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EVANS BANCORP INC - Quarter Report: 2019 March (Form 10-Q)

Table of Contents



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, 2019



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 every Interactive Data File required to be submitted 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 such files).  Yes No



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





 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

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 

Securities registered pursuant to Section 12(b) of the Act:



 

 



 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.50 par value

EVBN

NYSE American



 

 



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, 4,883,467 shares as of April 30, 2019.

 


 

Table of Contents





INDEX





EVANS BANCORP, INC. AND SUBSIDIARIES







 

 



 

 

PART 1.  FINANCIAL INFORMATION

PAGE



 

 

Item 1.

Financial Statements

 



 

 



Unaudited Consolidated Balance Sheets – March 31, 2019 and December 31, 2018



 

 



Unaudited Consolidated Statements of Income – Three months ended March 31, 2019 and 2018



 

 



Unaudited Consolidated Statements of Comprehensive Income – Three months ended March 31, 2019 and 2018



 

 



Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2019 and 2018



 

 



Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2019 and 2018



 

 



Notes to Unaudited Consolidated Financial Statements



 

 

Item 2.

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

31 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38 



 

 

Item 4.

Controls and Procedures

39 



 

 

PART II.  OTHER INFORMATION

 

 



 

 

Item 1.

Legal Proceedings

40 



 

 

Item 1A.

Risk Factors

40 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40 



 

 

Item 3.

Defaults Upon Senior Securities

40 



 

 

Item 4.

Mine Safety Disclosure

40 



 

 

Item 5.

Other Information

40 



 

 

Item 6.

Exhibits

41 



 

 



Signatures

42 



 

 



 

 







 

 


 

Table of Contents













 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 



 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

MARCH 31, 2019 AND DECEMBER 31, 2018

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

12,434 

 

$

13,997 

Interest-bearing deposits at banks

 

 

56,082 

 

 

25,918 

Securities:

 

 

 

 

 

 

Available for sale, at fair value (amortized cost: $140,240 at March 31, 2019;

 

 

138,831 

 

 

132,104 

$135,274 at December 31, 2018)

 

 

 

 

 

 

Held to maturity, at amortized cost (fair value: $1,903 at March 31, 2019;

 

 

1,900 

 

 

1,685 

$1,674 at December 31, 2018)

 

 

 

 

 

 

Federal Home Loan Bank common stock, at cost

 

 

1,474 

 

 

1,474 

Federal Reserve Bank common stock, at cost

 

 

1,939 

 

 

1,929 

Loans, net of allowance for loan losses of $15,207 at March 31, 2019

 

 

 

 

 

 

and $14,784 at December 31, 2018

 

 

1,170,222 

 

 

1,141,146 

Properties and equipment, net of accumulated depreciation of $19,713 at March 31, 2019

 

 

 

 

 

 

and $19,416 at December 31, 2018

 

 

10,583 

 

 

10,485 

Goodwill and intangible assets

 

 

12,880 

 

 

12,992 

Bank-owned life insurance

 

 

28,922 

 

 

28,403 

Operating lease right-of-use asset (see Note 1)

 

 

4,142 

 

 

-    

Other assets

 

 

16,772 

 

 

18,074 



 

 

 

 

 

 

TOTAL ASSETS

 

$

1,456,181 

 

$

1,388,207 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

$

242,156 

 

$

231,902 

NOW

 

 

122,204 

 

 

110,450 

Savings

 

 

618,471 

 

 

571,479 

Time

 

 

292,892 

 

 

301,227 

Total deposits

 

 

1,275,723 

 

 

1,215,058 



 

 

 

 

 

 

Securities sold under agreement to repurchase

 

 

2,482 

 

 

3,142 

Other borrowings

 

 

10,000 

 

 

10,000 

Operating lease liability (see Note 1)

 

 

4,594 

 

 

-    

Other liabilities

 

 

17,617 

 

 

17,031 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

Total liabilities

 

 

1,321,746 

 

 

1,256,561 



 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock, $.50 par value, 10,000,000 shares authorized; 4,860,316

 

 

 

 

 

 

and 4,852,868 shares issued at March 31, 2019 and December 31, 2018,

 

 

 

 

 

 

respectively, and 4,860,316 and 4,852,868 outstanding at March 31, 2019

 

 

 

 

 

 

and December 31, 2018, respectively

 

 

2,432 

 

 

2,429 

Capital surplus

 

 

61,448 

 

 

61,225 

Retained earnings

 

 

74,538 

 

 

73,345 

Accumulated other comprehensive loss, net of tax

 

 

(3,983)

 

 

(5,353)

Total stockholders' equity

 

 

134,435 

 

 

131,646 



 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,456,181 

 

$

1,388,207 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 











1

 


 

Table of Contents









 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

 

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2019

 

2018

INTEREST INCOME

 

 

 

 

 

 

Loans

 

$

14,362 

 

$

12,363 

Interest-bearing deposits at banks

 

 

249 

 

 

10 

Securities:

 

 

 

 

 

 

Taxable

 

 

801 

 

 

797 

Non-taxable

 

 

130 

 

 

196 

Total interest income

 

 

15,542 

 

 

13,366 

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

2,843 

 

 

1,498 

Other borrowings

 

 

45 

 

 

298 

Junior subordinated debentures

 

 

146 

 

 

118 

Total interest expense

 

 

3,034 

 

 

1,914 

NET INTEREST INCOME  

 

 

12,508 

 

 

11,452 

PROVISION FOR LOAN LOSSES

 

 

538 

 

 

767 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

11,970 

 

 

10,685 

NON-INTEREST INCOME

 

 

 

 

 

 

Deposit service charges

 

 

533 

 

 

509 

Insurance service and fees

 

 

2,442 

 

 

1,965 

Gain on loans sold

 

 

26 

 

 

-    

Bank-owned life insurance

 

 

159 

 

 

171 

Interchange fee income

 

 

421 

 

 

492 

Other

 

 

614 

 

 

649 

Total non-interest income

 

 

4,195 

 

 

3,786 

NON-INTEREST EXPENSE

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,160 

 

 

6,627 

Occupancy

 

 

836 

 

 

758 

Advertising and public relations

 

 

167 

 

 

124 

Professional services

 

 

745 

 

 

653 

Technology and communications

 

 

893 

 

 

764 

Amortization of intangibles

 

 

112 

 

 

28 

FDIC insurance

 

 

207 

 

 

232 

Other

 

 

1,104 

 

 

985 

Total non-interest expense

 

 

11,224 

 

 

10,171 

INCOME BEFORE INCOME TAXES

 

 

4,941 

 

 

4,300 

INCOME TAX PROVISION

 

 

1,221 

 

 

981 

NET INCOME

 

$

3,720 

 

$

3,319 



 

 

 

 

 

 

Net income per common share-basic

 

$

0.77 

 

$

0.69 

Net income per common share-diluted

 

$

0.75 

 

$

0.68 

Cash dividends per common share

 

$

0.52 

 

$

0.46 

Weighted average number of common shares outstanding

 

 

4,855,815 

 

 

4,787,846 

Weighted average number of diluted shares outstanding

 

 

4,932,451 

 

 

4,912,289 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 



2

 


 

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EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(in thousands)

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended March 31,



 

 

 

2019

 

 

 

 

2018



 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

$

3,720 

 

 

 

 

$

3,319 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

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

 

 

 

 

1,303 

 

 

 

 

 

(1,360)



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

 

 

 

61 

 

 

 

 

 

36 



 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

67 

 

 

 

 

 

42 



 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

1,370 

 

 

 

 

 

(1,318)



 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

 

$

5,090 

 

 

 

 

$

2,001 



 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 











3

 


 

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EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

 

 

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

 

 

 

 

 

 

Other

 

 

 



 

Common

 

Capital

 

Retained

 

Comprehensive

 

 

 



 

Stock

 

Surplus

 

Earnings

 

Loss

 

Total

Balance, December 31, 2017

 

$

2,394 

 

$

59,444 

 

$

59,921 

 

$

(3,417)

 

$

118,342 

Cumulative-effect adjustment due to change in accounting principle

 

 

 

 

 

 

 

 

1,496 

 

 

 

 

 

1,496 

Net Income

 

 

 

 

 

 

 

 

3,319 

 

 

 

 

 

3,319 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

(1,318)

 

 

(1,318)

Cash dividends ($0.46 per common share)

 

 

 

 

 

 

 

 

(2,202)

 

 

 

 

 

(2,202)

Stock compensation expense

 

 

 

 

 

186 

 

 

 

 

 

 

 

 

186 

Reissued 1,057 restricted shares

 

 

 

 

 

-    

 

 

 

 

 

 

 

 

-    

Issued 16,368 restricted shares

 

 

 

 

(8)

 

 

 

 

 

 

 

 

-    

Issued 3,404 shares in stock option exercises

 

 

 

 

48 

 

 

 

 

 

 

 

 

50 

Balance, March 31, 2018

 

$

2,404 

 

$

59,670 

 

$

62,534 

 

$

(4,735)

 

$

119,873 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

2,429 

 

$

61,225 

 

$

73,345 

 

$

(5,353)

 

$

131,646 

Net Income

 

 

 

 

 

 

 

 

3,720 

 

 

 

 

 

3,720 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,370 

 

 

1,370 

Cash dividends ($0.52 per common share)

 

 

 

 

 

 

 

 

(2,527)

