EVANS BANCORP INC - Quarter Report: 2017 March (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 March 31, 2017

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

For the transition period from to ______

Commission file number 001-35021

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)

New York 16-1332767

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

incorporation or organization) Identification No.)

One Grimsby Drive, Hamburg, NY 14075

(Address of principal executive offices) (Zip Code)

(716) 926-2000

(Registrant's telephone number, including area code)

Not Applicable

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

since last report)

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

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

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


Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if smaller reporting company)		Smaller reporting company ☐
Emerging growth company ☐

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

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

Yes ☐ No ☒

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

Common Stock, $.50 par value, 4,766,949 shares as of May 1, 2017

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INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES



PART 1. FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets – March 31, 2017 and December 31, 2016	1

	Unaudited Consolidated Statements of Income – Three months ended March 31, 2017 and 2016	2

	Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2017 and 2016	3

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2017 and 2016	4

	Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2017 and 2016	5

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 6.	Exhibits	43

	Signatures	44

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2017 AND DECEMBER 31, 2016
(in thousands, except share and per share amounts)
	March 31,		December 31,
	2017		2016
ASSETS
Cash and due from banks	$	10,795	$	12,503
Interest-bearing deposits at banks		19,440		581
Securities:
Available for sale, at fair value (amortized cost: $115,188 at March 31, 2017;		114,896		95,222
$95,810 at December 31, 2016)
Held to maturity, at amortized cost (fair value: $1,387 at March 31, 2017;		1,408		1,983
$1,959 at December 31, 2016)
Federal Home Loan Bank common stock, at cost		1,366		2,185
Federal Reserve Bank common stock, at cost		1,546		1,546
Loans, net of allowance for loan losses of $13,579 at March 31, 2017
and $13,916 at December 31, 2016		932,004		928,596
Properties and equipment, net of accumulated depreciation of $17,328 at March 31, 2017
and $17,012 at December 31, 2016		11,065		11,310
Goodwill and intangible assets		8,638		8,406
Bank-owned life insurance		21,664		21,534
Other assets		16,838		16,843

TOTAL ASSETS	$	1,139,660	$	1,100,709

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand	$	194,747	$	201,741
NOW		103,907		88,632
Savings		531,408		508,652
Time		147,915		140,949
Total deposits		977,977		939,974

Securities sold under agreement to repurchase		11,679		10,159
Other borrowings		10,000		28,200
Other liabilities		16,047		14,298
Junior subordinated debentures		11,330		11,330
Total liabilities		1,027,033		1,003,961

CONTINGENT LIABILITIES AND COMMITMENTS

STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized; 4,763,696
and 4,302,504 shares issued at March 31, 2017 and December 31, 2016,
respectively, and 4,763,696 and 4,300,634 outstanding at March 31, 2017
and December 31, 2016, respectively		2,384		2,153
Capital surplus		58,543		44,389
Treasury stock, at cost, 0 and 1,870 shares at March 31, 2017 and
December 31, 2016, respectively		-		-
Retained earnings		53,874		52,630
Accumulated other comprehensive loss, net of tax		(2,174)		(2,424)
Total stockholders' equity		112,627		96,748

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,139,660	$	1,100,709

See Notes to Unaudited Consolidated Financial Statements

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(in thousands, except share and per share amounts)
	Three Months Ended March 31,
	2017		2016
INTEREST INCOME
Loans	$	10,246	$	8,730
Interest-bearing deposits at banks		12		11
Securities:
Taxable		436		377
Non-taxable		224		238
Total interest income		10,918		9,356
INTEREST EXPENSE
Deposits		1,116		959
Other borrowings		58		50
Junior subordinated debentures		100		87
Total interest expense		1,274		1,096
NET INTEREST INCOME		9,644		8,260
(CREDIT) PROVISION FOR LOAN LOSSES		(435)		208
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		10,079		8,052
NON-INTEREST INCOME
Deposit service charges		390		443
Insurance service and fees		2,168		1,748
Gain on loans sold		18		15
Bank-owned life insurance		130		136
Interchange fee income		344		318
Other		472		334
Total non-interest income		3,522		2,994
NON-INTEREST EXPENSE
Salaries and employee benefits		5,716		5,514
Occupancy		775		699
Advertising and public relations		190		285
Professional services		602		580
Technology and communications		607		598
Amortization of intangibles		28		-
FDIC insurance		227		159
Other		910		693
Total non-interest expense		9,055		8,528
INCOME BEFORE INCOME TAXES		4,546		2,518
INCOME TAX PROVISION		1,400		804
NET INCOME	$	3,146	$	1,714

Net income per common share-basic	$	0.68	$	0.40
Net income per common share-diluted	$	0.66	$	0.40
Cash dividends per common share	$	0.40	$	0.38
Weighted average number of common shares outstanding		4,634,096		4,263,109
Weighted average number of diluted shares outstanding		4,757,062		4,328,034

