decreased from $11 million at December 31, 2015.  The Company has experienced strong loan growth in 2016, resulting in the decrease in short-term interest-bearing deposits at banks from the previous year-end.  In addition, there was slight run-off in the investment securities portfolio as management decided not to leverage the balance sheet given the uncertain rate environment at the end of the third quarter.  Securities and interest-bearing deposits at correspondent banks made up 11% of the Bank’s total average interest earning assets in the third quarter of 2016, down from 14% in the second quarter of 2016 and 17% in last year’s third quarter.



The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities at 49% of total investment securities at each of September 30, 2016 and June  30, 2016, compared with 38% at December 31, 2015.  The concentration in tax-advantaged debt securities issued by state and political subdivisions and U.S. government-sponsored agency bonds was 37% and 14%, respectively, of the total securities portfolio at September 30, 2016, compared with 35% and 16% at June  30, 2016 and 40% and 22% at December 31, 2015.



Management believes that the credit quality of the securities portfolio as a whole is strong, as the portfolio has no individual securities in a significant unrealized loss position.  Interest rates increased slightly in the third quarter of 2016 after declining in each of the first two quarters of 2016,  resulting in a decrease in the net unrealized gain position of the available-for-sale investment portfolio to $1.6 million at September 30, 2016 from $2.2 million at June  30, 2016.  The net unrealized gain was $0.8 million at December 31, 2015.



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.



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Funding Activities

Total deposits at September 30, 2016 were $898 million, a $28 million or 3% increase from $870 million at June 30, 2016 and a $95 million or 12% increase from $803 million at December 31, 2015The growth in the current quarter reflected growth in savings deposits of $17 million, demand deposits of $8 million, and time deposits of $5 million.  NOW deposits declined $2 million during the recent quarter.  The $95 million deposit growth since the previous year-end reflects growth across all product categories including savings deposits of $57 million, time deposits of $22 million, demand deposits of $13 million, and NOW deposits of $3 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 promotional savings and time deposit rates in an effort to attract new customers.  The decline in NOW deposits during the third quarter reflects fluctuation in the Company’s municipal deposit portfolio.  Due to the transactional nature of demand deposits, average balances are a useful metric to meaningfully measure sustained growth rates.  Average demand deposits were $187 million in the current quarter, a 5% increase from $178 million in the second quarter of 2016 and 11% higher than the $169 million average balance in the third quarter of 2015.  Most of the Company’s demand deposit growth during the current year has been with commercial customers. 



The Company had $51 million other borrowings at September 30, 2016, which consisted of $10 million in a long-term advance with the FHLBNY scheduled to mature in 2020, and $41 million in overnight borrowings.  Other borrowings were $16 million at June 30, 2016 and $10 million at December 31, 2015.  The Company has increased the usage of its overnight line of credit with FHLBNY during the past two quarters, particularly in the third quarter, as a funding source for its loan growth.  Loan growth significantly outpaced deposit growth, the Company’s core funding source, in the third quarter.



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ANALYSIS OF RESULTS OF OPERATIONS



Average Balance Sheet

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Three months ended September 30, 2016

 

Three months ended September 30, 2015



 

Average

 

Interest

 

 

 

 

Average

 

Interest

 

 

 



 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/



 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate



 

(dollars in thousands)

 

(dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

875,999 

 

$

9,620 

 

4.39 

%

 

$

706,568 

 

$

8,403 

 

4.76 

%

Taxable securities

 

 

74,172 

 

 

385 

 

2.08 

%

 

 

70,376 

 

 

407 

 

2.31 

%

Tax-exempt securities

 

 

37,853 

 

 

235 

 

2.48 

%

 

 

41,963 

 

 

273 

 

2.60 

%

Interest bearing deposits at banks

 

 

1,162 

 

 

 

0.34 

%

 

 

27,500 

 

 

16 

 

0.23 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

989,186 

 

$

10,241 

 

4.14 

%

 

 

846,407 

 

$

9,099 

 

4.30 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

13,802 

 

 

 

 

 

 

 

 

13,351 

 

 

 

 

 

 

Premises and equipment, net

 

 

11,557 

 

 

 

 

 

 

 

 

10,561 

 

 

 