 

 

 

 

 

(2,527)

Stock compensation expense

 

 

 

 

 

201 

 

 

 

 

 

 

 

 

201 

Reissued 500 restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-    

Issued 4,934 restricted shares, net of forfeitures

 

 

 

 

(2)

 

 

 

 

 

 

 

 

-    

Issued 2,514 shares in stock option exercises

 

 

 

 

24 

 

 

 

 

 

 

 

 

25 

Balance, March 31, 2019

 

$

2,432 

 

$

61,448 

 

$

74,538 

 

$

(3,983)

 

$

134,435 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















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EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(in thousands)



 

Three Months Ended March 31,



 

 

2019

 

 

2018

OPERATING ACTIVITIES:

 

 

 

 

 

 

Interest received

 

$

15,323 

 

$

13,392 

Fees received

 

 

4,424 

 

 

3,395 

Interest paid

 

 

(2,999)

 

 

(1,871)

Cash paid to employees and vendors

 

 

(12,685)

 

 

(11,122)

Income taxes paid

 

 

-    

 

 

(8)

Proceeds from sale of loans held for resale

 

 

2,071 

 

 

-    

Originations of loans held for resale

 

 

(2,045)

 

 

-    



 

 

 

 

 

 

Net cash provided by operating activities

 

 

4,089 

 

 

3,786 



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Available for sales securities:

 

 

 

 

 

 

Purchases

 

 

(10,568)

 

 

(47,853)

Proceeds from maturities, calls, and payments

 

 

5,523 

 

 

33,127 

Held to maturity securities:

 

 

 

 

 

 

Purchases

 

 

(224)

 

 

-    

Proceeds from maturities, calls, and payments

 

 

10 

 

 

610 

Cash paid for bank-owned life insurance

 

 

(360)

 

 

-    

Proceeds from bank-owned life insurance claims

 

 

-    

 

 

675 

Additions to properties and equipment

 

 

(426)

 

 

(162)

Purchase of tax credit investment

 

 

(19)

 

 

(129)

Net increase in loans

 

 

(29,454)

 

 

(48,445)



 

 

 

 

 

 

Net cash used in investing activities

 

 

(35,518)

 

 

(62,177)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Repayments of short-term borrowings, net

 

 

(660)

 

 

(25,755)

Net increase in deposits

 

 

60,665 

 

 

83,204 

Issuance of common stock

 

 

25 

 

 

50 



 

 

 

 

 

 

Net cash provided by financing activities

 

 

60,030 

 

 

57,499 



 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

28,601 

 

 

(892)



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

 

39,915 

 

 

21,330 



 

 

 

 

 

 

End of period

 

$

68,516 

 

$

20,438 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 



5

 


 

Table of Contents





 

 

 

 

 

 



 

 

 

 

 

 

EVANS BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 



 

Three Months Ended March 31,



 

 

2019

 

 

2018



 

 

 

 

 

 

RECONCILIATION OF NET INCOME TO NET CASH

 

 

 

 

 

 

PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 



 

 

 

 

 

 

Net income

 

$

3,720 

 

$

3,319 



 

 

 

 

 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

505 

 

 

446 

Deferred tax expense

 

 

12 

 

 

144 

Provision for loan losses

 

 

538 

 

 

767 

Loss on tax credit investment

 

 

148 

 

 

-    

Refundable state historic tax credit received (accrued)

 

 

17 

 

 

-    

Gain on loans sold

 

 

(26)

 

 

-    

Change in fair value of equity securities

 

 

-    

 

 

(147)

Stock compensation expense

 

 

201 

 

 

186 

Proceeds from sale of loans held for resale

 

 

2,071 

 

 

-    

Originations of loans held for resale

 

 

(2,045)

 

 

-    

Changes in assets and liabilities affecting cash flow:

 

 

 

 

 

 

Other assets

 

 

(4,528)

 

 

(1,060)

Other liabilities

 

 

3,476 

 

 

131 



 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

4,089 

 

$

3,786 



 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 















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Table of Contents



EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH  31, 2019 AND 2018



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”), and Evans National Holding Corp. (“ENHC”); 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, 2019 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, 2018 (“10-K”).  The Company’s significant accounting policies are disclosed in Note 1 to the 10-K.



The Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification.  The Company considers the applicability and impact of all ASUs when they are issued by FASB.  ASUs listed below were adopted by the Company during its current fiscal year.  ASUs not listed below did not have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.



On January 1, 2019, the Company adopted ASU 2016-02 Leases and all subsequent amendments (collectively, “ASU 2016-02”). 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 (“ROU”) 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. 



ASU 2016-02 required a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. The Company elected to use the effective date, January 1, 2019, as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.  In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.



Under ASU 2016-02, leases are classified as finance or operating, with the classification affecting the pattern and classification of expense recognition in the income statement. The Company’s leases, consisting of property leases for certain of our bank branches and insurance agency offices, are classified as operating leases. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As these leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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ASU 2016-02 had a material impact on the Company’s consolidated balance sheets, but did not have an impact on the consolidated statements of income or the consolidated statements of cash flows. The most significant impacts upon adoption on January 1, 2019 were the recognition of $4.3 million of ROU assets and $4.7 million of lease liabilities, including $0.4 million of liabilities that were reported in other liabilities in the Company’s December 31, 2018 consolidated balance sheet. ROU assets and lease liability were $4.1 million and $4.6 million, respectively, at March 31, 2019.  Operating lease expenses during the three months ended March 31, 2019 were $178 thousand and are included in other non-interest expense on the consolidated statement of income. Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2019 was $184 thousand and is included in cash flows from operating activities on the consolidated statement of cash flows. The weighted average discount rate related to the Company’s leases was 3.5% as of March 31, 2019.  The weighted average remaining lease term related to the Company’s leases was 9.0 years as of March 31, 2019.  Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows:





 



 



Year Ending December 31,

2019 (excluding the three months ended March 31, 2019)

552 
2020  749 
2021  682 
2022  694 
2023  589 

Thereafter

2,092 

Total future minimum lease payments

5,358 

Less imputed interest

764 

Total

4,594 



 

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2. SECURITIES



The amortized cost of securities and their approximate fair value at March 31, 2019 and December 31, 2018 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2019



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

39,160 

 

$

139 

 

$

(309)

 

$

38,990 

States and political subdivisions

 

 

20,212 

 

 

143 

 

 

(14)

 

 

20,341 

Total debt securities

 

$

59,372 

 

$

282 

 

$

(323)

 

$

59,331 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

27,135 

 

$

29 

 

$

(332)

 

$

26,832 

FHLMC

 

 

16,181 

 

 

20 

 

 

(192)

 

 

16,009 

GNMA

 

 

1,608 

 

 

 

 

(23)

 

 

1,594 

SBA

 

 

8,991 

 

 

 

 

(146)

 

 

8,848 

CMO

 

 

26,953 

 

 

15 

 

 

(751)

 

 

26,217 

Total mortgage-backed securities

 

$

80,868 

 

$

76 

 

$

(1,444)

 

$

79,500 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

140,240 

 

$

358 

 

$

(1,767)

 

$

138,831 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,900 

 

$

16 

 

$

(13)

 

$

1,903 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,900 

 

$

16 

 

$

(13)

 

$

1,903 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

(in thousands)



 

 

 

 

 

 

 

 



 

Amortized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

34,597 

 

$

 

$

(671)

 

$

33,928 

States and political subdivisions

 

 

22,168 

 

 

69 

 

 

(64)

 

 

22,173 

Total debt securities

 

$

56,765 

 

$

71 

 

$

(735)

 

$

56,101 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

27,747 

 

$

21 

 

$

(729)

 

$

27,039 

FHLMC

 

 

14,645 

 

 

11 

 

 

(431)

 

 

14,225 

GNMA

 

 

1,660 

 

 

 

 

(36)

 

 

1,630 

SBA

 

 

9,432 

 

 

-    

 

 

(299)

 

 

9,133 

CMO

 

 

25,025 

 

 

 

 

(1,055)

 

 

23,976 

Total mortgage-backed securities

 

$

78,509 

 

$

44 

 

$

(2,550)

 

$

76,003 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as available for sale

 

$

135,274 

 

$

115 

 

$

(3,285)

 

$

132,104 



 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,685 

 

$

11 

 

$

(22)

 

$

1,674 



 

 

 

 

 

 

 

 

 

 

 

 

Total securities designated as held to maturity

 

$

1,685 

 

$

11 

 

$

(22)

 

$

1,674 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



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Available for sale securities with a total fair value of $117 million and $94 million at March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018 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, 2019

 

December 31, 2018



 

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

 

$

3,344 

 

$

3,347 

 

$

5,074 

 

$

5,075 

Due after one year through five years

 

 

21,794 

 

 

21,782 

 

 

22,637 

 

 

22,448 

Due after five years through ten years

 

 

34,050 

 

 

34,016 

 

 

28,870 

 

 

28,391 

Due after ten years

 

 

184 

 

 

186 

 

 

184 

 

 

187 



 

 

59,372 

 

 

59,331 

 

 

56,765 

 

 

56,101 



 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

80,868 

 

 

79,500 

 

 

78,509 

 

 

76,003 



 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

140,240 

 

$

138,831 

 

$

135,274 

 

$

132,104 



 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

733 

 

$

734 

 

$

693 

 

$

693 

Due after one year through five years

 

 

991 

 

 

999 

 

 

811 

 

 

811 

Due after five years through ten years

 

 

88 

 

 

85 

 

 

93 

 

 

89 

Due after ten years

 

 

88 

 

 

85 

 

 

88 

 

 

81 

Total

 

$

1,900 

 

$

1,903 

 

$

1,685 

 

$

1,674 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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. 