See Notes to Unaudited Consolidated Financial Statements

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(in thousands)
	Three Months Ended March 31,
	2017			2016

NET INCOME		$	3,146		$	1,714

OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain on available-for-sale securities			187			649


Defined benefit pension plans:
Amortization of prior service cost	10			5
Amortization of actuarial loss	53			35
Total			63			40

OTHER COMPREHENSIVE INCOME, NET OF TAX			250			689

COMPREHENSIVE INCOME		$	3,396		$	2,403

See Notes to Unaudited Consolidated Financial Statements

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive		Treasury
	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance, December 31, 2015	$	2,132	$	43,318	$	47,616	$	(1,810)	$	-	$	91,256
Net Income						1,714						1,714
Other comprehensive income								689				689
Cash dividends ($0.38 per common share)						(1,626)						(1,626)
Stock compensation expense				118								118
Excess tax benefit from stock-based compensation				9								9
Issued 19,093 restricted shares		10		(10)								-
Reissued 2,938 restricted shares, net of forfeitures												-
Balance, March 31, 2016	$	2,142	$	43,435	$	47,704	$	(1,121)	$	-	$	92,160

Balance, December 31, 2016	$	2,153	$	44,389	$	52,630	$	(2,424)	$	-	$	96,748
Net Income						3,146						3,146
Other comprehensive income								250				250
Cash dividends ($0.40 per common share)						(1,902)						(1,902)
Stock compensation expense				136								136
Issued 440,000 shares in stock offering		220		13,922								14,142
Issued 15,763 restricted shares		8		(8)								-
Issued 5,429 shares in stock option exercises		3		104								107
Reissued 1,870 shares in stock option exercises												-
Balance, March 31, 2017	$	2,384	$	58,543	$	53,874	$	(2,174)	$	-	$	112,627

See Notes to Unaudited Consolidated Financial Statements

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(in thousands)
	Three Months Ended March 31,
		2017		2016
OPERATING ACTIVITIES:
Interest received	$	10,801	$	9,090
Fees received		3,210		2,839
Interest paid		(1,263)		(1,068)
Cash paid to employees and vendors		(10,116)		(8,353)
Income taxes paid		(5)		(9)
Proceeds from sale of loans held for resale		2,788		880
Originations of loans held for resale		(3,354)		(335)

Net cash provided by operating activities		2,061		3,044

INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(22,300)		(20,471)
Proceeds from maturities, calls, and payments		3,656		3,883
Held to maturity securities:
Purchases		(35)		-
Proceeds from maturities, calls, and payments		610		11
Additions to properties and equipment		(56)		(300)
Purchase of tax credit investment		-		(359)
Insurance agency acquisitions		(275)		-
Net increase in loans		(2,082)		(23,176)

Net cash used in investing activities		(20,482)		(40,412)

FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term borrowings, net		(16,680)		2,072
Net increase in deposits		38,003		46,067
Issuance of common stock		14,249		-

Net cash provided by financing activities		35,572		48,139

Net increase in cash and cash equivalents		17,151		10,771

CASH AND CASH EQUIVALENTS:
Beginning of period		13,084		22,621

End of period	$	30,235	$	33,392

(continued)

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(in thousands)
	Three Months Ended March 31,
		2017		2016

RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:

Net income	$	3,146	$	1,714

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		432		359
Deferred tax expense		367		36
(Credit) Provision for loan losses		(435)		208
Gain on loans sold		(18)		(15)
Stock options and restricted stock expense		136		118
Proceeds from sale of loans held for resale		2,788		880
Originations of loans held for resale		(3,354)		(335)
Changes in assets and liabilities affecting cash flow:
Other assets		(901)		561
Other liabilities		(100)		(482)

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	2,061	$	3,044

See Notes to Unaudited Consolidated Financial Statements

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PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIODS ENDED MARCH 31, 2017 AND 2016

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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2. SECURITIES

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



	March 31, 2017
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. government agencies	$	16,795	$	73	$	(81)	$	16,787
States and political subdivisions		34,472		434		(62)		34,844
Total debt securities	$	51,267	$	507	$	(143)	$	51,631

Mortgage-backed securities:
FNMA	$	22,140	$	96	$	(229)	$	22,007
FHLMC		9,452		31		(78)		9,405
GNMA		2,463		29		(21)		2,471
SBA		7,975		19		(55)		7,939
CMO		21,891		52		(500)		21,443
Total mortgage-backed securities	$	63,921	$	227	$	(883)	$	63,265

Total securities designated as available for sale	$	115,188	$	734	$	(1,026)	$	114,896

