Annual Statements Open main menu

EVANS BANCORP INC - Quarter Report: 2017 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, 2017



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



For the transition period from             to ______



Commission file number    001-35021



                   EVANS BANCORP, INC.                  

(Exact name of registrant as specified in its charter)



          New York                            16-1332767

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

incorporation or organization)       Identification No.)



One Grimsby Drive, Hamburg, NY        14075

(Address of principal executive offices)  (Zip Code)



       (716) 926-2000    

(Registrant's telephone number, including area code)



            Not Applicable         

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

 since last report)



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



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



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





 

 

Large accelerated filer

 

Accelerated filer

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

 

Smaller reporting company

Emerging growth company

 

 



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



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

Yes   No 



Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.50 par value, 4,779,262 shares as of October 30, 2017



 

 

 


 

Table of Contents



INDEX





EVANS BANCORP, INC. AND SUBSIDIARIES







 

 



 

 

PART 1.  FINANCIAL INFORMATION

PAGE



 

 

Item 1.

Financial Statements

 



 

 



Unaudited Consolidated Balance Sheets – September 30, 2017 and December 31, 2016



 

 



Unaudited Consolidated Statements of Income – Three months ended September 30, 2017 and 2016



 

 



Unaudited Consolidated Statements of Income – Nine months ended September 30, 2017 and 2016



 

 



Unaudited Consolidated Statements of Comprehensive Income – Three months ended September 30, 2017 and 2016



 

 



Unaudited Consolidated Statements of Comprehensive Income – Nine months ended September 30, 2017 and 2016



 

 



Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Nine months ended September 30, 2017 and 2016



 

 



Unaudited Consolidated Statements of Cash Flows - Nine months ended September 30, 2017 and 2016



 

 



Notes to Unaudited Consolidated Financial Statements



 

 

Item 2.

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

38 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47 



 

 

Item 4.

Controls and Procedures

48 



 

 

PART II.  OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

49 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49 



 

 

Item 6.

Exhibits

49 



 

 



Signatures

51 



 

 







 

 

 


 

Table of Contents





 

 

 

 

 

 



 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

September 30,

 

December 31,



 

2017

 

2016

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

16,790 

 

$

12,503 

Interest-bearing deposits at banks

 

 

1,265 

 

 

581 

Securities:

 

 

 

 

 

 

Available for sale, at fair value (amortized cost: $148,771 at September 30, 2017;

 

 

148,300 

 

 

95,222 

$95,810 at December 31, 2016)

 

 

 

 

 

 

Held to maturity, at amortized cost (fair value: $4,472 at September 30, 2017;

 

 

4,487 

 

 

1,983 

$1,959 at December 31, 2016)

 

 

 

 

 

 

Federal Home Loan Bank common stock, at cost

 

 

2,404 

 

 

2,185 

Federal Reserve Bank common stock, at cost

 

 

1,908 

 

 

1,546 

Loans, net of allowance for loan losses of $14,182 at September 30, 2017

 

 

 

 

 

 

and $13,916 at December 31, 2016

 

 

983,823 

 

 

928,596 

Properties and equipment, net of accumulated depreciation of $17,952 at September 30, 2017

 

 

 

 

 

 

and $17,012 at December 31, 2016

 

 

10,742 

 

 

11,310 

Goodwill and intangible assets

 

 

8,581 

 

 

8,406 

Bank-owned life insurance

 

 

23,233 

 

 

21,534 

Other assets

 

 

18,621 

 

 

16,843 



 

 

 

 

 

 

TOTAL ASSETS

 

$

1,220,154 

 

$

1,100,709 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

$

216,250 

 

$

201,741 

NOW

 

 

96,741 

 

 

88,632 

Savings

 

 

552,559 

 

 

508,652 

Time

 

 

166,769 

 

 

140,949 

Total deposits

 

 

1,032,319 

 

 

939,974 



 

 

 

 

 

 

Securities sold under agreement to repurchase

 

 

9,380 

 

 

10,159 

Other borrowings

 

 

33,600 

 

 

28,200 

Other liabilities

 

 

16,033 

 

 

14,298 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

Total liabilities

 

 

1,102,662 

 

 

1,003,961 



 

 

 

 

 

 

CONTINGENT LIABILITIES AND COMMITMENTS

 

 

 

 

 

 



 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock, $.50 par value, 10,000,000 shares authorized; 4,776,763

 

 

 

 

 

 

and 4,302,504 shares issued at September 30, 2017 and December 31, 2016,

 

 

 

 

 

 

respectively, and 4,776,360 and 4,300,634 outstanding at September 30, 2017

 

 

 

 

 

 

and December 31, 2016, respectively

 

 

2,391 

 

 

2,153 

Capital surplus

 

 

59,017 

 

 

44,389 

Treasury stock, at cost, 403 and 1,870 shares at September 30, 2017 and

 

 

 

 

 

 

December 31, 2016, respectively

 

 

-    

 

 

-    

Retained earnings

 

 

58,304 

 

 

52,630 

Accumulated other comprehensive loss, net of tax

 

 

(2,220)

 

 

(2,424)

Total stockholders' equity

 

 

117,492 

 

 

96,748 



 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,220,154 

 

$

1,100,709 



 

 

 

 

 

 

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, 2017 AND 2016

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

Three Months Ended September 30,



 

2017

 

2016

INTEREST INCOME

 

 

 

 

 

 

Loans

 

$

11,659 

 

$

9,620 

Interest-bearing deposits at banks

 

 

 

 

Securities:

 

 

 

 

 

 

Taxable

 

 

706 

 

 

385 

Non-taxable

 

 

202 

 

 

235 

Total interest income

 

 

12,574 

 

 

10,241 

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

1,252 

 

 

977 

Other borrowings

 

 

116 

 

 

100 

Junior subordinated debentures

 

 

111 

 

 

95 

Total interest expense

 

 

1,479 

 

 

1,172 

NET INTEREST INCOME  

 

 

11,095 

 

 

9,069 

PROVISION FOR LOAN LOSSES

 

 

161 

 

 

1,006 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

10,934 

 

 

8,063 

NON-INTEREST INCOME

 

 

 

 

 

 

Deposit service charges

 

 

448 

 

 

475 

Insurance service and fees

 

 

2,169 

 

 

1,855 

Gain on loans sold

 

 

61 

 

 

35 

Bank-owned life insurance

 

 

128 

 

 

144 

Loss on tax credit investment

 

 

(1,338)

 

 

-    

Refundable state historic tax credit

 

 

972 

 

 

-    

Interchange fee income

 

 

379 

 

 

319 

Other

 

 

546 

 

 

507 

Total non-interest income

 

 

3,365 

 

 

3,335 

NON-INTEREST EXPENSE

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,343 

 

 

5,402 

Occupancy

 

 

805 

 

 

732 

Advertising and public relations

 

 

311 

 

 

232 

Professional services

 

 

514 

 

 

535 

Technology and communications

 

 

730 

 

 

504 

Amortization of intangibles

 

 

28 

 

 

-    

FDIC insurance

 

 

195 

 

 

201 

Other

 

 

910 

 

 

1,105 

Total non-interest expense

 

 

9,836 

 

 

8,711 

INCOME BEFORE INCOME TAXES

 

 

4,463 

 

 

2,687 

INCOME TAX PROVISION

 

 

740 

 

 

471 

NET INCOME

 

$

3,723 

 

$

2,216 



 

 

 

 

 

 

Net income per common share-basic

 

$

0.78 

 

$

0.52 

Net income per common share-diluted

 

$

0.76 

 

$

0.51 

Cash dividends per common share

 

$

0.40 

 

$

0.38 

Weighted average number of common shares outstanding

 

 

4,774,602 

 

 

4,287,124 

Weighted average number of diluted shares outstanding

 

 

4,896,967 

 

 

4,362,479 



 

 

 

 

 

 

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, 2017 AND 2016

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 



Nine Months Ended September 30,



2017

 

2016

INTEREST INCOME

 

 

 

 

 

Loans

$

32,551 

 

$

27,228 

Interest-bearing deposits at banks

 

62 

 

 

45 

Securities:

 

 

 

 

 

Taxable

 

1,705 

 

 

1,323 

Non-taxable

 

636 

 

 

695 

Total interest income

 

34,954 

 

 

29,291 

INTEREST EXPENSE

 

 

 

 

 

Deposits

 

3,558 

 

 

2,972 

Other borrowings

 

224 

 

 

201 

Junior subordinated debentures

 

315 

 

 

273 

Total interest expense

 

4,097 

 

 

3,446 

NET INTEREST INCOME  

 

30,857 

 

 

25,845 

PROVISION FOR LOAN LOSSES

 

136 

 

 

838 

NET INTEREST INCOME AFTER

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

30,721 

 

 

25,007 

NON-INTEREST INCOME

 

 

 

 

 

Deposit service charges

 

1,266 

 

 

1,321 

Insurance service and fees

 

6,249 

 

 

5,175 

Gain on loans sold

 

131 

 

 

79 

Bank-owned life insurance

 

400 

 

 

421 

Loss on tax credit investment

 

(2,257)

 

 

(2,139)

Refundable state historic tax credit

 

1,619 

 

 

1,508 

Interchange fee income

 

1,102 

 

 

977 

Other

 

1,466 

 

 

1,267 

Total non-interest income

 

9,976 

 

 

8,609 

NON-INTEREST EXPENSE

 

 

 

 

 

Salaries and employee benefits

 

18,089 

 

 

16,383 

Occupancy

 

2,355 

 

 

2,171 

Advertising and public relations

 

717 

 

 

707 

Professional services

 

1,666 

 

 

1,771 

Technology and communications

 

2,141 

 

 

1,653 

Amortization of intangibles

 

84 

 

 

-    

FDIC insurance

 

551 

 

 

542 

Other

 

2,605 

 

 

2,731 

Total non-interest expense

 

28,208 

 

 

25,958 

INCOME BEFORE INCOME TAXES

 

12,489 

 

 

7,658 

INCOME TAX PROVISION

 

3,002 

 

 

1,725 

NET INCOME

$

9,487 

 

$

5,933 



 

 

 

 

 

Net income per common share-basic

$

2.01 

 

$

1.39 

Net income per common share-diluted

$

1.96 

 

$

1.37 

Cash dividends per common share

$

0.80 

 

$

0.76 

Weighted average number of common shares outstanding

 

4,724,774 

 

 

4,278,171 

Weighted average number of diluted shares outstanding

 

4,845,664 

 

 

4,345,307 



 

 

 

 

 

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, 2017 AND 2016

(in thousands)

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,



 

2017

 

 

2016



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

3,723 

 

 

 

 

$

2,216 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

 

 

(112)

 

 

 

 

 

(376)



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

28 

 

 

 

 

 

35 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

32 

 

 

 

 

 

40 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE LOSS, NET OF TAX

 

 

(80)

 

 

 

 

 

(336)



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

3,643 

 

 

 

 

$

1,880 



 

 

 

 

 

 

 

 

 

 

 

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, 2017 AND 2016

(in thousands)

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended September 30,



 

2017

 

 

2016



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

9,487 

 

 

 

 

$

5,933 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

 

 

78 

 

 

 

 

 

533 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

19 

 

 

 

 

 

15 

 

 

 

Amortization of actuarial loss

 

107 

 

 

 

 

 

105 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

126 

 

 

 

 

 