 

 

 

Other assets

 

 

44,130 

 

 

 

 

 

 

 

 

42,191 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,058,675 

 

 

 

 

 

 

 

$

912,510 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

86,428 

 

$

50 

 

0.23 

%

 

$

78,335 

 

$

78 

 

0.40 

%

Regular savings

 

 

487,168 

 

 

574 

 

0.47 

%

 

 

431,127 

 

 

442 

 

0.41 

%

Time deposits

 

 

115,644 

 

 

353 

 

1.22 

%

 

 

97,321 

 

 

308 

 

1.27 

%

Other borrowed funds

 

 

44,577 

 

 

94 

 

0.84 

%

 

 

10,000 

 

 

44 

 

1.76 

%

Junior subordinated debentures

 

 

11,330 

 

 

95 

 

3.35 

%

 

 

11,330 

 

 

83 

 

2.93 

%

Securities sold U/A to repurchase

 

 

13,400 

 

 

 

0.18 

%

 

 

10,783 

 

 

 

0.19 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

758,547 

 

$

1,172 

 

0.62 

%

 

 

638,896 

 

$

960 

 

0.60 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

187,201 

 

 

 

 

 

 

 

 

168,883 

 

 

 

 

 

 

Other

 

 

16,860 

 

 

 

 

 

 

 

 

15,122 

 

 

 

 

 

 

Total liabilities

 

$

962,608 

 

 

 

 

 

 

 

$

822,901 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

96,067 

 

 

 

 

 

 

 

 

89,609 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

1,058,675 

 

 

 

 

 

 

 

$

912,510 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earnings

 

 

 

 

$  

9,069 

 

 

 

 

 

 

 

$  

8,139 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.67 

%

 

 

 

 

 

 

 

3.85 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.52 

%

 

 

 

 

 

 

 

3.70 

%



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Nine months ended September 30, 2016

 

Nine months ended September 30, 2015



 

Average

 

Interest

 

 

 

 

Average

 

Interest

 

 

 



 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/



 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate



 

(dollars in thousands)

 

(dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

816,712 

 

$

27,228 

 

4.45 

%

 

$

693,652 

 

$

24,149 

 

4.64 

%

Taxable securities

 

 

71,941 

 

 

1,323 

 

2.45 

%

 

 

69,114 

 

 

1,242 

 

2.40 

%

Tax-exempt securities

 

 

38,314 

 

 

695 

 

2.42 

%

 

 

36,551 

 

 

750 

 

2.74 

%

Interest bearing deposits at banks

 

 

11,949 

 

 

45 

 

0.50 

%

 

 

28,500 

 

 

50 

 

0.23 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

938,916 

 

$

29,291 

 

4.16 

%

 

 

827,817 

 

$

26,191 

 

4.22 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

12,852 

 

 

 

 

 

 

 

 

12,404 

 

 

 

 

 

 

Premises and equipment, net

 

 

11,321 

 

 

 

 

 

 

 

 

10,291 

 

 

 

 

 

 

Other assets

 

 

42,973 

 

 

 

 

 

 

 

 

42,266 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,006,062 

 

 

 

 

 

 

 

$

892,778 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

87,864 

 

$

213 

 

0.32 

%

 

$

78,130 

 

$

241 

 

0.41 

%

Regular savings

 

 

469,470 

 

 

1,711 

 

0.49 

%

 

 

410,912 

 

 

1,114 

 

0.36 

%

Time deposits

 

 

113,054 

 

 

1,048 

 

1.24 

%

 

 

104,812 

 

 

1,116 

 

1.42 

%

Other borrowed funds

 

 

21,988 

 

 

182 

 

1.10 

%

 

 

9,539 

 

 

93 

 

1.30 

%

Junior subordinated debentures

 

 

11,330 

 

 

273 

 

3.21 

%

 

 

11,330 

 

 

243 

 

2.86 

%

Securities sold U/A to repurchase

 

 

13,252 

 

 

19 

 

0.19 

%

 

 

11,624 

 

 

16 

 

0.18 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

716,958 

 

$

3,446 

 

0.64 

%

 

 

626,347 

 

$

2,823 

 

0.60 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

180,472 

 

 

 

 

 

 