Held to Maturity:
Debt securities
States and political subdivisions	$	1,408	$	4	$	(25)	$	1,387

Total securities designated as held to maturity	$	1,408	$	4	$	(25)	$	1,387



	December 31, 2016
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. government agencies	$	12,958	$	67	$	(153)	$	12,872
States and political subdivisions		34,952		356		(166)		35,142
Total debt securities	$	47,910	$	423	$	(319)	$	48,014

Mortgage-backed securities:
FNMA	$	14,694	$	96	$	(230)	$	14,560
FHLMC		3,544		32		(51)		3,525
GNMA		2,535		19		(21)		2,533
CMO		27,127		67		(604)		26,590
Total mortgage-backed securities	$	47,900	$	214	$	(906)	$	47,208

Total securities designated as available for sale	$	95,810	$	637	$	(1,225)	$	95,222

Held to Maturity:
Debt securities
States and political subdivisions	$	1,983	$	5	$	(29)	$	1,959

Total securities designated as held to maturity	$	1,983	$	5	$	(29)	$	1,959

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

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




	March 31, 2017				December 31, 2016
	Amortized		Estimated		Amortized		Estimated
	cost		fair value		cost		fair value
		(in thousands)				(in thousands)

Debt securities available for sale:

Due in one year or less	$	2,875	$	2,885	$	2,869	$	2,876
Due after one year through five years		30,201		30,405		30,171		30,214
Due after five years through ten years		15,487		15,555		12,166		12,133
Due after ten years		2,704		2,786		2,704		2,791
		51,267		51,631		47,910		48,014

Mortgage-backed securities
available for sale		63,921		63,265		47,900		47,208

Total available for sale securities	$	115,188	$	114,896	$	95,810	$	95,222

Debt securities held to maturity:

Due in one year or less	$	174	$	173	$	780	$	778
Due after one year through five years		285		279		289		283
Due after five years through ten years		849		842		814		805
Due after ten years		100		93		100		93
		1,408		1,387		1,983		1,959

Total held to maturity securities	$	1,408	$	1,387	$	1,983	$	1,959

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

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

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	March 31, 2017

		Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
		(in thousands)
Available for Sale:
Debt securities:
U.S. government agencies	$	6,919	$	(81)	$	-	$	-	$	6,919	$	(81)
States and political subdivisions		9,370		(46)		733		(16)		10,103		(62)
Total debt securities	$	16,289	$	(127)	$	733	$	(16)	$	17,022	$	(143)

Mortgage-backed securities:
FNMA	$	15,301	$	(229)	$	-	$	-	$	15,301	$	(229)
FHLMC		7,730		(37)		925		(41)		8,655		(78)
GNMA		1,036		(19)		308		(2)		1,344		(21)
SBA		5,906		(55)		-		-		5,906		(55)
CMO		14,275		(353)		3,662		(147)		17,937		(500)
Total mortgage-backed securities	$	44,248	$	(693)	$	4,895	$	(190)	$	49,143	$	(883)

Held to Maturity:
Debt securities:
States and political subdivisions	$	611	$	(13)	$	362	$	(12)	$	973	$	(25)

Total temporarily impaired
securities	$	61,148	$	(833)	$	5,990	$	(218)	$	67,138	$	(1,051)



	December 31, 2016

		Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
		(in thousands)
Available for Sale:
Debt securities:
U.S. government agencies	$	6,847	$	(153)	$	-	$	-	$	6,847	$	(153)
States and political subdivisions		16,895		(146)		731		(20)		17,626		(166)
Total debt securities	$	23,742	$	(299)	$	731	$	(20)	$	24,473	$	(319)

Mortgage-backed securities:
FNMA	$	9,577	$	(230)	$	-	$	-	$	9,577	$	(230)
FHLMC		1,728		(8)		988		(43)		2,716		(51)
GNMA		1,046		(17)		309		(4)		1,355		(21)
CMO		19,745		(569)		1,166		(35)		20,911		(604)
Total mortgage-backed securities	$	32,096	$	(824)	$	2,463	$	(82)	$	34,559	$	(906)

Held to Maturity:
Debt securities:
States and political subdivisions	$	863	$	(3)	$	706	$	(26)	$	1,569	$	(29)

Total temporarily impaired
securities	$	56,701	$	(1,126)	$	3,900	$	(128)	$	60,601	$	(1,254)

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

The Company has not recorded any other-than-temporary impairment (“OTTI”) charges as of March 31, 2017 and did not record any OTTI charges during 2016. The credit worthiness of the Company’s portfolio is largely reliant on the ability of U.S. government sponsored agencies such as FHLB, Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations. In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio. The stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.

3. FAIR VALUE MEASUREMENTS

Fair value is defined in ASC Topic 820 “Fair Value Measurements and Disclosures” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

There are three levels of inputs to fair value measurements:


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


			Level 3 inputs are unobservable inputs.