120 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX

 

 

204 

 

 

 

 

 

653 



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

9,691 

 

 

 

 

$

6,586 



 

 

 

 

 

 

 

 

 

 

 

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, 2017 AND 2016

 

 

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 



 

Common

 

Capital

 

Retained

 

Comprehensive

 

Treasury

 

 

 



 

Stock

 

Surplus

 

Earnings

 

Income (Loss)

 

Stock

 

Total

Balance, December 31, 2015

 

$

2,132 

 

$

43,318 

 

$

47,616 

 

$

(1,810)

 

$

-    

 

$

91,256 

Net Income

 

 

 

 

 

 

 

 

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 exercise

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

2,153 

 

$

44,389 

 

$

52,630 

 

$

(2,424)

 

$

-    

 

$

96,748 

Net Income

 

 

 

 

 

 

 

 

9,487 

 

 

 

 

 

 

 

 

9,487 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

204 

 

 

 

 

 

204 

Cash dividends ($0.80 per common share)

 

 

 

 

 

 

 

 

(3,813)

 

 

 

 

 

 

 

 

(3,813)

Stock compensation expense

 

 

 

 

 

462 

 

 

 

 

 

 

 

 

 

 

 

462 

Reissued 741 restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-    

Issued 440,000 shares in stock offering

 

 

220 

 

 

13,922 

 

 

 

 

 

 

 

 

 

 

 

14,142 

Issued 13,936 restricted shares, net of forfeitures

 

 

 

 

(9)

 

 

 

 

 

 

 

 

 

 

 

-    

Issued 3,253 shares under Dividend Reinvestment Plan

 

 

 

 

124 

 

 

 

 

 

 

 

 

 

 

 

126 

Issued 3,713 shares in Employee Stock Purchase Plan

 

 

 

 

124 

 

 

 

 

 

 

 

 

 

 

 

126 

Issued 10,001 shares in stock option exercises

 

 

 

 

140 

 

 

 

 

 

 

 

 

 

 

 

145 

Repurchased 9,218 shares in treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(342)

 

 

(342)

Reissued 13,300 shares in stock option exercises

 

 

 

 

 

(135)

 

 

 

 

 

 

 

 

342 

 

 

207 

Balance, September 30, 2017

 

$

2,391 

 

$

59,017 

 

$

58,304 

 

$

(2,220)

 

$

-    

 

$

117,492 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017 AND 2016

(in thousands)



 

Nine Months Ended September 30,



 

 

2017

 

 

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Interest received

 

$

34,568 

 

$

28,952 

Fees received

 

 

10,095 

 

 

8,648 

Interest paid

 

 

(4,062)

 

 

(3,419)

Cash paid to employees and vendors

 

 

(27,256)

 

 

(24,467)

Cash contributed to pension plan

 

 

(1,000)

 

 

(140)

Income taxes paid

 

 

(1,733)

 

 

(974)

Proceeds from sale of loans held for resale

 

 

9,793 

 

 

5,300 

Originations of loans held for resale

 

 

(9,483)

 

 

(7,227)



 

 

 

 

 

 

Net cash provided by operating activities

 

 

10,922 

 

 

6,673 



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Available for sales securities:

 

 

 

 

 

 

Purchases

 

 

(65,889)

 

 

(25,953)

Proceeds from maturities, calls, and payments

 

 

12,041 

 

 

18,425 

Held to maturity securities:

 

 

 

 

 

 

Purchases

 

 

(3,355)

 

 

(194)

Proceeds from maturities, calls, and payments

 

 

851 

 

 

337 

Cash paid for bank owned life insurance

 

 

(1,300)

 

 

-    

Additions to properties and equipment

 

 

(358)

 

 

(1,329)

Purchase of tax credit investment

 

 

(2,380)

 

 

(703)

  Insurance agency acquisitions

 

 

(275)

 

 

-    

Net increase in loans

 

 

(54,724)

 

 

(136,160)



 

 

 

 

 

 

Net cash used in investing activities

 

 

(115,389)

 

 

(145,577)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from short-term borrowings, net

 

 

4,621 

 

 

41,985 

Net increase in deposits

 

 

92,345 

 

 

94,983 

Dividends paid

 

 

(1,902)

 

 

(1,626)

Repurchase of treasury stock

 

 

(342)

 

 

(80)

Issuance of common stock

 

 

14,509 

 

 

248 

Reissuance of treasury stock

 

 

207 

 

 

-    



 

 

 

 

 

 

Net cash provided by financing activities

 

 

109,438 

 

 

135,510 



 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

4,971 

 

 

(3,394)



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

 

13,084 

 

 

22,621 



 

 

 

 

 

 

End of period

 

$

18,055 

 

$

19,227 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 



(continued)

7

 


 

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, 2017 AND 2016

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 



 

Nine Months Ended September 30,



 

 

2017

 

 

2016



 

 

 

 

 

 

RECONCILIATION OF NET INCOME TO NET CASH

 

 

 

 

 

 

PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 



 

 

 

 

 

 

Net income

 

$

9,487 

 

$

5,933 



 

 

 

 

 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,333 

 

 

1,079 

Deferred tax expense (benefit)

 

 

830 

 

 

(211)

Provision for loan losses

 

 

136 

 

 

838 

Loss on tax credit investment

 

 

2,257 

 

 

2,139 

Refundable state historic tax credit

 

 

(1,619)

 

 

(1,508)

Gain on loans sold

 

 

(131)

 

 

(79)

Stock compensation expense

 

 

462 

 

 

421 

Proceeds from sale of loans held for resale

 

 

9,793 

 

 

5,300 

Originations of loans held for resale

 

 

(9,483)

 

 

(7,227)

Cash contributed to pension plan

 

 

(1,000)

 

 

(140)

Changes in assets and liabilities affecting cash flow:

 

 

 

 

 

 

Other assets

 

 

(1,944)

 

 

(1,784)

Other liabilities

 

 

801 

 

 

1,912 



 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

10,922 

 

$

6,673 



 

 

 

 

 

 

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, 2017 AND 2016



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



The results of operations for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.  The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 (“10-K”).  The Company’s significant accounting policies are disclosed in Note 1 to the 10-K.





9

 


 

Table of Contents



2. SECURITIES



The amortized cost of securities and their approximate fair value at September 30, 2017 and December 31, 2016 were as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2017



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

28,461 

 

$

64 

 

$

(278)

 

$

28,247 

States and political subdivisions

 

 

29,985 

 

 

424 

 

 

(21)

 

 

30,388 

Total debt securities

 

$

58,446 

 

$

488 

 

$

(299)

 

$

58,635 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

32,772 

 

$

123 

 

$

(230)

 

$

32,665 

FHLMC

 

 

15,242 

 

 

34 

 

 

(116)

 

 

15,160 

GNMA

 

 

2,176 

 

 

25 

 

 

(15)

 

 

2,186 

SBA

 

 

10,310 

 

 

24 

 

 

(82)

 

 

10,252 

CMO

 

 

29,825 

 

 

50 

 

 

(473)

 

 

29,402 

Total mortgage-backed securities

 

$

90,325 

 

$

256 

 

$

(916)

 

$

89,665 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

148,771 

 

$

744 

 

$

(1,215)

 

$

148,300 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

4,487 

 

$

 

$

(21)

 

$

4,472 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

4,487 

 

$

 

$

(21)

 

$

4,472 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

12,958 

 

$

67 

 

$

(153)

 

$

12,872 

States and political subdivisions

 

 

34,952 

 

 

356 

 

 

(166)

 

 

35,142 

Total debt securities

 

$

47,910 

 

$

423 

 

$

(319)

 

$

48,014 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

14,694 

 

$

96 

 

$

(230)

 

$

14,560 

FHLMC

 

 

3,544 

 

 

32 

 

 

(51)

 

 

3,525 

GNMA

 

 

2,535 

 

 

19 

 

 

(21)

 

 

2,533 

CMO

 

 

27,127 

 

 

67 

 

 

(604)

 

 

26,590 

Total mortgage-backed securities

 

$

47,900 

 

$

214 

 

$

(906)

 

$

47,208 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

95,810 

 

$

637 

 

$

(1,225)

 

$

95,222 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,983 

 

$

 

$

(29)

 

$

1,959 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,983 

 

$

 

$

(29)

 

$

1,959 



10

 


 

Table of Contents



Available for sale securities with a total fair value of $129 million and $87 million at September 30, 2017 and December 31, 2016, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.



The scheduled maturities of debt and mortgage-backed securities at September 30, 2017 and December 31, 2016 are summarized below.  All maturity amounts are contractual maturities.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2017

 

December 31, 2016



 

Amortized

 

Estimated

 

Amortized

 

Estimated



 

cost

 

fair value

 

cost

 

fair value



 

 

(in thousands)

 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

4,557 

 

$

4,579 

 

$

2,869 

 

$

2,876 

Due after one year through five years

 

 

25,945 

 

 

26,170 

 

 

30,171 

 

 

30,214 

Due after five years through ten years

 

 

25,989 

 

 

25,887 

 

 

12,166 

 

 

12,133 

Due after ten years

 

 

1,955 

 

 

1,999 

 

 

2,704 

 

 

2,791 



 

 

58,446 

 

 

58,635 

 

 

47,910 

 

 

48,014 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

90,325 

 

 

89,665 

 

 

47,900 

 

 

47,208 



 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale securities

 

$

148,771 

 

$

148,300 

 

$

95,810 

 

$

95,222 



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

3,392 

 

$

3,388 

 

$

780 

 

$

778 

Due after one year through five years

 

 

495 

 

 

483 

 

 

289 

 

 

283 

Due after five years through ten years

 

 

506 

 

 

512 

 

 

814 

 

 

805 

Due after ten years

 

 

94 

 

 

89 

 

 

100 

 

 

93 



 

 

4,487 

 

 

4,472 

 

 

1,983 

 

 

1,959 



 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities

 

$

4,487 

 

$

4,472 

 

$

1,983 

 

$

1,959 



Contractual maturities of the Company’s mortgage-backed securities generally exceed ten years; however, the effective lives may be significantly shorter due to prepayments of the underlying loans and due to the nature of these securities.  The duration of the investment securities portfolio increased from 3.4 years at December 31, 2016 to 3.8 years at September 30, 2017.



Information regarding unrealized losses within the Company’s available for sale securities at September 30, 2017 and December 31, 2016 is summarized below.  The securities are primarily U.S. government-guaranteed agency securities or municipal securities. 