Information regarding unrealized losses within the Company’s available for sale securities at March 31, 2019 and December 31, 2018 is summarized below.  The securities are primarily U.S. government-guaranteed agency securities or municipal securities. 



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Table of Contents









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2019



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

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

 

$

-    

 

$

-    

 

$

24,697 

 

$

(309)

 

$

24,697 

 

$

(309)

States and political subdivisions

 

 

402 

 

 

(1)

 

 

3,545 

 

 

(13)

 

 

3,947 

 

 

(14)

Total debt securities

 

$

402 

 

$

(1)

 

$

28,242 

 

$

(322)

 

$

28,644 

 

$

(323)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

-    

 

$

-    

 

$

22,217 

 

$

(332)

 

$

22,217 

 

$

(332)

FHLMC

 

 

-    

 

 

-    

 

 

13,558 

 

 

(192)

 

 

13,558 

 

 

(192)

GNMA

 

 

201 

 

 

(1)

 

 

769 

 

 

(22)

 

 

970 

 

 

(23)

SBA

 

 

-    

 

 

-    

 

 

7,113 

 

 

(146)

 

 

7,113 

 

 

(146)

CMO

 

 

-    

 

 

-    

 

 

22,795 

 

 

(751)

 

 

22,795 

 

 

(751)

Total mortgage-backed securities

 

$

201 

 

$

(1)

 

$

66,452 

 

$

(1,443)

 

$

66,653 

 

$

(1,444)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

-    

 

$

-    

 

$

558 

 

$

(13)

 

$

558 

 

$

(13)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

603 

 

$

(2)

 

$

95,252 

 

$

(1,778)

 

$

95,855 

 

$

(1,780)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

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

 

$

9,931 

 

$

(49)

 

$

21,144 

 

$

(622)

 

$

31,075 

 

$

(671)

States and political subdivisions

 

 

5,218 

 

 

(15)

 

 

6,893 

 

 

(49)

 

 

12,111 

 

 

(64)

Total debt securities

 

$

15,149 

 

$

(64)

 

$

28,037 

 

$

(671)

 

$

43,186 

 

$

(735)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

$

2,637 

 

$

(21)

 

$

23,667 

 

$

(708)

 

$

26,304 

 

$

(729)

FHLMC

 

 

1,895 

 

 

(25)

 

 

11,899 

 

 

(406)

 

 

13,794 

 

 

(431)

GNMA

 

 

-    

 

 

-    

 

 

926 

 

 

(36)

 

 

926 

 

 

(36)

SBA

 

 

-    

 

 

-    

 

 

9,133 

 

 

(299)

 

 

9,133 

 

 

(299)

CMO

 

 

-    

 

 

-    

 

 

23,127 

 

 

(1,055)

 

 

23,127 

 

 

(1,055)

Total mortgage-backed securities

 

$

4,532 

 

$

(46)

 

$

68,752 

 

$

(2,504)

 

$

73,284 

 

$

(2,550)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

156 

 

$

-    

 

$

722 

 

$

(22)

 

$

878 

 

$

(22)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

19,837 

 

$

(110)

 

$

97,511 

 

$

(3,197)

 

$

117,348 

 

$

(3,307)













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Management has assessed the securities available for sale in an unrealized loss position at March 31, 2019 and December 31, 2018 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, 2019 and did not record any OTTI charges during 2018.  The credit worthiness of the Company’s securities portfolio is largely reliant on the ability of U.S. government sponsored agencies such as Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations.  In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio.  The stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.





3.  FAIR VALUE MEASUREMENT



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



There are three levels of inputs to fair value measurement:



 

 

 



 

 

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



 

 

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



 

Level 3 inputs are unobservable inputs.



Observable market data should be used when available.



FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS



The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, respectively:









 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

-    

 

$

38,990 

 

$

-    

 

$

38,990 

States and political subdivisions

 

 

-    

 

 

20,341 

 

 

-    

 

 

20,341 

Mortgage-backed securities

 

 

-    

 

 

79,500 

 

 

-    

 

 

79,500 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

587 

 

 

587 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

-    

 

$

33,928 

 

$

-    

 

$

33,928 

States and political subdivisions

 

 

-    

 

 

22,173 

 

 

-    

 

 

22,173 

Mortgage-backed securities

 

 

-    

 

 

76,003 

 

 

-    

 

 

76,003 

Mortgage servicing rights

 

 

-    

 

 

-    

 

 

609 

 

 

609 









12

 


 

Table of Contents



Securities available for sale



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



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



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



Equity securities

   

At December 31, 2017 and through the first three months of 2018, the Company held equity securities in another financial institution.  Since the ownership level was less than 5% of the outstanding shares of that financial institution, the investment was recorded on the Company’s balance sheet at historical cost, under the cost method of accounting.  On January 1, 2018, the Company adopted ASU 2016-01, requiring the Company to mark the investment to its fair value with a cumulative-effect adjustment to retained earnings.  

   

The equity securities of the financial institution are classified as Level 3 in the fair value hierarchy because the primary inputs in measuring the fair value are unobservable to the public.  The shares of the institution are not publicly traded on a major stock exchange, but rather through private sales between shareholders.  Trading in the securities is fairly limited as the institution’s total trading volume for the first three months of 2018 was approximately 1% of the outstanding common shares.   The Company obtained the sales information from the institution to calculate the fair value of the equity securities as of the end of the reporting period.  The fair value recorded in the Company’s financial statements is based on observable prices obtained from the latest orderly transactions in the quarter.

   

Due to the adoption of ASU 2016-01 and the designation of the financial institution’s equity securities as Level 3 on the fair value hierarchy, there was a transfer into Level 3 for the institution’s equity securities during the first quarter of 2018. The Company sold its entire equity interest in this financial institution during the third quarter of 2018. The following table summarizes the changes in fair value for equity securities:

   













 

 

 

(in thousands)

 

Three months ended March 31, 2018

Equity securities - January 1

 

$

580 

Increase in recorded value due to adoption of ASU 2016-01 through beginning retained earnings

 

 

1,234 

Fair value change included in earnings

 

 

147 

Equity securities - March 31

 

$

1,961 



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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.  MSRs 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 MSRs:









 

 

 

 

 

 



 

Three months ended March 31,

(in thousands)

 

2019

 

2018

Mortgage servicing rights - January 1

 

$

609 

 

$

586 

Losses/(gains) included in earnings

 

 

(40)

 

 

58 

Additions from loan sales

 

 

18 

 

 

 -

Mortgage servicing rights - March 31

 

$

587 

 

$

644 



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











 

 

 

 

 

 



 

March 31, 2019

 

December 31, 2018

Servicing fees

 

0.25 

%

 

0.25 

%

Discount rate

 

9.00 

%

 

9.00 

%

Prepayment rate (CPR)

 

7.31 

%

 

6.52 

%





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, 2019 and December 31, 2018:













 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

$

-    

 

$

21,221 

 

$

21,221 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans

 

$

-    

 

$

-    

 

$

20,590 

 

$

20,590 



Collateral dependent impaired loans



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

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The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company’s internal loan rating scale to a special mention or a substandard depending on the amount of the loan, the type of loan and the type of collateral.  All impaired commercial loans are graded substandard or worse 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.  Collateral dependent impaired loans had a gross value of $22.2 million, with an allowance for loan loss of $1.0 million, at March 31, 2019 compared with $21.7 million and $1.1 million, respectively, at December 31, 2018.



FAIR VALUE OF FINANCIAL INSTRUMENTS



The table below depicts 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.















 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2019

 

December 31, 2018



 

Carrying

 

Fair

 

Carrying

 

Fair



 

Amount

 

Value

 

Amount

 

Value



 

 

(in thousands)

 

 

(in thousands)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,516 

 

$

68,516 

 

$

39,915 

 

$

39,915 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

138,831 

 

 

138,831 

 

 

132,104 

 

 

132,104 

FHLB and FRB stock

 

 

3,413 

 

 

3,413 

 

 

3,403 

 

 

3,403 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities

 

 

1,900 

 

 

1,903 

 

 

1,685 

 

 

1,674 

Loans, net

 

 

1,170,222 

 

 

1,165,888 

 

 

1,141,146 

 

 

1,131,891 

Mortgage servicing rights

 

 

587 

 

 

587 

 

 

609 

 

 

609 



 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

242,156 

 

$

242,156 

 

$

231,902 

 

$

231,902 

NOW deposits

 

 

122,204 

 

 

122,204 

 

 

110,450 

 

 

110,450 

Savings deposits

 

 

618,471 

 

 

618,471 

 

 

571,479 

 

 

571,479 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreement to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase

 

 

2,482 

 

 

2,482 

 

 

3,142 

 

 

3,142 

Other borrowed funds

 

 

10,000 

 

 

9,904 

 

 

10,000 

 

 

9,854 

Junior subordinated debentures

 

 

11,330 

 

 

11,330 

 

 

11,330 

 

 

11,330 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

 

292,892 

 

 

291,744 

 

 

301,227 

 

 

298,999 



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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, 2019