Observable market data should be used when available.

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS

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



(in thousands)		Level 1		Level 2		Level 3		Fair Value

March 31, 2017
Securities available-for-sale:
U.S. government agencies	$	-	$	16,787	$	-	$	16,787
States and political subdivisions		-		34,844		-		34,844
Mortgage-backed securities		-		63,265		-		63,265
Mortgage servicing rights		-		-		564		564

December 31, 2016
Securities available-for-sale:
U.S. government agencies	$	-	$	12,872	$	-	$	12,872
States and political subdivisions		-		35,142		-		35,142
Mortgage-backed securities		-		47,208		-		47,208
Mortgage servicing rights		-		-		527		527

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Securities available for sale

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

Management believes that it has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control. On a quarterly basis, the Company reviews changes in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. Additionally, on an annual basis, the Company has its entire security portfolio priced by a second pricing service to determine consistency with another market evaluator. If, during the Company’s review or when comparing with another servicer, a material difference between pricing evaluations were to exist, the Company would submit an inquiry to the service provider regarding the data used to value a particular security. If the Company determines it has market information that would support a different valuation than the initial evaluation it can submit a challenge for a change to that security’s valuation.

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

Mortgage servicing rights

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

The following table summarizes the changes in fair value for mortgage servicing rights during the three month periods ended March 31, 2017 and 2016, respectively:



	Three months ended March 31,
(in thousands)	2017		2016
Mortgage servicing rights - January 1	$	527	$	557
Gains (losses) included in earnings		11		(69)
Additions from loan sales		26		8
Mortgage servicing rights - March 31	$	564	$	496

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




	March 31, 2017		December 31, 2016
Servicing fees	0.25	%	0.25	%
Discount rate	9.52	%	9.52	%
Prepayment rate (CPR)	8.15	%	8.12	%

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

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



(in thousands)		Level 1		Level 2		Level 3		Fair Value

March 31, 2017
Collateral dependent impaired loans	$	-	$	-	$	17,535	$	17,535

December 31, 2016
Collateral dependent impaired loans	$	-	$	-	$	13,114	$	13,114

Collateral dependent impaired loans

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

The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company internal loan rating scale to a 5 (special mention) or a 6 (substandard) depending on the amount of the loan, the type of loan and the type of collateral. All impaired commercial loans are either graded a 6 or 7 on the internal loan rating scale. For consumer loans, the Company obtains appraisals when a loan becomes 90 days past due or is determined to be impaired, whichever occurs first. Subsequent to the downgrade or reaching 90 days past due, if the loan remains outstanding and impaired for at least one year more, management may require another follow-up appraisal. Between receipts of updated appraisals, if necessary, management may perform an internal valuation based on any known changing conditions in the marketplace such as sales of similar properties, a change in the condition of the collateral, or feedback from local appraisers. Impaired loans had a gross value of $19.5 million, with an allowance for loan loss of $2.0 million, at March 31, 2017 compared with $15.1 million and $2.0 million, respectively, at December 31, 2016.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

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




	March 31, 2017				December 31, 2016
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents	$	30,235	$	30,235	$	13,084	$	13,084
Level 2:
Available for sale securities		114,896		114,896		95,222		95,222
FHLB and FRB stock		2,912		2,912		3,731		3,731
Level 3:
Held to maturity securities		1,408		1,387		1,983		1,959
Loans, net		932,004		913,707		928,596		945,998
Mortgage servicing rights		564		564		527		527

Financial liabilities:
Level 1:
Demand deposits	$	194,747	$	194,747	$	201,741	$	201,741
NOW deposits		103,907		103,907		88,632		88,632
Savings deposits		531,408		531,408		508,652		508,652
Level 2:
Securities sold under agreement to
repurchase		11,679		11,679		10,159		10,159
Other borrowed funds		10,000		9,937		28,200		28,152
Junior subordinated debentures		11,330		11,330		11,330		11,330
Level 3:
Time deposits		147,915		148,921		140,949		141,758

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

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

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

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

The Bank, as a member of the FRB system, is currently required to purchase and hold shares of capital stock in the FRB in an amount equal to 6% of its capital and surplus. Based on the current capital adequacy and liquidity position of the FRB, management believes there is no impairment in the Company’s investment at March 31, 2017.

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

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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.