11

 


 

Table of Contents





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Less than 12 months

 

 

12 months or longer

 

 

Total



 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized



 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses



 

 

(in thousands)

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

18,540 

 

$

(278)

 

$

 -

 

$

-    

 

$

18,540 

 

$

(278)

States and political subdivisions

 

 

2,470 

 

 

(8)

 

 

1,645 

 

 

(13)

 

 

4,115 

 

 

(21)

Total debt securities

 

$

21,010 

 

$

(286)

 

$

1,645 

 

$

(13)

 

$

22,655 

 

$

(299)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

18,130 

 

$

(141)

 

$

4,079 

 

$

(89)

 

$

22,209 

 

$

(230)

FHLMC

 

 

10,281 

 

 

(82)

 

 

1,039 

 

 

(34)

 

 

11,320 

 

 

(116)

GNMA

 

 

940 

 

 

(14)

 

 

287 

 

 

(1)

 

 

1,227 

 

 

(15)

SBA

 

 

4,354 

 

 

(82)

 

 

-    

 

 

-    

 

 

4,354 

 

 

(82)

CMO

 

 

12,005 

 

 

(116)

 

 

12,352 

 

 

(357)

 

 

24,357 

 

 

(473)

Total mortgage-backed securities

 

$

45,710 

 

$

(435)

 

$

17,757 

 

$

(481)

 

$

63,467 

 

$

(916)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

3,471 

 

$

(4)

 

$

561 

 

$

(17)

 

$

4,032 

 

$

(21)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

70,191 

 

$

(725)

 

$

19,963 

 

$

(511)

 

$

90,154 

 

$

(1,236)













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Less than 12 months

 

 

12 months or longer

 

 

Total



 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized



 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses



 

 

(in thousands)

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

6,847 

 

$

(153)

 

$

-    

 

$

-    

 

$

6,847 

 

$

(153)

States and political subdivisions

 

 

16,895 

 

 

(146)

 

 

731 

 

 

(20)

 

 

17,626 

 

 

(166)

Total debt securities

 

$

23,742 

 

$

(299)

 

$

731 

 

$

(20)

 

$

24,473 

 

$

(319)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

9,577 

 

$

(230)

 

$

-    

 

$

-    

 

$

9,577 

 

$

(230)

FHLMC

 

 

1,728 

 

 

(8)

 

 

988 

 

 

(43)

 

 

2,716 

 

 

(51)

GNMA

 

 

1,046 

 

 

(17)

 

 

309 

 

 

(4)

 

 

1,355 

 

 

(21)

CMO

 

 

19,745 

 

 

(569)

 

 

1,166 

 

 

(35)

 

 

20,911 

 

 

(604)

Total mortgage-backed securities

 

$

32,096 

 

$

(824)

 

$

2,463 

 

$

(82)

 

$

34,559 

 

$

(906)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

863 

 

$

(3)

 

$

706 

 

$

(26)

 

$

1,569 

 

$

(29)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

56,701 

 

$

(1,126)

 

$

3,900 

 

$

(128)

 

$

60,601 

 

$

(1,254)





12

 


 

Table of Contents



Management has assessed the securities available for sale in an unrealized loss position at September 30, 2017 and December 31, 2016 and determined the decline in fair value below amortized cost to be temporary.  In making this determination, management considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, and the financial condition of the issuer (primarily government or government-sponsored enterprises).  In addition, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost.  Management believes the decline in fair value is primarily related to market interest rate fluctuations and not to the credit deterioration of the individual issuers.



The Company has not recorded any other-than-temporary impairment (“OTTI”) charges as of September 30, 2017 and did not record any OTTI charges during 2016.  The credit worthiness of the Company’s portfolio is largely reliant on the ability of U.S. government sponsored agencies such as FHLB, Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations.  In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio.  The stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.





3.  FAIR VALUE MEASUREMENT



Fair value is defined in ASC Topic 820 “Fair Value Measurement” 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 measurement:



 

 

 



 

 

Level 1 inputs are quoted prices for identical instruments in active markets;



 

 

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



 

Level 3 inputs are unobservable inputs.



Observable market data should be used when available.



FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS



The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, respectively:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

28,247 

 

$

-    

 

$

28,247 

States and political subdivisions

 

 

-    

 

 

30,388 

 

 

-    

 

 

30,388 

Mortgage-backed securities

 

 

-    

 

 

89,665 

 

 

-    

 

 

89,665 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

571 

 

 

571 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

-    

 

$

12,872 

 

$

-    

 

$

12,872 

States and political subdivisions

 

 

-    

 

 

35,142 

 

 

-    

 

 

35,142 

Mortgage-backed securities

 

 

-    

 

 

47,208 

 

 

-    

 

 

47,208 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

527 

 

 

527 



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, 2017 and 2016, respectively:





 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended September 30,

(in thousands)

 

2017

 

2016

Mortgage servicing rights - July 1

 

$

555 

 

$

466 

Losses included in earnings

 

 

(25)

 

 

(22)

Additions from loan sales

 

 

41 

 

 

15 

Mortgage servicing rights - September 30

 

$

571 

 

$

459 





14

 


 

Table of Contents



 

 

 

 

 

 



 

 

 

 

 

 



 

Nine months ended September 30,

(in thousands)

 

2017

 

2016

Mortgage servicing rights - January 1

 

$

527 

 

$

557 

Losses included in earnings

 

 

(46)

 

 

(147)

Additions from loan sales

 

 

90 

 

 

49 

Mortgage servicing rights - September 30

 

$

571 

 

$

459 





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







 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



 

September 30, 2017

 

December 31, 2016

Servicing fees

 

0.25 

%

 

0.25 

%

Discount rate

 

9.52 

%

 

9.52 

%

Prepayment rate (CPR)

 

8.78 

%

 

8.12 

%





FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS



The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements.  The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

$

-    

 

$

18,639 

 

$

18,639 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

$

-    

 

$

13,114 

 

$

13,114 



Collateral dependent impaired loans



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



The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company’s 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 $20.3 million, with an allowance for loan loss of $1.7 million, at September 30, 2017 compared with $15.1 million and $2.0 million, respectively, at December 31, 2016.

15

 


 

Table of Contents

FAIR VALUE OF FINANCIAL INSTRUMENTS



At each of September 30, 2017 and December 31, 2016, the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2017

 

December 31, 2016



 

Carrying

 

Fair

 

Carrying

 

Fair



 

Amount

 

Value

 

Amount

 

Value



 

 

(in thousands)

 

 

(in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,055 

 

$

18,055 

 

$

13,084 

 

$

13,084 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

148,300 

 

 

148,300 

 

 

95,222 

 

 

95,222 

FHLB and FRB stock

 

 

4,312 

 

 

4,312 

 

 

3,731 

 

 

3,731 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities

 

 

4,487 

 

 

4,472 

 

 

1,983 

 

 

1,959 

Loans, net

 

 

983,823 

 

 

977,975 

 

 

928,596 

 

 

945,998 

Mortgage servicing rights

 

 

571 

 

 

571 

 

 

527 

 

 

527 



 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

216,250 

 

$

216,250 

 

$

201,741 

 

$

201,741 

NOW deposits

 

 

96,741 

 

 

96,741 

 

 

88,632 

 

 

88,632 

Savings deposits

 

 

552,559 

 

 

552,559 

 

 

508,652 

 

 

508,652 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreement to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase

 

 

9,380 

 

 

9,380 

 

 

10,159 

 

 

10,159 

Other borrowed funds

 

 

33,600 

 

 

33,558 

 

 

28,200 

 

 

28,152 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

 

 

11,330 

 

 

11,330 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

166,769 

 

 

168,389 

 

 

140,949 

 

 

141,758 





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



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



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



As a member of the FHLB System, the Bank is required to hold stock in FHLBNY.  The Company regularly evaluates investments in FHLBNY for impairment, considering liquidity, operating performance, capital position, stock repurchase and dividend history.  As of September 30, 2017, the Bank’s investment in FHLBNY stock was not impaired.



The Bank, as a member of the FRB system, is currently required to purchase and hold shares of capital stock in the FRB in an amount equal to 6% of its capital and surplus.  Based on the current capital adequacy and liquidity position of the FRB, management believes there is no impairment in the Company’s investment at September 30, 2017.



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



16

 


 

Table of Contents

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



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



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



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



Other Borrowed Funds.    The fair value of the short-term portion of other borrowed funds approximates its carrying value.  The fair value of the long-term portion of other borrowed funds is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.







17

 


 

Table of Contents



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, 2017

 

December 31, 2016

Mortgage loans on real estate:

 

(in thousands)

Residential mortgages

 

$

125,946 

 

$

118,542 

Commercial and multi-family

 

 

492,692 

 

 

462,385 

Construction-Residential

 

 

1,850 

 

 

2,540 

Construction-Commercial

 

 

100,446 

 

 

93,240 

Home equities

 

 

67,343 

 

 

66,234 

Total real estate loans

 

 

788,277 

 

 

742,941 



 

 

 

 

 

 

Commercial and industrial loans

 

 

207,110 

 

 

197,371 

Consumer and other loans

 

 

1,521 

 

 

1,417 

Net deferred loan origination costs

 

 

1,097 

 

 

783 

Total gross loans

 

 

998,005 

 

 

942,512 



 

 

 

 

 

 

Allowance for loan losses

 

 

(14,182)

 

 

(13,916)



 

 

 

 

 

 

Loans, net

 

$

983,823 

 

$

928,596 





The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages.  In the three month period ended September 30, 2017, the Bank sold mortgages to FNMA totaling $4.4 million, compared with $1.7 million in the three month period ended September 30, 2016.  During the nine month periods ended September 30, 2017 and 2016, the Bank sold $9.7 million and $5.2 million, respectively, to FNMA.  At September 30, 2017, the Bank had a loan servicing portfolio principal balance of $80 million upon which it earned servicing fees, compared with $76 million at December 31, 2016.  The value of the mortgage servicing rights for that portfolio was $0.6 million at September 30, 2017 and $0.5 million at December 31, 2016.  At September 30, 2017 there were $0.1 million in residential mortgages held for sale compared with $0.3 million at December 31, 2016.  The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.



As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.  Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2016 are consistent with those utilized by the Company in the three and nine month periods ended September 30, 2017.



18

 


 

Table of Contents



Credit Quality Indicators



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



·

1-3-Pass

·

4-Watch

·

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

·

6-Substandard

·

7-Doubtful

·

8-Loss



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



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









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

1-3

 

$

74,627 

 

$

374,371 

 

$

448,998 

 

$

133,588 

4

 

 

25,819 

 

 

94,204 

 

 

120,023 

 

 

59,199 

5

 

 

-    

 

 

10,417 

 

 

10,417 

 

 

8,122 

6

 

 

-    

 

 

13,700 

 

 

13,700 

 

 

4,572 

7

 

 

-    

 

 

-    

 

 

-    

 

 

1,629 

Total

 

$

100,446 

 

$

492,692 

 

$

593,138 

 

$

207,110 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

1-3

 

$

82,520 

 

$

372,235 

 

$

454,755 

 

$

121,414 

4

 

 

6,541 

 

 

73,655 

 

 

80,196 

 

 

59,117 

5

 

 

-    

 

 

12,506 

 

 

12,506 

 

 

12,623 

6

 

 

4,179 

 

 

3,989 

 

 

8,168 

 

 

3,404 

7

 

 

-    

 

 

-    

 

 

-    

 

 

813 

Total

 

$

93,240 

 

$

462,385 

 

$

555,625 

 

$

197,371 



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, 2017

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Total Past 

 

Current 

 

Total

 

90+ Days

 

Non-accruing



 

30-59 days

 

60-89 days

 

90+ days

 

Due

 

Balance

 

Balance

 

Accruing

 

Loans



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,491 

 

$

912 

 

$

2,012 

 

$

6,415 

 

$

200,695 

 

$

207,110 

 

$

 

$

2,363 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

829 

 

 

105 

 

 

825 

 

 

1,759 

 

 

124,187 

 

 

125,946 

 

 

-    

 

 

1,146 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

1,850 

 

 

1,850 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

168 

 

 

2,301 

 

 

1,488 

 

 

3,957 

 

 

488,735 

 

 

492,692 

 

 

-    

 

 

8,788 

  Construction

 

 

6,929 

 

 

452 

 

 

-    

 

 

7,381 

 

 

93,065 

 

 

100,446 

 

 

-    

 

 

-    

Home equities

 

 

538 

 

 

381 

 

 

570 

 

 

1,489 

 

 

65,854 

 

 

67,343 

 

 

-    

 

 

1,081 

Consumer and other

 

 

 

 

12 

 

 

10 

 

 

29 

 

 

1,492 

 

 

1,521 

 

 

-    

 

 

10 

Total Loans

 

$

11,962 

 

$

4,163 

 

$

4,905 

 

$

21,030 

 

$

975,878 

 

$

996,908 

 

$

 

$

13,388 



Note: Loan balances do not include $1.1 million in net deferred loan origination costs as of September 30, 2017.