 

December 31, 2018

Mortgage loans on real estate:

 

(in thousands)

Residential mortgages

 

$

160,999 

 

$

158,404 

Commercial and multi-family

 

 

608,384 

 

 

592,507 

Construction-Residential

 

 

194 

 

 

113 

Construction-Commercial

 

 

101,468 

 

 

105,196 

Home equities

 

 

69,777 

 

 

70,546 

Total real estate loans

 

 

940,822 

 

 

926,766 



 

 

 

 

 

 

Commercial and industrial loans

 

 

241,509 

 

 

226,057 

Consumer and other loans

 

 

1,438 

 

 

1,520 

Net deferred loan origination costs

 

 

1,660 

 

 

1,587 

Total gross loans

 

 

1,185,429 

 

 

1,155,930 



 

 

 

 

 

 

Allowance for loan losses

 

 

(15,207)

 

 

(14,784)



 

 

 

 

 

 

Loans, net

 

$

1,170,222 

 

$

1,141,146 





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, 2019, the Bank sold mortgages to FNMA totaling $2.0 million.  The Bank did not sell any mortgages to FNMA in the three month period ended March 31, 2018.  At March 31, 2019 and December 31, 2018, the Bank had a loan servicing portfolio principal balance of $73 million upon which it earned servicing fees.  The value of the mortgage servicing rights for that portfolio was $0.6 million at March 31, 2019 and December 31, 2018.  No loans were held for sale at March 31, 2019.  At December 31, 2018 there were $0.4 million in residential mortgages held for sale.  The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.



As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.  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, 2018.  Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2018 are consistent with those utilized by the Company in the three month period ended March 31, 2019.



16

 


 

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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:



·

Acceptable or better

·

Watch

·

Special Mention

·

Substandard

·

Doubtful

·

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, 2019

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

Acceptable or better

 

$

58,782 

 

$

459,925 

 

$

518,707 

 

$

153,604 

Watch

 

 

29,529 

 

 

126,592 

 

 

156,121 

 

 

74,762 

Special Mention

 

 

4,330 

 

 

15,778 

 

 

20,108 

 

 

4,830 

Substandard

 

 

8,827 

 

 

6,089 

 

 

14,916 

 

 

8,313 

Doubtful/Loss

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total

 

$

101,468 

 

$

608,384 

 

$

709,852 

 

$

241,509 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(in thousands)

Corporate Credit Exposure – By Credit Rating

 

Commercial Real Estate Construction

 

Commercial and Multi-Family Mortgages

 

Total Commercial Real Estate

 

Commercial and Industrial

Acceptable or better

 

$

65,932 

 

$

466,294 

 

$

532,226 

 

$

155,687 

Watch

 

 

30,628 

 

 

109,409 

 

 

140,037 

 

 

57,366 

Special Mention

 

 

-    

 

 

10,583 

 

 

10,583 

 

 

4,105 

Substandard

 

 

8,636 

 

 

6,221 

 

 

14,857 

 

 

8,870 

Doubtful/Loss

 

 

-    

 

 

-    

 

 

-    

 

 

29 

Total

 

$

105,196 

 

$

592,507 

 

$

697,703 

 

$

226,057 



 

 

 

 

 

 

 

 

 

 

 

 







17

 


 

Table of Contents



Past Due Loans

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Current 

 

 

 

 

 

 

 

 

 

Non-accruing

 

Total



 

Balance

30-59 days

 

60-89 days

 

90+ days

 

Loans

 

Balance



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

237,850 

 

$

1,316 

 

$

-    

 

$

-    

 

$

2,343 

 

$

241,509 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

158,734 

 

 

609 

 

 

-    

 

 

-    

 

 

1,656 

 

 

160,999 

  Construction

 

194 

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

194 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

600,585 

 

 

1,710 

 

 

-    

 

 

-    

 

 

6,089 

 

 

608,384 

  Construction

 

83,095 

 

 

9,546 

 

 

-    

 

 

-    

 

 

8,827 

 

 

101,468 

Home equities

 

68,219 

 

 

461 

 

 

25 

 

 

-    

 

 

1,072 

 

 

69,777 

Consumer and other

 

1,425 

 

 

13 

 

 

-    

 

 

-    

 

 

-    

 

 

1,438 

Total Loans

$

1,150,102 

 

$

13,655 

 

$

25 

 

$

-    

 

$

19,987 

 

$

1,183,769 



Note: Loan balances do not include $1.7 million in net deferred loan origination costs as of March 31, 2019.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Current 

 

 

 

 

 

 

 

 

 

Non-accruing

 

Total



 

Balance

30-59 days

 

60-89 days

 

90+ days

 

Loans

 

Balance



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

217,625 

 

$

6,173 

 

$

565 

 

$

-    

 

$

1,694 

 

$

226,057 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Residential

 

154,063 

 

 

2,546 

 

 

332 

 

 

-    

 

 

1,463 

 

 

158,404 

  Construction

 

113 

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

113 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

582,016 

 

 

4,546 

 

 

-    

 

 

-    

 

 

5,945 

 

 

592,507 

  Construction

 

95,204 

 

 

1,027 

 

 

329 

 

 

-    

 

 

8,636 

 

 

105,196 

Home equities

 

69,094 

 

 

123 

 

 

76 

 

 

-    

 

 

1,253 

 

 

70,546 

Consumer and other

 

1,514 

 

 

 

 

 

 

-    

 

 

-    

 

 

1,520 

Total Loans

$

1,119,629 

 

$

14,420 

 

$

1,303 

 

$

-    

 

$

18,991 

 

$

1,154,343 



Note: Loan balances do not include $1.6 million in net deferred loan origination costs as of December 31, 2018.





18

 


 

Table of Contents



Allowance for loan losses



The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended March 31, 2019 and 2018:













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,368 

 

$

8,844 

 

$

106 

 

$

1,121 

 

$

345 

 

$

14,784 

Charge-offs

 

 

(121)

 

 

-    

 

 

(23)

 

 

-    

 

 

-    

 

 

(144)

Recoveries

 

 

22 

 

 

-    

 

 

 

 

-    

 

 

-    

 

 

29 

Provision (Credit)

 

 

485 

 

 

205 

 

 

21 

 

 

(168)

 

 

(5)

 

 

538 

Ending balance

 

$

4,754 

 

$

9,049 

 

$

111 

 

$

953 

 

$

340 

 

$

15,207 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

499 

 

$

579 

 

$

22 

 

$

70 

 

$

-    

 

$

1,170 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

4,255 

 

 

8,470 

 

 

89 

 

 

883 

 

 

340 

 

 

14,037 

Total

 

$

4,754 

 

$

9,049 

 

$

111 

 

$

953 

 

$

340 

 

$

15,207 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

4,293 

 

$

15,536 

 

$

22 

 

$

2,963 

 

$

1,661 

 

$

24,475 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

237,216 

 

 

694,316 

 

 

1,416 

 

 

158,230 

 

 

68,116 

 

 

1,159,294 

Total

 

$

241,509 

 

$

709,852 

 

$

1,438 

 

$

161,193 

 

$

69,777 

 

$

1,183,769 







* Includes construction loans



Note: Loan balances do not include $1.7 million in net deferred loan origination costs as of March 31, 2019.



19

 


 

Table of Contents









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial and Industrial

 

Commercial Real Estate Mortgages*

 

Consumer and Other

 

Residential Mortgages*

 

Home Equities

 

Total

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,204 

 

$

7,409 

 

$

109 

 

$

950 

 

$

347 

 

$

14,019 

Charge-offs

 

 

(67)

 

 

-    

 

 

(34)

 

 

-    

 

 

-    

 

 

(101)

Recoveries

 

 

 

 

-    

 

 

 

 

-    

 

 

 

 

Provision (Credit)

 

 

(28)

 

 

736 

 

 

20 

 

 

57 

 

 

(18)

 

 

767 

Ending balance

 

$

5,115 

 

$

8,145 

 

$

96 

 

$

1,007 

 

$

330 

 

$

14,693 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

292 

 

$

567 

 

$

24 

 

$

36 

 

$

-    

 

$

919 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

4,823 

 

 

7,578 

 

 

72 

 

 

971 

 

 

330 

 

 

13,774 

Total

 

$

5,115 

 

$

8,145 

 

$

96 

 

$

1,007 

 

$

330 

 

$

14,693 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

2,485 

 

$

10,282 

 

$

24 

 

$

2,765 

 

$

1,960 

 

$

17,516 

Collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

 

242,773 

 

 

641,284 

 

 

1,541 

 

 

138,146 

 

 

67,422 

 

 

1,091,166 

Total

 

$

245,258 

 

$

651,566 

 

$

1,565 

 

$

140,911 

 

$

69,382 

 

$

1,108,682 



* Includes construction loans



Note: Loan balances do not include $1.3 million in net deferred loan origination costs as of March 31, 2018.