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4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Loan Portfolio Composition

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




	March 31, 2017		December 31, 2016
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	122,818	$	118,542
Commercial and multi-family		464,288		462,385
Construction-Residential		2,155		2,540
Construction-Commercial		95,757		93,240
Home equities		66,229		66,234
Total real estate loans		751,247		742,941

Commercial and industrial loans		192,041		197,371
Consumer and other loans		1,344		1,417
Net deferred loan origination costs		951		783
Total gross loans		945,583		942,512

Allowance for loan losses		(13,579)		(13,916)

Loans, net	$	932,004	$	928,596

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

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

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

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Credit Quality Indicators

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

1-3-Pass

4-Watch

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

6-Substandard

7-Doubtful

8-Loss

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

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




March 31, 2017
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
1-3	$	80,643	$	375,456	$	456,099	$	123,648
4		10,936		71,958		82,894		55,746
5		-		6,641		6,641		9,264
6		4,178		10,233		14,411		2,570
7		-		-		-		813
Total	$	95,757	$	464,288	$	560,045	$	192,041




December 31, 2016
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
1-3	$	82,520	$	372,235	$	454,755	$	121,414
4		6,541		73,655		80,196		59,117
5		-		12,506		12,506		12,623
6		4,179		3,989		8,168		3,404
7		-		-		-		813
Total	$	93,240	$	462,385	$	555,625	$	197,371

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Past Due Loans

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



March 31, 2017
(in thousands)

							Total Past		Current		Total		90+ Days		Non-accruing
	30-59 days		60-89 days		90+ days		Due		Balance		Balance		Accruing		Loans

Commercial and industrial	$	2,751	$	138	$	931	$	3,820	$	188,221	$	192,041	$	72	$	2,771
Residential real estate:
Residential		1,225		70		659		1,954		120,864		122,818		-		846
Construction		-		-		-		-		2,155		2,155		-		-
Commercial real estate:
Commercial		15,249		213		2,097		17,559		446,729		464,288		-		3,174
Construction		4,127		-		4,179		8,306		87,451		95,757		-		4,179
Home equities		128		207		593		928		65,301		66,229		-		1,232
Consumer and other		50		7		-		57		1,287		1,344		-		11
Total Loans	$	23,530	$	635	$	8,459	$	32,624	$	912,008	$	944,632	$	72	$	12,213

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

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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		5		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.

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Allowance for loan losses

The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended March 31, 2017 and 2016:




March 31, 2017

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,813	$	7,890	$	96	$	769	$	348	$	13,916
Charge-offs		(33)		-		(28)		-		-		(61)
Recoveries		147		-		12		-		-		159
Provision (Credit)		(964)		308		55		150		16		(435)
Ending balance	$	3,963	$	8,198	$	135	$	919	$	364	$	13,579

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	253	$	1,716	$	36	$	1	$	9	$	2,015
Collectively evaluated
for impairment		3,710		6,482		99		918		355		11,564
Total	$	3,963	$	8,198	$	135	$	919	$	364	$	13,579

Loans:
Ending balance:
Individually evaluated
for impairment	$	2,786	$	12,473	$	36	$	2,561	$	1,694	$	19,550
Collectively evaluated
for impairment		189,255		547,572		1,308		122,412		64,535		925,082
Total	$	192,041	$	560,045	$	1,344	$	124,973	$	66,229	$	944,632

* Includes construction loans

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

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March 31, 2016

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,383	$	7,135	$	85	$	909	$	371	$	12,883
Charge-offs		(13)		-		(7)		-		-		(20)
Recoveries		7		38		3		-		-		48
Provision (Credit)		203		269		12		(213)		(63)		208
Ending balance	$	4,580	$	7,442	$	93	$	696	$	308	$	13,119

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	516	$	1,134	$	41	$	2	$	-	$	1,693
Collectively evaluated
for impairment		4,064		6,308		52		694		308		11,426
Total	$	4,580	$	7,442	$	93	$	696	$	308	$	13,119

Loans:
Ending balance:
Individually evaluated
for impairment	$	5,382	$	10,092	$	41	$	2,482	$	1,545	$	19,542
Collectively evaluated
for impairment		145,431		464,806		2,131		104,212		60,048		776,628
Total	$	150,813	$	474,898	$	2,172	$	106,694	$	61,593	$	796,170

* Includes construction loans

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

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Impaired Loans

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



		At March 31, 2017
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	1,176	$	1,279	$	-	$	1,183	$	23	$	5
Residential real estate:
Residential		2,491		2,697		-		2,493		9		17
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		2,452		2,506		-		2,534		34		19
Construction		-		-		-		-		-		-
Home equities		1,611		1,697		-		1,627		15		4
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	7,730	$	8,179	$	-	$	7,837	$	81	$	45


		At March 31, 2017
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	1,610	$	1,853	$	253	$	1,654	$	24	$	2
Residential real estate:
Residential		70		72		1		70		1		-
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		5,843		5,871		541		5,843		13		53
Construction		4,178		4,201		1,175		4,179		50		-
Home equities		83		85		9		83		1		-
Consumer and other		36		62		36		37		1		1
Total impaired loans	$	11,820	$	12,144	$	2,015	$	11,866	$	90	$	56