 

 

163,651 

 

 

 

 

 

 

Other

 

 

14,632 

 

 

 

 

 

 

 

 

14,521 

 

 

 

 

 

 

Total liabilities

 

$

912,062 

 

 

 

 

 

 

 

$

804,519 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

94,000 

 

 

 

 

 

 

 

 

88,259 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

1,006,062 

 

 

 

 

 

 

 

$

892,778 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earnings

 

 

 

 

$  

25,845 

 

 

 

 

 

 

 

$  

23,368 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.67 

%

 

 

 

 

 

 

 

3.76 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.52 

%

 

 

 

 

 

 

 

3.62 

%





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Net Income



Net income was $2.2 million, or $0.51 per diluted share, in the third quarter of 2016, compared with $2.0 million, or $0.46 per diluted share, in the second quarter of 2016 and $2.5 million, or $0.58 per diluted share, in last year’s third quarter.  The increase from the 2016 trailing second quarter reflects an increase in net interest income and noninterest income, partially offset by higher provision for loan loss.  The decline from last year’s third quarter reflects the after-tax gain of $0.5 million or $0.11 per diluted share in the prior year period from an insurance settlement related to a fire sustained at a branch location, as well as an increase in provision for loan loss, partially offset by an increase in net interest income.  Return on average equity was 9.23% for the third quarter of 2016 compared with 8.56% in the trailing second quarter and 11.20% in the third quarter of 2015.

The Company had net income of $5.9 million, or $1.37 per diluted share, in the first nine months of 2016, compared with $6.1 million, or $1.41 per diluted share, in the comparable period of 2015.  The decrease in net income is related to the decline in noninterest income and increase in noninterest expenses, partially offset by the increase in net interest income and a tax benefit related to historic rehabilitation tax credits realized during the first nine months of 2016.  The $2.2 million decline in noninterest income in the first three quarters of 2016 when compared with the prior year period reflects the gain on the insurance settlement in 2015 and a loss taken on a tax credit investment.



Other Results of Operations – Quarterly Comparison



Net interest income was $9.1 million in the third quarter of 2016, an increase of $0.6 million or 6% from the second quarter of 2016 and $0.9 million or 11% from the prior-year third quarter, reflecting strong loan and demand deposit growth.  The Company’s commercial loan portfolio continued to grow at a significant rate as average commercial loans, including both commercial and industrial loans and commercial real estate loans, were $712 million in the third quarter, up 11% from $642 million in the trailing second quarter and up 28% from $557 million in the 2015 third quarter.

Net interest margin of 3.67% declined 18 basis points from the 2015 third quarter, but improved 2 basis points from the second quarter of 2016.  The margin contraction from last year reflects a continued decrease in loan yields as market rates remain historically low in a highly competitive market.  The margin improvement from the trailing second quarter was due to a decrease in the cost of interest-bearing liabilities as interest-bearing deposit rates declined 4 basis points.  This improvement in deposit pricing was somewhat offset by a decrease in loan yields.

The Company recorded $1.0 million in loan loss provision in the third quarter of 2016 compared with a release of allowance for loan losses of $0.4 million in the trailing second quarter and a provision for loan loss of $0.4 million in the prior year third quarter.  The increase in loan loss provision reflects the Company’s significant loan growth during the third quarter of 2016, the movement of a small number of commercial loan relationships to criticized status, and increased specific reserves on impaired loans, partially offset by other more favorable credit quality trends such as lower non-performing loans and a charge-off ratio that has been sustained at historically low levels.

Noninterest income was $3.3 million in the third quarter of 2016, an increase from $2.3 million in the second quarter of 2016, but lower than the $4.3 million earned in the prior year third quarter.  The primary reason for the increase in the third quarter from the second quarter of 2016 was the $2.1 million loss recorded during the second quarter on a tax credit investment in a community-based project in the linked quarter.  The loss on the investment was offset by a $1.5 million refundable state tax credit in noninterest income and $0.6 million in tax benefits realized in income tax expense during the second quarter of 2016.  The Company recognized additional tax benefits of $0.3 million during the third quarter of 2016.  The decrease in noninterest income in the third quarter of 2016 when compared with the prior year period reflected a $0.7 million gain recorded in last year’s third quarter for an insurance settlement related to a fire sustained at a branch location.