20

 


 

Table of Contents



Impaired Loans

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2019



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With no related allowance recorded:

(in thousands)

Commercial and industrial

 

$

3,372 

 

$

3,581 

 

$

-    

 

$

3,545 

 

$

17 

 

$

36 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,419 

 

 

2,649 

 

 

-    

 

 

2,485 

 

 

15 

 

 

16 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,614 

 

 

7,043 

 

 

-    

 

 

6,858 

 

 

67 

 

 

11 

Construction

 

 

424 

 

 

424 

 

 

-    

 

 

462 

 

 

 

 

Home equities

 

 

1,661 

 

 

1,832 

 

 

-    

 

 

1,739 

 

 

18 

 

 

Consumer and other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

14,490 

 

$

15,529 

 

$

-    

 

$

15,089 

 

$

126 

 

$

75 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2019



 

 

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

 

$

921 

 

$

962 

 

$

499 

 

$

982 

 

$

16 

 

$

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

544 

 

 

548 

 

 

70 

 

 

547 

 

 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Construction

 

 

8,498 

 

 

8,975 

 

 

579 

 

 

8,720 

 

 

133 

 

 

-    

Home equities

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Consumer and other

 

 

22 

 

 

26 

 

 

22 

 

 

23 

 

 

-    

 

 

-    

Total impaired loans

 

$

9,985 

 

$

10,511 

 

$

1,170 

 

$

10,272 

 

$

156 

 

$



21

 


 

Table of Contents







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At March 31, 2019



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

4,293 

 

$

4,543 

 

$

499 

 

$

4,527 

 

$

33 

 

$

39 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,963 

 

 

3,197 

 

 

70 

 

 

3,032 

 

 

22 

 

 

16 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,614 

 

 

7,043 

 

 

-    

 

 

6,858 

 

 

67 

 

 

11 

Construction

 

 

8,922 

 

 

9,399 

 

 

579 

 

 

9,182 

 

 

142 

 

 

Home equities

 

 

1,661 

 

 

1,832 

 

 

-    

 

 

1,739 

 

 

18 

 

 

Consumer and other

 

 

22 

 

 

26 

 

 

22 

 

 

23 

 

 

-    

 

 

-    

Total impaired loans

 

$

24,475 

 

$

26,040 

 

$

1,170 

 

$

25,361 

 

$

282 

 

$

78 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2018



 

 

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

 

$

1,633 

 

$

2,611 

 

$

-    

 

$

1,785 

 

$

116 

 

$

65 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,289 

 

 

2,483 

 

 

-    

 

 

2,337 

 

 

45 

 

 

69 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,538 

 

 

6,914 

 

 

-    

 

 

6,733 

 

 

220 

 

 

115 

Construction

 

 

116 

 

 

116 

 

 

-    

 

 

143 

 

 

-    

 

 

12 

Home equities

 

 

1,887 

 

 

2,058 

 

 

-    

 

 

1,952 

 

 

71 

 

 

43 

Consumer and other

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Total impaired loans

 

$

12,463 

 

$

14,182 

 

$

-    

 

$

12,950 

 

$

452 

 

$

304 





22

 


 

Table of Contents





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2018



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

With a related allowance recorded:

(in thousands)

Commercial and industrial

 

$

2,068 

 

$

2,095 

 

$

249 

 

$

2,098 

 

$

17 

 

$

125 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

525 

 

 

556 

 

 

85 

 

 

520 

 

 

22 

 

 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Construction

 

 

8,636 

 

 

8,975 

 

 

716 

 

 

8,793 

 

 

379 

 

 

113 

Home equities

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Consumer and other

 

 

23 

 

 

27 

 

 

23 

 

 

23 

 

 

-    

 

 

Total impaired loans

 

$

11,252 

 

$

11,653 

 

$

1,073 

 

$

11,434 

 

$

418 

 

$

243 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

At December 31, 2018



 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Foregone

 

 

Interest Income Recognized

Total:

 

 

(in thousands)

Commercial and industrial

 

$

3,701 

 

$

4,706 

 

$

249 

 

$

3,883 

 

$

133 

 

$

190 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,814 

 

 

3,039 

 

 

85 

 

 

2,857 

 

 

67 

 

 

72 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,538 

 

 

6,914 

 

 

-    

 

 

6,733 

 

 

220 

 

 

115 

Construction

 

 

8,752 

 

 

9,091 

 

 

716 

 

 

8,936 

 

 

379 

 

 

125 

Home equities

 

 

1,887 

 

 

2,058 

 

 

-    

 

 

1,952 

 

 

71 

 

 

43 

Consumer and other

 

 

23 

 

 

27 

 

 

23 

 

 

23 

 

 

-    

 

 

Total impaired loans

 

$

23,715 

 

$

25,835 

 

$

1,073 

 

$

24,384 

 

$

870 

 

$

547 





23

 


 

Table of Contents



Troubled debt restructurings



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

March 31, 2019



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

2,181 

 

$

231 

 

$

1,950 

 

$

81 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,585 

 

 

278 

 

 

1,307 

 

 

-    

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

4,045 

 

 

3,520 

 

 

525 

 

 

-    

Construction

 

 

8,593 

 

 

8,498 

 

 

95 

 

 

578 

Home equities

 

 

817 

 

 

228 

 

 

589 

 

 

-    

Consumer and other

 

 

22 

 

 

-    

 

 

22 

 

 

22 

Total TDR loans

 

$

17,243 

 

$

12,755 

 

$

4,488 

 

$

681 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2018



 

 

(in thousands)



 

 

Total

 

 

Nonaccruing

 

 

Accruing

 

 

Related Allowance

Commercial and industrial

 

$

2,282 

 

$

275 

 

$

2,007 

 

$

154 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,617 

 

 

266 

 

 

1,351 

 

 

14 

Construction

 

 

-    

 

 

-    

 

 

-    

 

 

-    

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and multi-family

 

 

4,164 

 

 

3,571 

 

 

593 

 

 

-    

Construction

 

 

8,753 

 

 

8,637 

 

 

116 

 

 

716 

Home equities

 

 

756 

 

 

122 

 

 

634 

 

 

-    

Consumer and other

 

 

23 

 

 

-    

 

 

23 

 

 

23 

Total TDR loans

 

$

17,595 

 

$

12,871 

 

$

4,724 

 

$

907 





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, 2019, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.



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





24

 


 

Table of Contents



The following tables show the data for TDR activity by the type of concession granted to the borrower for the three month periods ended March 31, 2019 and 2018:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2019

 

Three months ended March 31, 2018



 

(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

 

 -

 

$

-    

 

$

-    

 

-    

 

$

-    

 

$

-    

Residential Real Estate & Construction

 

 -

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Commercial Real Estate & Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of maturity

 

-    

 

 

-    

 

 

-    

 

 

 

181 

 

 

181 

Home Equities:

 

 

 

 

-    

 

 

-    

 

-    

 

 

-    

 

 

-    

Extension of maturity and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate reduction

 

 

 

109 

 

 

109 

 

-    

 

 

-    

 

 

-    

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 to its collateral value.  A loan is considered in default when the loan is 90 days past due.  Loans which were classified as TDRs during the previous 12 months which defaulted during the three month periods ended March 31, 2019 and 2018 were not material.



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, 2019 and 2018, the Company had an average of 76,636 and 124,443 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 period ended March 31, 2019 and 2018, there was an average of 46,220 and 28,660 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.





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6. OTHER COMPREHENSIVE INCOME



The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three months ended March 31, 2019 and 2018:







 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2018

 

Net Change

 

Balance at March 31, 2019



 

(in thousands)

Net unrealized loss on investment securities

 

$

(2,348)

 

$

1,303 

 

$

(1,045)

Net defined benefit pension plan adjustments

 

 

(3,005)

 

 

67 

 

 

(2,938)

Total

 

$

(5,353)

 

$

1,370 

 

$

(3,983)



 

 

 

 

 

 

 

 

 



 

Balance at December 31, 2017

 

Net Change

 

Balance at March 31, 2018



 

(in thousands)

Net unrealized loss on investment securities

 

$

(1,049)

 

$

(1,360)

 

$

(2,409)

Net defined benefit pension plan adjustments

 

 

(2,368)

 

 

42 

 

 

(2,326)

Total

 

$

(3,417)

 

$

(1,318)

 

$

(4,735)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2019

 

Three months ended March 31, 2018



 

(in thousands)

 

(in thousands)



 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

 

Before-Tax Amount

 

Income Tax (Provision) Benefit

 

Net-of-Tax Amount

Unrealized gain (loss) on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

1,761 

 

$

(458)

 

$

1,303 

 

$

(1,838)

 

$

478 

 

$

(1,360)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income for gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (a)

 

$

 

$

(2)

 

$

 

$

 

$

(2)

 

$

Amortization of actuarial loss (a)

 

 

83 

 

 

(22)

 

 

61 

 

 

42 

 

 

(6)

 

 

36 

Net change

 

 

91 

 

 

(24)

 

 

67 

 

 

50 

 

 

(8)

 

 

42 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

$

1,852 

 

$

(482)

 

$

1,370 

 

$

(1,788)

 

$

470 

 

$

(1,318)



(a)

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



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7. SEGMENT INFORMATION



The Company comprises  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, 2019 and 2018.