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		At March 31, 2017
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	2,786	$	3,132	$	253	$	2,837	$	47	$	7
Residential real estate:
Residential		2,561		2,769		1		2,563		10		17
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		8,295		8,377		541		8,377		47		72
Construction		4,178		4,201		1,175		4,179		50		-
Home equities		1,694		1,782		9		1,710		16		4
Consumer and other		36		62		36		37		1		1
Total impaired loans	$	19,550	$	20,323	$	2,015	$	19,703	$	171	$	101



		At December 31, 2016
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	1,304	$	1,604	$	-	$	1,455	$	125	$	51
Residential real estate:
Residential		2,513		2,720		-		2,542		39		78
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		2,123		2,168		-		2,181		33		89
Construction		257		257		-		404		2		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

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		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		1		72		2		1
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		9		1
Consumer and other		43		68		43		45		3		3
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		1		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		3		3
Total impaired loans	$	15,141	$	15,913	$	2,027	$	15,640	$	570	$	334

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Non-performing loans

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



	March 31, 2017			December 31, 2016
		(in thousands)
Non-accruing loans:
Commercial and industrial loans	$	2,771		$	3,106
Residential real estate:
Residential		846			862
Construction		-			-
Commercial real estate:
Commercial and multi-family		3,174			1,874
Construction		4,179			4,178
Home equities		1,232			1,261
Consumer loans		11			17
Total non-accruing loans	$	12,213		$	11,298

Accruing loans 90+ days past due		72			722
Total non-performing loans	$	12,285		$	12,020

Total non-performing loans
to total assets		1.08	%		1.09	%
Total non-performing loans
to total loans		1.30	%		1.28	%

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Troubled debt restructurings

The Company had $9.1 million and $5.1 million in loans that were restructured in a troubled debt restructuring (“TDR”) at March 31, 2017 and December 31, 2016, respectively. Of those balances, $1.7 million and $1.2 million were in non-accrual status at March 31, 2017 and December 31, 2016, respectively. Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.

The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all TDR loans are considered impaired. As of March 31, 2017, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.

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



		March 31, 2017
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	729	$	714	$	15	$	168
Residential real estate:
Residential		1,949		235		1,714		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		5,713		592		5,121		245
Construction		-		-		-		-
Home equities		638		177		461		-
Consumer and other loans		26		-		26		26
Total troubled restructured loans	$	9,055	$	1,718	$	7,337	$	439



		December 31, 2016
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	574	$	532	$	42	$	147
Residential real estate:
Residential		1,949		227		1,722		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		1,617		313		1,304		-
Construction		257		-		257		-
Home equities		667		175		492		1
Consumer and other loans		26		-		26		26
Total troubled restructured loans	$	5,090	$	1,247	$	3,843	$	174

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

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


	Three months ended March 31, 2017					Three months ended March 31, 2016
	(Recorded Investment in thousands)					(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial and Industrial:
Extension of maturity	-	$	-	$	-	1	$	24	$	24
Interest rate reduction	-		-		-	-		-		-
Term-out line of credit	1		180		180	1		20		20
Combination of concessions	-		-		-	-		-		-
Residential Real Estate & Construction:
Extension of maturity	-		-		-	1		95		95
Commercial Real Estate & Construction	-		-		-	-		-		-
Extension of maturity	3		5,073		5,073	-		-		-
Home Equities	-		-		-	-		-		-
Consumer and other loans	-		-		-	-		-		-

The general practice of the Bank is to work with borrowers so that they are able to repay their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off. There were no loans which were classified as TDRs during the previous 12 months which defaulted during each of the three month periods ended March 31, 2017 and 2016.

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5. COMMON EQUITY AND EARNINGS PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period. For the three month periods ended March 31, 2017 and 2016, the Company had an average of 122,966 and 64,925 dilutive shares outstanding, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three month periods ended March 31, 2017 and 2016, there was an average of 24,990 and 49,550 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.

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

6. OTHER COMPREHENSIVE INCOME

The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three month periods ended March 31, 2017 and 2016:



	Balance at December 31, 2016		Net Change		Balance at March 31, 2017
	(in thousands)
Net unrealized (loss) gain on investment securities	$	(365)	$	187	$	(178)
Net defined benefit pension plan adjustments		(2,059)		63		(1,996)
Total	$	(2,424)	$	250	$	(2,174)


	Balance at December 31, 2015		Net Change		Balance at March 31, 2016
	(in thousands)
Net unrealized gain on investment securities	$	475	$	649	$	1,124
Net defined benefit pension plan adjustments		(2,285)		40		(2,245)
Total	$	(1,810)	$	689	$	(1,121)