The largest component of noninterest income, insurance service and fee revenue, was $1.9 million in the third quarter of 2016. Insurance revenue increased $0.3 million from the trailing second quarter due to the seasonal increase in commercial lines insurance commissions.  The $0.1 million decline from the previous year’s third quarter was due to a decrease in personal lines insurance commissions and financial services sales revenue, partially offset by strong commercial lines insurance revenue growth.    

Total non-interest expense was $8.7 million in the third quarter of 2016, which was flat when compared with the second quarter of 2016, but 5% higher than $8.3 million in the third quarter of 2015.  The third quarter of 2015 included a $0.2 million reversal in the Company’s litigation reserve after a legal matter was settled during the period.  Salaries and benefits costs of $5.4 million in the third quarter of 2016 decreased $0.1 million when compared with the second quarter of 2016, reflecting stabilization in the number of employees at the Company during the third quarter of 2016.  The 3% increase in salaries and benefits costs from last year’s third quarter reflects annual merit increases and strategic hires to support the Company’s continued growth, most notably in the expansion of its commercial banking team with new commercial loan officers, business development officers and related support staff.

The efficiency ratio for the current quarter was 70.2%, compared with 76.3% in the second quarter of 2016 and 66.8% in last year’s third quarter.  The calculation of the efficiency ratio for the second quarter of 2016 excludes the net impact of the tax credit

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investment.    The increase in the efficiency ratio this quarter when compared with last year’s third quarter is the $0.7 million gain related to the insurance settlement in the third quarter of 2015.

Income tax expense of $0.5 million was recognized for the third quarter of 2016, compared with an income tax expense of $0.5 million in the second quarter of 2016 and $1.2 million in the third quarter of 2015.  The effective tax rate for the quarter was 17.5% compared with 18.3% in the second quarter of 2016 and 32.6% in the third quarter of 2015.  The lower effective tax rate over the two most recent quarters reflects the impact of the historic tax credit transaction in the second quarter of 2016.

Other Results of Operations – Year-to-Date Comparison

Net interest income was $25.8 million for the first nine months of 2016, a $2.5 million or 11% increase from the first nine months of 2015.  The increase in net interest income is attributable to a $111 million or 13% increase in average interest-earning assets, somewhat offset by a decrease in net interest margin as described below.  The increase in average interest-earning assets reflects average net loan growth of $123 million or 18% to $817 million during the first nine months of 2016.  Most of the growth was in commercial loans, including $79 million in average commercial real estate loans and $33 million in commercial and industrial loans.



The Company’s net interest margin decreased 9 basis points from 3.76% in the first nine months of 2015 to 3.67% in the first nine months of 2016.  The yield on average interest-earning assets decreased 6 basis points from 4.22% to 4.16%.  Average loan yields decreased 19 basis points from 4.64% to 4.45%.  The decline in the yield on interest-earning assets was less than the decrease in average loan yields due to a shift in the mix of interest-earning assets.  Average loans were 87% of total average interest-earnings assets in the first nine months of 2016, compared with 84% in the first nine months of the prior year.  Loans have earned higher yields than investment securities and short-term interest-earning cash over the past two years.  The cost of interest-bearing liabilities was 0.64% for the first three quarters of 2016, 4 basis points higher than the 0.60% rate for the first nine months of 2015. The increased rate reflected a higher average savings rate of 0.49% in the year to date period ended September 30, 2016, compared with 0.36% in the comparable period in 2015.  Average savings deposit rates have increased as the product with the highest growth rate in the savings deposit portfolio has been at a promotional rate in 2016 in an effort to attract new customers at a time of disruption in the Company’s footprint due to bank merger activity.



The Company recorded $0.8 million in provision for loan losses in the nine-month period ended September 30, 2016, compared with $1.0 million in the first nine months of 2015.  The year-over-year decrease is attributable to the benefit of a sustained period of low charge-offs, partially offset by provision needed for the Company’s strong loan growth.