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

March 31, 2019



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

12,541 

 

$

(33)

 

$

12,508 

Provision for loan losses

 

 

538 

 

 

-    

 

 

538 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

12,003 

 

 

(33)

 

 

11,970 

Non-interest income

 

 

1,753 

 

 

-    

 

 

1,753 

Insurance service and fees

 

 

119 

 

 

2,323 

 

 

2,442 

Amortization expense

 

 

-    

 

 

112 

 

 

112 

Non-interest expense

 

 

9,086 

 

 

2,026 

 

 

11,112 

Income before income taxes

 

 

4,789 

 

 

152 

 

 

4,941 

Income tax provision

 

 

1,181 

 

 

40 

 

 

1,221 

Net income

 

$

3,608 

 

$

112 

 

$

3,720 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

March 31, 2018



 

 

Banking

 

 

Insurance Agency

 

 

 



 

 

Activities

 

 

Activities

 

 

Total



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

11,479 

 

$

(27)

 

$

11,452 

Provision for loan losses

 

 

767 

 

 

-    

 

 

767 

Net interest income (expense) after

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

10,712 

 

 

(27)

 

 

10,685 

Non-interest income

 

 

1,821 

 

 

-    

 

 

1,821 

Insurance service and fees

 

 

137 

 

 

1,828 

 

 

1,965 

Amortization expense

 

 

-    

 

 

28 

 

 

28 

Non-interest expense

 

 

8,565 

 

 

1,578 

 

 

10,143 

Income before income taxes

 

 

4,105 

 

 

195 

 

 

4,300 

Income tax provision

 

 

938 

 

 

43 

 

 

981 

Net income

 

$

3,167 

 

$

152 

 

$

3,319 







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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,



 

2019

 

2018



 

(in thousands)



 

 

 

 

 

 

Commitments to extend credit

 

$

281,042 

 

$

290,785 

Standby letters of credit

 

 

3,543 

 

 

3,379 

Total

 

$

284,585 

 

$

294,164 





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 2019 or during 2018.



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





9. NET PERIODIC BENEFIT COSTS



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



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



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



The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three months ended March 31, 2019 and 2018:

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Three months ended March 31,



 

 

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Supplemental Executive



 

Pension Benefits

 

Retirement Plan



 

 

 

 

 

 

 

 

 

 

 

 



 

2019

 

2018

 

2019

 

2018



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

-    

 

$

-    

 

$

36 

 

$

47 

Interest cost

 

 

55 

 

 

51 

 

 

50 

 

 

34 

Expected return on plan assets

 

 

(69)

 

 

(78)

 

 

-    

 

 

-    

Amortization of prior service cost

 

 

-    

 

 

-    

 

 

 

 

Amortization of the net loss

 

 

24 

 

 

21 

 

 

59 

 

 

21 

Net periodic cost (benefit)

 

$

10 

 

$

(6)

 

$

153 

 

$

110 





The components of net periodic benefit cost other than the service cost component are included in the line item “other expense” in the income statement.







10REVENUE RECOGNITION OF NON-INTEREST INCOME



A description of the Company’s material revenue streams in non-interest income accounted for under ASC 606 follows:

   

Insurance Service and Fees: Insurance services revenue relates to various revenue streams from services provided by TEA and the Bank:

 

·

TEA earns commission revenue from selling commercial and personal property and casualty (“P&C”) insurance as well as employee benefits (“EB”) solutions to commercial customers.

 

TEA has agreements with various insurance companies to sell policies to customers on behalf of the carriers. The performance obligation for TEA is to sell annual P&C policies to commercial customers and consumers. This performance obligation is met when a new policy is sold or when an existing policy renews. The policies are generally one year terms. In the agreements with the respective insurance companies, a commission rate is agreed upon.  The commission is recognized at the time of the sale of the policy or when a policy renews. 

   

TEA has signed contracts with insurance carriers that enable TEA to sell benefit plans to commercial customers on behalf of the insurance carriers. The performance obligation for TEA is to sell the plans to commercial customers. After the initial sale when the customer signs an agreement to purchase the offered benefit plan, the performance obligation is met each month when a customer continues utilizing benefit plans from the carrier. The customer does not commit to a specific length of time with the carrier. In the agreements with the respective insurance companies, a commission rate is agreed upon. Revenue is recognized each month when the customer continues with the benefit plan sold by TEA.



·

TEA also earns contingent profit sharing revenue. The insurance companies measure the loss ratio for TEA’s customers and pay TEA according to how profitable TEA customers are.



TEA has signed written agreements with insurance carriers that document payouts to TEA based on the loss ratios of its customers. The performance obligation for TEA is to maintain a customer base with loss ratios below the agreed upon thresholds. In the contracts with the insurance companies, payout rates based on loss ratios are documented. The consideration is variable as loss ratios vary based on customer experience.  TEA’s performance obligation is over the course of the year as its customers’ performance with insurance carriers is measured throughout the year as losses occur. Due to the variable nature of contingent profit sharing revenue, TEA will accrue contingent profit sharing revenue throughout the year based on recent historical results. As loss events occur and overall performance becomes known to TEA, accrual adjustments will be made until the cash is ultimately received. 



·

Financial services commission revenue from the Bank related to wealth management such as life insurance, annuities, and mutual funds sales is also included in the “insurance service and fees” line of the income statement.

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The Company earns wealth management fees from its contracts with customers for certain financial services.  Fees that are transaction-based are recognized at the point in time that the transaction is executed.  Other related services provided include financial planning services and the fees the Bank earns are recognized when the services are rendered. 

   

·

Insurance claims services revenue is recorded at FCS.



FCS has signed agreements with insurance companies to perform claims services including investigative and adjustment services related to residential and commercial lines. The performance obligation is for FCS to investigate the insurance claims and inspecting the damage to determine the extent of the insurance company’s liability. FCS is paid based on time and materials expended to investigate the claim. The rates paid are determined in the agreement between FCS and the respective insurance companies. Upon completion of its claims inspection work, FCS bills the insurance company for services rendered and recognizes the revenue earned. 

 

A disaggregation of the total insurance service and other fees for the three months ended March 31, 2019 and 2018 is provided in the tables below:





 

 

 

 

 



 

 

 

 

 



 

Three months ended March 31,



 

2019

 

 

2018



 

(in thousands)

Commercial property and casualty insurance commissions

$

842 

 

$

722 

Personal property and casualty insurance commissions

 

750 

 

 

597 

Employee benefits sales commissions

 

293 

 

 

246 

Profit sharing and contingent revenue

 

257 

 

 

159 

Wealth management and other financial services

 

124 

 

 

143 

Insurance claims services revenue

 

146 

 

 

73 

Other insurance-related revenue

 

30 

 

 

25 

Total insurance service and other fees

$

2,442 

 

$

1,965 











11RECENT ACCOUNTING PRONOUNCEMENTS



Note 1 contains details on the impact of accounting pronouncements adopted during the three months ended March 31, 2019.  The following standards will be adopted in future periods.  ASUs not listed below are not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

  

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 life of loan loss concept presents complexities that can decrease capital, and add both volatility to the allowance for loan losses (“ALLL”) estimates and additional costs.  Changes in expectations of future economic conditions will play a large role in CECL and can significantly affect the credit loss estimate.  The Company is developing its approach for determining expected credit losses under the new guidance, including the licensing of new software and the development of processes to track loan performance.  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 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement – The amendments in this ASU modify the disclosure requirements on fair value measurements.  The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period

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presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adoption of this ASU will impact the Company’s disclosures but will not impact the Company’s financial condition, results of operations or cash flows.



ASU 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans – The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant.   The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Adoption of this ASU will impact the Company’s disclosures but will not impact the Company’s financial condition, results of operations or cash flows.



12ACQUISITIONS



TEA purchased the business of Richardson and Stout Insurance (“R&S”) on July 1, 2018 for $5 million.  R&S was an insurance agency in Wellsville, NY that offered personal and commercial property and casualty insurance agency services.  The purchase agreement included an additional $1.5 million in cash and stock compensation to be paid by TEA should the former R&S owners remain employees of TEA through July 1, 2021.  The $0.6 million in stock compensation will be made through an issuance of the Company’s stock based on the share price as of the close of business on June 29, 2018 of $46.10.  The cash and stock compensation expense will be accrued evenly over the three-year period from the acquisition date to the payment date.  The accrual of both the cash and stock compensation is included in salaries and benefits expense in the Unaudited Consolidated Income Statement.



The purchase included $0.3 million in tangible assets and resulted in $2.4 million in goodwill and $2.3 million in identifiable intangible assets.  The tangible assets included accounts receivable and fixed assets.  $2.2 million of the identifiable intangible assets is related to customer relationships and will be amortized over a seven-year period and $0.1 million is attributable to the R&S trade name and will be amortized over a five-year period.  The Company recorded $0.1 million in amortization expense related to the R&S purchase during the three months ended March 31, 2019.



R&S contributed $0.5 million of revenue during the three months ended March 31, 2019.  R&S did not have a material impact on net income for the three months ended March 31, 2019.



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, 2018.  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.



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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES



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



Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2018.  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, 2018 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 31.  No impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its carrying value.  There were no triggering events in the three month period ended March 31, 2019 that resulted in an interim impairment test. 

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ANALYSIS OF FINANCIAL CONDITION



Loan Activity

Total gross loans were $1.2 billion at March 31, 2019, a $29 million or 3% increase from December 31, 2018 and a $75 million or 7% increase from March 31, 2018. 



Loans secured by real estate were $941 million at March 31, 2019, reflecting a $14 million or 2% increase from $927 million at December 31, 2018 and a $79 million or 9% increase from $862 million at March 31, 2018.  Commercial real estate loans, including construction loans, were $710 million at March 31, 2019, $12 million or 2% higher than the $698 million balance at the end of the fourth quarter of 2018 and $58 million or 9% higher than the balance at March 31, 2018.  Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio.  The market for commercial real estate in the Company’s footprint in Western New York has been strong over the past two years.  The demand, along with the Company’s dedicated resources to commercial real estate lending, led to strong growth at an annualized rate of 7% in the first quarter of 2019.