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	Three months ended March 31, 2017						Three months ended March 31, 2016
	(in thousands)						(in thousands)
	Before-Tax Amount		Income Tax (Provision) Benefit (b)		Net-of-Tax Amount		Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount
Unrealized gain on investment
securities:
Unrealized gain on investment
securities	$	296	$	(109)	$	187	$	1,047	$	(398)	$	649

Defined benefit pension plan
adjustments:
Reclassifications from accumulated other
comprehensive income for gains (losses)
Amortization of prior service cost (a)	$	8	$	2	$	10	$	8	$	(3)	$	5
Amortization of actuarial loss (a)		43		10		53		56		(21)		35
Net change		51		12		63		64		(24)		40

Other Comprehensive Income (Loss)	$	347	$	(97)	$	250	$	1,111	$	(422)	$	689

(a)

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

(b)

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

from 34% to 35%.

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7. SEGMENT INFORMATION

The Company is comprised of two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three month periods ended March 31, 2017 and 2016.




	March 31, 2017
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	9,670	$	(26)	$	9,644
(Credit) provision for loan losses		(435)		-		(435)
Net interest income (expense) after
provision for loan losses		10,105		(26)		10,079
Non-interest income		1,354		-		1,354
Insurance service and fees		109		2,059		2,168
Amortization expense		-		28		28
Non-interest expense		7,647		1,380		9,027
Income before income taxes		3,921		625		4,546
Income tax provision		1,159		241		1,400
Net income	$	2,762	$	384	$	3,146




	March 31, 2016
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	8,291	$	(31)	$	8,260
Provision for loan losses		208		-		208
Net interest income (expense) after
provision for loan losses		8,083		(31)		8,052
Non-interest income		1,246		-		1,246
Insurance service and fees		116		1,632		1,748
Non-interest expense		7,327		1,201		8,528
Income before income taxes		2,118		400		2,518
Income tax provision		650		154		804
Net income	$	1,468	$	246	$	1,714

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8. CONTINGENT LIABILITIES AND COMMITMENTS

The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:



	March 31,		December 31,
	2017		2016
	(in thousands)

Commitments to extend credit	$	203,354	$	217,581
Standby letters of credit		4,504		3,736
Total	$	207,858	$	221,317

Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance by the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank did not incur any losses on its commitments and did not record a reserve for its commitments during the first three months of 2017 or during 2016.

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

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9. NET PERIODIC BENEFIT COSTS

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

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

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

The Bank did not make a contribution to the defined benefit pension plan during the first three months of 2017.

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three month periods ended March 31, 2017 and 2016:




		Three months ended March 31,
		(in thousands)

					Supplemental Executive
	Pension Benefits				Retirement Plan

	2017		2016		2017		2016

Service cost	$	-	$	-	$	42	$	47
Interest cost		54		55		34		36
Expected return on plan assets		(69)		(65)		-		-
Amortization of prior service cost		-		-		8		8
Amortization of the net loss		23		22		20		34
Net periodic cost (benefit)	$	8	$	12	$	104	$	125

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10. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The objective of this ASU is to require entities to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within the reporting period. The Company does not expect the standard to have a material impact on the Company’s financial reporting.

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

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

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

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

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

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

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

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

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

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

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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

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

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

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

Allowance for Loan Losses

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

Goodwill

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

ANALYSIS OF FINANCIAL CONDITION

Loan Activity

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

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

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

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

Credit Quality of Loan Portfolio

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

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

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $34 million at March 31, 2017, a $4 million decrease from $38 million at December 31, 2016 and $7 million lower than the $41 million in criticized loans at March 31, 2016. The decrease in criticized loans in the recent quarter was in the C&I portfolio as one large loan relationship was upgraded to watch from special mention as the borrower demonstrated improved operating performance over a sustained period of time. The level of criticized loans can fluctuate as new information is constantly received on the Company’s borrowers and their financial circumstances change over time. As noted in Note 4 to the Company’s Unaudited Financial Statements included in Part I of this Quarterly Report on Form 10-Q, internal risk ratings are the credit quality indicators used by the Company’s management to determine the appropriate allowance for loan losses for commercial credits. “Special mention” and “substandard” loans are weaker credits with a higher risk of loss categorized as “criticized” credits rather than “pass” or “watch” credits.

The Company maintains an allowance for loan losses that in management’s judgment appropriately reflects losses inherent in the loan portfolio. The allowance for loan losses totaled $13.6 million or 1.44% of total loans outstanding at March 31, 2017, compared with $13.9 million or 1.48% of total loans outstanding as of December 31, 2016 and $13.1 million or 1.65% of total loans outstanding at March 31, 2016. The Company released $0.4 million in allowance for loan losses during the 2017 first quarter, reflecting favorable credit quality trends including a sustained historically low charge-off ratio and a decrease in criticized loans. The net charge-off (recovery) ratio for the first quarter of 2017 was (0.04)% of average net loans, compared with a ratio of 0.07% and (0.02)% in the fourth quarter of 2016 and first quarter of 2016, respectively.