Non-interest income for the first nine months of 2016 decreased $2.2 million from the prior year period to $8.6 million.  The decrease was predominantly a result of the $2.1 million loss on the historic tax credit in the second quarter of 2016 and the $0.7 million gain on insurance proceeds in the third quarter of 2015 related to a fire at a branch location, offset, in part, by a $1.5 million refundable state tax credit recorded in non-interest income during the second quarter of 2016Additionally, insurance service and fee revenue, the largest component of non-interest income, was $5.2 million for the nine-month period ended September 30, 2016, down from $5.6 million in the comparable period of the prior year.  The decline was primarily due to last year’s high level of claims adjustment fees earned for services provided to assess damages of local properties impacted by the previous year’s severe winter.  This decrease was somewhat offset by an increase in commercial property and casualty insurance commissions.  Other non-interest income was $1.3 million for the first three quarters of 2016, compared with $1.7 million in the first nine months of 2015.  The decline from the prior year period is predominantly due to a decline in the Company’s mortgage servicing rights asset and the expected run-off of data center income.



Total non-interest expense increased to $26.0 million in the first nine months of 2016, 8% higher than the nine-month period ended September 30, 2015.  The increase was mostly attributable to an increase in salaries and employee benefits costs.  Salaries and employee benefits costs were $16.4 million for the first nine months of 2016, a $1.3 million or 8% increase from $15.1 million in the prior year period.  The year-over-year increase in salary and benefits expense reflects annual merit increases and personnel hires to support the Company’s growth strategy.  Technology and communications expenses increased $0.2 million to $1.1 million, reflecting additional expense related to the Company’s conversion to a new core banking system in 2016.



The Company’s efficiency ratio for the first nine months of 2016 was 74.0%, compared with 70.3% during the prior-year period.  The increase reflects the increase in non-interest expenses and decrease in non-interest income, somewhat offset by the increase in net interest income.  The calculation of the efficiency ratio for 2016 excludes the net impact of the tax credit investment.



An income tax expense of $1.7 million was recognized for the nine-month period ended September 30, 2016, compared with $3.0 million in the first nine months of 2015.  The difference reflected a $0.8 million tax credit benefit realized in 2016 relating to the historic tax credit investment in a community project.  The effective tax rate for the first nine months of 2016 was 22.5%, compared with 33.3% in the comparable 2015 period.  Excluding the impact of the historic tax credit and the write-off of the tax credit investment recognized in non-interest income, the current year-to-date effective tax rate was 31.0%.

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CAPITAL



The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a  Tier 1 leverage ratio of 9.55% at September 30, 2016, compared with 10.06% and 10.45% at June 30, 2016 and December 31, 2015, respectively.  New minimum capital ratios, known as “Basel III”, became effective for the Company and the Bank on January 1, 2015 and will be fully phased-in on January 1, 2019.  As of September 30, 2016, the Company and the Bank met all applicable capital adequacy requirements under the Basel III capital rules.

Book value per share of the Company’s common stock was $22.20 at September 30, 2016, compared with $21.44 at December 31, 2015.  Tangible book value per share (a non-GAAP measure) at September 30, 2016 was $20.31, compared with $19.53 at December 31, 2015.

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

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

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

 

 

 

 

 

 

  

 

 

 

 

 

 

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

 

 

 

 

 

 

($ in thousands, except per share data)

 

September 30, 2016

 

December 31, 2015



 

 

 

 

 

 

Stockholders' equity ("book value")

 

$

95,198 

 

$

91,256 

Goodwill (related to insurance agency reporting unit)

 

 

(8,101)

 

 

(8,101)

Tangible book value (non-GAAP)

 

$

87,097 

 

$

83,155 

Number of common shares outstanding

 

 

4,287,400 

 

 

4,257,179 

Tangible book value per share

 

$

20.31 

 

$

19.53 





On August 16, 2016, the Company declared a cash dividend of $0.38 per share on the Company’s outstanding common stock.  The dividend was paid on October 4, 2016 to shareholders of record as of September 13, 2016.



LIQUIDITY



The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations.  The Bank also has many borrowing options.  As a member of the FHLB, the Bank is able to borrow funds at competitive rates.  Advances of up to $207 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB.  An amount equal to 25% of the Bank’s total assets could be borrowed through the advance programs under certain qualifying circumstances.  The Bank also has the ability to purchase up to $14 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 September 30, 2016, approximately 5% of the Bank’s securities had contractual maturity dates of one year or less and approximately 35% had maturity dates of five years or less.