In the first quarter of 2019, residential mortgage originations were $7 million compared with the previous quarter’s originations of $10 million and $12 million in the first quarter of 2018.  Residential mortgages sold in the first quarter of 2019 equated to approximately 31% of the residential mortgages originated by the Company during the quarter, as compared with 37% in the fourth quarter of 2018.  There were no loans sold in the first quarter of 2018.  Management decides to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.



The Company has also focused on growth opportunities in commercial and industrial (“C&I”) lending as a way to diversify its overall loan portfolio.  The C&I portfolio was $242 million at March 31, 2019, representing a $16 million or 7% increase from $226 million at December 31, 2018, but $4 million or 2% lower than the $245 million balance at March 31, 2018.  The increase in C&I balances during the quarter equates to a 27% annualized growth rate.  C&I lending is a critical component of the Company’s strategy as C&I relationships can often include core deposits, which are especially valuable in a rising rate environment.



Credit Quality of Loan Portfolio

Total non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $20 million, or 1.69% of total loans outstanding at March 31, 2019, compared with $19 million, or 1.64% of total loans outstanding, as of December 31, 2018 and $15  million, or 1.33% of total loans outstanding, as of March 31, 2018.  In the first quarter of 2019, the increase in non-performing loans reflected higher C&I and commercial real estate nonaccrual loans.



Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $48 million at March 31, 2019, a $10 million increase from $38 million at each respective period ending December 31, 2018 and March 31, 2018The increase in criticized loans in the first quarter of 2019 primarily reflected $10 million in commercial real estate loans that were downgraded to special mention status during the quarter.  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 $15.2 million or 1.28% of total loans outstanding at March  31, 2019, compared with $14.8 million or 1.28% of total loans outstanding as of December 31, 2018 and $14.7 million or 1.32% at March 31, 2018.    The Company recorded $0.5 million in provision for loan losses in the first quarter of 2019, compared with $0.3 million release of allowance for loan losses during the fourth quarter of 2018 and $0.8 million provision for loan losses in last year’s first quarter.  The provision for loan losses in the first quarter of 2019 and 2018 reflects strong loan growth and an increase in criticized loans in both quarters.    The $0.3 million release of allowance for loan losses in the fourth quarter of 2018 reflected a decrease in non-performing loans and marginal loan growth in the quarter. 



Investing Activities

Total investment securities were $141 million at March 31, 2019, compared with $134 million at December 31, 2018 and $164 million at March 31, 2108.  Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, increased to $56 million at March 31, 2019 from $26 million at December 31, 2018, and $9 million at March 31, 2018.  The primary objectives of the Company’s investment portfolio are to provide liquidity, provide collateral to secure municipal deposits, and maximize income while preserving safety of principal.  With the yield curve continuing to flatten,  there is a reduced advantage to purchasing longer-term investment securities.  Average investment securities and interest-bearing cash were 14% of average interest-earning assets in the first quarter of 2019, compared with 15% in the fourth quarter of 2018 and 13% in last year’s first quarter. 

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The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities at 56%, 57% and 53% of total investment securities at March 31, 2019, December 31, 2018 and March 31, 2018, respectively.  The concentration in tax-advantaged debt securities issued by state and political subdivisions and U.S. government-sponsored agency bonds was 16% and 28%, respectively, of the total securities portfolio at March 31, 2019, compared with 17% and 25% at December 31, 2018 and 19% and 22% at March 31, 2018.



The total net unrealized loss position of the available-for-sale investment portfolio was $1.4 million at March 31, 2019, compared with $3.2 million at December 31, 2018 and $3.3 million at March 31, 2018.  The securities in an unrealized loss position at the end of the first quarter of 2019 reflect an increase in market interest rates rather than a reduction in credit concerns.  Management believes that the credit quality of the securities portfolio as a whole is strong. 



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



Funding Activities

Total deposits at March 31, 2019 were $1.28 billion, a $61 million or 5% increase from $1.22 billion at December 31, 2018 and a $141 million or 12% increase from $1.13 billion at March 31, 2018.  The growth in the first three months of 2019 reflects growth in municipal savings and commercial savings deposits of $28 million and $26 million, respectively.  Year-over-year, time deposits increased $89 million, of which $41 million were brokered.  Savings deposits were $618 million at March 31, 2019 an increase of $52 million from prior year period. The increase in savings deposits from prior year includes $50 million in commercial deposits, and $42 million in municipal deposits partially offset by a decrease in consumer deposits.  Further discussion of deposit growth and changes in deposit mix are in the “Analysis of Results of Operations.”  Due to the transactional nature of demand deposits, average balances are a useful metric to meaningfully measure sustained growth rates.  Average demand deposits were $242 million in the first quarter of 2019, a 2% decrease from $248 million in the fourth quarter of 2018, but 8% higher than the $223 million average balance in the first quarter of 2018.  Of the Company’s $19 million in average demand deposit growth over the prior year’s first quarter, $18 million was in commercial accounts.



The Company had $10 million in other borrowings at March 31, 2019 and December 31, 2018.  This represents a single $10 million long-term advance with the FHLBNY scheduled to mature in 2020.  Other borrowings were $62 million at March 31, 2018, including $52 million in overnight borrowings with the FHLBNY.  The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with deposits along with the line usage’s impact on interest rate risk.



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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, 2019

 

Three months ended March 31, 2018



 

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

 

$

1,153,067 

 

$

14,362 

 

5.05 

%

 

$

1,067,282 

 

$

12,363 

 

4.70 

%

Taxable securities

 

 

120,099 

 

 

801 

 

2.70 

%

 

 

128,603 

 

 

797 

 

2.51 

%

Tax-exempt securities

 

 

21,150 

 

 

130 

 

2.49 

%

 

 

32,136 

 

 

196 

 

2.47 

%

Interest bearing deposits at banks

 

 

44,024 

 

 

249 

 

2.29 

%

 

 

2,712 

 

 

10 

 

1.50 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

1,338,340 

 

$

15,542 

 

4.71 

%

 

 

1,230,733 

 

$

13,366 

 

4.40 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

13,515 

 

 

 

 

 

 

 

 

14,169 

 

 

 

 

 

 

Premises and equipment, net

 

 

10,501 

 

 

 

 

 

 

 

 

10,560 

 

 

 

 

 

 

Other assets

 

 

62,370 

 

 

 

 

 

 

 

 

55,915 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,424,726 

 

 

 

 

 

 

 

$

1,311,377 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

112,571 

 

$

82 

 

0.30 

%

 

$

114,268 

 

$

75 

 

0.27 

%

Savings

 

 

591,641 

 

 

1,174 

 

0.80 

%

 

 

552,546 

 

 

744 

 

0.55 

%

Time deposits

 

 

298,586 

 

 

1,587 

 

2.16 

%

 

 

194,223 

 

 

679 

 

1.42 

%

Other borrowed funds

 

 

10,000 

 

 

43 

 

1.74 

%

 

 

71,237 

 

 

293 

 

1.67 

%

Junior subordinated debentures

 

 

11,330 

 

 

146 

 

5.23 

%

 

 

11,330 

 

 

118 

 

4.22 

%

Securities sold U/A to repurchase

 

 

4,416 

 

 

 

0.18 

%

 

 

10,326 

 

 

 

0.20 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

1,028,544 

 

$

3,034 

 

1.20 

%

 

 

953,930 

 

$

1,914 

 

0.81 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

242,030 

 

 

 

 

 

 

 

 

223,176 

 

 

 

 

 

 

Other

 

 

21,219 

 

 

 

 

 

 

 

 

15,161 

 

 

 

 

 

 

Total liabilities

 

$

1,291,793 

 

 

 

 

 

 

 

$

1,192,267 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

132,933 

 

 

 

 

 

 

 

 

119,110 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

1,424,726 

 

 

 

 

 

 

 

$

1,311,377 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$  

12,508 

 

 

 

 

 

 

 

$  

11,452 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.79 

%

 

 

 

 

 

 

 

3.77 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

3.51 

%

 

 

 

 

 

 

 

3.59 

%





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Net Income



Net income was $3.7 million, or $0.75 per diluted share, in the first quarter of 2019, compared with
$4.5 million, or $0.90 per diluted share, in the fourth quarter of 2018 and $3.3 million, or $0.68 per diluted share, in last year’s first quarter.  The decrease from the linked quarter reflects higher loan loss provision and income tax provision, partially offset by higher non-interest income.  The fourth quarter of 2018 included a historic rehabilitation tax credit transaction that reduced non interest income by $0.9 million and reduced income tax expense by $1.4 million.  The increase over prior-year period reflects higher net interest income due to loan growth and higher insurance service and fee revenue primarily resulting from the acquisition of R&S, partially offset by an increase in non-interest expense.  Return on average equity was 11.19% for the first quarter of 2019 compared with 13.86% in the fourth quarter of 2018 and 11.15% in the first quarter of 2018.