20

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Total Past 

 

Current 

 

Total

 

90+ Days

 

Non-accruing



 

30-59 days

 

60-89 days

 

90+ days

 

Due

 

Balance

 

Balance

 

Accruing

 

Loans



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

6,772 

 

$

2,966 

 

$

1,150 

 

$

10,888 

 

$

186,483 

 

$

197,371 

 

$

-    

 

$

3,106 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

 

868 

 

 

123 

 

 

567 

 

 

1,558 

 

 

116,984 

 

 

118,542 

 

 

-    

 

 

862 

  Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

2,540 

 

 

2,540 

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

6,319 

 

 

1,522 

 

 

2,357 

 

 

10,198 

 

 

452,187 

 

 

462,385 

 

 

483 

 

 

1,874 

  Construction

 

 

257 

 

 

-    

 

 

4,417 

 

 

4,674 

 

 

88,566 

 

 

93,240 

 

 

239 

 

 

4,178 

Home equities

 

 

481 

 

 

119 

 

 

679 

 

 

1,279 

 

 

64,955 

 

 

66,234 

 

 

-    

 

 

1,261 

Consumer and other

 

 

15 

 

 

10 

 

 

 

 

30 

 

 

1,387 

 

 

1,417 

 

 

-    

 

 

17 

Total Loans

 

$

14,712 

 

$

4,740 

 

$

9,175 

 

$

28,627 

 

$

913,102 

 

$

941,729 

 

$

722 

 

$

11,298 



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





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, 2017 and 2016:











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,813 

 

$

7,890 

 

$

96 

 

$

769 

 

$

348 

 

$

13,916 

Charge-offs

 

 

(51)

 

 

(127)

 

 

(50)

 

 

-    

 

 

(1)

 

 

(229)

Recoveries

 

 

335 

 

 

-    

 

 

22 

 

 

-    

 

 

 

 

359 

Provision (Credit)

 

 

(74)

 

 

21 

 

 

41 

 

 

143 

 

 

 

 

136 

Ending balance

 

$

5,023 

 

$

7,784 

 

$

109 

 

$

912 

 

$

354 

 

$

14,182 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

808 

 

$

877 

 

$

35 

 

$

17 

 

$

-    

 

$

1,737 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

4,215 

 

 

6,907 

 

 

74 

 

 

895 

 

 

354 

 

 

12,445 

Total

 

$

5,023 

 

$

7,784 

 

$

109 

 

$

912 

 

$

354 

 

$

14,182 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

2,898 

 

$

13,693 

 

$

35 

 

$

2,545 

 

$

1,577 

 

$

20,748 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

204,212 

 

 

579,445 

 

 

1,486 

 

 

125,251 

 

 

65,766 

 

 

976,160 

Total

 

$

207,110 

 

$

593,138 

 

$

1,521 

 

$

127,796 

 

$

67,343 

 

$

996,908 







* Includes construction loans



Note: Loan balances do not include $1.1 million in net deferred loan origination costs as of September 30, 2017.



22

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,383 

 

$

7,135 

 

$

85 

 

$

909 

 

$

371 

 

$

12,883 

Charge-offs

 

 

(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.





23

 


 

Table of Contents



The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended September 30, 2017 and 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

($ in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,970 

 

$

7,899 

 

$

104 

 

$

832 

 

$

373 

 

$

14,178 

Charge-offs

 

 

(18)

 

 

(127)

 

 

(17)

 

 

-    

 

 

(1)

 

 

(163)

Recoveries

 

 

 

 

-    

 

 

 

 

-    

 

 

 

 

Provision (Credit)

 

 

67 

 

 

12 

 

 

21 

 

 

80 

 

 

(19)

 

 

161 

Ending balance

 

$

5,023 

 

$

7,784 

 

$

109 

 

$

912 

 

$

354 

 

$

14,182 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

($ in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,195 

 

$

7,308 

 

$

101 

 

$

763 

 

$

406 

 

$

12,773 

Charge-offs

 

 

(89)

 

 

-    

 

 

(13)

 

 

-    

 

 

-    

 

 

(102)

Recoveries

 

 

23 

 

 

 

 

 

 

-    

 

 

-    

 

 

35 

Provision (Credit)

 

 

781 

 

 

416 

 

 

15 

 

 

(176)

 

 

(30)

 

 

1,006 

Ending balance

 

$

4,910 

 

$

7,732 

 

$

107 

 

$

587 

 

$

376 

 

$

13,712 



*Includes construction loans

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, 2017



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With no related allowance recorded:

(in thousands)

Commercial and industrial

 

$

751 

 

$

876 

 

$

-    

 

$

822 

 

$

33 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,447 

 

 

2,607 

 

 

-    

 

 

2,472 

 

 

33 

 

 

63 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,968 

 

 

2,086 

 

 

-    

 

 

2,078 

 

 

98 

 

 

15 

Construction

 

 

197 

 

 

197 

 

 

-    

 

 

226 

 

 

-    

 

 

11 

Home equities

 

 

1,577 

 

 

1,677 

 

 

-    

 

 

1,613 

 

 

48 

 

 

16 

Consumer and other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

6,940 

 

$

7,443 

 

$

-    

 

$

7,211 

 

$

212 

 

$

111 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At September 30, 2017



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

2,147 

 

$

2,374 

 

$

808 

 

$

2,192 

 

$

101 

 

$

16 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

98 

 

 

98 

 

 

17 

 

 

98 

 

 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

11,528 

 

 

11,586 

 

 

877 

 

 

11,612 

 

 

85 

 

 

366 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Home equities

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Consumer and other

 

 

35 

 

 

60 

 

 

35 

 

 

38 

 

 

 

 

Total impaired loans

 

$

13,808 

 

$

14,118 

 

$

1,737 

 

$

13,940 

 

$

191 

 

$

384 



25

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At September 30, 2017



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

2,898 

 

$

3,250 

 

$

808 

 

$

3,014 

 

$

134 

 

$

22 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,545 

 

 

2,705 

 

 

17 

 

 

2,570 

 

 

36 

 

 

64 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

13,496 

 

 

13,672 

 

 

877 

 

 

13,690 

 

 

183 

 

 

381 

Construction

 

 

197 

 

 

197 

 

 

-    

 

 

226 

 

 

-    

 

 

11 

Home equities

 

 

1,577 

 

 

1,677 

 

 

-    

 

 

1,613 

 

 

48 

 

 

16 

Consumer and other

 

 

35 

 

 

60 

 

 

35 

 

 

38 

 

 

 

 

Total impaired loans

 

$

20,748 

 

$

21,561 

 

$

1,737 

 

$

21,151 

 

$

403 

 

$

495 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With no related allowance recorded:

(in thousands)

Commercial and industrial

 

$

1,304 

 

$

1,604 

 

$

-    

 

$

1,455 

 

$

125 

 

$

51 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,513 

 

 

2,720 

 

 

-    

 

 

2,542 

 

 

39 

 

 

78 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,123 

 

 

2,168 

 

 

-    

 

 

2,181 

 

 

33 

 

 

89 

Construction

 

 

257 

 

 

257 

 

 

-    

 

 

404 

 

 

 

 

28 

Home equities

 

 

1,559 

 

 

1,621 

 

 

-    

 

 

1,606 

 

 

51 

 

 

30 

Consumer and other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

7,756 

 

$

8,370 

 

$

-    

 

$

8,188 

 

$

250 

 

$

276 





26

 


 

Table of Contents





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

1,844 

 

$

1,913 

 

$

492 

 

$

1,898 

 

$

62 

 

$

53 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

71 

 

 

72 

 

 

 

 

72 

 

 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,054 

 

 

1,083 

 

 

296 

 

 

1,062 

 

 

50 

 

 

-    

Construction

 

 

4,179 

 

 

4,201 

 

 

1,175 

 

 

4,180 

 

 

194 

 

 

-    

Home equities

 

 

194 

 

 

206 

 

 

20 

 

 

195 

 

 

 

 

Consumer and other

 

 

43 

 

 

68 

 

 

43 

 

 

45 

 

 

 

 

Total impaired loans

 

$

7,385 

 

$

7,543 

 

$

2,027 

 

$

7,452 

 

$

320 

 

$

58 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2016



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

3,148 

 

$

3,517 

 

$

492 

 

$

3,353 

 

$

187 

 

$

104 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,584 

 

 

2,792 

 

 

 

 

2,614 

 

 

41 

 

 

79 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,177 

 

 

3,251 

 

 

296 

 

 

3,243 

 

 

83 

 

 

89 

Construction

 

 

4,436 

 

 

4,458 

 

 

1,175 

 

 

4,584 

 

 

196 

 

 

28 

Home equities

 

 

1,753 

 

 

1,827 

 

 

20 

 

 

1,801 

 

 

60 

 

 

31 

Consumer and other

 

 

43 

 

 

68 

 

 

43 

 

 

45 

 

 

 

 

Total impaired loans

 

$

15,141 

 

$

15,913 

 

$

2,027 

 

$

15,640 

 

$

570 

 

$

334 





27

 


 

Table of Contents



Troubled debt restructurings

The Company had $12.7 million and $5.1 million in loans that were restructured in a troubled debt restructuring (“TDR”) at September 30, 2017 and December 31, 2016, respectively.  Of those balances, $5.3 million and $1.2 million were in non-accrual status at September 30, 2017 and December 31, 2016, respectively.  Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable.  All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.