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

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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  September 30, 2016 the Company had net short-term liquidity of $245 million as compared with $282 million at December 31, 2015, due to the usage of cash for loan growth.  Available assets of $113 million, divided by public and purchased funds of $173 million, resulted in a long-term liquidity ratio of 65% at September 30, 2016, compared with 102% at December 31, 2015.



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



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





ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments.  The primary market risk that the Company is exposed to is interest rate risk.  The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change.  As a result, net interest income earned by the Bank is subject to the effects of changing interest rates.  The Bank measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities.  Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates.  The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans, and deposits.  Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.



The Bank’s Asset-Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities.  When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments.  Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and reliance on other financial instruments used for interest rate risk management purposes.



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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)



 

 

 

 

 

 



 

 

September 30, 2016

 

 

December 31, 2015

Changes in interest rates

 

 

 

 

 

 



 

 

 

 

 

 

+200 basis points

 

$

1,077 

 

$

1,034 

+100 basis points

 

 

2,136 

 

 

1,856 



 

 

 

 

 

 

-100 basis points

 

 

NM

 

 

NM

-200 basis points

 

 

NM

 

 

NM





Many assumptions were utilized by management to calculate the impact that changes in interest rates may have on the Bank’s net interest income.  The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities.  The Bank assumed immediate changes in rates including 200 basis point rate changes.  In each of the 100 and 200 basis point rate reduction scenarios, the applicable rate changes are limited to lesser amounts such that interest rates are not less than zero.  These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income.  Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes.  In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.





ITEM 4 - CONTROLS AND PROCEDURES



DISCLOSURE CONTROLS AND PROCEDURES



The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2016 (the end of the period covered by this Report).  Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of September 30, 2016 the Company’s disclosure controls and procedures were effective.



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING



No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended September 30, 2016 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 March 2013, the Company announced it had been authorized by its Board of Directors to purchase up to 100,000 shares of the Company’s outstanding common stock.  In the third quarter of 2016, the Company did not purchase any shares of its common stock.



Issuer Purchases of Equity Securities





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

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

 

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

July 2016:

 

 

 

 

 

 

 

 

 

 

July 1, 2016 - July 31, 2016

 

 

-    

 

$

-    

 

-    

 

15,212 

August 2016:

 

 

 

 

 

 

 

 

 

 

August 1, 2016 - August 31, 2016

 

 

-    

 

$

-    

 

-    

 

15,212 

September 2016:

 

 

 

 

 

 

 

 

 

 

September 1, 2016 - September 30, 2016

 

 

-    

 

$

-    

 

-    

 

15,212 



 

 

 

 

 

 

 

 

 

 

Total:

 

 

-    

 

$

-    

 

-    

 

15,212 





(1)

On March 25, 2013, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company’s common stock.  The repurchase program has no fixed expiration date but may be suspended or discontinued at any time.  The maximum number of shares that may be purchased under this program as of September 30, 2016 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

November 2, 2016



/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)







DATE

November 2, 2016



/s/ John B. Connerton

John B.  Connerton

Treasurer

(Principal Financial Officer)











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EXHIBIT INDEX







 

 

 

 

Exhibit No.

 

Name

 

 



 

 

 

 

10.1

 

Evans Bancorp, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on July 29, 2016.

 

 



 

 

 

 



 

 

 

 

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 September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – September 30, 2016 and December 31, 2015; (ii) Unaudited Consolidated Statements of Income – Three months ended September 30, 2016 and 2015; (iii) Unaudited Consolidated Statements of Income – Nine months ended September 30, 2016 and 2015; (iv) Unaudited Statements of Consolidated Comprehensive Income – Three months ended September 30, 2016 and 2015; (v) Unaudited Statements of Consolidated Comprehensive Income – Nine months ended September 30, 2016 and 2015; (vi) Unaudited Consolidated Statements of Stockholders' Equity – Nine months ended September 30, 2016 and 2015; (vii) Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2016 and 2015; and (vii) Notes to Unaudited Consolidated Financial Statements.

 

 



 

 

 

 









52