Other Results of Operations – Quarterly Comparison



Net interest income increased $0.1 million, or 1%, from the fourth quarter of 2018, and $1.1 million, or 9%, from the prior-year first quarter to $12.5 million in the first quarter of 2019.  The increase from the prior periods was driven by average interest-earning asset growth, particularly loans, partially offset by an increase in interest expense. The increase in interest income reflects growth in the commercial loan portfolio as well as the benefit from the re-pricing of variable rate loans tied to the Company’s prime rate.  Average commercial loans, including commercial real estate and commercial and industrial loans, were $935 million in the first quarter of 2019, $22 million higher than $913 million in the fourth quarter of 2018 and $63 million higher than $872 million in the first quarter of 2018   

First quarter net interest margin of 3.79% improved 9 basis points from the 2018 fourth quarter and 2 basis points from the first quarter of 2018.  The margin improvement stems from increased yields on loans, partially offset by higher funding costs.  The higher yield on loans when compared with the fourth quarter of 2018 and the first quarter of 2018 reflects an increase of 11 and 35 basis points, respectively.  The margin has been impacted by rising funding costs due to increases in short-term interest rates, along with competitive deposit market pricing.  The cost of interest-bearing liabilities was 1.20% in the first quarter of 2019, compared with 1.14% in the fourth quarter of 2018 and 0.81% in the first quarter of 2018.  The Company has experienced a shift in deposit mix as consumers in low-cost legacy savings deposit products have migrated to higher-rate time deposits.  The average cost of time deposits was 2.16% in the first quarter of 2019, compared with 2.07% in the fourth quarter of 2018 and 1.42% in the first quarter of 2018. Average time deposits comprised 24% of average total deposits during the first quarter of 2019 and the fourth quarter of 2018, compared with 18% in and the first quarter of 2018.  The Company has also increased its brokered time deposit activity as part of its funding strategy.  Average brokered time deposits were $41 million during the first quarter of 2019 and $40 million in the fourth quarter of 2018.  The Company did not have brokered time deposits during the first quarter of 2018.  

The $0.5 million and $0.8 million provision for loan losses for the first quarter of 2019 and 2018, respectively, reflects strong loan growth and an increase in criticized loans in both of the quartersThe $0.3 million release of allowance for loan losses for the fourth quarter of 2018 reflected a decrease in non-performing loans and marginal loan growth in the quarter.



Non-interest income was $4.2 million in the first quarter of 2019, compared with $3.0 million in the fourth quarter of 2018 and $3.8 million in the prior year first quarter.  The fourth quarter of 2018 included a $0.9 million net reduction of non-interest income related to an investment in an historic rehabilitation tax credit.  There were no significant historic tax credit transactions in the first quarter of 2019 and 2018.

The Company is actively engaged in the community by financing historic rehabilitation projects in the City of Buffalo and enhances its yield by investing in the related tax credits.  When a project is completed, the Company begins to recognize tax benefits with an associated reduction in the investment.  In the fourth quarter of 2018, the positive net impact to net income was $0.5 million as a $1.8 million refundable New York State tax credit was recorded in non-interest income and a corresponding $1.4 million tax benefit was realized in income tax expense, offset by a $2.7 million write-off on the investment.  The write-off was contemplated when management priced the initial investment in the tax credit project.    



Insurance revenue increased $0.2 million from the fourth quarter of 2018 and $0.5 million from last year’s first quarter to $2.4 million in the first quarter of 2019.  The increase in insurance revenue from the fourth quarter of 2018 was due to seasonally lower policy renewals for institutional clients, including businesses and municipalities, during the fourth quarter.  The R&S acquisition, which was effective July 1, 2018, contributed to the increase in revenue when compared to prior year’s first quarter. 



Non-interest expenses of $11.2 million in the first quarter of 2019 increased 10% from the prior-year period but decreased 2% from the fourth quarter of 2018.  Salaries and benefits costs were $7.2 million in the first quarter of 2019, an increase of 8% from last year’s first quarter, and relatively flat from the fourth quarter of 2018.  Salaries and benefits expense in the first quarter of 2018 included approximately $0.3 million of costs related to one-time bonuses paid to non-senior associates.  Excluding the impact of these bonuses, first quarter salaries and benefits costs increased 12% from the prior-year period, reflecting the R&S acquisition and the addition of strategic personnel hires to support the Company’s continued growth. 

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Technology and communications expenses were $0.9 million in the first quarter of 2019 and the fourth quarter of 2018, an increase of $0.1 million from last year’s first quarter, Technology expenses increased from the prior year period due to higher ATM card fees, online banking activity and software costs.    



The Company’s efficiency ratio in the first quarter of 2019 was 66.5%, a decrease from 69.5% in the fourth quarter of 2018 and 66.6%  in last year’s first quarter.  The decrease in the efficiency ratio compared with the fourth quarter of 2018 reflects higher seasonal insurance agency revenue.

Income tax expense was $1.2 million, or an effective tax rate of 24.7%, for the first quarter of 2019 compared with an income tax benefit of $0.2 million in the fourth quarter of 2018 and income tax expense of $1.0 million, or an effective tax rate of 22.8%, in last year’s first quarter.  Excluding the impact of historic tax credit transactions, the fourth quarter of 2018 effective tax rate was 23.1%. 

CAPITAL



The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 9.74% at March 31, 2019, compared with 9.73% at December 31, 2018 and 9.81% at March 31, 2018.  Book value per share increased to $27.66 at March 31, 2019, compared with $27.13 at December 31, 2018, and $24.96 at March 31, 2018.



On February 19, 2019, the Company declared a semi-annual cash dividend of $0.52 per share on the Company’s outstanding common stock.  The dividend was paid on April 3, 2019 to shareholders of record as of March 13, 2019.  This semi-annual dividend represents a $0.06, or 13% increase from its previous semi-annual dividend paid in October 2018.



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 as its primary source of overnight funds and also has one long-term advance with FHLBNY.  The Company had $10 million in borrowed funds at FHLBNY at March 31, 2019 and December 31, 2018.  The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with core deposits along with the line usage’s impact on interest rate risk.  The Company’s funding strategy has resulted in significant time deposit growth, resulting in less usage of the FHLBNY overnight line of credit.  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 $301 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB.  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, 2019, approximately 3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 19% had maturity dates of five years or less.  Additionally, mortgage-backed securities, which comprise 56% of the investment portfolio at March 31, 2019, 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, 2019, the Company had net short-term liquidity of $295 million as compared with $249 million at December 31, 2018.  Available assets of $200 million, divided by public and purchased funds of $303 million, resulted in a long-term liquidity ratio of 66% at March 31, 2019, compared with 63% at December 31, 2018.



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.



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





ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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



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

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



SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES







 

 

 

 

 

 



 

 

 

 

 

 



 

Calculated increase



 

in projected annual net interest income



 

(in thousands)



 

 

 

 

 

 



 

 

March 31, 2019

 

 

December 31, 2018

Changes in interest rates

 

 

 

 

 

 



 

 

 

 

 

 

+200 basis points

 

$

754 

 

$

1,598 

+100 basis points

 

 

2,471 

 

 

2,825 



 

 

 

 

 

 

-100 basis points

 

 

(2,645)

 

 

(3,026)

-200 basis points

 

 

NM

 

 

NM





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





ITEM 4 - CONTROLS AND PROCEDURES



DISCLOSURE CONTROLS AND PROCEDURES



The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2019 (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, 2019 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, 2019 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 1A – RISK FACTORS



There have been no material changes in risk factors relating to the Company to those disclosed in response to Item 1A. Part I of Form 10-K for the year ended December 31, 2018.



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



In the first quarter of 2019, 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

 

Maximum Number of Shares that may yet be Purchased Under the Plans or Programs (2)

January 2019:

 

 

 

 

 

 

 

 

 

 

January 1, 2019 - January 31, 2019

 

 

-    

 

$

-    

 

-    

 

100,000 

February 2019:

 

 

 

 

 

 

 

 

 

 

February 1, 2019 - February 28, 2019

 

 

1,468 

 

$

35.50 

 

-    

 

100,000 

March 2019:

 

 

 

 

 

 

 

 

 

 

March 1, 2019 - March 31, 2019

 

 

-    

 

$

-    

 

-    

 

100,000 



 

 

 

 

 

 

 

 

 

 

Total:

 

 

1,468 

 

$

35.50 

 

-    

 

100,000 



(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 American on that date.

 

(2)

On October 17, 2017, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company’s common stock (the “2017 Repurchase Program”). The 2017 Repurchase Program expires 24 months after its adoption and may be suspended or discontinued by the Board of Directors at any time. The maximum number of shares that may be purchased under the 2017 Repurchase Program as of March 31, 2019 was 100,000.



ITEM 3DEFAULTS UPON SENIOR SECURITIES



(Not Applicable.)



ITEM 4MINE SAFETY DISCLOSURE



(Not Applicable.)



ITEM 5OTHER INFORMATION



(Not Applicable.)

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ITEM 6 – EXHIBITS



The following exhibits are filed as a part of this report:





 

 

 

 



 

 

 

 

EXHIBIT INDEX



 

 

Exhibit No.

 

Name



 

 

10.1

 

Evans Bancorp, Inc. Amended and Restated 2019 Long Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on April 26, 2019).



 

 

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, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – March 31, 2019 and December 31, 2018; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2019 and 2018; (iii) Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2019 and 2018; (iv) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2019 and 2018; (v) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2019 and 2018; and (vi) Notes to Unaudited Consolidated Financial Statements.



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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, 2019



/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)







DATE

May 2, 2019



/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer and Principal Accounting Officer)









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