The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent.  This reserve methodology is used because all TDR loans are considered impaired.  As of September 30, 2017, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

September 30, 2017



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

1,525 

 

$

990 

 

$

535 

 

$

433 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,664 

 

 

265 

 

 

1,399 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

8,623 

 

 

3,915 

 

 

4,708 

 

 

368 

Construction

 

 

197 

 

 

-    

 

 

197 

 

 

-    

Home equities

 

 

625 

 

 

129 

 

 

496 

 

 

-    

Consumer and other

 

 

25 

 

 

-    

 

 

25 

 

 

25 

Total troubled restructured loans

 

$

12,659 

 

$

5,299 

 

$

7,360 

 

$

826 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2016



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

574 

 

$

532 

 

$

42 

 

$

147 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,949 

 

 

227 

 

 

1,722 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

1,617 

 

 

313 

 

 

1,304 

 

 

-    

Construction

 

 

257 

 

 

-    

 

 

257 

 

 

-    

Home equities

 

 

667 

 

 

175 

 

 

492 

 

 

Consumer and other

 

 

26 

 

 

-    

 

 

26 

 

 

26 

Total troubled restructured loans

 

$

5,090 

 

$

1,247 

 

$

3,843 

 

$

174 



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



28

 


 

Table of Contents



The following tables show the data for TDR activity by the type of concession granted to the borrower for the three month and nine month periods ended September 30, 2017 and 2016:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2017

 

Three months ended September 30, 2016



 

(Recorded Investment in thousands)

 

(Recorded Investment in thousands)

Troubled Debt Restructurings by Type of Concession

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral of principal

 

 

$

874 

 

$

874 

 

-    

 

$

-    

 

$

-    

Residential Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

 

 

133 

 

 

151 

 

-    

 

 

-    

 

 

-    

Extension of maturity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate reduction

 

-    

 

 

-    

 

 

-    

 

 

 

109 

 

 

109 

Commercial Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combination of concessions

 

 

 

4,179 

 

 

3,397 

 

-    

 

 

-    

 

 

-    

Home Equities

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Consumer and other loans

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016



 

(Recorded Investment in thousands)

 

(Recorded Investment in thousands)

Troubled Debt Restructurings by Type of Concession

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral of principal

 

 

$

874 

$

 

874 

 

-    

 

$

-    

 

$

-    

Extension of maturity

 

-    

 

 

-    

 

 

-    

 

 

 

24 

 

 

24 

Term-out line of credit

 

 

 

180 

 

 

180 

 

 

 

20 

 

 

20 

Residential Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

 

 

133 

 

 

151 

 

 

 

95 

 

 

95 

Extension of maturity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate reduction

 

-    

 

 

-    

 

 

-    

 

 

 

109 

 

 

109 

Commercial Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

 

 

5,073 

 

 

5,073 

 

-    

 

 

-    

 

 

-    

Combination of concessions

 

 

 

4,179 

 

 

3,397 

 

-    

 

 

-    

 

 

-    

Home Equities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate reduction

 

 

 

20 

 

 

20 

 

-    

 

 

-    

 

 

-    

Consumer and other loans

 

-    

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    









29

 


 

Table of Contents

The general practice of the Bank is to work with borrowers so that they are able to repay their loan in full.  If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off.  There were no loans which were classified as TDRs during the previous 12 months which defaulted during each of the three month and nine month periods ended September 30, 2017 and 2016, respectively.





5. COMMON EQUITY AND EARNINGS PER SHARE DATA



The common stock per share information is based upon the weighted average number of shares outstanding during each period.  For the three and nine month periods ended September 30, 2017, the Company had an average of 122,365 and 120,890 dilutive shares outstanding, respectively.  The Company had an average of 75,355 and 67,136 dilutive shares outstanding for the three and nine months periods ended September 30, 2016, respectively.



Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three month period ended September 30, 2017 there were no anti-dilutive shares outstanding. For the nine month period ended September 30, 2017, there was an average of 23,593 potentially anti-dilutive shares outstanding, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.  For both the three and nine month periods ended September 30, 2016, there were no anti-dilutive shares outstanding.



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



30

 


 

Table of Contents



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, 2017 and 2016:







 

 

 

 

 

 

 

 

 



 

Balance at June 30, 2017

 

Net Change

 

Balance at September 30, 2017



 

(in thousands)

Net unrealized loss on investment securities

 

$

(175)

 

$

(112)

 

$

(287)

Net defined benefit pension plan adjustments

 

 

(1,965)

 

 

32 

 

 

(1,933)

Total

 

$

(2,140)

 

$

(80)

 

$

(2,220)



 

 

 

 

 

 

 

 

 



 

Balance at June 30, 2016

 

Net Change

 

Balance at September 30, 2016



 

(in thousands)

Net unrealized gain (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 December 31, 2016

 

Net Change

 

Balance at September 30, 2017



 

(in thousands)

Net unrealized (loss) gain on investment securities

 

$

(365)

 

$

78 

 

$

(287)

Net defined benefit pension plan adjustments

 

 

(2,059)

 

 

126 

 

 

(1,933)

Total

 

$

(2,424)

 

$

204 

 

$

(2,220)



 

 

 

 

 

 

 

 

 



 

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)

31

 


 

Table of Contents









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2017

 

Three months ended September 30, 2016



 

(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 loss on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

(186)

 

$

74 

 

$

(112)

 

$

(605)

 

$

229 

 

$

(376)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

$

 

$

(3)

 

$

 

$

 

$

(3)

 

$

Amortization of actuarial loss (a)

 

 

44 

 

 

(16)

 

 

28 

 

 

56 

 

 

(21)

 

 

35 

Net change

 

 

51 

 

 

(19)

 

 

32 

 

 

64 

 

 

(24)

 

 

40 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

$

(135)

 

$

55 

 

$

(80)

 

$

(541)

 

$

205 

 

$

(336)



(a)

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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016



 

(in thousands)

 

(in thousands)



 

Before-Tax Amount

 

Income Tax (Provision) Benefit (b)

 

Net-of-Tax Amount

 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

Unrealized gain on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

117 

 

$

(39)

 

$

78 

 

$

860 

 

$

(327)

 

$

533 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

$

23 

 

$

(4)

 

$

19 

 

$

24 

 

$

(9)

 

$

15 

Amortization of actuarial loss (a)

 

 

130 

 

 

(23)

 

 

107 

 

 

168 

 

 

(63)

 

 

105 

Net change

 

 

153 

 

 

(27)

 

 

126 

 

 

192 

 

 

(72)

 

 

120 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

$

270 

 

$

(66)

 

$

204 

 

$

1,052 

 

$

(399)

 

$

653 



(a)

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

(b)

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

from 34% to 35%.





32

 


 

Table of Contents



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, 2017 and 2016.









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three months ended September 30, 2017



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

11,120 

 

$

(25)

 

$

11,095 

Provision for loan losses

 

 

161 

 

 

-    

 

 

161 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

10,959 

 

 

(25)

 

 

10,934 

Non-interest income

 

 

1,196 

 

 

-    

 

 

1,196 

Insurance service and fees

 

 

108 

 

 

2,061 

 

 

2,169 

Amortization expense

 

 

-    

 

 

28 

 

 

28 

Non-interest expense

 

 

8,315 

 

 

1,493 

 

 

9,808 

Income before income taxes

 

 

3,948 

 

 

515 

 

 

4,463 

Income tax provision

 

 

542 

 

 

198 

 

 

740 

Net income

 

$

3,406 

 

$

317 

 

$

3,723 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

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 





33

 


 

Table of Contents







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2017



 

 

Banking 

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

30,934 

 

$

(77)

 

$

30,857 

Provision for loan losses

 

 

136 

 

 

-    

 

 

136 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

30,798 

 

 

(77)

 

 

30,721 

Non-interest income

 

 

3,727 

 

 

-    

 

 

3,727 

Insurance service and fees

 

 

313 

 

 

5,936 

 

 

6,249 

Amortization expense

 

 

-    

 

 

84 

 

 

84 

Non-interest expense

 

 

23,836 

 

 

4,288 

 

 

28,124 

Income before income taxes

 

 

11,002 

 

 

1,487 

 

 

12,489 

Income tax provision

 

 

2,430 

 

 

572 

 

 

3,002 

Net income

 

$

8,572 

 

$

915 

 

$

9,487 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

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 









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,



 

2017

 

2016



 

(in thousands)



 

 

 

 

 

 

Commitments to extend credit

 

$

230,790 

 

$

217,581 

Standby letters of credit

 

 

2,875 

 

 

3,736 

Total

 

$

233,665 

 

$

221,317 



34

 


 

Table of Contents



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 2017 or during 2016.



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





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 made a $1 million contribution to the defined benefit pension plan during the first nine months of 2017.



The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three and nine month periods ended September 30, 2017 and 2016:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended September 30,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

42 

 

$

47 

Interest cost

 

 

55 

 

 

55 

 

 

35 

 

 

36 

Expected return on plan assets

 

 

(69)

 

 

(66)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

 

 

Amortization of the net loss

 

 

23 

 

 

22 

 

 

21 

 

 

34 

Net periodic cost (benefit)

 

$

 

$

11 

 

$

105 

 

$

125 





35

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Nine months ended September 30,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

126 

 

$

141 

Interest cost

 

 

163 

 

 

165 

 

 

103 

 

 

108 

Expected return on plan assets

 

 

(206)

 

 

(197)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

23 

 

 

24 

Amortization of the net loss

 

 

69 

 

 

66 

 

 

61 

 

 

102 

Net periodic cost (benefit)

 

$

26 

 

$

34 

 

$

313 

 

$

375 









10.  INCOME TAXES



In 2017, the Company recognized the impact of its investments in partnerships that incurred expenses related to the rehabilitation of certified historic structures located in New York State after the historic structures were placed in service.  At the time a historic structure is placed in service, the Bank is eligible for a federal and New York State tax credit.  The Company’s accounting policies related to these investments and the resulting tax credits is detailed in Note 1 to the audited Consolidated Financial Statements on Form 10-K for the year ended December 31, 2016.



The following table presents the impact to the results of operations for the three and nine month periods ended September 30, 2017 and 2016:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended September 30,

 

Nine months ended September 30,



 

 

(in thousands)

 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Loss on tax credit investment

 

$

(1,338)

 

$

-    

 

$

(2,257)

 

$

(2,139)

Refundable state historic tax credit

 

 

972 

 

 

-    

 

 

1,619 

 

 

1,508 

Income tax benefit

 

 

660 

 

 

380 

 

 

896 

 

 

757 

Total HTC income

 

$

294 

 

$

380 

 

$

258 

 

$

126 



 

 

 

 

 

 

 

 

 

 

 

 







11.  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 modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The ASU also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations.  The Company will adopt the guidance in the first quarter of 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the new revenue recognition standard does not have a material impact on the Company’s consolidated financial statements. The Company’s implementation efforts include the identification of revenue within the scope of the

36

 


 

Table of Contents

guidance, as well as the evaluation of revenue contracts. While we have not identified any material changes related to the timing or amount of revenue recognition, management will continue to evaluate disaggregation for significant categories of revenue in the scope of the guidance.    



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



ASU 2016-02, LeasesThe objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements to meet that objective.  The main difference between previous GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.  Under this new guidance, a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.  The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP.  Information about the Company’s operating lease obligations is disclosed in Note 16 to the Company’s Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2016.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently evaluating the impact of the standard on its financial reporting.



ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU is part of the FASB’s Simplification Initiative.  The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Some of the areas of simplification apply only to nonpublic entities.  The standard was adopted effective January 1, 2017.  One part of this ASU that impacted the Company was the elimination of the concept of a tax windfall pool.  Previously, an entity determined for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes resulted in either an excess benefit or a tax deficiency.  Excess tax benefits were recognized in additional paid-in-capital; tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement.  Excess tax benefits were not recognized until the deduction reduced taxes payable.  Under the new standard, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement in the period in which they are incurred.  The impact was a tax benefit of $0.1 million and $0.3 million for the three and nine month periods ended September 30, 2017, respectively.