Investing Activities

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

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

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

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

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

Funding Activities

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

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

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ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

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




	Three months ended March 31, 2017						Three months ended March 31, 2016
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(dollars in thousands)						(dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net	$	924,612	$	10,246	4.49	%	$	772,672	$	8,730	4.54	%
Taxable securities		70,584		436	2.51	%		64,796		377	2.34	%
Tax-exempt securities		36,440		224	2.49	%		38,298		238	2.50	%
Interest bearing deposits at banks		5,943		12	0.82	%		18,862		11	0.23	%

Total interest-earning assets		1,037,579	$	10,918	4.27	%		894,628	$	9,356	4.21	%

Non interest-earning assets:

Cash and due from banks		12,750						12,733
Premises and equipment, net		11,233						11,092
Other assets		46,741						42,550

Total Assets	$	1,108,303					$	961,003

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW	$	94,088	$	51	0.22	%	$	88,220	$	85	0.39	%
Savings		510,632		610	0.48	%		447,318		531	0.48	%
Time deposits		144,888		455	1.27	%		108,954		343	1.27	%
Other borrowed funds		15,522		53	1.38	%		10,427		44	1.70	%
Junior subordinated debentures		11,330		100	3.58	%		11,330		87	3.09	%
Securities sold U/A to repurchase		11,896		5	0.17	%		12,493		6	0.19	%

Total interest-bearing liabilities		788,356	$	1,274	0.66	%		678,742	$	1,096	0.65	%

Noninterest-bearing liabilities:
Demand deposits		196,331						176,074
Other		15,053						13,879
Total liabilities	$	999,740					$	868,695

Stockholders' equity		108,563						92,308

Total Liabilities and Equity	$	1,108,303					$	961,003

Net interest earnings			$	9,644					$	8,260

Net interest margin					3.77	%					3.71	%

Interest rate spread					3.61	%					3.56	%

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Net Income

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

Other Results of Operations – Quarterly Comparison

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

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

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

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

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

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

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

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

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

CAPITAL

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

On February 21, 2017, the Company declared a cash dividend of $0.40 per share on the Company’s outstanding common stock. The dividend was paid on April 4, 2017 to shareholders of record as of March 14, 2017. This semi-annual dividend represents a $0.02, or 5%, increase from the previous semi-annual dividend paid on October 4, 2016.

LIQUIDITY

The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. The Company uses the Federal Home Loan Bank of New York (“FHLBNY”) as its primary source of overnight funds and also has one long-term advance with FHLBNY. The Company had $10 million and $28 million in borrowed funds at FHLBNY at March 31, 2017 and December 31, 2016, respectively. The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements. As a member of the FHLB, the Bank is able to borrow funds at competitive rates. Advances of up to $201 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. An amount equal to 25% of the Bank’s total assets could be borrowed through the advance programs under certain qualifying circumstances. The Bank also has the ability to purchase up to $18 million in federal funds from its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.

Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At March 31, 2017, approximately 3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 29% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprise 55% of the investment portfolio at March 31, 2017, provide consistent cash flows for the Bank.

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

Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are liquid assets and potential liabilities. Management stresses the potential liabilities calculation to ensure a strong liquidity position. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases. In the Company’s internal stress test at March 31, 2017 the Company had net short-term liquidity

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

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

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

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES



	Calculated increase
	in projected annual net interest income
	(in thousands)

		March 31, 2017		December 31, 2016
Changes in interest rates

+200 basis points	$	1,800	$	1,838
+100 basis points		2,613		2,590

-100 basis points		NM		NM
-200 basis points		NM		NM

Many assumptions were utilized by management to calculate the impact that changes in interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes.

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

ITEM 4 - CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2017 (the end of the period covered by this Report). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of March 31, 2017 the Company’s disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

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

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

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

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 2017:
January 1, 2017 - January 31, 2017		-	$	-	-	15,212
February 2017:
February 1, 2017 - February 28, 2017		683	$	38.92	-	15,212
March 2017:
March 1, 2017 - March 31, 2017		-	$	-	-	15,212

Total:		683	$	38.92	-	15,212

(1)

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

(2)

On March 25, 2013, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company’s common stock. The repurchase program has no fixed expiration date but may be suspended or discontinued at any time. The maximum number of shares that may be purchased under this program as of March 31, 2017 was 15,212.

ITEM 6 – EXHIBITS

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

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SIGNATURES

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

Evans Bancorp, Inc.

DATE

May 2, 2017

/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

May 2, 2017

/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer)

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EXHIBIT INDEX


Exhibit No.		Name

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

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

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

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

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