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



ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.  Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the “probable” threshold.  The main objective of this ASU (commonly known as the Current Expected Credit Loss Impairment Model, or CECL, in the industry) is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  To achieve this objective, the amendments in CECL replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The amendments in CECL are effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The FASB expects that an entity will be able to leverage its current systems and methods for recording the allowance for credit losses.  However, many financial institutions, particularly community banks similar in size to the Company and industry groups like the American Bankers Association, have expressed concern about the impact of CECL.  The life of loan loss concept presents complexities that can decrease capital, and add both volatility to ALLL estimates and additional costs.  CECL may increase the ALLL, though many factors will determine the impact for each bank.  Changes in expectations of future economic conditions play a large role in CECL and can significantly affect the credit loss estimate.  A challenge for the Company could be the operational impact.  Costly new systems and processes to track loan performance may need to be purchased or developed.  Significant procedural challenges may be faced both in implementation and on an ongoing basis.  The total impact of CECL to the Company’s financial statements is unknown but may be material.  Implementation of CECL will be a significant project for the Company through the projected implementation date of January 1, 2020.



ASU 2017-04, Simplifying the Test for Goodwill Impairment.  The objective of this ASU is to simplify how an entity is required to test goodwill impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Under the amendments in

37

 


 

Table of Contents

this ASU, an entity will perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.  The Company does not expect the standard to have a material impact on the Company’s financial reporting.



ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities.  The objective of this ASU is to amend the amortization period for certain purchased callable debt securities held at a premium.  The FASB is shortening the amortization period for the premium to the earliest call date.  Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the investment.  Current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised.  As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.  The amendments do no not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company does hold callable debt securities that were purchased at a premium and is currently evaluating the impact of the standard on its financial reporting.





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



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



These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to: general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; loan losses in excess of the Company’s allowance for loan losses; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; the impact of such changes in accounting pronouncements and practices being greater than anticipated; the ability to realize the benefit of deferred tax assets; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.  Many of these factors are beyond the Company’s control and are difficult to predict.



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





APPLICATION OF CRITICAL ACCOUNTING ESTIMATES



The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes.  These estimates, assumptions, and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements.  Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported.  Estimates, assumptions, and judgments are necessary when assets and liabilities are 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. 

38

 


 

Table of Contents

Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.  When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.  Refer to Note 3 – “Fair Value Measurements” to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.



Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2016.  These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.



Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.



Allowance for Loan Losses



The allowance for loan losses represents management’s estimate of probable losses in the Company’s loan portfolio.  Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.  The loan portfolio also represents the largest asset type on the Company’s Unaudited Consolidated Balance Sheets.  Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 describes the methodology used to determine the allowance for loan losses.



Goodwill



The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis.  The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.  The goodwill impairment testing is performed annually as of December 31stNo impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its carrying value.  There were no triggering events in the nine month period ended September 30, 2017 that resulted in an interim impairment test.



ANALYSIS OF FINANCIAL CONDITION



Loan Activity

Total loans grew to $998 million at September 30, 2017, a $22 million or 2% increase from total loans of $976 million at June 30, 2017 and a $55 million or 6% increase from $943 million at December 31, 2016.



Loans secured by real estate were $788 million at September 30, 2017, reflecting a $22 million or 3% increase from $766 million at June 30, 2017 and a $45 million or 6% increase from $743 million at December 31, 2016.  Commercial and multi-family real estate loans were $493 million at September 30, 2017, $16 million higher than the $477 million balance at the end of the second quarter of 2017 and $30 million higher than the balance of $462 million at the end of 2016.  Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio.  The market for commercial real estate in the Company’s footprint in Western New York has been strong over the past two years.  The demand, along with the Company’s dedicated resources and proficiency in commercial real estate lending, led to strong growth at an annualized rate of 13% in the third quarter of 2017.



In the third quarter of 2017, residential mortgage originations were $12 million compared with the previous quarter’s originations of $6 million and $10 million in last year’s third quarter.  Residential mortgages sold in the third quarter of 2017 equated to approximately 38% of the residential mortgages originated by the Company during this quarter, as compared with 39% of residential mortgages originated during the second quarter of 2017 and 17% in the third quarter of 2016.  The Company originated $29 million in residential mortgages in the first nine months of 2017 and sold 34% of those loans, compared with $25 million and 20%, respectively, in the first

39

 


 

Table of Contents

nine months of 2016.  Management decides to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.



The Company has also focused on growth opportunities in commercial and industrial (“C&I”) lending as a way to diversify its overall loan portfolio.  The C&I portfolio was $207 million at September 30, 2017, representing a $1 million decrease from $208 million at June 30, 2017, but $10 million or 5% higher than the $197 million balance at December 31, 2016.  Commercial loan demand rebounded in the second and third quarter after weaker commercial loan demand in late fourth quarter of 2016 and early first quarter of 2017.  C&I loan growth has been impacted by the Company’s concerted effort to exit leveraged syndicated national credits (“SNC”).  A $9 million leveraged SNC loan was sold in the second quarter and the Company chose not to participate in the renewal of another $11 million leveraged SNC loan in the third quarter of 2017 resulting in an early payoff of the balance.  The Company has $12 million remaining in its leveraged SNC portfolio as of September 30, 2017.  While the Company is not actively marketing these remaining loans, it does not plan to originate any new loans in the leveraged SNC portfolio in the foreseeable future.



Credit Quality of Loan Portfolio

Total non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $13 million, or 1.34% of total loans outstanding at September 30, 2017, compared with $14 million, or 1.42% of total loans outstanding, as of June 30, 2017 and $12 million, or 1.28% of total loans outstanding, as of December 31, 2016.  The $1 million decrease in non-performing loans since June 30, 2017 reflects the extension of a matured loan that was 90 days past due as of the end of the second quarter.  That particular loan has paid as agreed since the extension and is therefore considered a performing loan as of September 30, 2017.



Troubled debt restructurings (“TDRs”) increased from $5 million at December 31, 2016 and $9 million at June 30, 2017 to $13 million at September 30, 2017.  The increase in the first six months of the year is attributable to a single commercial real estate loan of $5 million that matured in the first quarter and was subsequently extended.  While the borrower was considered by management to be financially troubled due to a high loan to collateral value ratio, the Company expects the borrower to pay the principal and interest of the restructured terms as contracted, and, therefore, the loan remains in accruing status.  The increase in the third quarter is due to a $4 million non-accruing commercial construction loan that was restructured during the quarter with new terms including a new maturity date, amortization, payments, and rate.  At the time of restructuring, there was a $0.7 million paydown and a $0.1 million charge-off.



Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $38 million at September 30, 2017, a $1 million decrease from $39 million at June 30, 2017, but approximately unchanged from the $38 million in criticized loans at December 31, 2016.  The level of criticized loans can fluctuate as new information is constantly received on the Company’s borrowers and their financial circumstances change over time.  As noted in Note 4 to the Company’s Unaudited Financial Statements included in Part I of this Quarterly Report on Form 10-Q, internal risk ratings are the credit quality indicators used by the Company’s management to determine the appropriate allowance for loan losses for commercial credits.  “Special mention” and “substandard” loans are weaker credits with a higher risk of loss categorized as “criticized” credits rather than “pass” or “watch” credits.



The Company maintains an allowance for loan losses that in management’s judgment appropriately reflects losses inherent in the loan portfolio.  The allowance for loan losses totaled $14.2 million or 1.42% of total loans outstanding at September 30, 2017, compared with $14.2 million or 1.45% of total loans outstanding as of June 30, 2017 and $13.9 million or 1.48% of total loans outstanding at December 31, 2016.  The Company recorded $0.2 million in provision for loan losses in the third quarter of 2017, compared with $0.4 million during the 2017 second quarter and $1.0 million in last year’s third quarter.  The fluctuation in provision for loan losses reflects the loan growth and criticized loan trends of the current quarter compared to the two comparative quarters.  The net charge-off (recovery) ratio for the third quarter of 2017 was 0.06% of average net loans, compared with a ratio of (0.08) % and 0.03% in the second quarter of 2017 and third quarter of 2016, respectively.



Investing Activities

Total securities increased to $153 million at September 30, 2017 from $143 million at June 30, 2017 and $97 million at December 31, 2016.  Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, were $1 million at September 30, 2017, compared with $2 million at June 30, 2017 and $1 million at December 31, 2016.  The Company has purchased investment securities to leverage the capital generated in the common equity issuance in the first quarter of 2017.  While management plans to leverage the capital with loan growth over the long term, investment securities have been purchased to generate more immediate returns.  Average investment securities and interest-bearing cash were 14% of average interest-earning assets in the third quarter of 2017, compared with 13% in the second quarter of 2017 and 11% 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 59% of total investment securities at September 30, 2017, compared with 57% at June 30, 2017 and 49% at December 31, 2016.  The concentration in tax-advantaged debt securities issued by state and political subdivisions and U.S. government-sponsored agency bonds was 23% and 18%, respectively, of the total securities portfolio at September 30, 2017, compared with 24% and 19% at June 30, 2017 and 38% and 13% at December 31, 2016.



40

 


 

Table of Contents

Management believes that the credit quality of the securities portfolio as a whole is strong, as the portfolio has no individual securities in a significant unrealized loss position.  The total net unrealized loss position of the available-for-sale investment portfolio was $0.5 million at September 30, 2017, compared with $0.3 million at June 30, 2017 and $0.6 million at December 31, 2016. 



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



Funding Activities

Total deposits at September 30, 2017 were $1.03 billion, a $13 million or 1% increase from $1.02 billion at June 30, 2017 and a $92 million or 10% increase from $940 million at December 31, 2016.  The growth in the first nine months of 2017 reflected growth in savings deposits of $44 million, time deposits of $26 million, demand deposits of $14 million, and NOW deposits of $8 million.  All of the savings deposit growth is attributable to municipal deposits.  The Company hired a new director of government banking and has more aggressively pursued municipal deposits in 2017.  The Company’s most successful effort in attracting new retail deposits through the first nine months of 2017 has been in time deposits as customers have returned to maturity deposits with increases in short-term interest rates.  Due to the transactional nature of demand deposits, average balances are a useful metric to meaningfully measure sustained growth rates.  Average demand deposits were $214 million in the third quarter of 2017, a 4% increase from $205 million in the second quarter of 2017 and 14% higher than the $187 million average balance in the third quarter of 2016.  Of the Company’s $27 million in average demand deposit growth over the past twelve months, $19 million was in commercial accounts, $5 million in municipal accounts, and $3 million in retail consumer accounts.



The Company had $34 million in other borrowings at September 30, 2017, which consisted of a $10 million long-term advance with the FHLBNY scheduled to mature in 2020 and $24 million in overnight borrowings with the FHLBNY.  Other borrowings were $15 million at June 30, 2017 and $28 million at December 31, 2016.  The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with core deposits along with the line usage’s impact on interest rate risk.



41

 


 

Table of Contents



ANALYSIS OF RESULTS OF OPERATIONS



Average Balance Sheet

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Three months ended September 30, 2017

 

Three months ended September 30, 2016



 

Average

 

Interest

 

 

 

 

Average

 

Interest

 

 

 



 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/



 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate



 

(dollars in thousands)

 

(dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

970,988 

 

$

11,659 

 

4.76 

%

 

$

875,999 

 

$

9,620 

 

4.37 

%

Taxable securities

 

 

117,888 

 

 

706 

 

2.38 

%

 

 

74,172 

 

 

385 

 

2.06 

%

Tax-exempt securities

 

 

35,103 

 

 

202 

 

2.28 

%

 

 

37,853 

 

 

235 

 

2.47 

%

Interest bearing deposits at banks

 

 

1,713 

 

 

 

1.62 

%

 

 

1,162 

 

 

 

0.34 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

1,125,692 

 

$

12,574 

 

4.43 

%

 

 

989,186 

 

$

10,241 

 

4.12 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

13,683 

 

 

 

 

 

 

 

 

13,802 

 

 

 

 

 

 

Premises and equipment, net

 

 

10,892 

 

 

 

 

 

 

 

 

11,557 

 

 

 

 

 

 

Other assets

 

 

48,312 

 

 

 

 

 

 

 

 

44,130 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,198,579 

 

 

 

 

 

 

 

$

1,058,675 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

91,962 

 

$

50 

 

0.22 

%

 

$

86,428 

 

$

50 

 

0.23 

%

Savings

 

 

545,900 

 

 

667 

 

0.48 

%

 

 

487,168 

 

 

574 

 

0.47 

%

Time deposits

 

 

163,087 

 

 

535 

 

1.30 

%

 

 

115,644 

 

 

353 

 

1.21 

%

Other borrowed funds

 

 

30,347 

 

 

111 

 

1.45 

%

 

 

44,577 

 

 

94 

 

0.84 

%

Junior subordinated debentures

 

 

11,330 

 

 

111 

 

3.89 

%

 

 

11,330 

 

 

95 

 

3.34 

%

Securities sold U/A to repurchase

 

 

9,547 

 

 

 

0.21 

%

 

 

13,400 

 

 

 

0.18 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

852,173 

 

$

1,479 

 

0.69 

%

 

 

758,547 

 

$

1,172 

 

0.61 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

214,228 

 

 

 

 

 

 

 

 

187,201 

 

 

 

 

 

 

Other

 

 

15,035 

 

 

 

 

 

 

 

 

16,860 

 

 

 

 

 

 

Total liabilities

 

$

1,081,436 

 

 

 

 

 

 

 

$

962,608 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

117,143 

 

 

 

 

 

 

 

 

96,067 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

1,198,579 

 

 

 

 

 

 

 

$

1,058,675 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earnings

 

 

 

 

$  

11,095 

 

 

 

 

 

 

 

$  

9,069 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.91 

%

 

 

 

 

 

 

 

3.65 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.74 

%

 

 

 

 

 

 

 

3.51 

%



42

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016



 

Average

 

Interest

 

 

 

 

Average

 

Interest

 

 

 



 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/



 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate



 

(dollars in thousands)

 

(dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

945,828 

 

$

32,551 

 

4.60 

%

 

$

816,712 

 

$

27,228 

 

4.45 

%

Taxable securities

 

 

93,848 

 

 

1,705 

 

2.43 

%

 

 

71,941 

 

 

1,323 

 

2.46 

%

Tax-exempt securities

 

 

35,541 

 

 

636 

 

2.39 

%

 

 

38,314 

 

 

695 

 

2.42 

%

Interest bearing deposits at banks

 

 

8,152 

 

 

62 

 

1.02 

%

 

 

11,949 

 

 

45 

 

0.50 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

1,083,369 

 

$

34,954 

 

4.31 

%

 

 

938,916 

 

$

29,291 

 

4.17 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

13,326 

 

 

 

 

 

 

 

 

12,852 

 

 

 

 

 

 

Premises and equipment, net

 

 

11,048 

 

 

 

 

 

 

 

 

11,321 

 

 

 

 

 

 

Other assets

 

 

47,269 

 

 

 

 

 

 

 

 

42,973 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,155,012 

 

 

 

 

 

 

 

$

1,006,062 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

94,481 

 

$

155 

 

0.22 

%

 

$

87,864 

 

$

213 

 

0.32 

%

Regular savings

 

 

532,623 

 

 

1,927 

 

0.48 

%

 

 

469,470 

 

 

1,711 

 

0.49 

%

Time deposits

 

 

153,423 

 

 

1,476 

 

1.29 

%

 

 

113,054 

 

 

1,048 

 

1.24 

%

Other borrowed funds

 

 

18,764 

 

 

208 

 

1.48 

%

 

 

21,988 

 

 

182 

 

1.11 

%

Junior subordinated debentures

 

 

11,330 

 

 

315 

 

3.72 

%

 

 

11,330 

 

 

273 

 

3.22 

%

Securities sold U/A to repurchase

 

 

10,856 

 

 

16 

 

0.20 

%

 

 

13,252 

 

 

19 

 

0.19 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

821,477 

 

$

4,097 

 

0.67 

%

 

 

716,958 

 

$

3,446 

 

0.64 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

205,380 

 

 

 

 

 

 

 

 

180,472 

 

 

 

 

 

 

Other

 

 

14,649 

 

 

 

 

 

 

 

 

14,632 

 

 

 

 

 

 

Total liabilities

 

$

1,041,506 

 

 

 

 

 

 

 

$

912,062 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

113,506 

 

 

 

 

 

 

 

 

94,000 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

1,155,012 

 

 

 

 

 

 

 

$

1,006,062 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earnings

 

 

 

 

$  

30,857 

 

 

 

 

 

 

 

$  

25,845 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.81 

%

 

 

 

 

 

 

 

3.68 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.64 

%

 

 

 

 

 

 

 

3.53 

%



43

 


 

Table of Contents

Net Income



Net income was $3.7 million, or $0.76 per diluted share, in the third quarter of 2017, compared with
$2.6 million, or $0.54 per diluted share, in the second quarter of 2017 and $2.2 million, or $0.51 per diluted share, in last year’s third quarter.  The increase over both prior periods primarily reflects higher net interest income and a lower provision for loan losses.  Return on average equity was 12.71% for the third quarter of 2017 compared with 9.13% in the second quarter and 9.23% in the third quarter of 2016.

The Company had net income of $9.5 million, or $1.96 per diluted share, in the first nine months of 2017, a 60% increase from $5.9 million, or $1.37 per diluted share, in the comparable period of 2016.  The increase reflected growth in net interest income and non-interest income and a reduction in the provision for loan losses.  Return on average equity improved from 8.42% in the first nine months of 2016 to 11.14% in the nine month period ended September 30, 2017.

Other Results of Operations – Quarterly Comparison

Net interest income increased $1.0 million, or 10%, from the second quarter of 2017 and $2.0 million, or 22%, from the prior-year third quarter to $11.1 million in the third quarter of 2017The increase was driven by average interest-earning asset growth, particularly loans, as well as a widening of the net interest margin.  Average commercial loans, including both commercial real estate and commercial and industrial loans, were $789 million in the 2017 third quarter, 3% higher than $763 million in the second quarter and 11% higher than $712 million in the 2016 third quarter.   

Net interest income benefited $0.4 million in the quarter from the payoff in full of two unrelated loans that were formerly in nonaccrual status.  At the time of the payoff, $0.4 million in interest payments previously received were recognized as income.  The benefit contributed 14 basis points toward the quarter’s net interest margin and 16 basis points toward the average loan yield during the quarter.

Third quarter net interest margin of 3.91% increased 17 basis points from the 2017 second quarter and 26 basis points from the third quarter of 2016.  Loan yields benefited from variable loan re-pricing due to an increase in the prime rate as the Federal Reserve increased its target rate by 75 basis points since late in 2016, including 25 basis points at its June 2017 meeting.  Funding costs increased during the quarter as the cost of interest-bearing liabilities was 0.69% in the third quarter of 2017 compared with 0.65% in the second quarter of 2017 and 0.61% in the third quarter of 2016.  Some of the increase in funding costs was due to an increase in time deposit rates given higher market rates and increased competition.    With the Company and most competitors keeping savings rates flat due to the high cost of re-pricing large savings portfolios, the primary tool to gather consumer deposits is through time deposits.  Time deposit customers tend to be more rate sensitive so banks need to keep rates at competitive levels to attract new time deposits.  The average cost of time deposits was 1.30% in the third quarter of 2017, compared with 1.28% in the second quarter of 2017 and 1.21% in the third quarter of 2016.  When compared with the second quarter of 2017, the increase in the overall cost of interest-bearing liabilities was also a result of higher usage of wholesale borrowings, which increased from 4% of interest-bearing liabilities in the second quarter of 2017 to 6% in the third quarter of 2017.  When compared with last year’s third quarter, the increase in the rates paid on overnight borrowings contributed to the higher cost of interest-bearing liabilities in the third quarter of 2017.  The average rate paid on borrowings in the third quarter of 2017 was 1.76%, compared with 1.12% in last year’s third quarter, reflecting the increase in the federal funds rate.

The $0.2 million provision for loan losses for the third quarter of 2017 reflects the loan growth in the quarter, somewhat offset by a decrease in criticized loans and a decrease in specific reserves on impaired loans.  The 2017 third quarter provision for loan losses is lower than the $0.4 million recorded in the second quarter of 2017 and $1.0 million in the third quarter of 2016.  Both of the comparative periods experienced higher loan growth and an increase in criticized loans.



Non-interest income was $3.4 million in the third quarter of 2017, compared with $3.1 million in the second quarter of 2017 and $3.3 million in the prior year third quarter.  Each of the third quarter and second quarter of 2017 included the impact of a net reduction of noninterest income related to investments in historic rehabilitation tax credits.  There was no comparable transaction in the third quarter of 2016.

The Company’s community focus and support extends to financing historic rehabilitation projects in the City of Buffalo and the Company enhances its yield by investing in the related tax credits.  When a project is completed, the Company begins to recognize tax benefits with an associated reduction in the investment.  In the third quarter of 2017, the positive net impact to net income was $0.3 million as a $1.0 million refundable New York State tax credit was recorded in non-interest income and a corresponding $0.6 million tax benefit was realized in income tax expense, offset by a $1.3 million write-off on the investment.  The write-off was contemplated during the pricing of the initial investment in the tax credit project, which ensures that the Company earns its desired return on investment.  The Company will recognize an additional $0.2 million tax benefit from these projects in the fourth quarter of 2017 to complete the transaction.  The net impact to non-interest income in the third quarter of 2017 from investing in historic tax credits was a reduction of $0.4 million, compared with a reduction of $0.3 million in this year’s second quarter and no impact in the third quarter of 2016.



Insurance revenue increased $0.3 million from each of the second quarter of 2017 and last year’s third quarter to $2.2 million in the third quarter of 2017Part of the increase from the second quarter of 2017 is seasonal in nature as commercial lines revenue has a large number of policies that renew in July.  Employee benefits revenue, an important focus for the Company after hiring a couple industry

44

 


 

Table of Contents

veterans, experienced significant growth in the quarter, particularly when compared with the prior year’s third quarter.  The year-over-year increase was also driven by continued growth in commercial lines insurance commissions and personal lines revenue bolstered by revenue from the two recent insurance agency acquisitions.



Non-interest expenses of $9.8 million in the third quarter of 2017 increased 13% from the prior-year period and 6% from the second quarter of 2017Salaries and benefits costs were $6.3 million in the third quarter of 2017, an increase of 5% from the second quarter of 2017 and 17% from last year’s third quarter.  The increase in salaries and benefits reflects strategic personnel hires to support the Company’s continued growth, as well as an increase in incentive compensation, benefits costs, and severance expenses.



Technology and communications expenses were $0.7 million in the third quarter of 2017, an increase of $0.2 million from last year’s third quarter, but down from $0.8 million in the second quarter of 2017.  Technology expenses increased from the prior year period due to a new online banking platform that was implemented in the second quarter of 2017 and a new core banking system that was converted in 2016.  Although the new core system was implemented in the beginning of the second quarter of 2016, there were credits and rebates associated with the new contract that were applied in the third quarter of 2016. 



The Company’s efficiency ratio in the third quarter of 2017 improved to 66.2%, lower than the 68.9% in the second quarter of 2017 and 70.2% in last year’s third quarter.  The reduction reflects the Company’s significant net interest income growth.



Income tax expense was $0.7 million, or an effective tax rate of 16.6%, for the third quarter of 2017 compared with $0.9 million, or 24.8%, in the second quarter of 2017 and $0.5 million, or 17.5%, in last year’s third quarter.  The effective tax rate for each of the quarters reflects the benefit of the previously noted tax credit investment transactions.  Excluding the impact of the historic tax credits, the effective tax rates were 29.0%, 29.3%, and 31.7% in the third quarter of 2017, the second quarter of 2017, and the third quarter of 2016, respectively. 



Other Results of Operations – Year-to-Date Comparison

Net interest income was $30.9 million for the first nine months of 2017, a $5.0 million or 19% increase from the first nine months of 2016. The increase in net interest income is attributable to a $144 million or 15% increase in average interest-earning assets and a 13 basis point increase in net interest margin. The increase in average interest-earning assets reflects average loan growth of $129 million or 16% to $946 million during the first nine months of 2017. Most of the growth was in commercial loans, including $76 million in average commercial real estate loans and $34 million in average C&I loans.



The Company’s net interest margin increased 13 basis points from 3.68% in the first nine months of 2016 to 3.81% in the first nine months of 2017.   The yield on average interest-earning assets increased 14 basis points from 4.17% to 4.31%. Average loan yields increased 15 basis points from 4.45% to 4.60%. Loan yields have benefited from variable loan re-pricing due to increases in the prime rate related after the Federal Reserve raised its target rate by 75 basis points between December 2016 and September 30, 2017.  The cost of interest-bearing liabilities was 0.67% for the nine month period ended September 30, 2017, an increase of 3 basis points from the prior year period.  Time deposit rates increased from 1.24% in the nine month period ended September 30, 2016 to 1.29% in the current year period.  Over the same periods, respectively, average other borrowings rates increased from 1.11% to 1.49% and junior subordinated debentures increased from 3.22% to 3.72%.  With the rise in short-term interest rates in 2017, competitive time deposit rates increased in the market and promotional pricing of time deposits resulted in the increase in the Company’s overall time deposit portfolio rate.  The other borrowings rate reflects the increase in the federal funds rate and the junior subordinated debentures increased rate reflects the higher 3 month LIBOR rate in 2017.  These rate increases were somewhat offset by a decrease in average NOW rates of 10 basis points and average savings deposit rates of 1 basis point.  Consumer NOW rates were reduced by the Bank in late 2016 while most savings deposit product rates were unchanged, with the slight decrease in the portfolio’s overall rate resulting from a higher concentration of lower-cost municipal savings deposits.



The Company recorded $0.1 million in provision for loan losses in the nine month period ended September 30, 2017, compared with a provision of $0.8 million in the first nine months of 2016. The lower provision in the first nine months of 2017 is attributable to a sustained period of low charge-offs impacting historical loss rates in the reserve calculation, net recoveries in the first nine months of 2017 of $0.1 million, and lower loan growth in the nine month period ended September 30, 2017.



Non-interest income for the first nine months of 2017 of $10.0 million increased $1.4 million from the prior year period. The increase was predominantly a result of increased insurance service and fee revenue.  Insurance service and fee revenue, the largest component of non-interest income, was $6.2 million for the nine month period ended September 30, 2017,  a 21% increase from $5.2 million in the comparable period of the prior year. Several business lines contributed to the increase, including profit sharing, commercial lines property and casualty commissions, personal lines property and casualty commissions, claims services revenue, and employee benefits revenue.



45

 


 

Table of Contents

Total non-interest expense increased to $28.2 million in the first nine months of 2017, $2.2 million or 9% higher than the nine month period ended September 30, 2016. The increase was mostly attributable to an increase in salaries and employee benefits costs. Salaries and employee benefits costs were $18.1 million for the first nine months of 2017, a $1.7 million or 10% increase from $16.4 million in the prior year period. The year-over-year increase in salary and benefits expense reflects annual merit increases, personnel hires to support the Company’s growth strategy, and higher incentive compensation. Technology and communications expenses increased $0.5 million to $2.1 million for the first nine months of 2017, reflecting additional expense related to the Company’s conversion to a new online banking platform in the second quarter of 2017 and a new core banking system in 2016.



The Company’s efficiency ratio for the first nine months of 2017 was 67.8%, compared with 74.0% during the prior-year period. The improvement in the ratio reflects the increase in net interest income and non-interest income,  partially offset by the increase in non-interest expenses.



An income tax expense of $3.0 million was recorded for the nine month period ended September 30, 2017, compared with $1.7 million in the first nine months of 2016. The difference reflected the increase in taxable income in 2017 as well as the impact of historic tax credits.  A benefit of $0.9 million was recorded in the first nine months of 2017, compared with $0.8 million in the comparative period in 2016.   The effective tax rate for the first nine months of 2017 was 24.0%, compared with 22.5% in the comparable 2016 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 29.7%, compared with 31.0% in the first nine months of 2016.  The lower rate reflects the benefit from discrete tax deductions related to stock compensation in the nine month period ended September 30, 2017.  The change in accounting for stock compensation as it relates to taxable income is described in more detail in Note 11 to the Unaudited Consolidated Financial Statements for the period ended September 30, 2017.





CAPITAL



The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a  Tier 1 leverage ratio of 10.38% at September 30, 2017, compared with 10.57% at June 30, 2017 and 9.49%  at December 31, 2016The increase from the end of 2016 reflects the impact of the Company’s registered common stock offering in January 2017 which netted $14 million in additional capital after expenses.  The Company issued 440,000 shares of common stock at $35.00 per share (including shares issued upon partial exercise of the underwriters’ allotment option in connection with the offering)The offering was accretive to book value per share.  Book value per share increased to $24.60 at September 30, 2017, compared with $24.21 at June 30, 2017, and $22.50 at December 31, 2016.



On August 15, 2017, the Company declared a semi-annual cash dividend of $0.40 per share on the Company’s outstanding common stock.  The dividend was paid on October 3, 2017 to shareholders of record as of September 12, 2017.  Earlier in the year, a $0.40 dividend was declared in February 2017 and paid in  April 2017.





LIQUIDITY



The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations.  The Bank also has many borrowing options.  The Company uses the Federal Home Loan Bank of New York (“FHLBNY”) as its primary source of overnight funds and also has one long-term advance with FHLBNY.  The Company had $34 million in borrowed funds at FHLBNY at September 30, 2017, compared with  $15 million and $28 million at June 30, 2017 and December 31, 2016, respectively.  The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements.    As a member of the FHLB, the Bank is able to borrow funds at competitive rates.  Advances of up to $180 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB.  An amount equal to 25% of the Bank’s total assets could be borrowed through the advance programs under certain qualifying circumstances.  The Bank also has the ability to purchase up to $18 million in federal funds from its correspondent banks.  By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window.  The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.



Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise.  Contractual maturities are also laddered, with consideration as to the volatility of market prices.  At September 30, 2017, approximately 5% of the Bank’s securities had contractual maturity dates of one year or less and approximately 22% had maturity dates of five years or less.  Additionally, mortgage-backed securities, which comprise 59% of the investment portfolio at September 30, 2017, provide consistent cash flows for the Bank.



46

 


 

Table of Contents

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



Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business.  As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank.  Included in the calculation are liquid assets and potential liabilities.  Management stresses the potential liabilities calculation to ensure a strong liquidity position.  Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases.  In the Company’s internal stress test at September 30, 2017, the Company had net short-term liquidity of $194 million as compared with $248 million at December 31, 2016.  Available assets of $154 million, divided by public and purchased funds of $239 million, resulted in a long-term liquidity ratio of 64% at September 30, 2017, compared with 58% at December 31, 2016.



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



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





ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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



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



47

 


 

Table of Contents



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, 2017

 

 

December 31, 2016

Changes in interest rates

 

 

 

 

 

 



 

 

 

 

 

 

+200 basis points

 

$

1,953 

 

$

1,838 

+100 basis points

 

 

2,801 

 

 

2,590 



 

 

 

 

 

 

-100 basis points

 

 

(3,664)

 

 

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 may be limited to lesser amounts such that interest rates are not less than zero. The Company included the 100 basis point reduction scenario results in the preceding table as of September 30, 2017 as this scenario offers more meaningful results now that the Federal Reserve has increased the federal funds rate 75 basis points between December 31, 2016 and September 30, 2017.  The projected negative impact to net interest income in this scenario reflects the Company’s asset sensitive position on its balance sheet.  The assumptions in the Company’s projections 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, 2017 (the end of the period covered by this Report).  Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of September 30, 2017 the Company’s disclosure controls and procedures were effective.



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING



No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





48

 


 

Table of Contents



PART II - OTHER INFORMATION



ITEM 1 – LEGAL PROCEEDINGS



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



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



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



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



Issuer Purchases of Equity Securities





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased (1)

 

Average Price Paid per Share

 

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

 

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

July 2017:

 

 

 

 

 

 

 

 

 

 

July 1, 2017 - July 31, 2017

 

 

498 

 

$

41.95 

 

-    

 

5,994 

August 2017:

 

 

 

 

 

 

 

 

 

 

August 1, 2017 - August 31, 2017

 

 

341 

 

$

40.95 

 

-    

 

5,994 

September 2017:

 

 

 

 

 

 

 

 

 

 

September 1, 2017 - September 30, 2017

 

 

-    

 

$

-    

 

-    

 

5,994 



 

 

 

 

 

 

 

 

 

 

Total:

 

 

839 

 

$

41.54 

 

-    

 

5,994 



(1)

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



(2)

On March 25, 2013, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company’s common stock.  The repurchase program has no fixed expiration date but may be suspended or discontinued at any time.  The maximum number of shares that may be purchased under this program as of September 30, 2017 was 5,994.



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.



49

 


 

Table of Contents





 

 

 

 



 

EXHIBIT INDEX



 

 

Exhibit No.

 

Name



 

 

31.1

 

Certification of Principal Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.    



 

 



 

 

31.2

 

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  



 

 



 

 

32.1

 

Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



 

 



 

 



 

 



 

 

32.2

 

Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



 

 



 

 



 

 



 

 

101

 

The following materials from Evans Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – September 30, 2017 and December 31, 2016; (ii) Unaudited Consolidated Statements of Income – Three months ended September 30, 2017 and 2016; (iii) Unaudited Consolidated Statements of Income – Nine months ended September 30, 2017 and 2016; (iv) Unaudited Statements of Consolidated Comprehensive Income – Three months ended September 30, 2017 and 2016; (v) Unaudited Statements of Consolidated Comprehensive Income – Nine months ended September 30, 2017 and 2016; (vi) Unaudited Consolidated Statements of Stockholders' Equity – Nine months ended September 30, 2017 and 2016; (vii) Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2017 and 2016; and (vii) Notes to Unaudited Consolidated Financial Statements.



50

 


 

Table of Contents



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, 2017



/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)







DATE

November 2, 2017



/s/ John B. Connerton

John B.  Connerton

Treasurer

(Principal Financial Officer)









51